Presentation | May 2009
State Fiscal and Economic Outlook
Presentation to The Council of State Governments' Executive Committee, 2009 Spring Conference, Coeur d’Alene, Idaho
Until quite recently, the outlook for the U.S. economy remained very grim. While there continues to be grave and complex challenges looming on the horizon, a number of positive developments have surfaced in the past few weeks. Notwithstanding these "green shoots of growth" on the dry, parched economic landscape and the diffuse rays of light indicating brightening economic indicators, we still have a very long way to go.
The U.S. economy faces monumental challenges of the magnitude not experienced since the Great Depression. Our economy has been ensnared in a recession since December 2007, a recession that has already exceeded the average length of all post World War Two recessions. It will last well into 2009, making it the longest since the 1930s. In terms of output, U.S. gross domestic product, GDP, fell at an annualized rate of 6.1 percent in the first quarter of 2009, the third straight quarter of declines that capped the worst six months of economic activity since the 1950s. The national unemployment rate soared to 8.9 percent in April 2009, its highest rate point in a generation; the U.S. economy lost 539,000 jobs last month and has shed 5.7 million jobs since the recession began 17 months ago. Based on March 2009 figures, the latest available, 35 states have an unemployment rate that is at or greater than 7 percent. Foreclosure filings – default notices, auction sale notices and bank repossessions – in April 2009, the latest month, were reported on over 342,00 U.S. properties, an increase of 32 percent from April 2008.
Even before the extreme economic turbulence of fall 2008, states were looking at a very depressed financial picture and states continue to experience steep revenue losses. Tax collection data for the first quarter of 2009 indicated a decline of 12.6 percent compared to the same period in 2008 with 45 of 47 reporting states indicating a decline in total tax collections. For the 30-month period between January 2009 and June 2011, the cumulative budget gaps are estimated to total a mind-numbing $350 billion to $370 billion. Almost half the states are forecasting double-digit revenue gaps as a percent of their general funds in their FY 2010 budgets.
There are several disturbing features about the current recession but the most alarming development is the fact that the U.S. economy faces concurrent crises on multiple fronts, a development not experienced in decades. While any one of these negative developments – output declines, revenue shortfalls, credit freezes, confidence drops – has the potential to stall the economy, all of them operating in concert – as they are now – has completely destabilized the U.S. economy. In fact, it is almost as if Hydra, the multi-headed monster is bearing down on the U.S. economy.
In terms of state responses to deal with the massive deficits looming on the horizon, policymakers have and are pursuing four broad strategies: One, slashing spending; two, tapping rainy day funds; three, expanding gaming; and four, raising taxes. States have also deployed federal stimulus funds to offset massive shortfalls in a number of critical areas.
Another important factor that makes the state fiscal outlook quite daunting is that the current revenue shortfalls and huge budget gaps masks a number of enormous fiscal challenges looming in such areas as healthcare, education, public pensions, emergency management, infrastructure, unemployment insurance and transportation. States will have to contend with these significant challenges once the current crisis abates.
Now, to address the "green shoots of growth," a phrase coined by Fed Chairman Ben Bernanke. In the past few weeks, there have been a series of economic indicators demonstrating that the nation's outlook is not completely suffocating from the weight of dour economic news. In fact, recent data suggests that the pace of contraction in a number of sectors may be slowing. This leads me to conclude that the economy is close to bottoming out and that we can now begin the long and bumpy road to more balanced growth. Nevertheless, it is important to emphasize the following: any state economic recovery is likely to lag the national economic recovery; consequently, state revenues will continue to struggle well into fiscal year 2010 even after the national recovery is in progress. Among the glimmers of hope are the following:
- The Federal Reserve Bank statement in late April that "the pace of economic contraction was somewhat slower" and Chairman Bernanke's statement earlier this month that the economy appeared to be stabilizing on many fronts even though he cautioned that a recovery was still months away. In addition, the Fed's latest Beige Book reports indicated that while overall economic activity contracted further or remained weak, 5 of the 12 Fed Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.
- Several positive nuggets from the housing sector indicating that the rate of decline may be slowing. Housing prices, for instance. The latest S&P/Case-Shiller Index of National Home Prices indicated a drop by nearly 19 percent in February 2009, yet, it was the first time in 16 months that the slide in housing prices did not accelerate. Then, the
- National Association of Realtors reported earlier this week that while nationally, the median existing-house price declined at an annualized 12 percent rate in the first quarter of 2009, it was still better than the 25 percent decline in the fourth quarter of 2008. Also, despite the sharp rise in foreclosure filings contained in the latest Realty Trac report, the increase in April 2009 compared to the previous month was less than 1 percent.
- State and local government credit markets have loosened up. Municipal debt raised in the first quarter of 2009 totaled $84.4 billion, almost on par with the first quarter of 2008. Leading the charge was the $6.85 billion bond issue by the state of California in late April that will jump-start 5,000 public works projects. Georgia, sold $315 million in tax exempt bonds in early May, following a $613 million bond sale in February 2009.
- Even though the national unemployment rate spiked to 8.9 percent and the American job market remains dreadful, it is worsening at a slower pace than before. The numbers for April looked promising when compared with recent months; net job losses in February and March stood at 681,000 and 699,000, respectively, while it was 539,000 in April.
- Consumer spending grew by 2.2 percent for the first quarter of 2009, after two consecutive quarters of declines despite dropping by 0.2 percent in March 2009. Consumer spending accounts for 70 percent of all U.S. economic activity.
- According to the Institute for Supply Management, U.S. manufacturing activity ticked up in April for the third straight month. Although the overall industry still remains in contraction, the pace of contraction was slower than at any time since September 2008.
- Consumer confidence rose in April 2009 to 39.2, its highest level in 2009, up from the record low rate reached in February 2009.
- Finally, even though I do not consider it a substantial measure of the economy's health, April 2009 was Wall Street's best month in 9 years. U.S. stocks gained nearly $1 trillion in value, on paper. The S & P 500 Index climbed 9.4 percent in April, its best performance since March 2000, and the nearly 19 percent gain in March-April is its best two month rise since 1975.
Documenting that it is not all gloom and doom, are the following bright sparks and promising economic development projects:
- In Atlanta, GA, the $1.3 billion international terminal at the airport is in progress and targeted to employ up to 1,800 people during construction;
- In Charlotte, NC, the nuclear-power unit of electronics giant, Toshiba, is set to set to create 200 jobs, all with six-figure incomes;
- The state of Tennessee, Nissan and the TVA are working proactively on an all-electric vehicle;
- Kentucky has made substantial progress in setting up a battery manufacturing research and development center that will build more efficient lithium-ion battery cells for automobiles;
- In Hillsboro, OR, the company SolarWorld has made a $500 million investment to manufacture solar cells;
- There is renewed interest in harvesting wind energy off the coasts of Georgia and North Carolina along with wind energy projects emerging in Ohio, Tennessee and Arkansas; and
- In Fayetteville, AR, the discovery and development of a natural gas shale is estimated to generate 4,500 jobs and have a $2.3 billion economic impact.
In closing, as foreboding as the severity of the ongoing recession has been and will be on both the national and state economies, there is a glimmer of optimism that there are nascent signs that we might be nearing the bottom. Undoubtedly, there is more anguish on the horizon given the depths to which the economy has plunged and we will continue to see more foreclosures, more job losses, more hurdles in accessing credit, weak business investment and wrenching economic pressures in a number of other areas. Redirecting the energies of our economy – beginning at the local and state levels along with engaging the federal government as a partner – will eventually generate broad-based, sustained economic growth in all sectors of the country. Thank you for your attention.