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SBJ Q&A with Navin: More downward pressure on unemployment rate coming

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Chamber Economic Outlook event keynote speaker Kathleen Navin spoke with Springfield Business Journal on tariffs, minimum wage and other topics.

SBJ: With the U.S. unemployment rate hitting an 18-year low this summer at 3.9 percent, do you believe this number is sustainable for the next 12 months? Does the rate truly indicate a strong economy to you?
Navin: Yes, our baseline forecast is that solid, above-trend economic growth will continue to push the unemployment rate lower over the coming months. We expect the unemployment rate to decline to 3.4 percent by the second half of next year. We also expect the participation rate to move up over that time, as more workers are encouraged back into the labor market. As economic growth moderates and eventually moves below trend, we expect the unemployment rate to begin moving up again starting in early 2020.

SBJ: Predictions of the next recession are always being made, with some economists forecasting 2020. Do you agree?
Navin: We show growth slowing to below trend beginning in 2020, but we do not show a recession in our baseline forecast. We see recession risks as fairly contained over the short term, but the possibility of a recession within the next five years or less is likely. Indeed, we have elevated concerns about 2020, as that is when we show growth slowing to below trend as monetary policy continues to tighten and fiscal stimulus wanes. In addition, our base forecast shows the unemployment rate beginning to rise in 2020, moving toward its sustainable rate. However, in the U.S., there has never been a case of the unemployment rate rising to its sustainable rate from below and stopping there. Such a period has always been followed by a recession.

SBJ: What is your position on the numerous tariffs now in effect in the U.S.? Are they good or bad for the economy? What impact do you see for them moving forward for the short- and long-term?
Navin: Generally speaking, tariffs have the potential to be a positive for the industries they protect. But they are a negative for the economy more broadly, as they raise the cost of imported commodities directly and many other downstream commodities indirectly.

Our baseline forecast includes those tariffs and retaliation that have either already been enacted or those that have been announced as ones that will soon be implemented. This includes tariffs on washing machines, solar panels, steel and aluminum, as well as 25 percent tariffs on $50 billion of imports from China. The inclusion of these tariffs has had little effect on our baseline macro forecast to date. However, the tariffs that have been threatened, including further tariffs on $200 billion of Chinese goods, would be a much bigger deal, and something we are watching closely.

Another risk to the forecast that we are watching is how businesses respond to the uncertainty created by escalating trade tensions. There is some anecdotal evidence that companies may be pausing capital expenditures until they better understand how this will all play out. We project solid growth of business investment over the near term, so this would be a potential downside risk to the forecast.

SBJ: How would Proposition B, which seeks to raise the state minimum wage to $12 by 2023, impact the state’s economy? What’s the outlook on minimum wage rates, economically speaking?
Navin: We have not done any analysis on the economic impact of Proposition B, so I can’t provide any estimates here. However, more broadly speaking, if the increase is modest enough, then it wouldn’t necessarily reduce employment – which tends to be the classic textbook response you may hear cited. The real world tends to be more nuanced, and there is evidence in the literature that modest increases in the minimum wage can lead to net positives for economic growth. For example, it would imply more income for those workers who earn the higher wage, providing a boost to consumer spending, which is a positive for growth. It could also lead to a more qualified workforce as employers try to offset the higher costs associated with labor by training workers to be more productive.

It’s important to note that these studies look at increases in the real minimum wage. With inflation expected to pick up modestly over the next few years, it’s possible such an increase in the minimum wage would at least partially be keeping up with overall price increases and really have minimal real economic effects.

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