Several U.S. States Unprepared for Recession, According to S&P Report

By Stephanie Kelly

NEW YORK – A recent analysis by S&P Global Ratings highlights that several states in the U.S. may lack the financial resilience to handle an economic recession, primarily due to a slow recovery in economic growth since the Great Recession.

The report indicates that fiscal imbalances, sluggish growth in state tax revenues, and escalating expenditures on social services have created a challenging fiscal environment. Since 2009, the annual real GDP growth in the U.S. has averaged only 2.1 percent.

In contrast, real GDP growth was 2.43 percent in 2014 and 2015, which falls short of pre-recession growth rates of 3.79 percent in 2004 and 3.35 percent in 2005, according to World Bank data.

To assess the fiscal stability of states during a hypothetical recession, S&P analyzed 10 states. The findings revealed that the anticipated revenue decline would surpass the combined budget reserves of these states by $5.4 billion.

Among the states evaluated, several—such as Illinois, Pennsylvania, New Jersey, and Connecticut—have budget reserves that are less than half of the potential revenue decline expected in the first year of a moderate recession.

Conversely, Washington, Florida, and New York appear to be in a stronger position, with reserves that exceed the potential revenue shortfalls. California, Massachusetts, and Wisconsin are categorized between these two groups.

The report emphasizes the significance of “fiscal alignment” as a measure of a state’s capacity to rebuild budget reserves. It highlights that the states identified as being most vulnerable to recession also exhibit persistent structural budget imbalances.

In addition, states have increased spending on public welfare programs, including Medicaid and pensions. As reported, spending on entitlements rose to 40 percent of total state expenditures in 2013, up from 34 percent in 1995. This trend has limited the funds available for essential investments in infrastructure and higher education, both of which are critical for economic growth.

Concerns over economic stability have been fueled by Britain’s exit from the European Union and a slowdown in job growth in the U.S. However, the report concludes that the likelihood of a recession occurring within the next year remains relatively low, estimated at 20 to 25 percent.