Infrastructure spending to help US keep recession at bay

Bloomberg

Minnesota leaders are starting work on a $2 billion light rail project, the state’s largest infrastructure project — and the kind of spending that may help keep recession risk at bay.
Spending by cities and states is a bright spot that could help to extend the expansion, now in its 10th year and within months of becoming the longest ever. Economists see it helping to offset other drag from the trade war, slowing global growth and a fading boost from federal fiscal stimulus and the effects of the longest government shutdown in US history.
States and municipalities contributed 0.22 percentage point to annualised growth in the third quarter, the most in two and a half years, Commerce Department data show. State and local spending will add as much as 0.3 percentage point to growth in 2019 and the first half of 2020, estimates Neil Dutta, head of US economics at Renaissance Macro Research LLC.
“There’s some scope for state and local government spending to add a bit more to growth,” Dutta said. While some forecasters predict a 2020 recession, “this is less plausible when you consider the tailwind from state and local spending.”
A strong economy with rising employment and robust consumer spending is boosting government coffers, funded mostly by sales, income and property taxes. Unlike the federal government, which passed a $1.5 trillion tax overhaul and $300 billion spending boost, most state and local budgets must be balanced, including maintaining rainy-day funds.
“With the long recovery, state and local finances have improved to the point where many states now feel they can undertake projects they had held in abeyance until finances improved,” said Joel Prakken, chief US economist at IHS Markit’s Macroeconomic Advisers. “It’s a late-cycle phenomenon made possible by improvement in fiscal balances.”
US states took in 5.5 percent more tax revenue from July 2017 through June 2018, the budget year most use, than in the previous year, after adjusting for inflation, according to a report from the Pew Charitable Trusts. It was the greatest increase since fiscal 2011, with gains in 48 of 50 states.
Still, former Federal Reserve Chairman Ben Bernanke has warned of a “Wile E. Coyote” cliff effect as fiscal policy tightens after 2019. Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund, predicted in September the economy is two years from a downturn.
A recent Bloomberg survey showed economists raised the probability of a recession in the next 12 months to 25 percent, the highest in more than six years. Two-thirds of business economists in the US expect a recession to begin by the end of 2020, according to a poll released October 1 by the National Association for Business Economics.
While the five-week shutdown ended and congressional leaders negotiating to avoid another, fiscal deficits are set to widen, and stimulus spending “is projected to diminish significantly by the end of 2019,” according to a new Congressional Budget Office forecast.