Mark Ballard: The talk of a recession is clouding Louisiana’s optimistic views

2 months ago The Advocate 0

Three weeks after winning a tight reelection, Gov. John Bel Edwards was in a playful mood as LSU prepared Thursday to head for Atlanta to contest the SEC championship — a position that five months ago most fans thought improbable.

Buoyed by optimism that seems to have taken hold of Louisiana, Edwards boldly predicted — three days before kickoff — that the Tigers would win their next two games and find themselves playing for the national championship on Jan. 13. “The state’s gonna have two really good things to celebrate (that day). One will be the inauguration for a second term and the other will be a national championship,” he said.

Reality often clouds sugar plum dreams, and for Edwards’ next four years Wall Street warns that “Winter is Coming.” Moody’s Analytics last week reported Louisiana is in the worst position of the 10 states that are least prepared to weather another recession.

A survey of business economists this fall forecast a 69% chance of a recession beginning by mid-2021, according to The Associated Press.

Recent economic reports show manufacturing activity is down for a fourth straight month in November. Construction spending dropped again in October.

Meanwhile, as the Trump administration negotiates a trade deal with China, the trade war to Brazil, Argentina and France is expanding.

For Louisiana, oil prices are expected to drop a few dollars, which would lower severance tax collections, and a decline in shipping because of the trade wars also could have a huge impact on the state’s bottom line. The Port of South Louisiana, alone, is the largest port in the U.S. in terms of tonnage and total domestic trade, handling half the nation’s grain exports.

Moody’s Analytics ran stress tests to see how well states would operate if the economy contracted. Louisiana doesn’t have enough savings to cover revenue losses accompanying a recession and could have to raise taxes or cut services, the report determined.

Moody’s Analytics performs annual stress tests on state government budgets – estimating the amount of fiscal stress likely to be applied to st…

Aware of the report, Edwards said Thursday, “Obviously we’re looking at the economy like everybody else is, and it’s sort of a guessing game as to when, not if, there will be the recession.”

A first look will come later this week, probably on Thursday, when the Revenue Estimating Conference meets to establish how much money the state has available to spend for the fiscal year beginning July 1.

Around this time last year, House Speaker Taylor Barras, R-New Iberia, said predictions of an economic downturn could mean state government would be obligated to spend more than would be collected in taxes. He refused to accept the REC’s higher revenue estimate, putting Edwards in the position of initially proposing a spending plan using the previous year’s lower income numbers.

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Just about anybody can recognize the winners and losers in the debate that took place Wednesday in the State Capitol.

With elections over, Edwards doesn’t expect a similar reluctance this week. His executive budget proposal is due Feb. 7.

Louisiana has a $535 million surplus, a quarter of which, about $134 million, by law will be deposited in the state’s “rainy day” fund to cover expenses when revenues are down. Edwards points out that the fund, which was tapped a lot during the past decade, will have more money than at any time since he took office in January 2016. That move alone should calm some of Moody’s fears.

Greg Albrecht, chief economist for the Louisiana Legislature, said replenishing the “rainy day” fund is really one of the few options available to state government in preparing for recession.

Albrecht is one of the two economists — Manfred Dix, the administration’s chief economist is the other — whose calculations will be presented this week to the REC.

Gov. John Bel Edwards' administration presents $31 billion proposed budget outline

In Gov. John Bel Edwards’ view, the state will have enough money in the coming year to fully-fund the popular Taylor Opportunity Program for S…

Louisiana finished strong last fiscal year, and Albrecht “anticipates upgrades” in the forecast though doesn’t venture a prediction on how those calculations will be received by REC members.

The price of oil, on which some of the budget depends, will be a few dollars less than anticipated, Albrecht said. But the projected per barrel prices for 2020 will be in the $55 to $60 range. Albrecht calls that a “sweet spot.” It’s enough to keep producers working but not so much that consumer gasoline prices would rise to the $3 per gallon range that slows the economy.

The impact of the trade war on Louisiana ports — and thus state government finances — remains to be seen. Manufacturing plants are pulling back their investments, which impacts equipment sales and construction. But how much and how long is unknown.

“There has been recession talk all year. But no recession happened, and all the forecasting has been for slow, tepid growth,” Albrecht said. “About the only thing that can be said for sure is one (a recession) is going to happen, and we’re not going to know until it’s upon us.”