ST. PAUL - Oil makes predicting the economic future a slippery proposition.
A December federal tax deal helped the Minnesota economy do better than expected, but now the prospects of higher oil costs could hurt the country's economy.
Minnesota State Economist Tom Stinson said a budget report released today counts on oil selling for $90 to $95 a barrel. Today, oil prices hovered around $100 per barrel.
Stinson said it would take little more of an oil-price increase to counteract the help that came from federal law changes.
The economist called the federal changes a "stealth stimulus package."
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Many Americans are paying lower income taxes, Stinson said, while others are receiving unemployment benefits longer than under earlier laws. Both December decisions helped the economy.
Overall, the Minnesota economy has remained fairly stable since the last economic report in November, Stinson said. Moderate economic growth is expected in the next two years, he added.
But some things have changed since the November report, which contained many questions about the economy's future.
"Some of those uncertainties are even more volatile than they we saw last November," Commissioner Jim Showalter of Minnesota Management and Budget said.
There is some good news. In November, the state's economic advisor, Global Insight, predicted a 2.3 percent growth but now it suggests the economy could grow at 3.2 percent.
Part of the improvement comes from a lower federal capital gains tax, which influences investors to spend money that otherwise would have gone to Washington, Stinson said. That helped produce more revenue for Minnesota, he added, but there is no way to predict whether such activity will continue.
Much of the fear is based on geopolitical factors, such as the upheaval in many oil-producing Middle East countries, the economist said. The actions "could certainly cause the economy to do less well than expected," he said.
Stinson said Global Insight made its national economic forecast before Middle East political upheavals began, so its expectation of sub-$100 oil may be too optimistic.
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For each $10 a barrel oil prices rise, he said, gasoline is 25 cents more per gallon at the pump. If that happens, it would not take much to produce a massive hit to the economy, Stinson said,
Washington turmoil over the federal budget also could be a problem. Congress and President Barack Obama have failed to agree on a budget, which was due last Oct. 1, and there is talk about a government shutdown this year.
"A federal government shutdown would not be helpful to the state economy," Stinson said, although it would be worse other states that have more federal government installations.
Don Davis reports for Forum Communications Co. The Herald is a Forum Communications newspaper.
