UofSC Economists: Tariffs to Tug at SC Economic Growth in 2019

Wednesday, December 5th, 2018

South Carolina can expect an economic tug-of-war in 2019.

Although market fundamentals — jobs, income and consumer spending — remain strong, rising interest rates and changes in international trade policy, including tariffs, threaten to temper economic growth in 2019, according to two University of South Carolina economists at the Darla Moore School of Business.

Doug Woodward, director of research, and Joseph Von Nessen, a research economist at the Moore School, presented their 2019 economic forecast to more than 200 business and community leaders at the 38th Annual Economic Outlook Conference in Columbia, South Carolina on Tuesday (Dec. 4).

The two predict steady employment and wage gains that will likely remain at or slightly below 2018 levels. And job creation, the single best predictor of economic performance, is expected to grow 1.8 percent in the coming year.

“South Carolina’s economy remains strong, but we are in a more volatile market environment than we were last year at this time,” Von Nessen says.

The volatility largely is driven by the introduction of new tariffs in the automotive sector and is fueled by rising interest rates that put upward pressure on housing costs.

“At the end of the day, a tariff is simply a tax. And in this case, it is a tax that is likely to increase the final sales price of vehicles produced in South Carolina,” Von Nessen says. “This price increase, in turn, can have a negative impact on the demand for these vehicles.”

Disruptions to the automotive industry can have a disproportionately large impact on South Carolina. The domino effect starts with manufacturers and continues along the automotive supply chain statewide.

“Every 10 jobs that are created or supported directly within South Carolina’s automotive cluster also create and support about 27 jobs elsewhere in the state’s economy, for a total of 37. That is a multiplier effect of 3.7,” Von Nessen says. “Unfortunately, that process also can work in reverse.”

Despite the negative effects of tariffs on the automotive industry, Woodward and Von Nessen anticipate that most South Carolina industrial sectors will see steady gains in 2019. They say it’s especially true in wholesale and retail trade, health care, professional services and tourism. Due to predicted job growth in those sectors, the economists forecast a small drop in the state’s unemployment rate to 3.1 percent from the current rate of 3.3 percent.

“There’s not much room left for unemployment to drop, but make no mistake, that’s a good problem to have,” Von Nessen says.

He says South Carolina benefits from relatively higher population growth compared with most states because of its beach and mountain access, good weather, recreational opportunities and low cost of living, which make it easier for employers to attract workers in an already tight labor market. 

“The bottom line is that we are experiencing an economic tug-of-war,” Von Nessen says. “Steady job and income gains, coupled with lower gas prices, are fueling higher demand. But some of these gains are offset by rising interest rates and new tariffs that put upward pressure on the prices of consumer goods. We don’t know whether 2019 will be a good year or a great year, but it’s not likely to be bad.” 

Tuesday’s conference also focused next steps for South Carolina’s long-term economic development. With unemployment at historic lows and an economic expansion now in its 10th year, Moore School economists, along with business and government leaders, explored ways to help regions of South Carolina that experience relatively high unemployment benefit from the state’s economic growth.

The Moore School partnered with the Federal Reserve Bank of Richmond to lead a panel discussion on the new federal tax provision called “Opportunity Zones,” designed to spur investment in distressed economic regions across the U.S. The panel focused on how South Carolina can maximize the economic benefits of the legislation that was added to the tax code by the Tax Cuts and Jobs Act in December 2017.

The panel was moderated by Jeanne Milliken Bonds, senior manager of regional community development for the Federal Reserve Bank of Richmond, and featured former South Carolina Gov. Jim Hodges, president and CEO of McGuireWoods Consulting LLC, and South Carolina Treasurer Curtis Loftis.