LOS ANGELES -- Following its positive January forecast for the state and local government sector, Standard & Poor’s said Thursday that it still believes sector-wide credit quality should remain relatively stable in 2013, despite possible impacts from the sequestration.
“While it may not be ideal fiscal policy in some respects, we don’t see sequestration itself as a sufficient enough source of drag on growth to derail the overall economic expansion,” analysts wrote in a report. “That said, we recognize that the effects of sequestration could affect regional economies differently.”
Most of the key credit drivers for the sector have strengthened since its January forecast. In fact, Standard & Poor’s only had a weaker forecast for one region, mainly due to the expected impacts of the sequestration.
“The Pacific states — particularly Alaska and Hawaii — are made vulnerable by their reliance on federal procurement and defense spending for a large share of their economic output,” the report said, adding that while the sequestration will take a bite out of GDP, it won’t prevent it from growing by about 2% in 2013.
Other states in the Pacific region include Washington, Oregon, and California.
The agency is forecasting gross domestic product growth in every region, ranging from 1.26% to 2.13% in 2013, and 2.2% to 4% in 2014.
“Economic performance during the first three months of the year helped solidify our forecast for GDP growth in 2013 and 2014,” the report said. “In fact, we now believe there is enough positive momentum that the economy can withstand the negative effects of federal sequestration and still post real GDP growth of 2.7%.”
Standard & Poor’s forecasts show the Mountain region (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming) and West South Central region (Arkansas, Louisiana, Oklahoma, and Texas ) with the strongest growth in 2013, and stronger growth for the West South Central region in 2014.
New England’s forecasts were better than S&P initially anticipated, with a revised GDP at 1.44% from 1.35% in 2013, and 2.37% from 2.12% in 2014. Major drivers of growth in the region will continue to be in the professional and business services and scientific and technical services sectors, analysts said.
The Mid-Atlantic region, which includes New Jersey, New York, and Pennsylvania, received a revised forecast to 1.9% from 1.6% for economic expansion in 2013. Standard & Poor’s said the region will likely be affected by sequestration, but the states are potentially less vulnerable than other areas. However, the region also has to deal with the economic impacts from Hurricane Sandy, which are still being determined.
In the South Atlantic region, S&P revised its GDP forecast up to 1.78% from 1.65% for 2013. However, with the region’s substantial presence of military contractors and bases, along with the national capitol in Washington D.C., the impact on economic activity from the sequester is uncertain, though analysts expect it to be minimal.
On the whole, the forecast for the East South Central region (Alabama, Kentucky, Mississippi, and Tennessee) remained unchanged, with an expected GDP growth at 1.55% growth for 2013, and 2.73% for 2014.
The West North Central region (Iowa, Kansas, Minnesota, Missouri, Nebraska, and North and South Dakota) and the East North Central region (Illinois, Indiana, Michigan, Ohio, and Wisconsin) are expected to continue a modest growth in the next two years. However, the East North Central region is expected to grow the slowest among the regions, with a projected 1.26% GDP growth in 2013, and 2.2% in 2014.
“Growth will be held back in part due to slower employment gains and a slower housing recovery than national trends,” according to the report.
S&P’s other key economic drivers include federal spending, which is expected to decline in almost all regions; consumer spending, which has been “robust” in recent months; housing starts, which have also been up recently; and unemployment levels, which have remained elevated nationally.