There are two views among economists
regarding the direction of the U.S. economy. The first anticipates a
substantial recession similar to 2008-09. The second expects a severe dip in the second
quarter of 2020 with a steady rebound thereafter. I favor the severe dip
scenario.
The 2008-09 recession was prolonged
because there were extreme price distortions in residential and capital markets
that took time to correct. The wealth effect from stock market losses was
compounded by a huge decline in residential housing equity.
The COVID-19 crisis, while painful
to many families, will have a temporary sharp impact on the U.S. macro economy.
The pandemic measures adopted will fall the most heavily on restaurants,
hotels, and airlines. The wealth effect from the losses in the stock market
will slow consumer spending in the short term, but the underlying prices and
resource markets in the nation are sound and two consecutive quarters of
declining GDP is unlikely.
Dr. John Stapleford
How hard was Delaware hit by the
2008-09 recession? Employment dropped by 50,000 over 20 months, an 11% decline.
Total wages and personal income declined for a year with losses of 3-4%, and
output fell 6% over five quarters.
Structural changes in Delaware’s
economy caused by the 2008-09 recession were profound. As happened following
the 1973-75 recession, the 2008-09 recession dramatically altered manufacturing.
Over $3.5 billion dollars of annual output was lost from the downsizing of the
DuPont Co., Astra Zeneca, and the remaining automobile manufacturing, together
with associated wholesale operations.
It took six years for total Delaware
employment to recover to its 2008 peak level. And the state’s economy is still
struggling. For five months now, based upon its leading economic index for
Delaware, the Philadelphia Fed has been forecasting a second quarter 2020
contraction in Delaware’s economy.
Over the most recent 12 months,
Delaware employment has increased at a rate of only 0.8%, and the unemployment
rate has risen to 4%. Half of the jobs added to the Delaware economy over the
last four years paid less than $20 per hour.
Two things are clear about the COVID-19
contraction. First, like the 2008-09 recession, this contraction will have its
greatest impact on workers with less formal education: workers in hourly wage
service job as opposed to salaried college graduates in white collar
occupations. This will put a strain on state social services, especially
Medicaid, SNAP, and unemployment insurance.
Second, as Delaware state social
service spending increases, state General Fund revenues will struggle. During
2008-09, state revenues dropped by more than 6%.
As of their March meeting, DEFAC
assumes its FY20 increase in total state revenues of 3.2%(over FY19) to remain
unchanged and for total revenues to essentially remain stable through FY21.
This is optimistic. As state task
force research has confirmed, Delaware’s major taxes are quite sensitive to
changes in the business cycle. This includes the state personal income tax,
corporate income tax, gross receipts tax, and real estate transfer tax. Even
the revenue from the abandoned property tax fell off in 2008-09.
The personal income for 2019 is on
the books, but personal income will dip in 2020, which means less personal
income tax revenue in FY21 due to slower growth in wages and dividend income.
Certainly, between now and June 30, corporate income, gross receipts, and real
estate taxes will dip. On the expense side, in addition to increased demand for
social services, the loss in asset earnings for the state pension fund will
create a huge gap that must be covered by withdrawals from the General Fund.
The bad news is counter-balanced by
a state government operating cash balance of $427 million. This is a
combination of the standard rainy day fund and the Governor’s new budget
stabilization fund.
The dark days of 2008-09 will not
reoccur, but over the next year belts will be tightened as a recovery is taking
hold.
Dr. John Stapleford, Caesar Rodney Institute’s chairman, is a past director of the University of Delaware’s Bureau of Economic and Research.
The Opinion page is populated with letters from you, our readers. The Delaware State News was founded on and still is dedicated to the basic principle of civilly and respectfully sharing ideas to create a better community for us all. To submit a letter to the editor, visit the Submit a Letter page.
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Commentary: Belt tightening in the near future, but not like 2008
By Dr. John Stapleford
There are two views among economists regarding the direction of the U.S. economy. The first anticipates a substantial recession similar to 2008-09. The second expects a severe dip in the second quarter of 2020 with a steady rebound thereafter. I favor the severe dip scenario.
The 2008-09 recession was prolonged because there were extreme price distortions in residential and capital markets that took time to correct. The wealth effect from stock market losses was compounded by a huge decline in residential housing equity.
The COVID-19 crisis, while painful to many families, will have a temporary sharp impact on the U.S. macro economy. The pandemic measures adopted will fall the most heavily on restaurants, hotels, and airlines. The wealth effect from the losses in the stock market will slow consumer spending in the short term, but the underlying prices and resource markets in the nation are sound and two consecutive quarters of declining GDP is unlikely.
How hard was Delaware hit by the 2008-09 recession? Employment dropped by 50,000 over 20 months, an 11% decline. Total wages and personal income declined for a year with losses of 3-4%, and output fell 6% over five quarters.
Structural changes in Delaware’s economy caused by the 2008-09 recession were profound. As happened following the 1973-75 recession, the 2008-09 recession dramatically altered manufacturing. Over $3.5 billion dollars of annual output was lost from the downsizing of the DuPont Co., Astra Zeneca, and the remaining automobile manufacturing, together with associated wholesale operations.
It took six years for total Delaware employment to recover to its 2008 peak level. And the state’s economy is still struggling. For five months now, based upon its leading economic index for Delaware, the Philadelphia Fed has been forecasting a second quarter 2020 contraction in Delaware’s economy.
Over the most recent 12 months, Delaware employment has increased at a rate of only 0.8%, and the unemployment rate has risen to 4%. Half of the jobs added to the Delaware economy over the last four years paid less than $20 per hour.
Two things are clear about the COVID-19 contraction. First, like the 2008-09 recession, this contraction will have its greatest impact on workers with less formal education: workers in hourly wage service job as opposed to salaried college graduates in white collar occupations. This will put a strain on state social services, especially Medicaid, SNAP, and unemployment insurance.
Second, as Delaware state social service spending increases, state General Fund revenues will struggle. During 2008-09, state revenues dropped by more than 6%.
As of their March meeting, DEFAC assumes its FY20 increase in total state revenues of 3.2%(over FY19) to remain unchanged and for total revenues to essentially remain stable through FY21.
This is optimistic. As state task force research has confirmed, Delaware’s major taxes are quite sensitive to changes in the business cycle. This includes the state personal income tax, corporate income tax, gross receipts tax, and real estate transfer tax. Even the revenue from the abandoned property tax fell off in 2008-09.
The personal income for 2019 is on the books, but personal income will dip in 2020, which means less personal income tax revenue in FY21 due to slower growth in wages and dividend income. Certainly, between now and June 30, corporate income, gross receipts, and real estate taxes will dip. On the expense side, in addition to increased demand for social services, the loss in asset earnings for the state pension fund will create a huge gap that must be covered by withdrawals from the General Fund.
The bad news is counter-balanced by a state government operating cash balance of $427 million. This is a combination of the standard rainy day fund and the Governor’s new budget stabilization fund.
The dark days of 2008-09 will not reoccur, but over the next year belts will be tightened as a recovery is taking hold.
Dr. John Stapleford, Caesar Rodney Institute’s chairman, is a past director of the University of Delaware’s Bureau of Economic and Research.
The Opinion page is populated with letters from you, our readers. The Delaware State News was founded on and still is dedicated to the basic principle of civilly and respectfully sharing ideas to create a better community for us all. To submit a letter to the editor, visit the Submit a Letter page.