The Outlook for States and Localities if a Recession Hits
TERADAT SANTIVIVUT/Getty Images
Connecting state and local government leaders
One leading economist puts the odds of a mild downturn at one in three over the next year. But experts who spoke at a Volcker Alliance event described factors states and local governments have in their favor.
The economy could be in for a bumpy period but states and municipalities are well-equipped to weather the turbulence.
That was the conclusion of the experts who spoke Thursday at a briefing on inflation and recession risks hosted by the Volcker Alliance and the Penn Institute for Urban Research.
“State and local governments are in good shape to navigate whatever … path we go down,’’ said Mark Zandi, chief economist at Moody’s Analytics.
He put the odds of a recession within the next 12 months at one in three, but he predicted the slowdown will be mild and expressed confidence in the Federal Reserve’s ability to manage the economy.
The hour-long session opened with remarks from Federal Reserve Chairman Jerome Powell. Powell did not address monetary policy in his prerecorded message but later on Thursday, in a speech at the International Monetary Fund Debate on the Global Economy, he endorsed a half-point interest rate hike next month.
Powell reflected on the legacy of Paul Volcker, who embraced policies that curbed the rampant inflation that gripped the U.S. in the 1970s and early ‘80s. “Paul Volcker ... took on the role of Fed chair at a time when high inflation had been allowed to entrench itself in the national psyche,’’ Powell said. “He … had to fight on two fronts: Slaying as he called it the ‘inflationary dragon’ and dismantling the public's belief that elevated inflation was an unfortunate but immutable fact of life."
Zandi said he expects the Fed to bring inflation down to its 2% target rate by the end of next year.
Over the past few months, inflation is exerting considerable impact on both household budgets and government spending, said Matt Gress, Arizona’s budget director and a Republican candidate for the state House of Representatives. Driven by gas prices and rising rents, Inflation in the metropolitan Phoenix area was at 10.9%, three percentage points higher than the national average, he said.
“The typical household in the state has spent more than $4,500 for the same goods and services over the past 14 months,’’ Gress said.
Gress cited a number of trends that will determine how well states weather a potential recession, such as how well they manage unemployment insurance trust funds and how big their rainy day fund balances are.
Between January of 2020 and January of 2021, unemployment trust funds dropped by $99 billion, but most had returned to their pre-pandemic levels by now, Gress said. “Should the cooling effects on the economy elevate unemployment, then the trust fund is going to be the place where states are going to have to step up from a safety-net perspective," he said.
Solid fundamentals prior to the pandemic and an influx of federal Covid-19 relief dollars have bolstered government budgets, said Natalie Cohen, founder of National Municipal Research, an independent research and consulting firm.
“State and local governments have maintained their strength fiscally and on credit quality,” Cohen said. “They entered the Covid period with adequate rainy day funds and reserves that helped to buffer a lot of the impact of the shutdowns. Federal stimulus money also has to be credited to help schools, states, cities halls and so on stay open.
They also likely staved off defaults that might have happened otherwise.”
Zandi agreed. “Given the ample rainy day funds that states have been able to accumulate–obviously a large part of that due to the federal government support that’s been provided throughout the pandemic--states and localities are in about as good a shape as they have ever been … so that does give me some solace that the economy will be able to evolve into self -sustaining economic expansion,’’ he said.
Gress said government officials have to look ahead several years, after the federal dollars have been spent. “Once the cash runs out in 2024, I think all eyes are going to be on state capitols,’’ he said.
“There is uncertainty. We have a lot of cash but use it wisely and try to prioritize structural reforms, [unemployment] trust funds, rainy day fund balance, paying down any unfunded liabilities … that will give you financial flexibility moving into these uncertain years ahead.”
Daniela Altimari is a reporter at Route Fifty based in West Hartford, Conn.
NEXT STORY: The New Buffalo Bills Stadium Is One of the Worst Deals for Taxpayers