Magazine article Government Finance Review

The Good News and the Bad News of the Numbers

Magazine article Government Finance Review

The Good News and the Bad News of the Numbers

Article excerpt

The April and October issues of Government Finance Review have included "Fiscal and Economic Indicators" as presented on the following page. Beginning with this issue, the Government Finance Research Center (GFRC) of the Government Finance Officers Association (GFOA) also will provide brief analyses of the numbers, commenting on both the general tone of the economy and the specific economic trends affecting government finance officers at the state and local levels. This column will focus on the general direction of the economy and the record level of state and local government debt issuance in 1992.

Direction of the Economy

A sluggish domestic economy and weak consumer confidence played significant roles in the outcome of the 1992 Presidential election. Since then, economic news has been positive, the American public is feeling better about its economic situation, and consumer confidence rose more than 20 points during the two months following the election.

In reality, the improving economic news began rolling in prior to the election. Third-quarter growth in the Gross Domestic Product (GDP) was initially reported at a 2.7 percent rate. At the time, this stronger-than-expected growth was viewed with skepticism; however, after the election third-quarter GDP growth was revised upward to 3.4 percent. The better-than-expected growth during the third and fourth quarters resulted in 1992 annual economic growth of 2.1 percent, a significant improvement over 0.8 percent in 1990 and -1.2 percent in 1991. For 1993, most forecasters place growth in the 3-5 percent range.

Another positive sign for the economy has been the lowering of interest rate levels since the presidential election. By late February the yield on the 30-year Treasury bond had fallen approximately 75 basis points. Much of this decrease was fueled by President Clinton's deficit reduction plan. Lower deficits lessen the likelihood that Congress will use the time-tested remedy of inflation to address the government's mounting deficits. The consensus view held by economists in early 1993 was an inflation rate of 1.5-4.5 percent in the years ahead.

There are many unanswered questions regarding the impact the Clinton administration's economic plans will have on state and local governments. Will short-term economic stimulus result in higher state and local government revenue growth? Will taxpayers affected by higher federal taxes be less willing to accept higher property, sales and state income taxes? Will efforts to meet infrastructure needs increase new construction expenditures by state and local governments? Will the transition from defense-dominated local/regional economies to nondefense activities result in fiscal stress for the state and local governments affected? As the details of the administration's plan are shaped in Congress and implemented in the months ahead, this column will strive to identify and analyze the indicators that might provide some insight regarding the answers to these questions.

1992: The Year of Refinancing

As illustrated in Table 2, issuance of long-term debt by state and local governments increased dramatically in 1992. The 35 percent increase from $172 billion to $233 billion resulted in an all-time record level of debt issuance in the municipal market, surpassing the previous high of $207 billion in 1985. Record-setting borrowing was fueled primarily by decade-low interest rate levels. …

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