Uncertainty may be the new normal, but the 2020 economy is thriving
Jan 02, 2020 01:41PM
By Chris Haire
To paraphrase the late, great Yogi Berra, when it comes to the 2020 economic outlook for South Carolina, it's deja vu all over again. Or at least that's what it feels like as the United States once again finds itself on the verge of a long-promised trade deal with China.
This time, however, it looks like it's all going to work out. Maybe. Either way, the start of 2020 is looking a lot like the start of 2019.
That certainly appears to be one conclusion that can be drawn after a recent chat with Joey Von Nessen, research economist at the Darla Moore School of Business at the University of South Carolina.
We spoke to Von Nessen shortly after he helped delivered the Darla Moore's annual economic outlook, and like last year, there are sure signs that South Carolina's economy will remain strong for all of 2020. In our discussion, Von Nessen talked about the "new normal"of economic uncertainty, the much anticipated signing of the USMCA trade agreement, the ongoing labor shortage, and the star player in South Carolina's economy.
The following is a distillation of what was discussed; it has been edited for clarity and length.
The New Normal
Economic uncertainty has become the new normal in 2019, and what we've seen in the last week is potentially a way to decrease that uncertainty going forward. I think that's especially true of the USMCA.
It looks increasingly likely that that will be passed into law sometime in 2020, and I think that's going to generate a significant positive psychological effect, basically immediately, because one of the big concerns about the renegotiation of NAFTA was that the United States might actually pull out of NAFTA if they couldn't figure something out. And that created a significant uncertainty for businesses who were trying to hold off to it to see what destructive effects that could potentially have.
Two of the provisions will help the United States, and potentially help South Carolina as well, one of which is that there's going to be a higher local content requirement for production for manufactured goods, including vehicles, and so that's going to incentivize companies to maintain their operations in the free trade zone and in the United States.
Secondly, there's also a provision that's going to require a certain percentage of the production of manufactured goods to be produced with labor that is earning at least $16 an hour. So basically there's effectively a minimum wage.
If you have a significant amount of production of labor that's going to be paying that $16 an hour wage rate, then all of a sudden, the cost savings to your labor from moving production to Mexico isn't quite as strong, and so in some cases that can deter companies from moving production to Mexico.
A Good Year for Ports
I think our long-term trajectory is still positive. The port has doubled its cargo volume in the last decade, and that's been primarily due to the fact that our advanced manufacturing and export-oriented manufacturing sectors have been doing so well, and by advanced manufacturing we're typically talking about aerospace, the automotive sector, and tires.
South Carolina is very competitive for manufacturing—the Southeast more generally is—and so the long-term economic conditions are favorable to South Carolina. Those trends are likely to continue.
Having said that, of course, because of the ongoing trade uncertainty and the ongoing tariff disputes, we have seen some fluctuations in those growth rates. So export volume going out of the port in late 2018, for example, basically turned negative for a brief period of time when we saw a 40 percent retaliatory tariff put on the books by China, which basically tacked on a 40 percent price increase to every vehicle that was sold in China. That that affected South Carolina significantly.
Fortunately that was only for a six-month period, and then it went back down to 15 percent in early 2019, so the growth rate in export activity has come back in 2019.
The Decaffeinated Economy
This year South Carolina's economy has been resilient in the face of these ongoing trade shocks, but we haven't come away completely unscathed. We've seen a softening of growth this year across the board in South Carolina, and we've also seen a softening of growth at the national level. And one of the reasons for that is because we are now in a decaffeinated economy. So that tax cut package that was passed in December 2017 had a stimulative effect in 2018. Now we're coming off of that this year.
That's also one of the reasons why we've seen more conversation surrounding a potential recession next year, because when you combine a bit of a softening of growth resulting from a stimulus ending with the ongoing uncertainty with the trade shocks, which also put some downward pressure on growth, then those two feed into each other, and all of a sudden you have a lot of concern about whether or not we are headed in a downward direction, headed towards a recession in 2020. But we don't see that.
We see slower growth in 2020—for South Carolina and for the U.S.—but no recession.
Continued Labor Shortage
For 2020, the labor shortage that has emerged is definitely going to be a bottleneck on our gross, and it's unlikely right now that we're going to see employment growth and overall economic growth in South Carolina pick up from its current rate to any significant degree because of that labor shortage, because we don't have the people.
Even if we envision a very positive scenario—let's say that USMCA is passed and let's say that we get a very good trade deal going with with China and we see, as a result of both of those things combined, a significant uptick in demand for manufacturers and in South Carolina—the question still arises, where are they going to get the people to service that demand?
From a worker's perspective, this is the best job market in a generation, and unemployment at 2.6 percent in South Carolina is the best that it's ever been in our history—not just in this expansion, but in all of South Carolina's history since we've been keeping records. So this is great news for workers, because it's having multiple positive effects that are somewhat unique because this expansion has been so lengthy.
This is the longest expansion on record going back to World War II, and a unique expansion brings with it unique economic benefits. And for South Carolina that comes in two forms. No. 1: it means that we're seeing wage growth across the board for all occupation categories, especially for those on the lower end of the pay scale. They're actually the ones seeing the most wage growth right now because there's such a high demand for labor. That's that's very good news for workers.
The 2019 MVP
In 2019 and going into 2020, advanced manufacturing is still the major driver of growth overall, if somewhat broadly. But I'd say this year, if we just look at 2019, it's been largely tourism and to a certain degree professional services, more generally, but tourism has been the big winner, particularly in Myrtle Beach and Hilton Head. And that's because consumer spending has been so strong this year, and that goes back to that tight labor market which is putting upward pressure on wages, and that provides consumers with the confidence to spend. So consumer spending is what's driving our economy right now, and we benefit from it.