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The impact of a national recession on Illinois: running on empty

It appears that the broader economy is succumbing to the impacts of the housing market decline and the subprime mortgage meltdown. Until recently, it was hoped that the economy might be able to weather these problems without a recession.

Now, odds that the national economy may be entering a recession seem to be increasing almost daily. The stock market has fallen markedly on recession fears; many economists now rate the likelihood of a recession at more than one in two compared to their estimates several months ago of one in three or four; the Federal Reserve has indicated its willingness to keep cutting interest rates, seemingly abandoning its inflation concerns; and politicians of both parties are endorsing various tax cut-rebate plans in an attempt to forestall a recession (or at least to make it less severe).

What would be an impact of a recession on the state of Illinois? First of all, it must be remembered that the national economy is the primary driver of the Illinois economy. While Illinois is not a perfect microcosm of the nation, the Illinois economy is similar in many ways to the national economy. If the national economy enters into a recession, it is virtually certain that the state will as well.

Therefore, the question is whether the state will fare better or worse than the nation if there is a recession. Recent history does not provide a clear guideline in this regard. In the twin recessions of 1980 and 1981, the downturn had a more traumatic impact on the state than the nation as a whole. This was a time of the "rust belt" phenomenon when Midwestern manufacturing states bore the brunt of the recession.

In the mid to late 1980s, Illinois significantly improved its manufacturing efficiency and made progress in legal and financial services. As a consequence, the state weathered the 1990 recession much better that the rest of the nation. The Illinois' response to the 2001 recession was somewhere between these two extremes.

There are several reasons to believe that the state might fare better than the nation as a whole in 2008. First, Illinois is not as deeply enmeshed in the subprime and real estate problems as many other states, most notably Florida, California and Michigan. In addition, Illinois is not as dependent on old-line manufacturing as is Michigan, with its reliance on the declining domestic automobile industry. Much of Illinois production such as agriculture, construction equipment (Caterpillar) and aircraft (Boeing) is competitive in the world market, where the weak dollar and relatively strong world economy provide encouragement.

The Illinois economy will also likely not suffer the disproportionate negative impact on the travel industry that occurred in the wake of the 9/11 attacks in 2001 nor will it likely experience a collapse of a major Illinois employer such as the demise of Arthur Andersen precipitated by the Enron case.

Unfortunately, all the news is not positive. Illinois has been a slow-growing state in the last decade. Its recovery from the 2001 recession has been more sluggish than most other states. During this period, Illinois' per capita state income has fallen relative to the rest of the nation, and the state has still not regained its pre-2001 employment levels.

The final problem that Illinois faces is the dysfunctionality of its state government. Everyone is well aware of the embarrassing performance of the governor and General Assembly. Unfortunately, the problem goes well beyond the state's inability to effectively resolve a number of pressing issues. The state also faces a huge looming fiscal shortfall that will be aggravated if the economy enters a recession.

States normally expect a slowing or even an absolute decline in revenues during a recession. A prudent state might rely on a "rainy day" fund accumulated during good times to address these revenue shortfalls. For example, Illinois entered the 2001 recession with more than $1.5 billion in reserves. In early 2008, according to a recent Comptroller's report, the state is now more than $1.5 billion behind in paying its bills. Instead of using the recovery from the 2001 recession to shore up the state's finances, the state has run up large deficits during good economic times. Further, there are a number of automatic expenditure increases built into future budgets resulting from Gov. Blagojevich's attempt to extend free healthcare with no visible funding source.

A troubling sign is a recent report from Commission on Government Forecasting and Accountability suggesting that the state revenues are $400 million below expected levels through the first six months of the fiscal year. Not even including long run short falls in pension funding, the state will enter a recession running below empty. This may result in painful program cuts and tax increases that would be ill-timed during a recession.

It appears that the positive and negative impacts may approximately cancel each other out so the impact of a recession on Illinois may be roughly comparable to the impact on the nation. Our best hope is that a national recession will be avoided or at least be mild. This is out of the state's control.

- J. Fred Giertz is a professor of economics within the University of Illinois' Institute of Government and Public Affairs. He can be reached at (217) 244-4822 or jgiertz@ad.uiuc.edu.

Growth will slow, but no recession

Morris Beschloss
CIBM Contributor

In the last few weeks I've been literally inundated by a single question: Will the U.S. be mired down in an exacerbating economic recession during 2008? My answer is a resounding negative.

This is not based on wishful thinking, or even a forlorn hope. It's the result of a careful analysis of the fundamental components that comprise America's $13.5 trillion economy, that is three times as large as the world's No. 2, Japan. To everyone's surprise, even China, whose economy is growing by leaps and bounds, has still not caught up with America's $2 trillion plus industrial sector.

Only Japan exceeds America's total manufacturing arena, due to 60 percent of its gross domestic product being devoted to industrial exports.

It is my belief that too much emphasis is placed on the recessionary impact of housing and new residential construction; as well as the downtrend in America's three major automotive corporations, especially the former national leader, General Motors.

What is not well known is that an increasing multiple of the business of General Motors, as well as that of other multi-billion multinationals, is generating record revenues overseas.

Little is written about the rebound of heavy industry in the U.S., such as all aspects of oil production, refining and transmission; power generation; all facets of high technology, and America's dubious distinction as the world's No. 1 arms supplier.

Because of its agricultural productivity, the U.S. has become the world's No. 1 exporter of farm products. However, America's amazing farm productivity and higher revenues of agricultural products in 2008 could top previous record agricultural exports.

Due to the shrinking value of the American dollar, exports (two-thirds of which are composed of industrial products) have practically doubled since the turn of the century.

Putting all these pieces together, the greatest danger to America's economic viability is a credit crunch that has panicked big and small banks alike, as well as major investment institutions. But even here, the massive growth of sovereign wealth funds have created an investment pool that is just beginning to target a plethora of U.S. fixed assets at unexpected discounts.

Since a recession requires two consecutive quarters of gross domestic retraction, such a setback is highly unlikely because of the unprecedented diversity of the U.S. economy.

Today's U.S. economy is a far cry from the short sharp recession of 2002 to 2003, when America was still reeling from the Sept. 11, 2001 terrorist attack, the busted dot.com bubble and the destructive Enron power price scam and phony shortage conspiracy.

Expect slow growth, especially in early 2008, but no recession. In fact, an upside rebound during the second half is a distinct possibility.

Editor's note: This article was previously published in the Desert Sun in Palm Springs, Calif.

- Morris R. Beschloss graduated from the University of Illinois' College of Communications in 1952.

He is a columnist for the Desert Sun and publishes two newsletters for the pipe, valve and fittings industry. He can be reached at flem6609@bellsouth.net or (760) 324-8166.

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