Maryland’s economy faces headwinds as it tries to grow

Maryland’s economy lags behind its neighboring states in several critical indicators, and experts warn obstacles ranging from looming budget woes to uncertainty about the impact of a second Trump administration hold power to derail efforts to recoup losses stemming from a post-pandemic slump.

Economists and state policymakers remain deeply concerned about what the Comptroller’s latest state economic report called “flashing yellow lights” as the state grapples with how to spur economic growth the same report describes as stalled since 2017.

Chief among those lights is a looming structural deficit in the state budget that’s expected to balloon to $2.7 billion by 2026, leaving policymakers with difficult decisions about whether to raise revenue, cut spending, or combine the two.

“There are some funding decisions (that must be made). You either cut spending … or the alternative is to raise revenue by increasing taxes, maybe broadly, maybe more specific[ally],” said Daraius Irani, an economist and vice president of strategic partnerships and applied research at Towson University.

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Tax increases, Irani said, may cause companies or individuals to reconsider their commitment to doing business and working in Maryland. At the same time, talk of potential tax increases arrives as the state’s business climate continues to lose traction in national rankings.

Maryland dropped from 22nd to 31st in CNBC’s Top States for Doing Business rankings, which, according to the Maryland Chamber of Commerce, discourages new investment and expansion from businesses.

“This ultimately means fewer businesses who will be willing to invest in Maryland, fewer jobs being created and less revenue to support public services,” according to a Maryland Chamber of Commerce assessment of the business environment in the state.

The decline in Maryland’s business climate is also underpinned by data showing that the state is lagging behind neighboring states and the nation regarding economic performance. Maryland’s Gross Domestic Product, which is defined as the value of goods and services produced in the state.

“So, Maryland has been ranking these at the bottom in terms of job creation compared to other states, its performance … it tends to be below (average) in terms of its economic growth. So, you know, we looked at the labor force growth as well … Maryland tends to underperform given what all the assets it has,” Irani said.

According to the Comptroller’s office, Maryland’s GDP increased 1.6% between 2016 and 2023, dwarfed by the national average of nearly 14%. Meanwhile, the neighboring states of Pennsylvania and Virginia experienced growth of 6.6% and 11.2%, respectively.

Maryland’s labor market, in particular, has also hindered economic growth in the state. While Maryland’s labor force participation of 65.3% beats the national average of 62.7%, it still has not returned to pre-pandemic levels, which, according to the Comptroller’s office, is the case in the rest of the nation.

“The lack of a full recovery in Maryland’s employment to pre-pandemic levels stems from a decline in the labor participation rate combined with a historically low unemployment rate, indicating that demand among employers for labor is high, but labor supply is scarce,” according to the Comptroller’s economic outlook.

However, the outlook for Maryland’s economy isn’t devoid of positives. The state retains the highest median income in the nation, according to the Comptroller’s office, combined with a national low unemployment rate of just under 2%. At the same time, the state’s poverty rate of 8.6% remains well below the national average of 11.5%.

According to experts, another boon for the state is its plethora of federal agencies and associated private contractors. Maryland also holds a solid base of what the Comptroller’s office dubs the “industries of the future,” which include vaccine development, medical technologies and quantum computing.

“I don’t think that there’s any specific reason to expect our relative growth rates to get worse than they already are. And looking at how the economic forecast has changed recently, there’s not much change. It’s pretty much status quo in terms of how things are expected to evolve,” said Maryland Center on Economic Policy Research Analyst Christopher Meyer.

Yet, one factor remains unknown for the state’s economy: the potential impact of a second term for President-elect Donald J. Trump.

While outgoing President Joe Biden pledged federal support for key infrastructure projects, such as rebuilding the Francis Scott Key Bridge, it’s unknown if the Trump administration, which has vowed to slash federal spending, will honor that pledge.

During the election, Trump also pledged to enact tariffs on imported goods, which economists worry may hurt major economic drivers in the state, such as the Port of Baltimore, that depend on imported goods.

“The incoming Trump administration … is talking about making deep and harmful cuts to federal administrative functions, which, in addition to having a deeply harmful impact on federal services, it’s also going to have a big ripple effect on Maryland’s economy, both in terms of federal employees potentially losing their jobs, as well as decreased spending at local businesses, because those families won’t have the money to spend, which will then kind of ripple out the entire economy,” Meyer said.