What a recession would mean for Illinois

Politicians and pundits can’t seem to agree about whether the U.S. is in a recession, but the semantics matter little for struggling Americans. Illinois can expect economic pain regardless of what it’s called.

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.

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.