What's ahead for the economy? State lawmakers face huge fiscal challenges as they convene their 2003 legislative sessions. What might they expect from the economy as they craft next year's budgets?

• Author: Eckl, Corina

The 2003 legislative sessions are shaping up to be among the most challenging in more than a decade. To help state legislators get a better sense of the economic picture and what they might encounter in coming months, NCSL interviewed David Wyss, chief economist at Standard & Poor's.

THE BIG PICTURE

Q. Although the National Bureau of Economic Research (NBER)--the official arbiter of a recession's starting and ending points--has yet to report, there have been numerous media stories saying that the recession is over. What are the chief indicators that an economic recovery is under way?

A. Real gross domestic product has now risen for four consecutive quarters, historically enough to allow the NBER to declare a recovery. However, employment has risen much less consistently, with two consecutive declines in September and October after five increases. The manufacturing sector continues to lag. The recovery seems in place, but is still spotty across sectors.

Q. What is the prospect for a strong economic recovery? What are the biggest threats to the recovery?

A. I do not expect a strong economic recovery. I think the upturn will be even more anemic than the "jobless recovery" of 1991-92. Consumers seem spent out, and business is not yet ready to pick up the lead. Moreover, weak foreign economies are dragging back the United States.

Q. Which states will rebound most quickly and why? Which states are likely to lag behind the national recovery?

A. The pattern of the recession was first, dot.com and high-tech states; second, heavy manufacturing; and third, tourism. The recovery is likely to be in the opposite order, with tourist states such as Florida and Arizona coming out first and the high-tech states like California and southern New England last. Note that some of the Great Plains states have not really had a recession because their unemployment rates are below pre-recession levels. The Great Lakes and West Coast were hit hardest.

Q. Is the U.S. economy still being affected by the Sept. 11 terrorist attacks?

A. Although the consumer rebounded quickly after the terror attacks, businesses have not. The uncertain prospect of further terror attacks still weighs on business confidence and is slowing capital spending. It is also a factor cutting investor confidence and keeping the stock market weak.

Q. Because of balanced budget requirements, states don't have the ability to deficit spend. But the federal government does. Is federal deficit spending helping to accelerate economic recovery?

A. The federal budget has gone from a $255 billion surplus in FY 2000 to a $175 billion deficit in FY 2002. That is $430 billion of stimulus for the economy, or 4 percent of the GDP. Government spending and tax cuts have kept the economy growing despite weak corporate spending.

Q. What are the longer term implications of federal deficit spending?

A. Federal deficits push interest rates--and especially long-term interest rates--up. Money borrowed by the federal government is money not available for private capital spending. In the short run, that is of little importance because no one wants to invest...