Is Kansas prepared for a recession? Coronavirus, market swings spark fear of downturn

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Just two days after taking office, Gov. Laura Kelly delivered a damning assessment of Kansas’s fiscal condition.

“Another recession will soon be upon us. It’s not a question of ‘if’. It’s a question of ‘when’ and ‘how bad,’” she told the Legislature in January 2019, adding that “Kansas finds itself now completely unprepared. We have no margin for error.”

Fears of a recession are growing in the United States amid the spread of the new coronavirus. As the number of cases mount, events have been cancelled, classes moved online and businesses are exploring ways for employees to work from home.

On Monday, the Dow Jones Industrial Average suffered its single worst day since 2008 and a new international price war sent the value of oil plunging.

The state already faces economic headwinds from the grounding of the Boeing 737 Max after two crashes killed hundreds of people. Spirit AeroSystems, which manufactures the plane’s fuselage, halted production and laid off 2,800 people earlier this year.

Is Kansas ready to face an economic downturn?

Since legislators ended Gov. Sam Brownback’s tax cuts in 2017, tax revenue has surged. Kansas now has hundreds of millions in reserves – a sea change from just a few years ago when the Legislature scraped together cash to keep the state budget above water.

A recession, depending on its depth and length, could quickly change the state’s good fortune.

Kansas is already projected to whittle down its reserves because it currently spends more than it collects. A downturn would accelerate that trend if state government is forced to dip into savings. At the very least, lawmakers may rethink approving priorities such as Medicaid expansion and property tax relief if they fear tax revenues are about to drop.

The first reckoning with changing economic conditions will come in April, when economists and budget officials produce new revenue projections.

“Then we’ll have to look at the numbers they provide to us and take pause and see exactly what have we approved in the budget so far and what can we scale back to make sure that we have a positive ending balance,” said Rep. Troy Waymaster, a Bunker Hill Republican who chairs the House Appropriations Committee.

In June 2019, Kansas held $1.1 billion in reserve. Projections show that under Kelly’s recommended budget, that figure will fall to about $633 million by June 2021, the end of the next fiscal year.

“It’s always hard to swallow a recession, but in terms of being prepared, we’re very fortunate to be starting where we are with the ending balance that we have,” said Rep. Steven Johnson, an Assaria Republican who chairs the House Tax Committee.

Kelly on Tuesday said her administration is “fully cognizant” of the possibilities and is following the situation nationally. The state is working closely with businesses to assess the impact the coronavirus, she said.

“We are as ready as you can be for something like that,” Kelly told reporters in Wichita.

“If it happens, we have a model from 2008 and (2009) to look back on,” Kelly said. “I expect we will get some federal assistance like we did back in those days to shore up some of the things that tend to get hit hard during recessions.”

Like nearly every state, Kansas was hit hard by the Great Recession in 2008. Revenues plunged, prompting roughly $1 billion in cuts and an increase in the state sales tax. The state also received hundreds of millions in federal recovery dollars.

The current Kansas economy at first glance appears relatively strong. Unemployment sits at 3.1 percent and its gross domestic product grew at a rate of 2.2 percent in the third quarter of 2019, according to the most recent data release from the Bureau of Economic Analysis.

But the state economically is typically growing more slowly than the rest of the country. Since the start of 2017, Kansas’s quarterly GDP growth has outpaced national GDP growth only twice.

“Post-recession, other states have done much better and would probably be in a better position than we would be given that we’ve had pretty weak growth over the last several years,” said Jeremy Hill, director of the Center for Economic Development and Business Research, or CEBR, at Wichita State University.

If problems with the Boeing 737 Max continue through the rest of the year, Wichita’s economy will be in decline in both the areas of employment and retail sales, Hill said. The layoffs will slow down the overall state economy, too.

“It does slow down the state economy from having a stronger expansion, given where we are in the cycle, to really weak growth, to if you take something else on top of that, that really changes the direction of the state economy,” Hill said.

How national authorities manage the fear Americans have over coronavirus could play a significant role in whether the country tips into recession, Hill contends. Stock market plunges can lead to people becoming more conservative spenders, which itself can place pressure on the economy.

President Donald Trump has said he wants to take steps to stimulate the economy, including a payroll tax cut. But he faces skepticism from some in Congress, which just approved more than $8 billion to combat the coronavirus.

“It is really in their hands to (stave) off that fear,” Hill said.

Eagle reporter Michael Stavola contributed reporting

This story was originally published March 11, 2020 at 5:00 AM with the headline "Is Kansas prepared for a recession? Coronavirus, market swings spark fear of downturn."