Moody’s Finds One-Third of U.S. States Unprepared for Recession
Not all U.S. states are in a shape to deal with a recessions. Ratings agency Moody’s Corporation has found that about one-third of U.S. states do not have the ability to withstand recessionary pressures. Louisiana, North Dakota, and Oklahoma top the list of U.S. states unprepared for recession.
Analysts at Moody’s have conducted stress tests on U.S. states to determine their preparedness for a recession. They have found that 15 states are unprepared to deal with an economic downturn. Other than the three aforementioned states, Arizona, Arkansas, Colorado, Connecticut, Illinois, Kansas, Missouri, New Jersey, New Mexico, Pennsylvania, Vermont, and Virginia are also under-equipped.
According to Moody’s, these states do not have enough money in their reserves to help them last through periods of low business activity.
All U.S. states are expected to contribute part of their revenue to their rainy-day funds. For instance, when Hurricane Harvey hit, Texas had an emergency fund at its disposal. The state could use these reserves if the federal government had delayed the release of the aid budget.
Louisiana Tops the List of U.S. States Unprepared for Recession
Not all states have been saving for emergencies. Louisiana, which Moody’s ranked as No. 1 among the U.S. states that are unprepared for a recession, is short by 24% in its reserves needed to withstand a recession.
According to Moody’s, the median of rainy-day funds held by all U.S. states is just enough to cover for about five percent of the government’s general budget. That’s about the same level seen in 2008, when the Great Recession hit. We have seen that those funds turned out to be inadequate to bear the recessionary pressure.
Ideally, the states are expected to have more than 10% of their budget saved in rainy-day funds to last them through a modest recession. However, state and local governments are not doing enough to prepare for unforeseen economic downturns. In fact, about a dozen states have failed to pass their budgets on time. Connecticut is still running without an official budget.
One of the economists who led the Moody’s stress test said, “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.”
Despite the warnings from Moody’s, chances are that these states will continue to lag in their savings. That’s partly because the state governments are set to lose more revenue following President Donald Trump’s proposed tax cuts.
“Moody’s: Louisiana, North Dakota, Oklahoma Unprepared for Recession,” Newsmax, October 18, 2017.