In December 2024, in Springfield, Missouri, the Show-Me Institute and Show-Me Opportunity hosted an event featuring Dr. Aaron Hedlund, Chief Economist at the Show-Me Institute, and Elijah Haahr, former Missouri Speaker of the House and host of The Elijah Haahr Show on KWTO.

The discussion focused on the 2025 economic outlook for Missouri and the U.S., exploring issues such as unsustainable government spending, the growing national debt, and the Federal Reserve’s role in shaping inflation, housing, and labor markets.

This episode is a recording of that event.

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Produced by Show-Me Opportunity

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This same ambiguous outlook applies to the U.S. economy as a whole. On the one hand, data released by the Department of Commerce last week reveals that real gross domestic product (GDP)—the value of all goods and services produced by the US economy, adjusted for inflation—increased at a 2.4% pace in the second quarter, following 2% growth in the first quarter. If this pace continues—a big if—then the economy will have safely avoided recession territory, having rebounded modestly from the two quarters of negative GDP growth at the beginning of 2022.

But past is not prologue. The economy still faces multiple headwinds that leave the risk of recession—or at least a significant weakening of growth—very much on the table. For one thing, the effects of monetary policy (i.e., rate hikes) on the economy operate with a time lag. The primary mechanism through which rate hikes fight inflation is by making borrowing costlier, thereby discouraging the demand for spending and, with it, the pressure on prices. The medicine from earlier doses of rate hikes is already having an effect on the economy; headline CPI inflation fell to 3% year-over-year last month, down from a peak of over 9%. However, rate hikes from late spring have not yet fully reverberated throughout the U.S. economy. Even so, the recent GDP data indicate that consumer spending only grew by 1.6% in the second quarter, with durable goods spending only growing by 0.4%. This particular subset of spending is useful as a gauge because durable goods like washing machines and other expensive household items are often purchased using credit, which now commands higher interest rates because of the Fed’s actions.

Another headwind facing the economy is the impending resumption of student loan repayments this fall. Make no mistake: student loan repayments ought to resume. Bailing out student debt by transferring it from the people who are reaping the financial gains from their education to taxpayers is regressive, fiscally irresponsible, and inflationary. However, this reality does not take away from the fact that people will feel the sting of being required to pay debts that they have been shielded from during the past few years. Consequently, consumer spending growth is likely to slow further or even turn negative. Considering that consumer spending contributed 1%age point (out of the 2.4) to GDP growth in the second quarter, a hypothetical scenario where consumer spending growth flatlines would by itself reduce GDP growth to just 1.4%. Moreover, another important component of GDP—investment—is sensitive both to rates themselves as well as business expectations about future consumer demand. It is entirely plausible—maybe even likely—that investment growth will decline from its most recent rate of 5.7%, and if that happens, GDP growth could easily fall below 1%.

Still another important headwind is the fact that, for all the progress the Fed—and the Fed alone—has made in combatting inflation, it has not yet succeeded in achieving its 2% target. As shown in the figure below, headline inflation is down to 3%, but core inflation—a better measure of fundamental pricing pressures—is still nearly 5%. Moreover, because the inflation readings are year-over-year measures, and because the monthly numbers from July and August 2022 were very low, it is quite possible that the headline year-over-year inflation numbers may rise modestly over the next few months.

Lastly, and arguably most importantly, the U.S. economy has been facing a productivity crisis over the past two years. Productivity—that is, economic output per hour of labor—has decreased by nearly 2.5% since the second quarter of 2021, which is unprecedented. By comparison, productivity rose by nearly 5% from the first quarter of 2017 to the fourth quarter of 2019. Not coincidentally, that earlier period corresponded with household income rising by over $5,000 after inflation—meaning higher purchasing power—as compared with the recent decline in purchasing power of over $2,000. The figure below gives a stark visual reminder that prices have grown consistently faster than wages since the passage of the American Rescue Plan Act “stimulus” bill in early 2021, with price growth decreasing only in response to the Federal Reserve’s interest-rate-hiking campaign.

As speculation continues over the near-term trajectory of the U.S. economy, it is worth mentioning again the essential need to raise productivity—not just to avoid recession, but to lift the economy out of the doldrums of 1% to 2% growth and return to or exceed its historical norm of 3% growth. While these numbers may seem difficult to relate to, a rule-of-thumb may prove useful. The amount of time (in years) that it takes for the U.S. economy to double in size is roughly 70 divided by the growth rate. Thus, if an economy grows at 3% per year, it will take approximately 70/3 = 23.3 years to double in size. By contrast, if the economy grows at 2% per year, it will take 70/2 = 35 years to double, and it will take 70/1 = 70 years to double if growth is persistently only 1%. That would be a disaster for the U.S.’s potential to remain the leading economy in the world.

So how do we achieve growth liftoff? Answering this question is much too large for a single blog post, but the key is productivity, and one important point to remember is that raising productivity is not about squeezing more out of workers and making life at work more of an unpleasant grind. Quite to the contrary. The most effective way to increase productivity is to ensure that workers are equipped with the skills to succeed, unencumbered by regulations to find the best occupation and employer to realize their potential, and where both workers and employers are able to keep more of the fruits of their productive activity. That phrase—productive activity—is key to keep in mind. While public debate often focuses on spending, spending, spending, it’s time to shift our attention to producing.

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A year later, in January 2023, a lot has changed, but some things remain the same—especially the amount of economic uncertainty on the horizon. The economy began the year with rock-bottom interest rates, but after the Federal Reserve finally came to terms with the persistence of inflation, it wisely abandoned its lax stance and proceeded to tighten the screws by raising interest rates at an extremely rapid pace—taking its benchmark Fed Funds rate from 0 percent at the beginning of the year to over 4 percent by the end. During this same period, mortgage rates jumped from historically low levels of under 3 percent to over 7 percent. As a result, existing home sales fell by 35 percent over the year, and residential investment plummeted. Meanwhile, gross domestic product shrank during the first two quarters of the year but managed to register a respectable number in the third quarter (fourth quarter data is not available yet).

The primary questions on everybody’s minds entering 2023 are these: Can the economy achieve a soft landing? And can inflation come down without the U.S. economy entering recession? Unfortunately, it is still far too early to tell. Today’s jobs report revealed that the labor market continues to hold up, with payrolls growing by 223,000 in December 2022 and the unemployment rate falling to 3.5 percent. While these data are good news, they don’t tell us much about the future, because the labor market tends to lag the rest of the economy. In other words, if the U.S. economy hits turbulence in 2023 and enters recession territory, the labor market response will likely be delayed, as has been the case historically. In the meantime, the main takeaway from the most recent jobs report is that the prospects for the Federal Reserve reversing its rate hikes are basically nil—at least until inflation drops back down to 2 percent and remains there for a while. The recent release of the Federal Reserve’s minutes from its most recent policy meetings confirms that there is no sentiment at the Fed to begin rate cuts anytime soon.

It is still possible to gather some other tea leaves from some of the recent economic data, however, to get a sense for where the economy may be headed. The downside of the latest jobs data is that there is little to no evidence that workers are being enticed from the sidelines. As shown in the chart here, the labor force participation rate—which counts people who are working and those actively looking for work—remains below 2019 levels by a full percentage point. Some of the drop is due to early retirements during COVID-19, but if one looks at the data just for prime-age workers (those between the age of 25 and 54—see the chart here), their labor force participation rate hasn’t fully recovered either. With 1.75 job openings per unemployed worker, the labor shortage has no imminent end in sight, which also complicates the inflation picture by making it more difficult for businesses to accommodate demand without raising prices.

Thankfully, the end of 2022 offered some promising signs for inflation. Most directly, the inflation data itself showed some moderation, although it continues to run hot at over 7 percent year-over-year. Also, the most recent jobs report showed that wage pressures also may be subsiding to some extent. Of course, faster wage growth in principle is a good thing for workers, but only when driven by sustainable forces. Over the past nearly two years, wage growth has run hotter than in prior years, but the increase took place amidst a backdrop of declining productivity. The result has been even faster price growth, resulting in a steep drop in purchasing power, leaving families poorer in terms of their living standards. Going forward, 2023 offers a lot of uncertainty, and data over the next few months regarding inflation and productivity will be quite revealing. One thing working in the economy’s favor is a divided Congress, which should mean a stop to the glut of inflationary government spending. The question is whether it will be too little, too late to avoid a hard landing.

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• Medicaid expansion goes to court
• Summarizing a successful legislative session
• Tax subsidy reform
• Small but important victories in education reform
• Missouri suing the president over an environmental issue

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The accomplishments of the session still leave Missouri far from where it needs to be. And certainly we would offer our 2017 Blueprint as a baseline for the sorts of reforms our state needs going forward. That menu of reforms includes the elimination of the state’s Certificate of Need laws; expansion of school choice through education savings accounts, charter schools, and course access; and substantive transportation and labor reforms to make sure that the state can compete for jobs and capital, whether already in the state or currently outside of it. Alongside the policy, we need procedural reforms in the state Senate where an historic number of bills languished and died; indeed, a filibuster on the last day of session nearly killed the state’s minimum wage reforms.

Still, there is ample room for optimism. The governor’s Committee on Simple, Fair and Low Taxes seems well-positioned to make 2018 the year of serious tax reform. Those reforms should include advancement of an earned income tax credit, the reform of state and local tax incentives, and the reduction of taxes on individuals and businesses in the state. Moreover, the passage of some priorities this year obviously clears space for the passage of other priorities in education, labor, and other areas that didn’t make it to home plate as the 2017 session closed.

The key, as some Kansas City Royals fans might put it, is to “keep the line moving.” The legislature doesn’t have to hit a home run every time it steps up to the policy plate; it just has to keep hitting singles with increasing frequency. And as baseball fans would tell you, if you do those small things right, chances are good that big things will eventually come.

While we would all have loved to see a towering moonshot of a legislative session, the Legislature ultimately hit enough singles to merit a cheer from free marketeers. Missourians had a good inning; we’re looking forward to seeing bigger and better things happen in the next one.

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The post Session Notes: Article V Convention Resolution Passes appeared first on Show-Me Institute.

How would legislators do it? As our readers may know, the most commonly attempted way to amend the Constitution has been via a two-thirds vote of Congress and ratification by three-quarters of the states. But perhaps less known is that two-thirds of the states themselves can call their own constitutional conventions for the purpose of independently proposing amendments to the Constitution. As the National Archives notes, “None of the 27 amendments to the Constitution have been proposed by constitutional convention.” That no amendments have been proposed in this way,  however, doesn’t mean amendments can’t or won’t be, and if supporters of a Missouri Senate resolution have their way, the 28th Amendment will be the first of its kind to have been initiated by the states themselves.

There’s a lot in the resolution itself about what it intends to do and how, but here’s the heart of the resolution:

Now, Therefore, Be It Resolved by the members of the Missouri Senate, Ninety-ninth General Assembly, First Regular Session, the House of Representatives concurring therein, hereby apply to Congress, under the provisions of Article V of the United States Constitution, for the calling of a convention of the states limited to proposing amendments to the United States Constitution that impose fiscal restraints on the federal government, limit the power and jurisdiction of the federal government, and limit the terms of office for its officials and members of Congress;

Later provisions lay out the precise nature of the convention and what it may consider—it’s worth your time to read—but the key reform elements of the bill are clear enough: federal fiscal limitations, federal power limitations, and federal term limitations. Beyond that, the exact reforms are open to debate, albeit circumscribed by the reform language of the bill itself to prevent a runaway convention. Resolutions like this one have passed in ten other states and may also pass later this year in North Carolina, as well, so it’s certainly an active idea nationally.

Twelve states aren’t enough to initiate a convention, of course; to initiate it, thirty-four states will have to pass similar resolutions. But the objectives of the resolution here are worthwhile enough, and its prospects plausible enough, to highlight here. If the bill passes the House, Missouri would become either the 11th or 12th state to sign on to this initiative. We’ll keep you posted if that happens.

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The fact that Missouri’s economy is expanding at a much slower rate than the national economy is not new. To compare the pace of economic activity in Missouri and the United States over time, the chart above tracks the levels of output (real gross state and domestic product, respectively) over the past 20 years. So that the two series are comparable, each is indexed to its 1997 value.

The chart below shows that by 2015, output of the U.S. economy was about 50 percent higher than it was in 1997. In Missouri, however, output in 2015 was only about 20 percent higher. Not only did Missouri not expand as fast as the U.S. economy prior to the Great Recession of 2007–2009, but it also has not recovered nearly as much. Since 2010, the U.S. economy has grown by about 11 percent. Over this same period Missouri’s economy is just a little over three percent larger.

Missouri’s slow growth has many consequences, such as diminished opportunity for new jobs and a business environment that is not conducive to new start-up firms. The situation also has many causes, some of which stem from policy decisions, such as those related to taxes and education. The fact that Missouri is falling further behind should create some urgency in discovering causes and exploring some possible solutions.

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Now let’s fill in the details.

The post Slip Sliding Away: The Weak Relative Growth of the Missouri Economy appeared first on Show-Me Institute.