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It probably won’t happen this year but the “next recession is probably closer than the last one,” one expert said during the National Governors Association’s winter meeting.
WASHINGTON — While a full-blown recession is unlikely in the U.S. during the coming months, there is a good chance one will hit within the next three years, economists warned at a gathering of governors from around the nation, which was held here over the weekend.
Despite the ongoing slump in oil prices, sluggishness in the manufacturing sector, the stock market’s tumultuous performance in early 2016 and worries about the economic outlook in China, a panel of experts largely agreed that the probability of a recession unfolding in the U.S. this year was relatively low, with two of them pegging the odds in the 20 to 25 percent range.
The economists made their remarks on Saturday during a panel discussion at the National Governors Association winter meeting.
“The strength of the domestic economy is still very robust at the moment,” Joseph Lake, a global economist with The Economist Intelligence Unit said. “By a lot of measures the U.S. economy is in stronger shape than it has been for the best part of a decade and probably in much stronger shape than most of the global economy is at the moment.”
But, he later cautioned, since World War II there have been 11 recessions and, on average, the business cycle expansions between them have lasted five years. The nation is now seeing a sixth year of expansion. “The next recession is probably closer than the last one,” Lake said.
Gail D. Fosler, who was also on the panel, agreed. A former chief economist for the U.S. Senate Budget Committee, Fosler is now president of The GailFosler Group, which bills itself as a strategic advisory firm for business leaders and public policymakers.
“I don’t think any of us see this year as being a recession,” Fosler said. “But I actually would put a 100 percent, a certainty, on a recession by 2018.” Fosler later added: “The governors here should be planning on that.”
Asked after the panel discussion about how well prepared he believed North Carolina was when it comes to girding itself against a recession, Gov. Pat McCrory pointed to steps he has taken to help ensure that the state’s finances are resilient against economic turbulence.
“Part of that resilient plan is to have a very diverse economy,” the Republican governor said. “From agriculture, to banking, to logistics, transportation, to manufacturing.”
McCrory also said that he has pushed to build up the state’s budget reserve accounts, including its “rainy day fund,” which he said is now at its highest level since the year 2000. “We’ve more than doubled the rainy day reserves since I’ve become governor,” McCrory boasted. But he also acknowledged that he would like to see the balance of the reserves grow further.
Additionally, he noted that North Carolina had paid off about $2.6 billion in debt owed to the federal government. The state owed that amount of money due to borrowing that began in 2009 to help cover the cost of unemployment benefits for North Carolinians.
“If it does happen,” McCrory said of a recession, “I won’t have to turn around and tax the employers while they’re getting hurt.”
Dan White, a senior economist with Moody’s Analytics, said there was “virtually 100 percent certainty” a recession would happen sometime in the next three years. He also said that when the Great Recession arrived in late 2007, “in general states were not well prepared.”
During the panel discussion, White highlighted work Moody’s Analytics had done to “stress test” the finances of U.S. states in order to gather insight into how well they would withstand recession.
The state of Utah has also done work in this area.
Running these sorts of tests, White said, makes it clear that recessions can affect a state’s revenues and spending in equally important ways.
This is because, in a downturn, demand tends to go up for programs people turn to when they’re struggling financially or unemployed, like Medicaid and public higher education. But, at the same time, revenues like individual and corporate income taxes, as well as taxes on capital gains, tend to see declines when economic conditions become poor.
Saving the equivalent of about 8.5 percent of general fund expenditures in some type of rainy day account, is a rough guideline for how much a state should sock away in order to make it through one year of a recession without tax increases, or spending cuts, White said.
He also pointed out that states with more “progressive” tax systems would typically be exposed in a downturn to greater revenue volatility, meaning bigger up and down fluctuations in their revenues.
Progressive taxation tends to rely more heavily on income taxes, especially those from higher income earners, which can be especially sensitive to business cycles.
States that have economies deeply intertwined with the energy sector, such as Alaska, Oklahoma, Texas and North Dakota, are not strangers to the concept of revenue volatility.
The amount of revenue flowing from the energy industry into a state’s coffers typically sees peaks and troughs depending on market factors like oil prices, which have been in the dumps lately.
“Many of the governors in energy producing states know that there’s already a recession in the energy sector,” said panelist Mark Finley, general manager for global energy markets and U.S. economics at the energy giant, BP America, Inc.
Finley went on to say that there are expectations that global demand will catch up to supply later this year, but that the energy market would have to “work off” existing surplus inventories of oil, before a balance between supply and demand would be restored.
Another panelist, Ethan Harris, the managing director and co-head of the global economics research division at Bank of America Merrill Lynch, expressed a bit more optimism than some of the others, and said he did not think there was a 100 percent chance of a recession in the next three years. “I don’t think that we’re on a clock here,” he said.
Harris explained that he did not see conditions in place right now that would spark a major downturn, such as skyrocketing inflation, spiking oil prices, or an oversized bubble in some part of the economy.
“But, you know, give us a few years,” he added. “And then you start to really worry about it.”
Remarking on the timing of the next recession, Lake, of the Economist Intelligence Unit, put it this way: “We know that one will come, it’s just a question of when.”
Bill Lucia is a Reporter for Government Executive’s Route Fifty.