Economy

The Impact of the National Recession on Iowa

Politicians, policy makers, and members of the media are scrambling to redefine the term “recession” for the American public.  Sometimes these explanations are counter to the traditional economic classification of a recession which is two consecutive quarters of negative growth, as measured by the nation’s Gross Domestic Product (GDP). For anyone keeping track at home, though, the economy declined by 1.6 percent during the first quarter of 2022, and the first estimate of second quarter activity is scheduled to be released on Thursday, July 28; the next announcement of GDP data could signal the arrival of a recession.  That GDP release will likely follow another interest rate hike by the Federal Reserve as the FOMC tries to turn back inflation that's at a 40-year high.

GDP, rising interest rates, and inflation aren’t the only factors that are impacting the outlook of consumers and businesses.  The Business Record (subscription required) recently hosted Peter Orazem and Anne Villamil, economics professors at Iowa State University and the University of Iowa, respectively, for a virtual discussion on the uncertainty of the economy.  The professors identified threats such as labor shortages, supply chain problems, and low consumer confidence, in addition to inflation and higher interest rates.  Conversely, they also noted positive aspects about our economy including robust consumption, high corporate profits, and the availability of jobs.  All of these competing factors point to a roller coaster ride ahead, as Orazem alluded to.

Hopefully Iowa’s leaders do not get caught up debating whether the United States economy is in a recession (technical, real, or otherwise).  Instead, attention should be paid to what the status of the economy might actually mean to those of us here in Iowa, and what impact it could have on the state’s budget.  While the past does not repeat itself, history often provides helpful illustrations of the direction Iowa’s budget could be headed.

Below is a table identifying the six most recent instances when the American economy was in a recession (1980, 1981-82, 1990-91, 2001, 2007-2009, 2020) and the corresponding changes in Iowa’s revenue.  Comparisons like this are imperfect because national economic activity does not align directly with the reporting of Iowa’s revenue, nor does it always fit neatly into a calendar year.  In fact, since Iowa’s revenue is reported on a fiscal year basis (annually ending on June 30), the following fiscal year in Iowa seems to be when the financial impact of a recession is noticed in state revenue collections, if at all.

Source: Federal Reserve Bank of St. Louis, Iowa Legislative Services Agency

Unfortunately for Iowa legislators, history does not appear to be providing a crystal ball in this case, as the data paints conflicting pictures.  Those six recessions occurred across parts of ten calendar years.  During Iowa’s corresponding fiscal years, the state had four years of declining revenue, and six years when the state’s revenue actually grew. Iowa’s diverse economy, including its agricultural strength, can often ward off the worst of national economic trends.  At the moment, corn prices and the value of Iowa farmland are just two factors that provide optimism about our state’s ability to fight national headwinds.  Nonetheless, when there are times of uncertainty, it is usually best to control the things one can control.  In the case of Iowa’s legislature and governor, the thing they can control is spending.

The FY 2023 budget Governor Reynolds signed this spring stayed far below the statutory limit (99 percent of revenue) that is placed on lawmakers, allocating 91 percent of the funds that were available for 2023’s budget.  Viewed another way, Iowa’s budget is already built to withstand a revenue drop of eight percent, something that has not occurred for at least the last 40 years.   It would be prudent to remain well below any required limits in the future and ensure that the growth of state government continues at a responsible pace.  By fighting off the temptation to pump-up spending, Iowa should be on solid ground when the national roller coaster ride ends.

President Joe Biden’s administration may be attempting to redefine what a recession is, but voters are not fooled by word games that are being played by politicians. Iowans are not only paying more for groceries and gas, but inflation is also eating away at their wages and savings, serving as a de facto tax hike.  Thankfully, Iowa’s leaders have developed a habit of following prudent fiscal policies, creating a roadmap that will help our state weather future economic storms triggered by irresponsible federal policies.

 

*Sources

FRED Economic Data - St. Lious Fed

The Iowa Legislature - IOWA FACTBOOK 1992

The Iowa Legislature - IOWA FACTBOOK 2004

The Iowa Legislature - IOWA FACTBOOK 2011

Legislative Services Agency (LSA) Report - September 30, 2021

Proprietary LSA Reporting