|
 Illinois’ slow recovery from the COVID-19 pandemic
may face a new threat: an economic contraction sparked by heightened global
uncertainty, soaring commodity prices and tightening financial conditions.
In an abrupt shift from 2021’s strong growth, the U.S. economy shrank at an
annual rate of 1.4% between January and March of this year – in large part
because the U.S. economy is overheating.
The latest economic report shows U.S. demand is resilient in the face of many
challenges – COVID-19, supply chains issues, labor shortages, a cooling global
economy, a war in Europe and rising commodity prices. This is because personal
consumption expenditures – roughly 70% of gross domestic product – and
investment actually increased despite rapid price increases.
Higher input costs for producers harm U.S. economic prospects. Higher inflation
can pull down U.S. output and exports because of higher prices faced by
producers. Uncertainty in Europe and a weaker global economy have also
strengthened the U.S. dollar and U.S. imports are soaring. As US exports become
relatively more expensive, the strong dollar has a negative impact on earnings
and economic growth. As a matter of simple accounting, lower net exports
subtract from GDP.
The increase in the trade deficit is also a sign domestic demand is outstripping
the economy’s productive capacity. That means the U.S. economy is overheating.
The personal consumption expenditures price index for March increased 6.6% from
one year ago. Employment costs are also up 4.5% over the past year, according to
data released by the U.S. Bureau of Labor Statistics.
An overheating U.S. economy will prompt the Fed to act more aggressively to
combat inflation. Faster inflation will weigh down the U.S. economy. More
aggressive action at the Fed to bring down inflation could also plunge the
economy into a recession.
The latest economic data is likely to result in faster and more aggressive rate
hikes.
[to top of second column] |
Unfortunately, the Fed has rarely been successful at bringing down inflation
without precipitating a recession. This time better be different, because a
handful of states such as Illinois have not yet recovered from the pandemic
downturn.
As of March 2022, Illinois was still missing 154,500 jobs that existed before
the pandemic. At 4.8%, the state’s unemployment rate is the sixth highest
nationally. If growth at the national level stalls or the U.S. economy
contracts, Illinoisans will likely be worse off than other Americans.
To really tamp down inflation, either demand needs to decrease, or America needs
a miracle increase in productivity. State policies could help.
While the Fed aims to bring down inflation, many states – flush with cash – are
handing out money to their residents or introducing record spending plans. While
these moves are politically expedient for politicians concerned with reelection,
the increase in state transfers to households worsens the problem and provides
only modest, temporary relief.
In Illinois for example, Gov. J.B. Pritzker is increasing state spending with
his record $46.5 billion budget, which included salary raises for lawmakers and
direct cash transfers to households. Rather than one-time handouts to
households, structural reforms that increase the incentive to work and to
innovate would expand potential output.
Lawmakers could start by addressing the $1.8 billion dollar unemployment trust
fund deficit that will result in higher taxes for producers. Illinois could work
to reduce the cost of doing business in Illinois, which is No. 3 in the U.S. for
the most regulatory restrictions. The state’s high business taxes also reduce
innovation.
State lawmakers should work to make structural changes that can boost domestic
production and keep the U.S. economy humming.
 |
