What Does the Economy Hold for Counties? By Dave Lucas, NYSAC Director of Finance and Intergovernmental Affairs
On the one hand… The New York State and U.S. economy are facing headwinds as we briskly stumble toward 2023. The highest inflation in 40 years, a Covid pandemic supply chain breakdown hangover, geopolitical conflict, severe weather and war impacting food supplies, a shrinking workforce, a stock market in bear country, rising interest rates, negative GDP, and continuous declines in housing sales have most economists projecting a recession during 2023 and many CEOs planning for the impact of a recession on their operations in August.
But on the other… Even with all of this, is a recession inevitable? There is a lot of conflicting economic data muddying the waters. Unemployment is near historic lows, consumer spending remains strong in the face of higher prices, cumulative “excess” personal savings has remained more than $1.1 trillion above pre-Covid levels since May of 2020 (down from a $2.1 trillion peak in July of 2021), employees still seem to have leverage in wage negotiations with employers, and there are still way more job openings than there are employees to fill them.
However, the consensus appears to be… Even with the mixed signals, it seems a recession is far more likely than not over the next 12-18 months. So, should we expect a hard landing or something more manageable? Back to our CEO’s thoughts on this front. According to the August Conference Board survey of CEO sentiment “…81% said they expect the downturn to be brief and shallow, vs. 12% who said they expected a deep recession.” Among economists, a most recent Wall Street Journal survey reported that 63% are expecting a recession to occur within the next 12 months (up from 49% in the prior month). Most expect the recession to be relatively short (around 8 months), with unemployment topping out just under 5% by the end of 2023 and hovering around that level through most of 2024.
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NYSAC News | Fall 2022
By historical standards, a 5% unemployment rate is pretty low. However, the low rate is driven by a smaller worker pool. The smaller worker pool will keep upward pressure on wages for many employers, which will, in turn, keep upward pressure on inflation and prod the Federal Reserve to continue raising interest rates. Some economists believe this cycle could lead to a longer and deeper recession.
Expectations for County Finances A recession will definitely impact county finances and revenues in a negative way. The State signaled after their first quarterly update to the SFY 2023 financial plan that the vast reserves they had built up were dwindling quickly and they would have to be more cautious. The midyear update had not come out as of this writing, even though cash reports from the State Comptroller for September showed revenues nearly $3 billion above the first quarter update. Longer term projections are likely to come down further as stock market volatility undermines income tax collections throughout the remainder of 2022 and potentially much of 2023. Counties rely on the state to, at a minimum, maintain funding for programs counties administer and partially fund on behalf of the state. If the state fiscal situation deteriorates enough, new cost shifts from the state to counties are likely. Other county revenues such as property tax are important parts of the county budget and should remain generally stable over the near term.
