Economic Report For The States
John Sugden
Senior Director- Analytic Manager
U.S. States Group/ U.S. Public Finance
NASACT – August 13th, 2014
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Economic Update
2014-2015 Economic Outlook for U.S. State and Local
Governments
Source: U.S. Economic Forecast: Keep Calm and Carry On” June 25th, 2014. as updated by U.S. Forecast Update: The Waiting (Is The Hardest Part) , July 31 st, 2014
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U.S. Public Finance Sector Conditions and Outlook
Source: Credit Conditions: North America’s Credit Conditions Remain Favorable, But Not Without Risk, June 9th, 2014
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Unemployment Drops Below 8% For All States
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Why Hasn’t Recovery Brought A Stronger Bounce Back
For Governments
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Macroeconomic Conditions – Upside
• Labor market recovers at a greater pace, driving growth in
wages.
• Consumer confidence would rise and fuel greater real
personal consumption.
• Historically low mortgage rates and stronger labor market
lead to increased demand for single-family homes.
• Unemployment declines to 5.5% for the first time since the
Great Recession.
• US GDP would expand almost 5% in the second half of
the year, boosting GDP growth to 2.7% and 4.4% in 2014
and 2015, respectively.
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Macroeconomic Conditions – Downside
• Disruption in oil supply gives rise to higher gasoline prices
• Global growth slows due to volatility in Iraq and to a lesser
extent Ukraine
• Stock market pulls back and consumer confidence wanes
lowering domestic demand
• Weakness in housing would remain driven by declining
affordability, tight credit, and rising construction costs
• Unemployment increases to 7.3% by 4th quarter
• Federal government spending shrinks 5.0% in 2014,
(0.5%) decline in 2015
• U.S. real GDP grows 1.1% in 2014 and 1.2% in 2015
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Credit Quality Overview
U.S. State Rating Distribution
6%
2%
2%
2%
30%
32%
26%
AAA
As of April 2, 2013
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AA+
AA
AA-
A+
A
A-
Overview of State Credit Quality
• Overall credit quality for the sector has remained strong,
with a few exceptions.
• 94% of U.S. State Ratings are AA- or better.
• A majority of U.S. states are in a better budgetary position
than at any other point since the start of the recession
• States began the 2nd Quarter of 2014 – which for most is
the final quarter of the fiscal year – with the wind at their
backs.
• Fundamentals point to ongoing expansion
• Even if revenues in the last quarter of the fiscal year hold
up, the states’ fiscal situations are not without risk heading
into fiscal 2015.
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2015 Budgets
The Fiscal 2015 Challenge: Striking a Balance Between
Competing Objectives
•
Modest revenue growth and easing pressures on social
networks are the result of the confluence of three factors:
o A gradual, but sustained economic expansion
o A five-year bull market for equities; and
o Broad political consensus in favor of budgetary restraint
• Elections, a less crisis-like budgeting atmosphere and
austerity fatigue could give way to weaker fiscal restraint
• “Repressed fiscal deficits” add to the challenge
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Measuring The Status Of The States Fiscal Recovery?
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Measuring The Status Of The States’ Fiscal Recovery?
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FY 2015 Is A Year To Watch Closely
Conclusion
• Our outlook calls for ongoing economic expansion
• Economic recovery is mature at this point
• Sluggish rebound has contributed to incomplete fiscal
recovery
• State revenue is volatile, as we saw in April
• Austerity fatigue in an election year
• Long-term pressures remain and will require continuous
management
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Recent Articles
• Economic Research: How Increasing Income Inequality Is Dampening
U.S. Economic Growth, And Possible Ways To Change The Tide,
Aug. 6th, 2014
• Not All Loans Are Equal: Some Terms and Conditions That Make
Disclosure Critical In Evaluating Credit Risk
• U.S. Public Finance Rating Changes Were Still Positive In The
Second Quarter, But A Bit Less So, July 18th, 2014
• U.S. State And Local Government Credit Conditions Forecast:
Ramping Up After A Slower-Than-Expected Start, July 8th, 2014
• U.S. Economic Forecast: Keep Calm And Carry On, June 25, 2014
• U.S. State Pension Funding: Strong Investment Returns Could Lift
Funded Ratios, But Longer-Term Challenges Remain, June 24, 2014
• Credit Conditions: North America’s Credit Conditions Remain
Favorable, But Not Without Risks, June 9th, 2014
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Thank You
John Sugden
Senior Director – Analytic Manager
T: 212.438.1678 | F: 212.438.0140
John.sugden@standardandpoors.com
Permission to reprint or distribute any content from this presentation requires the prior written approval of
Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.