Coronavirus: Grim Economic Outlook Shrouds State Budget

BOSTON (State House News Service) — Grounded planes, shuttered restaurants and stores, and empty arenas, college campuses and office buildings are symbols these days of an economy in fast decline. The question that no one can answer with certainty is how far will the fall be and when will it end.

As the world struggles with COVID-19, and focuses mostly on saving lives and slowing the virus' spread, financial analysts are running models and taking a stab at what's to come and whether states are equipped to handle it.

To analysts at Goldman Sachs, the surge in layoffs combined with a spending collapse that's "both historic in size and speed" led to a forecast of negative 6 percent growth in the first quarter, nosediving to negative 24 percent in the second quarter. For reference, a 24 percent decline in economic output would be almost 2.5 times the size of the largest quarterly decline in gross domestic product in the history of modern statistical record-keeping -- the 10 percent decline in early 1958.

In a report issued March 20 and titled "A Sudden Stop for the US Economy," Goldman Sachs forecast 12 percent growth in the third quarter and 10 percent in the fourth quarter, with full-year growth in 2020 at an annual average of negative 3.8 percent.

On Beacon Hill, the second quarter hit is setting up to torpedo the $43.3 billion fiscal 2020 budget Gov. Charlie Baker signed last July. The budget appeared to have been trending in the black, but Baker now faces stark choices about keeping it balanced and working with lawmakers on a budget plan for fiscal 2021, a year when many have been hoping for large new investments in public education and mass transit.

In their analysis, Goldman Sachs cautioned about highly uncertain timing and possible relapses, saying their projection of a gradual recovery hinges on factors like effective testing and mitigation, weather effects, medical breakthroughs and the ways that consumers and businesses adapt to change.

Spending declines, and job impacts, are particularly acute in certain U.S. industries, with a projected 85 percent decline in sports and entertainment spending, a 75 percent drop in transportation spending, and a 65 percent fall in hotel and restaurant spending, according to the report.

Housing and construction are also suffering. Analysts examined housing data in Asian countries hit earlier by the virus, reports of widespread open house cancellations and the shutdown of construction projects. They concluded it all adds up to a "large hit to the real estate and construction sector."

Unemployment? The Goldman Sachs forecast sees it rising from 3.5 percent to 9 percent nationally over the next couple of quarters. The jobs losses will be concentrated in low-wage occupations prone to temporary layoffs, the report said, including businesses forced to lay off employees because of abrupt cash flow problems.

In a separate report, published on March 19, Moody's Investors Service maintained its stable outlook on the state and local governments sector with a caveat that it "will reassess as necessary as events unfold."

Moody's flagged substantial tax revenue declines and massive public health costs as "profound challenges" for state and local governments.

"Still, state and local governments have many credit strengths with the potential to mitigate the financial impact, including generally strong reserves and significant spending flexibility," analysts reported. "This will allow most to withstand the effects of the outbreak without a substantial decline in credit quality."

On the tax front, capital gains receipts, which are always a volatile category, "will weaken materially in the next tax year" due to stock market losses, which will also exacerbate unfunded public pension liabilities in the states.

Sales taxes, which in Massachusetts are critical to the MBTA, school construction, and other government services, will also fall. Tourism is a major sector in Massachusetts and Moody's says states that rely more heavily on tourism "will feel the pain from sales tax revenue declines more severely."

The MBTA is also heavily reliant on fare revenues, which are also tanking. Moody's described fare-dependent mass transit enterprises as "among the most vulnerable issuers to financial effects from the coronavirus" and the backdraft whipped up by fare declines could draw more oxygen from a sales tax falloff.

Coronavirus infections will rise through the second quarter, Moody's said, as governments implement travel restrictions, quarantines and close schools and businesses to slow the spread of the virus, and "the fear of contagion will dampen consumption and investment."

Citing a higher degree of uncertainty than usual, Moody's also referenced its "downside scenario," which envisions a "significant increase in infections and fear, substantial market declines, shortages of goods because of global supply chain disruptions and low commodity prices for an extended period."

Another huge factor: the outcome of talks in Washington D.C. on a third coronavirus bill, which is setting up to be the largest in size. While uncertain about the outcome, Moody's said federal aid "is bulwark against financial calamity for state and local governments in times of crisis and disaster."

By Michael P. Norton, State House News Service

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