August 17, 2006
High Oil Prices and Interest Rates Are Slowing the National Economy, Says Standard & Poor's Expert
By Martin Kennedy
Nashville Bureau for NCSL
NASHVILLE – The economy is slowing, but that's okay, said David Wyss, chief economist at Standard & Poor’s at the National Conference of State Legislatures' 2006 Annual Meeting.
For the past few years, the economy has been growing at a rate of about 3.5 percent per year, Wyss said at a session titled "State Economic Outlook." He expects that to slow to about 2.5 percent per year.
“That’s not bad. We have about a 2.5 percent rate of inflation and just over 4 percent unemployment rate. The foreseeable future looks pretty good actually,” Wyss said. But he added, "the future really is not foreseeable. We don’t know what will happen.”
The economist blamed the slowdown on high energy prices and higher interest rates.
While energy is expensive today, Wyss explained that U.S. output is far less focused on that sector now than it was during the last two dramatic oil price spikes in the 1970s and 1980s. The U.S. produces more output per barrel of oil consumed than we did then. Therefore, Wyss explained, the economy is insulated to a greater degree from volatility in this area.
Wyss predicts that oil prices will fall to somewhere between $55 and $60 per barrel. Though national output per barrel has increased, the total U.S. demand for oil is still growing, he said. Increased demand from China will also keep prices higher than historical averages. These trends should keep energy prices high enough to provide an incentive for the domestic oil industry to ramp up production in the U.S.
While oil could be getting cheaper, Americans could be paying more to borrow money before the year is over, Wyss believes. "The Fed has given us 17 consecutive interest rate hikes,” he said. And he thinks it’s an even bet whether the Fed will raise rates again this year. But by spring or early summer 2007, rates should ease.
Wyss had few worries about the present state of the economy, but when he peered years ahead, he did have concerns.
He called the current federal budget deficit overrated. "Currently it is between 2 percent and 3 percent of GDP, lower than most industrialized countries," Wyss said.
But he sees a longer term demographic problem looming. Currently there are 21 retirees per 100 working people. By 2020 the ratio will be 29 to 100. The trend in countries like Japan and Italy is worse.
"We've made promises in terms of Social Security and healthcare that are going to be difficult to keep. Our national debt is 45 percent of GDP currently. If we change nothing the debt will be 350 percent of GDP by 2050,” he said.
Wyss said the nation must either lessen its promises, decrease benefits, increase revenues or some combination of those options.
While states' budgets look fine for now, and their bond ratings are in good shape, they could face some of the same problems as the federal government as the Baby Boomers retire. Wyss pointed out that Standard and Poor’s does not take pension systems into account when making evaluations. He said that many states have significant problems with under-funded pensions and future healthcare expenditures.
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This summary is provided for information purposes only. NCSL does not endorse any views it contains.
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