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The State’s Economic Outlook Is Strong Now — but the Bubble Could Burst

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Legislative economist Tom Kavet, center, at the Statehouse in Montpelier on April 12, 2019. Photo by Glenn Russell/VTDigger

During a briefing Wednesday meant to catch lawmakers up before a new session begins in January, Tom Kavet, the Legislature’s top economist, returned again and again to the same theme: uncertainty.

“We will continue to be whipsawed by what happens with the pandemic and, obviously, the responses to it,” he said.

The state’s economists create formal economic forecasts twice a year: one in July, the other in January. 

December’s numbers are preliminary, but in the short term, they are telling the same story they have been telling for about a year: awash in federal funds, the state’s coffers are flush and the economy is booming. Still, the state’s number crunchers warn a downturn could still be on the not-too-distant horizon.

Vermont is now projected to end the fiscal year with a $188 million General Fund surplus, a portion of which likely would be reallocated when the state makes its mid-year budget adjustment. (This is separate from, and in addition to, a projected $90 million surplus in the Education Fund.) And the state now has $265 million socked away in reserves, more than 13% of its General Fund. 

Between payments sent to businesses, residents, state government and municipalities, the state already has received a staggering $10 billion between all the Covid-19-relief packages. It is now set to get at least another $2.2 billion from the federal infrastructure deal, and the Build Back Better social spending bill championed by President Joe Biden could bring billions more. Though it’s currently stalled in Congress.

If the pandemic recedes, according to Kavet, pent-up demand and improving labor markets could generate GDP growth of nearly 10% — the highest since 1989.

Vermont’s experience with the Delta variant also suggests that the economic impact of surges in infections are far more muted than before, the economist said. Electricity consumption in commercial spaces, for example, is back to baseline. And, spooked by air travel, many appear to be headed to destinations they can get to by car.

“There’s roughly 50 million people within about a five-hour drive from Vermont. It’s brought a lot of tourism to the state, and meals and rooms (taxes) have benefited from that,” Kavet said.

But record-breaking and rising hospitalizations could spell trouble. And supercharged stock and real estate markets could collapse of their own accord.

Stock market gains right now are extraordinary, Kavet said, and “highly vulnerable to downside at this point.” Another key indicator that what goes up may soon come down? Enormous investments in meme stocks and cryptocurrency.

Inflationary trends — particularly in real estate — show no signs of slowing down for now. Home prices grew by double digits in at least two quarters of 2021, a trend Kavet said he predicted would extend well into the new year.

“With interest rates low, capital plentiful, a long period of underinvestment in new housing — all the ingredients are in place for record price growth until supply catches up or incomes falter,” he said.

Real estate markets appear to be entering the third major cyclical upswing in the past 40 years, Kavet said, with the most recent and similar spike in home prices taking place right before the 2008 crash. 

“This is very much looking bubble-like,” he said.

Read the story on VTDigger here: The state’s economic outlook is strong now — but the bubble could burst.

Original Article: vtdigger.org

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