States Still Feel Recession's Effects Two Years After Downturn's End - Southwest Economy, Fourth Quarter 2011 - FRB Dallas

The U.S. economy entered a financial-market-driven recession in December 2007 from which it has yet to fully recover. The boom of the mid-2000s has been replaced with a stubborn national reality of high unemployment and sluggish output growth, with no clear indication when economic activity will return to more normal levels.

Yet the states have, in many ways, borne the brunt of the recession. Demand for public services increased at the very moment tax revenue—especially from property taxes—declined. As late as this October, a full two years after the recession ended, states from Florida to California to New York warned of new shortfalls that must be addressed through spending cuts and tax increases. In Texas, lawmakers completed work on cuts totaling at least $15 billion for the upcoming two-year budget cycle.

As the nation’s economic woes continued, the federal budget deficit climbed, posing potential limits on aid Washington could provide. The deficit soared to $1.4 trillion in 2009 and is expected to remain above $1 trillion annually until 2013. At least one major ratings agency downgraded the country’s top-tier credit rating, warning as part of its unprecedented action that officials must do more over the short term to stabilize and improve the deficit picture. Other ratings firms have similarly cautioned that their assessments of U.S. creditworthiness could be cut if fiscal imbalances aren’t addressed.

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