“A concerning number of states are still substantially unprepared for an economic downturn, and that level of preparedness will have economic repercussions if not addressed,” wrote Dan White of Moody’s Analytics.
“At the very least, states and local governments should be reviewing their reserve policies and checking on their adequacy following such a tumultuous fiscal period as the last decade,” continued White, leader of the group of Moody’s economists responsible for the report.
Fifteen state governments don’t have enough money reserved to replace the revenue that would disappear in the event of a moderate recession. Louisiana, North Dakota, and Oklahoma are the least prepared, according to the stress tests conducted by Moody’s Analytics. New Mexico, Illinois, Colorado, New Jersey, Pennsylvania, Missouri, Kansas, Virginia, Vermont, Arizona, Arkansas, and Connecticut were also found to be under prepared.
To develop its list, Moody’s looked at state-by-state estimates of tax revenue shortfalls and Medicaid spending increases under a recession. They then compared that figure against the reserves held by each state for fiscal year 2017. Moody’s Analytics determined that states with a greater than 5 percentage point differences between actual and necessary reserves as unprepared for the next recession.
While Moody’s Analytics isn’t forecasting a recession, it’s only a matter of time for the next one.
Despite the market being at all-time highs, the current environment is ripe for a recession. Unemployment can’t go much lower. Consumer debt levels are quickly approaching 2007 levels, and if the FED increases interest rates much further, service payments will severely hinder future consumption. Speaking of rising interest rates, historically, interest rates have always risen just before a recession as central banks attempt to prevent economies from overheating.
According to Moody’s, states are more vulnerable to a recession now than they were in the past. Spending on Medicaid has been rising at rates faster than revenue, becoming a much larger portion of states’ budgets. Additionally, tax revenue collections have become more volatile as states have relied more on progressive personal income taxes for revenue.