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U.S. Public Finance Mid-Year Outlook: Beyond COVID?

COMMENTS

U.S. Public Finance Rating Activity, September 2021

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

COMMENTS

Global Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date In 2021

COMMENTS

U.S. CMBS Update Q3 2021: Issuance Picks Up, Leverage Remains Elevated


U.S. Public Finance Mid-Year Outlook: Beyond COVID?

To start 2021, the key question for U.S. public finance was: Will the pandemic be contained and the economy and credit conditions get back on track? The answer to that question at mid-year is "yes" due to rapid and widespread vaccination across the U.S. which eased COVID-19 caseloads and accelerated social and economic activity. The strong federal fiscal and monetary response to the pandemic was also a major contributor to the economy and improved fiscal prospects for most public finance issuers in the U.S.

We have seen a return to credit stability during the first two quarters and we expect that to continue for the remainder of the year (see rating and outlook distribution charts). The rating distribution remains strong and negative outlooks represent about 6% of total ratings compared to about 8% last year at this time. The 2020 default study for U.S. public finance, published July 9, also highlights this credit stability. All sector views are now stable except for higher education. This was a quick shift from a year ago when all sector views were negative. (A sector view is a macro, forward-looking assessment of where we see credit trends in the year ahead; it does not apply to specific issuer- or issue-level ratings.)

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Despite these generally positive trends, challenges remain as the pace of vaccination has slowed and COVID variants have accelerated in the U.S. and globally. The recent rise of the delta variant again highlights the regional variations and uneven health outcomes we have observed throughout the pandemic. In addition to the lingering health and safety challenges of COVID, other issues--many of them also under the environmental, social, and governance label--are front and center for the remainder of 2021 and will test issuers and require active management.

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The sectors that comprise the municipal market are diverse but there are some key macro issues that matter for all in terms of credit quality in 2021.

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Economic Forecast Update

S&P Global Economics updated its forecast and now projects an acceleration of growth (see "Economic Outlook U.S. Q3 2021: Sun, Sun, Sun, Here It Comes," published June 24, 2021, on RatingsDirect). Highlights include:

  • The forecast for GDP growth was slightly raised for 2021 and 2022 to 6.7% and 3.7%, respectively, from 6.5% and 3.1% in March.
  • The labor market still has a long way to go before it recovers the 22.4 million jobs lost from COVID-19, which likely won't happen before fourth-quarter 2022. The unemployment rate is projected to reach its precrisis range of under 4% by first-quarter 2023.
  • Although inflation has jumped on base effects and supply running behind reopening demand, we agree with the Federal Reserve that price gains should be "largely transitory."
  • We assume the Fed's first rate hike will be in first-quarter 2023, followed by another in the third quarter, and two more in 2024.
  • Recession risk is now 10%-15%, the lowest in six years.

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Mid-Year Credit And Research Roundup By Sector

General public finance articles
Charter schools
Health care
Higher education
Housing
Local governments
Public power
Transportation
States

This report does not constitute a rating action.

Primary Credit Analysts:Robin L Prunty, New York + 1 (212) 438 2081;
robin.prunty@spglobal.com
Jane H Ridley, Centennial + 1 (303) 721 4487;
jane.ridley@spglobal.com
Secondary Contacts:David N Bodek, New York + 1 (212) 438 7969;
david.bodek@spglobal.com
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
geoffrey.buswick@spglobal.com
Theodore A Chapman, Farmers Branch + 1 (214) 871 1401;
theodore.chapman@spglobal.com
Suzie R Desai, Chicago + 1 (312) 233 7046;
suzie.desai@spglobal.com
Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Jessica L Wood, Chicago + 1 (312) 233 7004;
jessica.wood@spglobal.com
Marian Zucker, New York + 1 (212) 438 2150;
marian.zucker@spglobal.com

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