Metro-Area Economies: Don’t Uncross Those Fingers Just Yet

Economists predict a return to steady economic growth in the latter half of this decade but said inaction on Capitol Hill could reverse that.
by | January 18, 2013 AT 1:00 PM

The nation’s metropolitan areas should have more to look forward to as economists predict a return to steady growth in the latter half of this decade but cautioned inaction on Capitol Hill could reverse that outlook.

After years of tight budgeting and flat revenues, James Diffley, director of regional economies for IHS Global Insight, told city leaders that metropolitan areas were poised for better job growth in the coming years.

“Absent a political debacle over the debt ceiling, we continue to expect a slowly growing economy but with improved fundamentals which will leave us poised for faster growth in 2014 and beyond,” Diffley said Thursday during a presentation at the U.S. Conference of Mayors in Washington, D.C. “And metropolitan areas will lead the nation back toward full employment and a robust economy.”

Diffley predicts economic growth this year will average 1.7 percent, a rate he characterized as “moderate to slow.” Healthy growth is around 3 percent, he said.

The key for localities, however, is to move away from the notion that they will return to their old economy.

“Regional economies face this new paradigm marked by a high degree of need just as they are presented with significant caps in resources,” Matt Erskine, a U.S. Department of Commerce assistant secretary told a separate panel of mayors. “So what that results in is communities and regions [barely] getting by, much less thrive or return to the status quo like we did in past recessions. We need improved models to harness regional assets in order to create the best economic impact.”

Cities can take advantage of new government programs designed to create local jobs, even as local aid shrinks, Erskine said. The $40 million Make it in America Challenge, launched in September by Commerce, will give out roughly 15 awards to winning companies that will increase local investment and domestic manufacturing.

Additionally, the New Markets Tax Credit Program was extended in January and made $3.5 billion available each year for 2012 and 2013. The program is part of the Community Development Financial Institutions Fund, which is geared toward investment in underserved communities.

But failure to reach an agreement on the nation’s debt ceiling could have a catastrophic effect on local economies. Congress has until March to either raise the country’s $16.3 trillion debt limit or risk letting the Treasury default on its debt and the issue has once again pitted fiscally conservative Republicans against a push from Democrats to allow more spending. If an agreement is not reached, and the federal government default, the spending cutbacks would be extensive.

“Literally, we’re talking about another recession should the government have to cut back,” Diffley said. “This is essentially worse than the fiscal cliff: the fiscal cliff we could have gotten by afterward for a little while because spending cuts would have taken effect gradually. The debt ceiling, the spending cuts occur all at once.”

Cutbacks in federal spending would trickle down to the state and then local level at a time when local governments have already squeezed their constituencies for more revenue. Additionally, a default on debt would have a devastating effect on consumer outlook and spending, Diffley said.

Still, attitudes are positive, which has a direct impact on consumer sentiment. Fitch Ratings on Thursday said in a news release that its outlook for the public finance sector remains stable and it anticipated the majority of rating actions in 2013 will be affirmations.

John Zogby, founder of the Zogby Poll, said during a U.S. Mayors conference presentation that optimism among voters has returned – 53 percent of likely voters describe themselves as “very” or “somewhat optimistic” about the future of the country. And President Barack Obama’s approval rating clocked in at 56 percent, his highest since October 2009, according to the poll.

“And so this is a time for a jobs agenda, this is a time to take that momentum that the public is feeling, the level of expectation they’re feeling with a new administration,” Zogby said.