Economists Bullish On Fed’s Course Steady State Growth Will Result From Greenspan’s Approach, Batt Analysts Say

Amid criticism of the Federal Reserve for its anti-inflation zeal in raising interest rates, Batt administration economists believe the Fed’s approach actually will assure Idaho’s steady economic growth.

In their new forecast, Division of Financial Management analysts see this year as the weakest for the state economy into the next century.

And even though Idaho fails to match national benchmarks in certain key indicators like personal income during 1997, growth should still be solid if the nation’s central bank sticks to what many believe is its game plan.

The following three years through 2000 should again produce stronger growth in Idaho than nationally, the new forecast indicates, albeit “at a much slower pace than during the first half of the decade.”

But that outlook relies heavily on Federal Reserve Chairman Alan Greenspan continuing to ignore those who claim the March increase of a quarter percentage point in the Federal Funds interest rate was an unwarranted overreaction to a nonexistent inflation problem.

Not only do state economists believe circumstances justified the initial Fed increase, but that boosts of another quarter point this month and again toward year’s end can assure that the nation - and Idaho - avoid recession.

Even waiting until summer to make the next adjustment could set the stage for serious problems, the forecasters indicate.

They point out that inflation has been checked by temporary factors, mainly the unprecedented slowing of employer medical expenses in the shift to HMOs and managed care. Once that fact disappears, as it will, they say, employee compensation costs will begin rising again in what remains a tight labor market.

Modestly moving interest rates now to temper economic enthusiasm, the economists say, should keep inflation from undermining continued steady growth.

“If the Federal Reserve waits until there are clear signs of inflation, it will be too late, and it will be forced to take drastic measures that could plunge the economy into a recession,” economist Derek Santos writes.

To be sure, a delay would benefit Idaho in the short run - generating 1,200 more jobs and more than $400 million in extra personal income this year and next than currently forecast.

But the forecasters paint a gloomy picture they say would result in the event of such a delay:

The bill would come due in 1999 and 2000 when the Fed has to act more aggressively against inflation.

The Federal Funds Rate would have to be pushed to 8.5 percent, more than 3 points higher than it is today.

The prime interest rate that banks charge their best customers would surge into double digits, choking off the capital that had kept both the state and national economies growing.

Idaho would wind up with 12,000 fewer jobs than now expected in those two years, 10 times the number of extra jobs the strategy would create this year and next.

Real personal income would fall more than a half-billion dollars.

Linking Idaho’s economic performance directly with the nation’s marks the end of the state’s counter-cyclical relationship to the rest of the country.

For generations, Idaho was always the last to feel the economic swings. Its economy would be flagging when the rest of the country was enjoying prosperity, and it would be flush when the rest of America was struggling.

But the structural change Idaho has undergone in the past decade, underscored by the major role high technology has assumed, has diversified the economy to the extent it now reacts in tandem with the national economy.

Nearly 20 years ago, timber, mining and agriculture were the cornerstones of the state economy. They accounted for more than half of the generally higher-paying, goods-producing jobs.

Per capita income was 85 percent of the national average. Total wages and salaries were rising at double-digit percentage rates. And 9,000 new homes were being built annually.

Then Idaho plunged into one of its worst economic downturns. Wages and salaries were stagnant. Per capita income dropped to 75 percent of the national average. Home starts sank to 3,500. People were fleeing the state, and total population actually declined.

The downturn wrenched the inefficiencies - and many of the jobs - out of the resource-based industries.

When the economy finally began its comeback five years later in the late 1980s, there were actually 8,300 fewer jobs in those cornerstone industries of timber, mining and food processing.

But high-tech, only a blip on the job chart during the resource heyday of the late 1970s, was asserting itself.

Today, food processing, timber and mining still provide fewer jobs than 20 years ago despite a 29 percent increase in population.

But the high-tech work force has nearly quadrupled in that time to become the largest in the manufacturing sector. Idaho’s population is growing at twice the national rate. Nearly 8,500 new homes will be built this year by a construction labor force double the size it was a decade ago. And per capita income is back up to 80 percent of the national average.

“The restructured Idaho economy is better positioned to exploit growth opportunities that arise this decade and is expected to sustain solid growth,” Santos writes.