Advisory council wonders about inflation as South Dakota’s economy keeps on roaring

Capitol News Bureau
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PIERRE, S.D. (KELO) — Five straight months of double-digit increases in South Dakota sales tax collections had some of the state Council of Economic Advisors making educated guesses Tuesday about how high inflation might reach and how long it might last.

State Revenue Secretary Jim Terwilliger said the Federal Reserve board appears willing to accept 2% inflation, as the U.S. economy fights its way out of the COVID-19 slowdown amid massive injections of relief from Congress.

South Dakota state government alone has received more than $2 billion through two rounds of federal coronavirus relief, plus hundreds of millions of dollars more being pumped directly out to taxpayers, banks, schools and others.

“I think there’s a real threat of it,” Terwilliger said about inflation rising from a long slumber. But, he noted, state government’s economic forecasting consultant, IHS Global Insight, so far isn’t factoring it into forecasts.

University of South Dakota professor of economics Mike Allgrunn said he expects 5 to 6% inflation for the next two to four years.

David Chicoine of Brookings, a past president of South Dakota State University, wouldn’t go that far or that long. Chicoine estimated it would be 3 to 4% for the next two to three years.

John Hemmingstad, an investment company director from Elk Point, didn’t offer a number. He said inflation hasn’t shown yet in the bond markets or asset prices.

“We really don’t know. Inflation can be self-fulfilling,” Hemmingstad said. 

What is clear is that South Dakota consumers haven’t sat on their pandemic payments from the federal government.

South Dakota sales and use tax collections grew by 13.9% during the recently completed fiscal year of July 2020 through June 2021, including nine months of 10% or more, according to numbers from the state Bureau of Finance and Management.

State economist Derek Johnson described the nearly 14% growth as “historic” and said the final four months of increases — March up 16.5%, April 25%, May 28% and June 19% — were “unprecedented.”

Collections for July 2021, covering sales from June, came in at 14.5% above the July 2020 growth of 10%.

Normally South Dakota’s sales tax collections grow 4 to 5% per year.

Secretary Terwilliger said non-farm income growth has been “a pretty good indicator” of sales tax growth. He doesn’t expect double-digit growth to last. “It doesn’t seem like it’s sustainable,” Terwilliger said.

Another theme that ran through the discussion Tuesday was the labor shortage throughout South Dakota and the nation.

Terwilliger said the McDonald’s restaurant in Pierre recently raised its offered starting wage to $15 from $13. Allgrunn said wage pressure foreshadows inflation. “It’s really hard to hire anybody, even for entry-level jobs, for less than $15 an hour,” Allgrunn said.

Hemmingstad said there is constant pressure to reduce jobs as labor costs go up. Chicoine said investors want to increase productivity of labor force.

The U.S. labor market was at a a 50-year low in unemployment before the pandemic spread in the early months of 2020, Allgrun said. Johnson said South Dakota had nearly 27,000 job openings, a record, as of August 11. Allgrunn said there were 3.6 to 4 job openings per unemployed person in the Great Plains region this summer.

“Something has changed here about the labor market,” Allgrunn said. On South Dakota’s unemployment rate of 2.9% for June being half of the US rate of 5.9%, he said South Dakota was “an outlier.”

Allgrunn showed there were large jumps in government transfers as part of nonfarm income nationally – 20% during pandemic compared to 16% pre-pandemic – and thinks that trend suggests South Dakota’s tax growth won’t be sustainable.

Allgrunn said South Dakota’s population and labor force increased more than the national average from 2010 to 2020. “So that’s something that bodes well for us,” he said. He added, “It’s going to be tight for a while, but growth prospects are strong.” 

Another factor Tuesday was the drought that grips so much of South Dakota this summer. Dan Noteboom of Corsica, who’s made a career selling farm equipment, said the agriculture industry has low inventories of used and new tractors and various implements. He said that will affect state government through lower revenues from sales.

Noteboom said the cattle industry and crop producers are concerned about the lack of rain in many places and about inflation nationwide. “There’s a lot of uncertainty out there.” 

He said equipment manufacturers are moving into autonomous technology — where the tractors drive themselves with a human being overseeing them — and it’s in part to offset skilled labor shortage.

“We’re seeing a real revolution in the ag sector right now that is going to have a major impact,” Noteboom said. 

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