State and local governments will continue to face trying fiscal conditions next year, characterized by stubbornly high unemployment and slower economic growth, according to the Securities Industry and Financial Markets Association’s semiannual economic outlook.
The SIFMA survey said real gross domestic product will slow to a 3.1% annual growth rate in 2011 from 3.3% this year, according to the median estimate of 18 economists. That pace of U.S. economic expansion is not strong enough to significantly lower the unemployment rate, which economists predict will moderate to 8.9% in 2011 from 9.4% at the end of this year. The survey was conducted from May 26 to June 11.
The U.S. economy is on a path toward an “unspectacular recovery,” said Jay H. Bryson, managing director and global economist at Wells Fargo Securities, who presented the survey. Restrained consumer spending, which makes up about 70% of GDP, will be one of the chief reasons for slower economic growth, he said.
Economists predicted state and local government spending will be flat in 2011 after contracting 1.4% this year. The concerns about state and local governments and their debt outstanding “has already been priced into the [municipal] market,” Bryson said, noting that budget problems could be exacerbated “if growth turns out to be a lot slower” next year.
Michael Moran, chief economist at Daiwa Securities America Inc., said he would be surprised to see a default this year at the state level, but not at the local level. Municipal issuers still have some reserve balances they can tap into for funding, he said in a phone interview.
Moran said issuers could resort to providing IOUs to their venders to pay bondholders — an option California utilized last year. “It’s a trick other states could pull,” said Moran, who participated in the SIFMA survey.
Respondents were evenly divided over the usefulness of the American Jobs and Closing Tax Loopholes Act, a mini-stimulus currently being debated in Congress. Additional federal support could have a positive, albeit modest, impact on state and local governments, the survey said.
Some were concerned that additional federal stimulus spending might push the U.S. toward a Greece-like catastrophe, Bryson said. Others pointed to the need for federal spending to head off a double-dip recession, like the one the U.S. experienced in 1936 and 1937, he said.
The European sovereign debt crisis and volatility in the stock market prompted SIFMA economists to slow their expectations for Federal Reserve interest rate increases. The consensus when SIFMA previously polled its economists, at the end of 2009, was that the Fed would begin to tighten the federal funds target rate the second half of this year and increase it to 0.5% by the end of December.
This time, more than half of the economists surveyed said they didn’t expect the Fed to hike that key benchmark lending rate — which has been limited to a target range of 0.0% to 0.25% since December 2008 — until the middle of 2011.
With inflation low and economic volatility remaining, the Fed has no incentive to raise rates, Bryson said, adding that “if the Fed is going to make a policy mistake in this environment, it will probably be to keep rates too low for too long.”
The SIFMA economists’ prediction for the 10-year Treasury note was slightly below their December estimate. They now expect the 10-year to yield 3.8% this December, down from a 4.0% estimate six months ago. The economists estimated that the consumer price index will increase 1.2% in the third quarter and 1.5% in the fourth quarter. They see the core personal consumption expenditures deflator increasing 1.0% in the third quarter and 1.4% in the fourth quarter.