articles Ratings /ratings/en/research/articles/220804-looking-forward-how-economic-volatility-could-affect-u-s-state-and-local-government-ratings-12459373 content esgSubNav
In This List

Looking Forward: How Economic Volatility Could Affect U.S. State And Local Government Ratings


Recent Pension Funding Gains For Largest U.S. Cities Are Expected To Be Short-Lived


Charter School Brief: Texas


U.S. Local Governments Credit Brief: Illinois Counties And Municipalities Means And Medians


U.S. Not-For-Profit Health Care Rating Actions, August 2022

Looking Forward: How Economic Volatility Could Affect U.S. State And Local Government Ratings

The strength of the economy, both national and local, is a critical part of S&P Global Ratings' criteria both for states and local governments. While economic shifts don't always have a direct impact on credit quality for these issuers, changes and trends over time can create pressure. On a quarterly basis, S&P Global Ratings publishes a U.S. economic forecast ("Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent," June 27, 2022) and a summary of North American credit conditions ("Credit Conditions North America Q3 2022: Credit Headwinds Turn Stormy," June 28, 2022). This article adds details to some of the factors in those reports that have the greatest possibility of affecting state and local government ratings.

Chart 1


Local Governments Remain Stable, For Now

S&P Global Economics' most recent U.S. economic forecast projects reductions in key economic measures over the next 12 months. Following the recent 75 basis point Fed rate hike, our economists raised the likelihood of a recession to 40% to 50% over the next 12 months ("U.S. Business Cycle Barometer: The Party's Over," July 27, 2022), up from 35% to 45% just a month prior. Due in large part to federal stimulus received in 2020 and 2021, local government credit quality remains stable but weakening economic conditions--even without a technical recession--could contribute to more credit pressures for local governments. (For more details about the National Bureau of Economic Research [NBER] and recessions, please see "Economic Research: U.S. Recession--Are We There Yet?," Aug. 2, 2022.)

Given their dependence on property taxes, local governments benefit from growth in the tax base, and a hot housing market has delivered. Across the U.S., there has been extremely strong growth in the housing market and the S&P/Case-Shiller U.S. National Home Price Index reached a historic high of 20.4% in April 2022, more than five times the average of 4% in the past five years. However, as prices continue to rise and interest rates go up, housing affordability is less attainable for many Americans (see "The American Dream May No Longer Be In Reach," July 20, 2022). We don't anticipate any near-term effect on local government credit quality from these home price spikes but will be watching closely over time to see how governments and residents could be affected.

Although housing prices remain high, S&P Global Ratings believes the market is supported by several fundamental economic factors that are unlikely to end soon. The most significant of these is the demand-supply imbalance since there is a shortage of several million homes in the U.S. and the pace of building would have to increase substantially to meet demand in coming years. Given this, we expect continued price appreciation nationally, albeit at a more subdued pace, with declines only in certain regions. Even then, since economic softness generally takes longer to run through the tax assessment and collection process, local governments should have time to adjust if there is a downturn; for example, during the Great Recession there were increases in property tax delinquencies but the effect on ratings was limited.

States Are Generally Healthy

States came out of the pandemic with higher rainy day reserves than they went in, so should be prepared if another recession occurs in the near term. Most states have adopted fiscal 2023 budgets that are structurally balanced, although there is potential for an economic contraction that could lead some to revisit their fiscal year revenue projections and cut expenditures.

Federal support and related spending remain key focus areas for states. Spending one-time revenue from the American Rescue Plan Act and the Infrastructure Investment and Jobs Act on one-time expenses could be a stabilizing factor for credit, but new programs without recurring revenues may pressure out-year budgets and credit stability, particularly in a recessionary environment. All of this could be enhanced by the double-edged sword of inflation since it can help some revenues remain on-budget but also leads to higher expenditures.

Medicaid remains the largest annual outlay from the federal government to the states, and changes in this disbursement are likely coming in the next six to nine months since extra COVID-related Medicaid funds will run out by Sept. 30, 2022, unless the program is extended. This could lead to budget challenges right when economic conditions are also worsening. Federal law prohibited removing Medicaid coverage for approximately 16.1 million enrolled individuals (or 22.5% above February 2020 enrollment) since the onset of the national health emergency, which is currently extended through mid-October 2022. Once the emergency ends, states will largely be responsible for redetermining eligibility and unwinding their Medicaid rolls, which could lead to significant variations in spending across states.

Most states use economic projections in determining budgets. Current projections, for the most part, all agree that economic conditions will remain muted compared to calendar 2021 highs and that the growth rate will slow or perhaps even stall. Even with slower growth projections state revenue forecasts still show increases; we consider this reasonable given the economic climate. However, even with credit pressures that arise over the next year, we believe that strong rainy-day balances and revenue projections that reflect a slowing economy still allow continued stability in the sector.

Chart 2


The Labor Market And Inflation Continue To Exert The Most Pressure

Two sectors of the economy that could influence the credit stability of state and local governments the most are the labor market and inflation. These charts from our most recent U.S. economic forecast indicate some of the challenges the economy faces: not enough workers, and less buying power even with higher wages.

While most governments have been managing well through a challenging post-pandemic labor market, gaps in the workforce, such as shown in chart 3, can slow economic growth over time. This influences all major tax sources, particularly income and sales taxes. To date, only 56% of state and local jobs cut at the start of the pandemic have been recovered, underscoring the slow return of jobs in the government space.

Chart 3


Low unemployment generally bodes well for sales tax collections, but competition for workers is pushing wages up and exacerbating inflation. More sales translate to higher sales taxes but high inflation means less buying power, which can affect consumer spending levels.

Chart 4


Key Credit Factors To Consider

There are numerous key economic factors we consider important to state and local government credit health; some are macro factors that S&P Global Ratings defines as Key Risks and assigns risk levels. Others are offshoots of the economic factors that particularly affect governments although the effects are felt broadly across public finance in general. These factors include:

Chart 5


Comparing The Regions: Gross State Product, Unemployment, And Inflation

There are few significant outliers when comparing projections for these three key data points. However, the confluence of weaker--or stronger--projections could affect the economic stability in some regions. Of the nine U.S. Census regions, only one, West South Central, has two of the weakest projections, and only one, Pacific, has two of the strongest.

Chart 6


For additional regional data, please see the table below.

Regional Baseline Credit Driver Forecasts
% change unless otherwise indicated
2019 2020 2021 2022 2023
New England
Consumer Price Index 1.6 1.4 4.0 7.9 3.5
Home price, existing median 4.6 7.9 17.1 15.6 8.6
Home price, existing median ($) 353,847 381,769 446,930 516,846 561,328
Housing starts, total private (4.2) (0.8) 8.1 9.8 (11.2)
Housing starts, total private (000) 31 31 33 36 32
Real GSP growth 2.1 (4.1) 5.8 2.0 0.8
Real retail sales 0.9 2.0 8.4 (0.0) (1.4)
Unemployment rate 3.1 8.3 5.5 3.9 4.2
Mid Atlantic
Consumer Price Index 1.6 1.2 3.9 7.6 3.5
Home price, existing median 4.2 7.5 15.1 15.1 8.4
Home price, existing median ($) 303,581 326,362 375,791 432,385 468,661
Housing starts, total private 6.0 (1.9) 26.9 (3.3) (18.5)
Housing starts, total private (000) 84 82 104 101 82
Real GSP growth 2.2 (4.8) 4.9 1.2 1.1
Real retail sales 1.3 2.5 12.1 0.4 (2.4)
Unemployment rate 3.9 9.6 6.7 4.5 4.9
South Atlantic
Consumer Price Index 1.5 1.1 5.1 7.8 3.3
Home price, existing median 5.1 8.0 17.6 20.8 9.6
Home price, existing median ($) 246,033 265,714 312,397 377,518 413,765
Housing starts, total private 6.6 6.2 16.1 2.5 (10.7)
Housing starts, total private (000) 373 397 460 472 421
Real GSP growth 2.3 (3.1) 5.5 1.6 1.4
Real retail sales 2.0 1.3 12.3 1.4 (1.8)
Unemployment rate 3.4 7.2 4.6 3.4 4.1
East South Central
Consumer Price Index 1.3 0.9 5.1 7.7 3.2
Home price, existing median 6.0 8.5 17.4 19.4 8.1
Home price, existing median ($) 165,049 179,016 210,213 250,965 271,278
Housing starts, total private 9.3 10.5 15.5 (7.1) (7.9)
Housing starts, total private (000) 77 85 98 91 84
Real GSP growth 1.6 (3.3) 6.0 1.1 0.9
Real retail sales 0.9 4.4 14.8 0.9 (3.9)
Unemployment rate 3.8 7.0 4.4 3.6 4.6
East North Central
Consumer Price Index 1.5 1.0 5.2 7.7 3.2
Home price, existing median 5.1 7.6 14.3 15.2 7.8
Home price, existing median ($) 184,157 198,107 226,353 260,741 281,119
Housing starts, total private (2.3) 14.0 9.0 0.1 (1.7)
Housing starts, total private (000) 96 109 119 120 117
Real GSP growth 0.8 (4.1) 5.2 0.8 1.2
Real retail sales 1.0 2.8 13.9 0.3 (2.3)
Unemployment rate 3.8 8.5 5.2 3.9 4.5
West North Central
Consumer Price Index 1.4 0.9 4.9 7.7 3.1
Home price, existing median 5.0 7.1 13.9 15.0 8.2
Home price, existing median ($) 191,467 205,149 233,628 268,689 290,801
Housing starts, total private 1.9 14.6 17.2 (7.1) (9.7)
Housing starts, total private (000) 73 84 98 91 82
Real GSP growth 0.8 (2.7) 5.1 0.1 1.3
Real retail sales 1.4 2.7 14.0 2.2 (3.1)
Unemployment rate 3.1 5.7 3.7 2.8 3.4
West South Central
Consumer Price Index 1.4 0.7 5.1 8.0 3.4
Home price, existing median 4.6 6.4 16.1 17.8 8.6
Home price, existing median ($) 177,804 189,142 219,587 258,698 280,835
Housing starts, total private 12.7 10.6 11.1 0.2 (7.9)
Housing starts, total private (000) 236 261 290 291 268
Real GSP growth 2.6 (3.3) 5.0 2.2 1.9
Real retail sales (0.5) (0.7) 14.2 2.6 (1.8)
Unemployment rate 3.6 7.6 5.4 4.1 4.6
Consumer Price Index 2.5 1.0 3.9 7.6 3.3
Home price, existing median 6.8 9.7 21.8 21.0 9.7
Home price, existing median ($) 297,920 326,748 398,034 481,683 528,357
Housing starts, total private (1.6) 17.8 19.5 (3.4) (11.4)
Housing starts, total private (000) 153 180 215 208 184
Real GSP growth 3.7 (2.5) 5.6 1.4 1.9
Real retail sales (0.4) 0.3 16.3 3.3 (1.4)
Unemployment rate 3.7 7.6 5.0 3.6 4.2
Consumer Price Index 2.7 2.0 4.8 7.6 3.4
Home price, existing median 4.3 7.9 18.8 19.1 9.8
Home price, existing median ($) 523,525 564,893 671,094 799,286 877,421
Housing starts, total private (7.0) (1.1) 12.0 0.6 1.2
Housing starts, total private (000) 168 166 186 187 189
Real GSP growth 3.4 (2.7) 7.3 2.0 1.1
Real retail sales 2.6 1.3 15.1 1.5 (1.9)
Unemployment rate 4.1 9.8 6.8 4.6 5.4
Source: S&P Global Market Intelligence

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Jane H Ridley, Centennial + 1 (303) 721 4487;
Secondary Contacts:Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Robin L Prunty, New York + 1 (212) 438 2081;
Research Contributors:Vikram Sawant, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai
Adriana Artola, San Francisco + 415-371-5057;
Matthew T Martin, New York + 1 (212) 438 8227;

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back