The West Virginia University College of Business and Economics is having their annual West Virginia Economic Outlook Conference this morning at the Embassy Suites in Charleston. On tap, we have Federal Reserve Bank of Richmond economist Andy Bauer to speak about the 2014 forecast for the U.S. economy. Later this morning, John Deskins, director of the college’s Bureau of Business and Economic Research will detail the school’s 2014 forecast for West Virginia, followed by a panel of business and state representatives to discuss issues and challenges facing the state’s economy in the coming year.
The conference lasts through noon today, so keep checking back and following along for updates.
And with that, we’re out of time. Thanks for joining today on the live blog, and look for final, wrapup coverage in tomorrow’s Daily Mail.
Question for Muchow as to what will happen once Federal Government whittles down its 100% coverage of new Medicaid enrollees once the program is expanded. Muchow said, “Actually, we’re having difficulty affording the Medicaid program prior to the expansion.” Said he would expect higher education budgets for states across the country will get smaller as states free up more resources to cover health care. “Over time, a greater and greater share of resources will be devoted to medical (expenses),” Muchow said.
Another question from High School students: Wondered what the impact of health care jobs will be with the $1.3 billion negative impact of Medicare employment. Ramsey said it will be negative. “There’s no way the industry can absorb that now.” Said you will find that people will have insurance, but will not have access because their doctors won’t take new Medicare/Medicaid patients. With low reimbursement rates, will make hospitals unable to expand to handle influx of other patients. “We’re in for a rough 7 to 10 years.”
Question from high school students in attendance, wondered what the state is doing to develop and retain young workforce. Rotruck pointed to PROMISE Scholarship, also said it’s important to retain those out-of-state college students. “I think that’s a great talent point that we should do more to try and retain in the state of WV.”
Sartarelli said the state is over-regulated for every new regulation there should be cost-benefit analysis. Said there’s no pathway to a future prosperity that’s faster than economic development. Said that is based on five things: have to have natural resources; develop human capital; capital formation, need more capital flowing in the state; technology and science; and finally policy. “Light policy, unleashing the power of the free enterprise system would do so well for this state.” There’s no reason for a state with the natural resources like it has that it can’t be a powerhouse for economic development. “Every bill should be checked for its economic impact — will it help create jobs and advance the economic interest of the state, and if not, it shouldn’t be considered.”
Audience question about what policy change could help the state’s ranking in terms of economic freedom/growth. Hall said it’s hard to pinpoint a single policy. Said since he’s moved to WV,he’s noticed a high degree of “small regulatory cost bites.” Things that you tend not to notice, but add up over time. He said a rational look at specific regulatory costs, “can we achieve those without having so many layers?” Thinks that WV tends to have more of that stacking, which he said was odd given the lack of fiscal centralization of the state. Said the state could have a bit more competition among its tax revenue bases, relying less on one specific area like severance, and more across the entire base.
Question from the audience regarding proposed Future Fund. Rotruck said it’s analogous to Rainy Day Fund, can be sound policy, but needs to be done in a sound way that doesn’t inhibit production. Muchow said state has nearly $1 billion Rainy Day Fund, having a savings account is very vital for a state that relies so heavily on natural resources. Said revenue in the past has been used to reduce taxes in other areas, led to lowest property taxes among other areas of the country. Said it’s important to have a savings fund, just need an idea of how it will be used, how much it will be and keep in mind the taxes now are used to offset ways to raise revenue from citizens to pay for services.
Rotruck said there needs to be a focus on efficiency and maximize output. Support technology development in all sectors, not pick winners and losers.
Rotruck said an all of the above policy is best approach. Said the cyclical nature of energy markets and the way resources are used makes specific resource importance grow and fall over time. “Don’t give up on any particular industry, a lot of times they will come back.”
Rotruck: Public Policy counts. Transitions to new forms of energy were driven by shifts in public policy in the past, UK fleets go to oil under Churchill, de Gaulle’s decision to promote nuclear options, Carter pushing coal in the late 1970s, Merkel in Germany going from nuclear to coal-fired plants. Rotruck said energy industry is in a state of flux that is very hard to predict as a result of public policy decisions.
Scott Rotruck now speaking on the paradigm shift in the energy markets, moving from scarcity to abundance. “We have an abundance of energy in this country.” While some of the sector is struggling with regulations, pricing, there is a paradigm shift of the country going from scarce energy resources to abundance.
Ramsey: With declining government reimbursement rates. “In the near term, unless Congress can decide to work together, we expect the health care industry in this state and every other state are going to be challenged financially.”
Ramsey: Said recent fiscal cliff legislation reduced Medicare hospital payments for hospitals over the next 3 years by $85 million. Sequestration resulted in 2% payment cuts. Regarding Medicaid expansion of 90,000 people in WV, said there were many reasons to be concerned, “When more of our patients and people seeking health care will be covered by government payers….the challenges for every health care provider in our state will be pretty tremendous going forward.”
Ramsey: Regarding the ACA, “It’s the law of the land, it’s here to stay,” but said no interest in policy makers in making it work, so it’s up to hospitals to find a way to make it work. Health care reform will trigger $1.3 billion in reimbursements from Medicaid/Medicaid for WV hospitals over the next 10 years. “Looking ahead…we’re going to lose more hospitals in the state in the coming years based on these reductions in Medicare, which already pays below costs, that are coming.”
Ramsey: Health Care employs 108,000 people in WV, with $3.7 billion in payroll. Even though CAMC is non-profit, they generate nearly $121 million community benefit impact through charity care, unreimbursed Medicaid, subsidized health services and community benefit programs.
Ramsey: 76% of patients in WV are in government health care plan, PEIA, Medicare Medicaid…and that’s expected to rise.
Ramsey: Said PEIA is the worst payer in the state in terms of paying below cost, second with Medicaid. “There’s a hidden tax with everyone in this state, it’s called the cost-shift…we are so dependent on the commercial payer in our state.” Said as government paid patients go up, hospitals will have to rely increasingly more on commercially covered patients.
CAMC’s president David Ramsey speaking now, talking about health care and hospitals. 62 hospitals in the state. WV lost 18 hospitals since mid-1980s, 5 since 1990s. Existing hospitals treat over 5 million patients a year, deliver 20,000 babies. Said that birth rate has declined, “which is a huge impact on workforce development.” Said “we need a campaign to keep young people in our state or we it will be devastating for health care and just about every other industry.”
Looking ahead, Muchow said economic growth is expected to have stalled through first half of the current fiscal year, foreign market weakness will affect exports, employment growth will pick up with relation to health care. Said Federal fiscal policy has been a drag on the state. They are expecting continued volatility tied to energy.
As a share of government revenue, state more reliant on severance taxes, income taxes and lottery revenues than in the past, all of which are more volatile. Federal funds are about $4.64 billion of state budget, more than general revenue fund.
Said for the rest of the year, for the budget to balance out with revenue, they would need about 2.8% growth in revenue y/y for the rest of the fiscal year.
Said revenue estimates missed by $2 million last month, means, down about $34 million for the year so far. Now have negative revenue growth for the year. Personal income tax through part of last month was down 4.3% year over year, corporate income revenue down 12.9%. Severance was up 15.1%. Said corporations and businesses are now reluctant to invest, keeping more revenue on their balance sheets. That will decline in the future as they start spending.
Muchow: Natural gas not only important for state tax coffers, but for local counties. 5 north central counties saw property value growth between 15 to 75% last year, state average was 6.5%. Said that could affect future local-state share of revenue in some areas.
Muchow: Exports of metallurgical coal have dipped slightly in terms of revenue,. Coal severance tax collections 13% natural gas was up 207%. About $9.7 million ahead of last year levels in terms of overall collections. A key is natural gas prices because of the way that tax is collected. Price also affects the steam coal market.
Muchow: “We’re in the midst of a multi-year period of little to not revenue growth.” due to coal mining decline, slowdown in worldwide economy, decline in dollar value of steam coal hurt. One of the areas of concern is wage growth. Been very sluggish over the last few years. That has an impact on personal income tax collections.
Mark Muchow is now beginning a talk on the fiscal outlook for 2014 and beyond.
Hall Thinks too much can be made about the perception of public policy in regard to the state of West Virginia. But he said they are important to keep in mind the public perception of the state when officials look at marketing efforts. “These reports, regardless of whether you think they are valuable, do play an important role in people’s minds when they think about possible business investment in the state.” Can help the state identify places where it is out of the norm, or where it can make small changes that have big benefits.
Hall reviewed legal quality reports from Chamber of Commerce’s Institute for Legal Reform and Americans for Tort Reform. Both ranked the state very low. Hall said a large part of the difference can be explained by the partisan nature of judicial elections in states like WV compared to states that have non-partisan or appointed processes for judges. “The partisan nature of elections can make it seem like we have a bad legal system.”
Hall said WV scores poorly in terms of selective fuel, sales and utility taxes, corporate net income tax rates (which are coming down) and the state’s fiscal centralization. One report state doesn’t do very poorly on is the state business tax climate index by Tax Foundation, it ranks the state as about average in all taxes they measure. Said of all the indicies out there that try to rank state policy, surprisingly that one has least relationship between how they rate states on their index and others like income and income growth.
Hall said WV scores poorly in these measures due to high measures of government spending as a percentage of GDP and government employment as a percentage of total employment. (Has high percentages in both areas.) State does average in terms of subsidies as % of GDP and sales tax as % of GDP. State does poorly in fiscal and regulatory policy freedom rankings, but good in personal freedom ranks.
Hall is going to speak on West Virginia Public Policy with regard to economic freedom, competitiveness and tax policy. Hall said as he prepared to move to the state, many people had the perception of lack of competitiveness. He said there are many ways to measure this, there is much to debate about the value of those measures, but said it is good to know the perception.
Now we begin a panel with WVU Associate Professor Josh Hall, WV Deputy Revenue Secretary Mark Muchow, CAMC CEO David Ramsey and Scott Rotruck, director of energy and transportation services at Spillman Thomas and Battle.
That wraps up the overview of the economic forecast. Dean Jose Sartarelli notes the growth of exports is key for the state. Said most post-WWII countries that saw key growth and influence in the global economy did so by growing their exports.
Deskins: Challenge for reducing disparities is daunting. Risk factors of physical inactivity, poor nutrition, smoking an obesity are high in the state. 75% of the state’s adult population had health coverage in 2009, WV was in the 4th quintile along with KY, Tenn, NC, Alabama, Indiana and some western states. On the bright side, WV performing better than other states for preventative care measures like cancer and cholesterol screenings and vaccinations.
Deskins: said health disparities represent a drain on the economy, both with direct costs of health care and indirect costs of lost productivity/wages, absenteeism, family leave and premature death. Many factors come into play, personal health behaviors, biology, socioeconomic status and health policy.
Desksins: Employment growth in next five years will be more evenly distributed among counties compared to how it was over the last decade. Kanawha County is the highest per capita income county in the state, growth is expected to be inline with state average. Putnam also high, will grow faster than the state average in next five years.
By counties, Deskins said economic growth varies widely by county. Mostly centered in Monongalia, Preston, Hampshire, Morgan, Berkeley, Jefferson and Gilmer counties in population growth since 2002. Going forward, those counties, along with Putnam, are expected to continue to grow at larger rate. Half of counties have actually lost population in last decade, though WVU forecasts more positive picture in next five years.
Deskins: State and local government expenditures per capita is relatively low in WV compared to other states. Only 15 states have smaller governments than WV’s governments in terms of total spending per capita. (This doesn’t include federal spending, just state/local.) As a share of personal expenditures, only 11 states have higher shares than WV.
Health care & Leisure/Hospitality, they predict about 2.3 percent for health care employment. It dipped this year, possibly related to some type of switch over related to Affordable Care Act, but demand for services will continue in the coming years, especially with the aging population. 1% growth expected going forward for leisure and hospitality.
Deskins: In construction sector, expect WV housing growth to reflect national growth. Key driver of construction growth will come from heavy and civil engineering — roads and bridges, heavy infrastructure for oil & gas boom. Housing construction employment will be flat.
Deskins: Coal mining employment expected to be level in coming years, natural gas employment will see continued growth of about 2% annually going forward. Coal use for power generation was about 3 times greater than natural gas use a decade ago, now is just 1.4 times greater.
Deskins said the growth in natural gas is the most difficult to predict portion of the economic forecast due to how much it has exploded in recent years. Production rose almost 40% last year. WVU expects continued growth of 1.7% annually over the next 5 years. Until recently WV was a net natural gas importer, seems it will switch to net exporter in next few years.
Deskins: Moving to industry-specific area of discussion. Beginning with energy, third-biggest sector in regard to output, though small in share of employment. Suffered recently due to coal, but has produced 3,000 new jobs in first half of 2013 due to oil and natural gas industry. While coal mining employment suffered losses in recent years, Deskins said coal mining employment has stabilized. Coal production has increased slightly in 2013, due to rise in natural gas prices, but Deskins said they don’t expect that to remain and coal will level off at a lower production level. Part of the challenge is competition from Illinois, plus a lack of certainty with regard to how new regulatory policies will affect coal production.
Deskins: Age distribution. WV has enjoyed about .1% population growth in recent years, but now expect declines over the next five years. Population growth that state has seen was heavily concentrated in a few counties, was not broad-based. Over the next 5 years, 17 & under population will decline about .2%, 18-44 decline ~.3%, 45-64 decline about 1 percent, but 65 and older will grow about 2.5%.
Deskins: Real per capita income will have little to no growth this year, both for US and WV. Reflective not of slow growth, but because of change in payroll tax break that came into play earlier this year. Expecting WV to have 2% annual growth in per capita income in coming years.
Deskins: Continue to expect WV unemployment rate to remain 1 percentage point below US average, though said that’s still driven by mix of job growth and people leaving labor force (aging population retiring and people leaving the state). Predicting it will take about a decade to get back to 4-percentage pre-recession unemployment rate.
Deskins: Employment growth to be about 1% annually going forward over the next 5 years, somewhat shorter than US, which is 1.6% annually. Professional/business services will be biggest driver, followed by construction then education and health services. Most other sectors are expected to grow, though lower than state average. Mining growth will be slower than the last few years, but still growing. Utilities sector is the biggest laggard that is expected to decline in the next five years.
Deskins: Moving on to 2014 forecast, comes from their own WVU BBER econometric model. Accounts for more than 50 WV-specific variables. “The big picture here: more good news.” Expect continued growth, strong growth in construction sector and the service producing side. “However we do expect growth will probably be a bit slower than US rate going forward.” Not so much because WV rate will slow, but because US rate will pick up. Said population losses and aging will present a challenge to growth. “If you have a shrinking labor force, that presents big challenges to the economy.”
Deskins: Canada is the top export destination in terms of countries. Top destination for coal exports is diverse, going to Netherlands, India, China and Brazil. “Coal exports are moving widely across the globe.”
Deskins: “I cannot ignore exports in WV. Our state’s exports have been booming in the last few years and they deserve special attention.” In 2000, exports accounted for just over 5% of WV total economic output. Last year, exports accounted for 16%. “The importance of exports to the WV economy has more than tripled just in the last 12 years.” Exports started to pick up around 2004, but boomed in the last three years — 30 percent-plus annual growth each year. Isn’t broad based though, mostly coal exports. “Coal has exploded.” Accounted for 9% of WV exports in 2000, last year it was 65%. The contribution of exports to economic output, grew from 1% in 2000, to 12% last year. Expected this to continue to remain important, doesn’t think it’s an anomaly.
Deskins: Real GDP grew by 3.3 percent in last year, above national rate of 2.5 percent. WV grew more rapidly than 40 other states. State GDP has grown more rapidly than national rate for four years.
Deskins: Average hourly earnings growing at about a 2.5 percent annual rate. Mining and logging industry is growing 42 percent stronger than national average.
Deskins: Per Capita income growth, “WV has outperformed the US by a decent margin for the last two years.” For 4 out of 5 years, WV has outperformed the nation. “Even though we have seen this strong growth — which is very encouraging — we still rank very low among the states in this ranking.” Only three states have lower rates. Typical West Virginian is making about $4 compared to $5 of what the typical US citizen is making. Still, that’s the highest rate in many years.
Deskins: “We cannot talk about the unemployment rate in West Virginia without talking about the labor force participation rate…what share of our population is ready, willing and able to work.” Nationally has dropped precipitously. WV is a full 10 percentage points lower than the national statistic. National ~63 percent, WV is 54 percent. “Only 54 percent of our adult population either has a job or is looking for one.” Part is due to older population, but said a key part is some long-run problems in state economy.
Deskins: WV has been below the US in terms of unemployment rate for about 6 years now. Now in the low 6% range in WV, compared to 7% for US. Unfortunately, drop in unemployment has not been driven by people finding jobs, do have a discouraged worker problem of people leaving labor force and not being counted in unemployment rate.
Deskins: US economy remains 1-2% below pre-recession levels. From mid-2012 to mid-2013, state added about 3,000 jobs. Employment growth has been broad-based. Much be driven by mining and natural resources, which represents about 5% of the economy. That sector added 2,000 over that period. The government, which employs 1 in 5, has been biggest drag.
Deskins: “We have a lot of things to be happy about here in WV. And not just talking about the Mountaineer win over Oklahoma State, but in our economy. Overall, our state’s economy continues to improve.” Based on main macro factors, WV has outperformed the US as a whole recently. Job growth is up, per capita income has grown rapidly and real GDP has “grown rapidly and outperformed the US by a considerable margin over the last few years.”
John Deskins, director of the BBER, now beginning the presentation for the WV Economic Outlook for 2014. Will cover recent performance, the forecast, some key industry forecasts and some county-level impacts. Will also cover the special topic of health care disparities.
That wraps up Bauer’s session. There will now be a 15-minute break, and reconvene at 10 a.m. for the presentation of the 2014 WV Economic Outlook.
Bauer: Was asked if instead of Dodd-Frank, if they just restored Glass-Steagall. Person said Dodd-Frank seemed to try to get same results as Glass-Steagall, but through a more complicated way. Bauer said if GS issue of commercial/investment bank mix was sole cause of financial crisis, it could work, but he said the real problem was larger than that. There was moral hazard and excessive risk and failure of market discipline. He said going forward regulators need to find the best way to restore discipline in the markets, which is beyond what GS would do. Still, many bankers are still working to figure out what the exact impact of Dodd-Frank are, which is holding back growth to some degree.
Bauer: Was asked if the Fed’s eventual campaign to raise rates, which will happen as accomodative policies are unwound, if that will hurt housing market. Bauer said the low rates have improved homeowners’ equity position because they’ve been able to refinance. While some are still struggling, on the whole many consumers are in a better position.
Bauer: Said the Fed would like to see consistently 3.5 to 4 percent growth over time to see a significant recovery in labor market post-recession.
Bauer: Taking questions from the audience. Said the 2nd half pickup in growth has not yet been as strong as people thought. Led Fed to revise growth outlook for next year downward slightly. Said most likely due to the uncertainty, but said that is “difficult to quantify” how much that has affected businesses. “But when we sit down and talk to businesses…we consistently hear — over the last couple years, and particularly this year — concerns about some of these changes.” Said it doesn’t necessarily mean change is bad, it just means the businesses are waiting to see the full impact the change will have.
Bauer: In summary, continue to see moderate economic growth, but overall moderate with 3% growth in 2014. Underlying fundamentals seem to be improving, but still a lot of uncertainty with how things will go going forward. Steady improvement in labor market will continue in near term. While moderate growth continues, monetary policy will continue to be very accommodative to promote economic growth.
Bauer: Moving on to monetary policy, inflation rate for personal consumption expenditures has remained below target and is expected to stay that way in near term. Policies to lower interest rates, namely quantitative easing, have expanded Fed balance sheet. Was at $3.758 trillion on 9/18 this year, up from $3.351 in May. Focus on Fed meetings now due to expected tapering, Fed decided not to taper at most recent meeting due to wanting more evidence that economy will continue growing. While Fed members are seeing improvement, they want to see it continue before tapering.
Bauer: Said Social Security and spending on federal health programs will continue to rise, along with net interest on the debt, while other non-interest spending will decline moderately in coming decades. Outlook on the budget, “Clearly that’s not going to be solved overnight,” will result in continued uncertainty until long-term sustainability is achieved.
Bauer: Source of considerable uncertainty has been the budget situation here. Businesses can’t plan their long-term tax policy costs, creates caution in the business community while that process unfolds. Over next couple years, U.S. Debt-to-GDP ratio will drop some in coming years, but beyond 2020, it is projected to rise at an unsustainable rate.
Now onto concerns. Bauer said a recent concern was the sovereign debt crisis and problems in Europe that could impact the banking system over there and trickle into U.S. economy. Resulted in a reduction in risk-taking and investment by U.S. businesses. Now that Europe has enacted some reforms, he said Europe is beginning to slowly improve. While fundamentals in Europe remain tricky, he said things are improving.
Bauer: Said home price indexes are rebounding, showing growth in prices. Growth is now greater than 10 percent over the last 12 months. “We’re seeing, in terms of home prices, that things are finally settling down and the housing market is gaining momentum.”
Bauer: Said a stronger labor market would help the housing market, so that’s weighing on growth in that sector. Number of owner-occupied homes has declined since the Great Recession, meaning they are renting waiting on a better time to buy a home (pent-up demand). “People are clearly out there waiting to purchase, they’re just waiting on the right time.”
Bauer: In the housing market, homebuilders haven’t returned to the highs of the housing boom, but they are feeling better about the future. Still, seeing consumers coming back is a good sign for the overall economy. Vacant housing levels are declining, level of new home inventories are near historic lows. Said that sets stage for continued construction.
Bauer: Businesses that know things are going to improve in their business and will see strong demand are hiring. Business that don’t know about future demand, or are uncertain about the impact of health care or other reforms are less likely to hire.
Bauer attributed part of that the demographic change of baby boom generation beginning to retire. “But that’s only part of the story.” Rest: Seeing slow recovery in housing market, unemployed construction workers still not working after the bust. Also seeing, despite fact manufacturing sector has done relatively well, manufacturers are able to do more with less due to improvements in production. “Manufacturers through the recession find ways to do things more efficiently…as a result, as it comes time post-recession to do things, they’re able to do more with less.” “As a result, certain jobs that were lost in the recession do not come back.” Said that can lead to mismatch of skills of workers in the labor force and those being demanded by businesses, results in continued slack in the labor market.
Bauer said, “You would have to describe the current conditions in the labor market as weak.” Said Labor Force Participation Rate has continued to decline since the recession, meaning less people are engaged in the labor force. Have not seen a measurable uptick in employment-population ratio, showing incredible slack in economy.
Bauer said inflation outlook remains fairly positive, meaning Fed doesn’t believe it will grow beyond its target for some time. Noted the economy did not experience the “big bump” you would expect coming out of the Great Recession. Employment growth since then has not been fast enough to lead to a rise in wages, causing wages and salaries to remain relatively flat.
Bauer: “Business investment has really softened in the last couple of quarters.” Said it has averaged at a low rate of 2 percent. Mainly tied to uncertainty. Just the latest fiscal uncertainty has held back investment. Also some regulatory uncertainty giving businesses pause.
Federal Reserve Bank of Richmond economist has already started his presentation about the U.S. economic outlook. Bauer has said the economy for 2nd half of 2013 & 2014 will feature “moderate growth with significant headwinds.”
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