Presentation to The Council of State Governments’ Executive Committee, 2009 Spring Conference, Coeur d’Alene, Idaho, May 2009
Senior Fiscal Analyst
Southern Legislative Conference of The Council of State Governments
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:
Documenting that it is not all gloom and doom, are the following bright sparks and promising economic development projects:
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.