The State of the SD Economy

Presentation to the Governor’s

Council of Economic Advisors

May 17, 2018

Ralph J. Brown, Professor Emeritus of Economics

University of South Dakota

Outline of Presentation

Overview of US economy

US economy forecast

SD economy

Summary & Conclusions

US Forecast

IHS MARKIT Forecast – May 8, 2018

Real GDP

Consumption,

Housing Starts

Federal Budget

Interest Rates and Inflation

GDPGood growth in 2018 and 2019 at 2.8%. In 2020 growth slows to 1.9%.Consumer spending will continue to contribute to growth supported by improving HH finances, lower taxes, strong labor market, real income increases, and rising home prices.Diluted tariffs will have little impact on budget or forecast.Business fixed investment and some strength in the housing market, mainly multi-family.

Growth Picks Up

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

06 08 10 12 14 16 18 20

1997-2007 3.2%

GROSS DOMESTIC PRODUCT

Actual Forecast

Source: BEA and IHS

GDP2011Q3=2007Q4

2016 1.5%2017 2.3%Forecast2018 2.8%2019 2.8%2020 1.9%

Components of GDP are:

GDP = Consumption (69%)

Investment (17%)

Government (18%)

Net Export (-4%)

ConsumptionAs previously mentioned, consumer

fundamentals looks strong.

Projected growth is at 2.4% through 2020.

University of Michigan’s Consumer Sentiment and the Conference Board’s Consumer Confidence Index remain close to historical highs.

Deleveraging Plateaus

0%2%4%6%8%

10%12%14%16%18%

50%60%70%80%90%100%110%120%130%140%

70 75 80 85 90 95 00 05 10 15

PersonalSavingRate

HH DebtDisp IncRatio

HOUSEHOLD DEBT AND SAVING RATE

Source: BEA and FED

133%

80%60%

Record Low Debt Service

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

1990 1995 2000 2005 2010 2015

HOUSEHOLD DEBT SERVICEAS % OF DISP. PERS. INC.

Source: BEA

Slower Growth Ahead

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

06 08 10 12 14 16 18 20

Actual Forecast

REAL CONSUMPTION

Source: BEA and IHS

1997-2007 3.7%

2016 2.7%2017 2.7%Forecast2018 2.4%2019 2.4%2020 2.4%

Investment SectorFixed business investment showing solid

growth. 2018 5.9% 2019 6.0% 2020 4.0%

Growth supported by TCJA and expanded expensing.

Low inventories in housing market will drive prices higher. Recent increases of 7.3%.

In spite of tight housing market, most upturn in multi-family housing.

Recovery Continues

0.4

0.8

1.2

1.6

2.0

2.4

0.4

0.8

1.2

1.6

2.0

2.4

06 08 10 12 14 16 18 20

ActualForecast

2016 1.18 mil2017 1.21Forecast2018 1.342019 1.412020 1.46

HOUSING STARTS

Source: US Census and IHS

Mill

ions

, Uni

tsM

illions, Units

Government Sector

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2000 2005 2010 2015 2020 2025

EXPENDITURES

RECEIPTS

DEFICITS

FORECAST

FEDERAL GOVERNMENT AS % OF GDP

Source: IHS

Debt Held by Public

30%

40%

50%

60%

70%

80%

90%

100%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2005 2010 2015 2020 2025

FEDERAL DEBT HELD BY PUBLIC AS % OF GDP

FORECAST

Source: IHS

Debt held by ind, corp, s&l govtforeigners, and Fed Res Syst

The balance ownedby intergovt holdingssuch as Soc Sec

Foreigners holdabout 47% ofpublicly helddebt

The Fiscal Picture

The CBO projects real GDP growth at 1.9% through 2028. The contribution of TCJA is only about 0.06 percentage point per year.

In other words, they do not see that the TCJA will significantly spur growth or recoup the cost of tax cuts.

IHS Markit has accepted the CBO forecast.

Foreign SectorThe $ is expected to strengthen over the next four quarters driven by the need to finance expected deficits due to recent legislation.

World real GDP growth will peak at 3.4% in 2018 and slow to 3.3% in 2019 and 3.1% in 2020.

The major change in the May report is that both imports and exports of petroleum will be higher over the 2018-2020 period.

Employment & UnemploymentSolid gains in employment will be driven by

robust growth in production.

This strong growth will boost both wage growth and inflation pressures.

The employment cost index expected to increase 3.0% in 2018 and rise to 3.5% by 2021.

The unemployment rate averaged 4.4% in 2017. IHS projects 3.9% in 2018, 3.5% in 2019, and 3.7% in 2020.

Employment Growth

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

2006 2008 2010 2012 2014 2016

CHANGE IN NONFARM EMPLOYMENT

Source: BLS

Thou

sand

s Thousands3 Month Average +208,000

Future Job Growth Steady

-8%

-6%

-4%

-2%

0%

2%

4%

06 08 10 12 14 16 18 20

NONFARM EMPLOYMENT

Source: BLS and IHS

Actual Forecast

1997-2007 1.1%

2016 1.8%2017 1.5%Forecast2018 1.6%2019 1.5%2020 0.8%

Low U3 Unemployment Rate Still Falling

3%

4%

5%

6%

7%

8%

9%

10%

3%

4%

5%

6%

7%

8%

9%

10%

06 08 10 12 14 16 18 20

Actual Forecast

UNEMPLOYMENT RATE

Source: BLS and IHS

1997-2007 4.9%

U6=7.8%Avg U 23.1 wksU>27 wks 20.0%

2016 4.9%2017 4.4%Forecast2018 3.9%2019 3.5%2020 3.7%

Labor Participation Rate Still Low

62%

63%

64%

65%

66%

67%

68%

62%

63%

64%

65%

66%

67%

68%

1990 1995 2000 2005 2010 2015

LABOR FORCE PARTICIPATION RATE

Source: BLS

Tight Labor Market

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

06 08 10 12 14 16

Job Openings

Unemployed

LABOR MARKET CONDITIONS

Source: BLS

Tho

usan

dsT

housands

Inflation & Interest RatesThe FED will increase the Federal Funds rate four

times in 2018. Post-2018, they will increase the Federal Funds rate to 3.5% by 2020.

IHS Markit estimates the NAIRU at 4.6%. Therefore, they see the core PCE inflation rate at 2.3% by 2020.

Factors contributing to higher interest rates are the FED, FED balance sheet shrinkage, and higher inflation premia.

They see higher interest rates as a negative for equity valuation and expect little cumulative gains in the broad indexes over the next couple of years.

Still Very Low

-12%

-8%

-4%

0%

4%

8%

-12%

-8%

-4%

0%

4%

8%

06 08 10 12 14 16 18 20

INFLATION: CPI

1997-2007 2.6%

ActualForecast

Source: BLS

2016 1.3%2017 2.1%Forecast2018 2.5%2019 1.8%2020 2.5%

MAJOR RISKS

Loss of confidence leading to fall in fixed residential and nonresidential investment and expansion ends in 117th month just short of 120 month record. The business sector seeing this weakness cuts back on spending on equipment, etc. (20%)

Variable 2016 2017 2018 2019 2020 GDP 1.5% 2.3% 2.8% 2.8% 1.9%

Recession Probability 20%

NA Emp 1.8% 1.5% 1.6% 1.5% 0.8%

Oil(Brent) $44 $55 $70 $67 $69

Housing 1.18 1.21 1.34 1.41 1.46

CPI 1.3% 2.1% 2.5% 1.8% 2.5%

Un Rate 4.9% 4.4% 3.9% 3.5% 3.7%

IHS MARKIT FORECAST MAY 2018

Wells Fargo ForecastMay 2018

2017 2018 2019

GDP 2.3% 2.9% 2.8%

NA EMP 182 thou 178 thou 153 thou

CPI 2.1% 2.5% 2.3%

10-YR T Note 2.33% 2.99% 3.40%

Key Variables Tracking SD Economy

Nonfarm employment

Housing starts

Real nonfarm personal income

Taxable sales

Leading indicator

Pick Up

150,000

145,000

140,000

135,000

130,000

125,000

460

440

420

400

380

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Thou

sand

s Thousands

Source: BLS

NONFARM EMPLOYMENT

SD

US

RatioScale

Job Loss P to TUS -8.7 mil -6.3%SD -12.7 thous -3.1%

SD RecessionBegins =>

2014 M04

2012 M02

Divergence

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

1990 1995 2000 2005 2010 2015

NONFARM EMPLOYMENT

US

SD

SF

RC

Source: BLS

ECONOMY AT A GLANCE(Employment Y/Y) MARCH

INDUSTRY SD SF RCTotal NonFarm 1.5% 0.9% 2.3%Min,log,const 0.4% 4.0% 2.2%Manufacturing 5.6% 3.6% 0.0%Trade,tran,util -0.7% -1.6% 3.8%Information -1.7% -3.8% 0.0%Finance 1.7% 0.0% 2.6%Prof,business 3.2% 2.0% 3.8%Educ,health 1.8% 1.3% 2.5%Leisure,hosp 0.6% 0.0% -1.1%Other services 1.2% 3.4% 0.0%Government 1.5% 2.1% 3.5%

SF Outpaces the Rest

200

180

160

140

120

100

80

200

180

160

140

120

100

801990 1995 2000 2005 2010 2015

SF

US

SD

RC

Growth1990-2017US=1.1%SD=1.6%SF=2.5%RC-1.6%

RatioScale

Source: BLS

NONFARM EMPLOYMENT

Recent Slowing

8,0007,5007,0006,5006,000

5,500

5,000

20

21

22

23

24

25

06 08 10 12 14 16

Tho

usan

dsT

housands

Source: BLS

CONSTRUCTION EMPLOYMENT

RatioScale

SD

US

Negative Growth

-20%-16%-12%-8%-4%0%4%8%

12%16%

-20%-16%-12%-8%-4%0%4%8%12%16%

2006 2008 2010 2012 2014 2016

Source: BLS

CONSTRUCTION EMPLOYMENT

SDSF

US

RC

% Change y/y

Some Growth

0100200300400500600700800900

0100200300400500600700800900

2006 2008 2010 2012 2014 2016

Total, SD

Single, SD

Uni

ts

SD Building Permits, Total & Single

12 Month Moving Average

Source: Census Bureau

Which is More Cyclical?

72

68

64

60

56

380370

360

350

340

330

320

2006 2008 2010 2012 2014 2016

Service EmploymentRight Scale==>

RatioScale

Goods Employment<==Left Scale

Thou

sand

s Thousands

SOUTH DAKOTA SERVICE AND GOODSPRODUCING EMPLOYMENT

Source: BLS

Goods-Producing = Manufacturing+Construction

SD Peaked Later and Decline Less Severe

300280

260

240

220

200

180

160

300280

260

240

220

200

180

16006 08 10 12 14 16

SDUS

RatioScale

1991

=100

1991=100

Source: FHLB

House Price Index

On the Uptick

14,50014,00013,50013,00012,50012,00011,50011,000

4644

42

40

38

36

2006 2008 2010 2012 2014 2016

MANUFACTURING EMPLOYMENTTh

ousa

nds Thousands

Source: BLS

RatioScale

SD

US

MFG %US 8.9%SD 9.4%SF 9.3%

Divergent Growth

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

06 08 10 12 14 16

US

SDSF

RC

MANUFACTURING EMPLOYMENT

Source: BLS

SD More Volatile

8,600

8,400

8,200

8,000

7,800

7,600

27

28

29

30

31

32

06 08 10 12 14 16

RatioScale

Tho

usan

dsT

housands

Source: BLS

SD

US

P to TUS -8.5%SD -13.0%

Fin %US 5.8%SD 6.7%SF 10.6%

FINANCIAL ACTIVITY EMPLOYMENT

Note SD and SF Different Than US

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2006 2008 2010 2012 2014 2016

FINANCIAL ACTIVITY EMPLOYMENT

Source: BLS

SD

US

SF

% Change y/y

US 3.9% SD 3.4% SF 3.1% RC 3.7%

2%3%4%5%6%7%8%9%

10%11%

2%3%4%5%6%7%8%9%10%11%

06 08 10 12 14 16

US

SDSF

RC

1997-2007US=4.9%SD=3.2%

U6US=7.8%SD=6.4%

UNEMPLOYMENT RATES

Source: BLS

Real Growth But Slower

$15,000

$14,000

$13,000

$12,000

$11,000

$38

$36

$34

$32

$30

$28

$26

2006 2008 2010 2012 2014 2016

RatioScale

Bill

ionsB

illions

Source: BLS

NONFARM PERSONAL INCOME (2009 $S)

SD

US

P to TUS -2.8%SD -1.1%

US and SD Track

-6%

-4%

-2%

0%

2%

4%

6%

8%

2006 2008 2010 2012 2014 2016

SD

US

REAL NONFARM PERSONAL INCOME(Year-Over-Year Percent Change)

Souce: BEA

Farm Down Sharply –Low Prices

$40

$60

$80

$100

$120

$140

$0

$1

$2

$3

$4

$5

2006 2008 2010 2012 2014 2016

Bill

ions

Billions

SD

US

Source: BEA

FARM INCOME

5 Year Avg% of PIUS = 0.7%SD = 7.2%

Way Below Average

$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5

$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5

06 08 10 12 14 16

Source: BEA

2005-2017Average

SOUTH DAKOTA FARM INCOME

Bill

ions

Billions

Recent Uptick

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2006 2008 2010 2012 2014 2016

Large Projects=>

% Change y/y = +4.2%

12-MonthMoving Average

SD TAXABLE SALES

Source: SD Department of Revenue

Big Project =>a Year Earlier

Recent Pickup

$2.0B

$1.8B

$1.6B

$1.4B

$1.2B

$1.0B

$2.0B

$1.8B

$1.6B

$1.4B

$1.2B

$1.0B2006 2008 2010 2012 2014 2016

RatioScale

SD Taxable Sales - Seasonally Adjusted

Source: SD Department of Revenue

12 Month Moving Average

Mar 2017 to Mar 2018 +4.2%

Mid-American States Leading Indicators - GOSS

March 2018 Index > 50 GrowthOverall 67.4New Orders 71.9Sales 72.7Delivery lead time 65.1Inventories 64.2Employment 62.9

More Optimistic Than Recent Reports

Goss Comments “In 2017, South Dakota ranked 49th in

the nation, and ninth in the nine-state region in terms of the export of goods. These exports supported approximately 9,500 jobs, directly and indirectly in the state. The state’s new export orders for March of 70.6 indicates that South Dakota exports remain very strong,” said Goss.

Conclusions

SD economy growing at slower pace

SF economy growing at faster rate

US economy growing slowly

20% chance of recession

The End