Tough Economic Times Mean Tough Fiscal Choices Ahead

Updated:

Evidence is mounting that the longest (albeit one of the slowest) economic recovery in U.S. history is nearly at its end – including slumping sales for recreational vehicles made in Elkhart, Indiana.

Last week, fears of a downturn pushed enough investors towards long-term treasuries to flash the dreaded ‘inverted yield curve.’  But as the lure of the open road diminishes as economic uncertainty grows, the RV market has joined the bond market as a reliable predictor of recession. 

That puts the spotlight on Elkhart, where two of every three RVs in the U.S. are made.  But as sluggish demand puts the brakes on the RV industry, the trade war with China threatens to stall the entire manufacturing sector.  Factory orders fell into negative territory this month for the first time since 2009.     

Elkhart may be a bellwether, but a manufacturing recession would take a harsh toll across Indiana.

Thousands of Indiana companies closed their doors during the Great Recession, and hundreds of thousands of jobs were lost.  After a decade of recovery, more Hoosiers are working today than ever before – but another downturn could quickly erase these gains. 

Along with the human costs, we also have to think about the fiscal implications of recession for Indiana’s public sector, as the need for services continues – and more people turn to government for help – in times of economic turmoil. 

In many ways, Indiana has been prudently preparing for the inevitable downturn.  2019 marks a decade of consecutive state budget surpluses, and better-than-expected revenue growth last year pushed our ‘rainy day’ funds to nearly 14% of total spending.  (Even if the legislature spends a portion of the surplus on projects identified by Governor Holcomb, we’ll be far ahead of most states.)

But local government could be a very different story.  Indiana’s property tax caps were just being implemented in 2008-09, so their full impact during a recession is uncertain.  Local revenues have basically flatlined since 2007, with greater reliance on income taxes (also more susceptible to decline with the business cycle).

In 2016, Purdue economist Larry DeBoer created a revenue-cost index to measure the ability of Indiana’s local governments to fund basic services within average tax rates; he found a corridor of communities across east-central Indiana already facing dire fiscal conditions.  DeBoer connected the industrial legacies of places like Anderson, Muncie, New Castle and Marion to their plight, with losses in manufacturing employment, payrolls, and the declining property values of former factory sites decimating the tax base.

If the U.S. is slipping into a ‘manufacturing recession,’ how will these places fare? Comparing today’s employment data to DeBoer’s report, there are 17 more counties with higher manufacturing concentrations than the state average and uncertain-to-negative fiscal capacity – a wide swath of Indiana that could be especially vulnerable to a manufacturing-led recession’s impact on revenues.

The need to strengthen local budgets isn’t the only challenge Indiana faces.  The state’s unemployment trust fund is underfunded according to national guidelines, leaving legislators a difficult decision next year: Raising business taxes as the economy slows, or risk scrambling to request (and repay) federal loans if jobless claims wipe out the trust fund?

And even though Indiana has saved its way to a sturdy umbrella against a stormy economy, we can’t be confident that rainy day funds can bail us out of a deeper recession. 85 cents of every dollar collected by the state comes from income and sales taxes – at risk of declining personal income and consumer spending.

A recession could also lead to uncharted territory for the state’s finances after voters approved a balanced budget amendment to Indiana’s constitution last year, leaving uncertainties over how to adjust expenditures to revenues (based on forecasts made before the end of each fiscal year) to erase a deficit.

If the hardship starting to be felt in places like Elkhart deepens into a full recession, tough times lie ahead for all of us – including tough choices on taxing and spending for state and local officials.  And perhaps the most challenging part of managing through a downturn is preparing for the day it ends – protecting public investments in education, workforce and economic development, infrastructure and quality of life that will put Indiana in a better position to rebound during the recovery.

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