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Perspective | Slower Growth Is More Sustainable

Experts: U.S. GDP up 2-2.5% in ’19; state at or under 2%
Mark Green is executive editor of The Lane Report.

Economists’ educated guess is that the Kentucky economy grows roughly another 2 percent in 2019, continuing a slow 10-year expansion.

In 2018, state GDP was $205.6 billion for all public and private goods and services produced and provided in Kentucky, an overall 1.7 percent increase. That means 2 percent growth equates to another $4.1 billion goods and services for a total of just under $210 billion in economic activity.

The bad news is, U.S. GDP growth is expected to be 2.5 percent in 2019, so Kentucky will not perform as strongly as the nation as a whole. The good news, though, is that the commonwealth’s urban centers are forecast to grow more than the national rate.

The experts at the University of Kentucky Gatton College of Economic and Business tend toward conservative estimates, which they share at an annual outlook conference that The Lane Report cosponsors.

Jenny Minier, professor of business and public policy and director of UK’s Center for Business and Economic Research, said that her best guesstimate for Kentucky GDP growth for 2019 is 1.8 percent – pointing out that it’s lower than the U.S. rate but higher than the state’s 1.7 percent growth last year.

In a February presentation in Lexington to an audience heavy with bankers attending the 2019 outlook conference, Minier cited as the primary economic pluses for this year the nation’s “strong” GDP growth, low unemployment, low inflation and stock market levels that remain historically high. Concerns are low wage growth, increasing federal debt levels and uncertainty about trade policy as well as potential government shutdowns.

The state is diverse. Areas near the major logistics hubs at the Louisville and Northern Kentucky airports are thriving and face running out of land to develop. Areas in Eastern Kentucky, however, continue to truly suffer from the loss of most of their coal jobs – so much so that several counties are experiencing population declines.

The trade, transportation and utilities category has generated the most jobs, both for 2017-18 at 10,300 and for 2015-18 at 27,100. Professional and business services was the No. 2 category in 2017-18, with 6,300 new jobs, reflecting the fact that the long, slow recovery truly accelerated last year on a broad basis. For the three-year period, the next highest categories were education and health services with 8,800 jobs and manufacturing with 8,700 jobs.

As for things to watch this year, Minier’s presentation advised monitoring the news on trade policy, including the Trump administration’s threat to increase 10 percent tariffs on imports from China to 25 percent; renegotiation of NAFTA because Canada is the largest export destination for Kentucky goods; tariffs on aluminum and steel, which are significant industrial sectors for Kentucky; and whether other nations decide to retaliate.

Nationally, the view from Loretta Mester, president/CEO of the Cleveland Federal Reserve Bank, is for GDP growth that was 3 percent last year to slow in 2019 to somewhere in the range of 2-2.5 percent. Mester, who also presented at the Gatton conference, is one of the members of the Fed’s influential Federal Open Market Committee that sets short-term interbank loan interest rates that are the reference point for all other interest-rate financial instruments such as business loans and home mortgages.

Mester said Fed governors are happy with that 2-2.5 percent GDP growth forecast because it should keep the economy close to the federal policy makers’ goal of 2 percent price inflation. That means stability in interest rates, which the Fed raised four times in 2018, provoking political consternation and business community angst. Rate hikes – in isolation – increase costs for business investment and mortgages, which decreases returns and economic activity. However, knowing that inflation should remain at about 2 percent decreases uncertainty for business budget planners and managers.

“The most likely outcome is that the (U.S.) economic expansion will continue this year, with growth moving down to a more sustainable pace,” Mester said.

Mark Green is executive editor of The Lane Report. He can be reached at [email protected]