Submitted by Ted Dabrowski of WirePoints

Wall Street’s best predictor of a recession has reared its ugly head and Illinois is nowhere near ready for a slowdown. In fact, Illinois is the nation’s least-prepared state for an economic downturn. When that recession finally comes, Illinoisans should expect to get hit hard.

The predictor of that next recession is the U.S. interest rate curve. It’s somewhat technical, but all you need to know is that when long-term interest rates fall to levels below short-term interest rates – called a yield-curve inversion – a recession typically follows within 21 months. And those interest rates have started to invert.*

The last time U.S. interest rates predicted a downturn? It was 2007, right before the Great Recession.

Of course, there’s no guarantee of when the next recession will come. It may take time since many parts of the national economy are still humming. We also don’t know how deep the next recession will be. Most recessions are short, but it’s the long ones that do real damage.

Nevertheless, the market signal should serve as a stark warning to Illinoisans. An economic downturn is inevitable and their politicians are doing nothing to prepare the state for it.

Unprepared

Most well-run states are prepared for when the national economy tanks. They have rainy-day funds and slack in their budgets,which allows them to prioritize what must be spent and what can be delayed.

Illinois has none of that. Quite the contrary.

Moody’s, for example, rates Illinois’ finances and governance the worst in the nation, just one notch above junk. The U.S. News and World Report places Illinois dead last in fiscal stability nationwide and next to last when looking just at short-term indicators. Only New Jersey was worse. And the Mercatus Center also finds Illinois worst in terms of fiscal stability nationwide.

The next recession will hit Illinoisans particularly hard

Many Illinoisans have yet to recover from the Great Recession. Statistics from manufacturing to black unemployment to underwater homes show Illinois has continued to underperform since 2009. And Illinois is shrinking after losing population four years in a row, a distinction shared nationally only with West Virginia.

But what makes the situation even more worrisome today is the state’s finances. They’ve deteriorated significantly since the Great Recession. Already, the state has a stack of $7 billion in bills it can’t pay, billions in future budget deficits and debt it can’t handle. With a $250 billion state pension shortfall and $73 billion in retiree health insurance debts, Illinois has the worst retirement crisis in the nation.

For Illinoisans, that mess means they’ll pay for the next recession more dearly. It’s hard to predict how it will all playout, but Illinoisans should brace themselves for an oversized hit to their wages, job prospects and home values.

Depressing

Yes, the above message is depressing. Politicians have made a mess of Illinois. The hurt felt by many ordinary Illinoisans is the doing of their politicians.

But until Illinoisans are ready – and willing– to mount a populist reform movement that brings about the structural reforms Illinois needs, it behooves individuals to look out for themselves. After all, their politicians certainly aren’t.

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* A full inversion of the curve is when 10-year rates fall below 2-year rates. So far, that has yet to happen this cycle. The curve did invert partially, however, on December 4, 2018. That’s when 5-year rates fell below 3-year rates.