Thursday marked the semiannual Festival of Numbers that is the consensus economic forecast, prepared as always by Vermont state economists Tom Kavet and Jeffrey Carr. The topline: Happy times will continue for another year and a half or so, but after that there’s tremendous uncertainty and huge downside risk.
Or, to put it in purely political terms, Phil Scott will enjoy smooth financial sailing through fiscal year 2024 (assuming he wins another term, and there’s no reason to think he won’t), but whoever is governor in 2025-26 may have a real mess on their hands.
The very short-term forecast is for even more money to flow into Vermont’s coffers. Carr and Kavet upgraded their revenue forecast for the rest of FY2022 (ends June 30) by $44 million.
The reason: Vermont’s economy and state revenues continue to be buoyed by the flood of federal Covid relief dollars — more than $10 billion in all. “We had a [fiscal] hole and we’re filling it five times over with federal stimulus,” said Kavet. Those dollars will continue to flow for 12-18 more months. Then comes a return to Earth, and a landing that might be soft, or… a splat on the landscape.
“There is no playbook from the last time the feds dropped $10 billion on our economy,” said Carr, meaning that it’s never happened before. When the money dries up, Carr said, “the amount of risk, especially on the downside, escalates… The economy will transition into something new and different.”
And while the short-term outlook is rosy in the aggregate, that doesn’t mean everyone is doing well. “One hand’s in boiling water, one’s in ice water,” said Carr. “On average, you’re okay.”
Who’s in danger of fiscal frostbite? “There are many sectors and groupings whose fortunes have diverged starkly,” said Kavet. “In general, it looks like greater inequality of wealth and income post-pandemic.”
Why? For one thing, investment income has generally been strong. “There’s so much money in the system, people don’t know what to do with it,” said Kavet. That has boosted not only stock prices, but also nontraditional investments like cryptocurrency and NFTs. Of course, you can’t benefit from this if you have no spare cash to invest.
And housing stock. The housing market continues to be red-hot. The median home price in Vermont hit an eye-popping all-time high of $369,450 in December. This was a good thing for Carr when he recently sold his home — in a matter of hours for way above list price.
“Our listing had over a thousand visits on Zillow on the first day,” Carr noted.
The flip side of that $370,000 coin: If you’re a renter, you’re shit out of luck. You can’t cash in on an asset you don’t own, and rents are increasing.
There are historically few homes on the market; it’s also a historically good time to sell a car and an equally bad time to buy one. In November, according to the Federal Reserve Bank, less than 40,000 cars were available for purchase nationwide. (A normal figure would be in the neighborhood of 1.5 milllion.) That’s the equivalent of 77 cars for sale in all of Vermont. “The housing and auto markets are constrained by supply, not demand,” Kavet noted.Again, if you have assets you’re doing well. If you don’t, sucks to be you.
Corporate profits are also booming — at least for the winners. Because of all the demand, said Kavet, “those that can pass price increases along are doing so with gusto.”
Meanwhile, there hasn’t been much wage growth at all. Well, there’s been some at the low end of the scale as low-wage employers have struggled to fill vacancies. But lower earners have been hit hard by the inflation resulting from red-hot demand, so they’re not exactly winning overall.
That “on aggregate” prosperity hides another grim reality. “There’s still an awful lot of labor market damage to repair,” Carr said. “We lost 63,500 jobs at the beginning of the pandemic. The unemployment rate is low but if you adjust for labor participation, it’s probably over 7%. There’s still a lot of economic damage out there.”
Bottom line: There’s tremendous uncertainty about how strong our economy will look like after the flood of federal aid recedes — and equal uncertainty about the nature of the post-pandemic economy. One thing seems certain: Wealth inequality, which was already ridiculous before Covid-19, will be even worse.
We should keep that fact in the front of our minds as we figure out how to spend all those federal dollars. Addressing wealth inequality should be at the top of the list. You can’t have a healthy, vibrant economy if available wealth is captured by a fortunate few. You need a lot of people contributing to, and benefiting from, economic activity.
What does this mean in terms of policy priorities? More housing, especially affordable housing. Education, especially making higher education more affordable and boosting technical education and the trades. And addressing the problems of rural Vermont.
I’m probably missing some big items here, but that’s a decent starting point.
The stormy outlook for the medium and long term makes it even more important that we invest our federal dollars wisely. We won’t get this chance again. We have to take advantage of it to minimize the pain of an economy in rapid transition toward an uncertain future, and to make sure we leave no Vermonters behind.