Although the economy is beginning to heal, uncertainty over fiscal policy and future tax rates is hindering a stronger recovery, according to several experts who spoke recently at an annual conference.
Greg Gonzales, commissioner of the Tennessee Department of Financial Institutions, delivers the keynote address Sept. 21, 2012, during the MTSU Economic Outlook Conference. (Photo courtesy of MTSU/Andy Heidt)
“The economy is not being threatened to jump off a cliff,” said David Penn, director of the Middle Tennessee State University Business and Economic Research Center. “It is being pushed.”
Penn was one of several economists who addressed a crowd of more than 200 people during the annual Economic Outlook Conference, which was held Friday at Embassy Suites Murfreesboro Hotel and Conference Center.
During his presentation, Penn pointed to an improving housing market in the Middle Tennessee area as one facet of the economy that continues to show improvement.
“Housing is the brightest spot in the Nashville market right now,” he said, adding single-family home construction for Tennessee rose to 1,084 units in July, up 73 from June.
Volatility in the housing market also maintained its decline.
However, Penn cited concern over signs that the economic recovery is beginning to stall due to the regulatory and policy-making uncertainty in Washington, D.C. – a situation that is unlikely to change because Congress has adjourned until after the November elections.
He noted there is still great apprehension over the rising unemployment rate in recent months, as well as other key economic indicators that have stagnated or begun to head in the wrong direction.
If Congress allows the tax cuts passed under former President George W. Bush to expire and avoids finding long-term solutions to the national debt, the United States will be pushed into a double-dip recession that could take even longer to self-correct, he said.
Under those conditions, he said the unemployment rate in Tennessee will likely rise from 8.4 percent to 9.3 percent in the fourth quarter next year.
Penn said the unemployment would remain that high at least until the second quarter of 2014, at which time it would fall to present levels, not lower.
Donald Ratajczak, a professor of economics emeritus at Georgia State University, reiterated those concerns, pointing to five areas of uncertainty that are affecting the national and global economy.
Among those, he said the future stability of the European and Chinese economies have a direct affect on American markets. He added that the recent drought has also impacted food prices, which cuts into disposable income.
In addition, Ratajczak said an unbalanced U.S. fiscal policy of heavy Federal Reserve intervention and little to no action on the federal debt is hampering a stronger economy recovery.
“This uncertainty is starting to slow down the economy,” said Ratajczak, who is a nationally known economist. “No one will risk capital until decisions are made. This is a Congress that has not done anything.”
The comments come on the heels of a recent decision by the Federal Reserve to purchase mortgage-backed securities, as part of further efforts to target the high unemployment rate and keep interest rates low.
The move was met with harsh criticism because it is just the latest round of quantitative easing, which is a monetary policy used to increase the money supply in an effort to stimulate economic growth.
And while the stock market surged on the news, Ratajczak said more federal intervention into the American economy also strains private sector growth, especially given the fact that the national debt crisis is a primary factor causing negative expectations.
Several Tennessee lawmakers have also expressed similar concerns in recent months, including Republican U.S. Sen. Bob Corker.
“Business leaders all over the country tell me that economic growth is being impaired by public policy uncertainty – mostly driven by the implications of our massive debt – not by a lack of cheap money,” Corker said last week in a press release.
Instead of temporary fixes that substantially add to the national debt, Corker said Congress should do its job and work together to find solutions.
“To get this economy really moving, we need true fiscal reform that includes pro-growth tax reform, a long-term plan to restore solvency to Social Security and Medicare,” he said, “and dramatically lowers the deficit.”