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 It may be a recession based on data released July
28, or it may not be, but Illinois is in for a rough ride.
The national economy shrank by 0.9% during the second quarter of 2022, according
to preliminary data released July 28 by the U.S. Bureau of Economic Analysis.
The decrease in gross domestic product was driven by declines in private
inventory investment, residential fixed investment, government spending and
nonresidential fixed investment. Exports and personal consumption expenditures
increased during the quarter, partially offsetting the decline of other
components.
This marks the second consecutive quarter that the U.S. economy got smaller
after GDP declined by 1.6% during the first quarter of 2022. Now that official
government data has indicated the U.S. experienced back-to-back quarters of
negative economic growth, debate over whether or not the economy is in a
recession has reached a fever pitch.
Are we in a recession?
The evidence suggests the U.S. is now likely in a recession.
While there is no official definition of what constitutes a recession, the most
common shorthand has traditionally been two consecutive quarters of negative
economic growth. In fact, this rule of thumb has held true for the past 75
years. The last time the country experienced consecutive quarters of negative
economic growth without slipping into a recession was 1947.
However, there are other measures – such as personal income, employment,
personal consumption expenditures, retail sales, etc. – that are also taken into
consideration when determining whether the term “recession” is appropriate. So
far, there are a lot of mixed signals in the data, which are contributing to the
debate on the issue. But even the positive signs in the economy are weakening.
Employment growth continues to exceed expectations, but the unemployment rate
hasn’t budged since March. Personal consumption expenditures are still on the
rise, although at a substantially slower rate during each of the past two
quarters. That allows for a slim possibility the U.S. could avoid a prolonged
downturn. In addition to the overall decline in GDP, retail sales and wages are
falling while major companies have announced layoffs and hiring freezes.
The fact that some economic indicators remain positive – at least for now – has
fueled the current debate on what term should be used to describe the current
state of the economy. While there have been plenty of attempts by politicians
and those in the media to both advance and avoid the “recession” narrative,
especially as election season approaches, evidence is mounting the next economic
contraction is already underway.
Does it matter?
Whether experts, politicians and political pundits agree to call the nation’s
current economic climate a “recession” is largely irrelevant to the average
American. The Business Cycle Dating Committee of the National Bureau of Economic
Research is tasked with officially determining whether the economy is in a
recession. But they won’t be making an announcement any time soon. The committee
didn’t declare the Great Recession was official until December 2008, a full year
after the crisis started. That designation didn’t change the reality of the pain
Americans were feeling in the lead-up to the announcement.
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Americans are currently battling the highest inflation rates seen in the past 40
years. Incomes are falling as wages are unable to keep up with inflation. In
recent months, job openings and hiring activity have begun declining while
layoffs are on the rise. The U.S. is still missing half a million jobs from pre-COVID
levels. Periods of high inflation and low unemployment have almost always been
followed by recessions, as former U.S. Treasury Secretary and Director of the
National Economic Council, Larry Summers, recently highlighted.
What does it mean for Illinois?
Illinois’ economy still hasn’t fully recovered from the economic downturn of
2020. The state is still missing 117,000 jobs and the unemployment rate is
highest in the Midwest. Making matters worse, Illinoisans suffered more during
the Great Recession than most other Americans and are poised to be particularly
vulnerable in the event of an economic downturn today.
On top of recent policies that have exacerbated the threat of recession,
Illinois governments have less flexibility in their budgets and spending on
vital services, which will be especially needed during a recession, has largely
been crowded out by pension obligations. The state is also facing a $1.8 billion
unemployment trust fund deficit that raises questions about how much assistance
could be provided to Illinoisans who lose their jobs and about whether it will
result in higher taxes for businesses.
The results could be catastrophic for Illinois, whose businesses and residents
are already fleeing the state. Three major corporations – Boeing, Caterpillar
and Citadel – in the past two months all announced they would be relocating
company headquarters out of Illinois. A record exodus driving population decline
threatens to prevent the state’s economy from ever returning to pre-pandemic
employment levels.
The first step to ensure Illinoisans don’t endure a particularly painful future
economic downturn will be for voters to take a hard look at Amendment 1 on the
Nov. 8 ballot. Amendment 1 would change the Illinois Constitution to grant
unions in Illinois more extreme powers than they have in any other state,
including the ability to bargain over virtually limitless subjects, the ability
to override state law through their contracts and guarantees taxpayers and
lawmakers would have an extremely difficult time reversing course.
Should Amendment 1 pass, Illinois’ $313 billion pension debt would continue to
balloon as state and local taxes, which are already among the highest in the
nation, rise in an attempt to keep up. Spending on vital programs would continue
to fall. Illinois’ housing and labor markets are already suffering as high taxes
and reduced services make finding a job and living in the state tenuous. These
problems would be exacerbated should the U.S. enter a prolonged recession.
Illinois needs reform that will control the state’s cost drivers and deliver
vital support to taxpayers when they need it the most. Amendment 1 ensures those
challenges worsen during periods of economic duress.
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