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U.S. Public Finance 2023 Year In Review: Better Than Expected

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U.S. Public Finance 2023 Year In Review: Better Than Expected

As 2023 winds down, credit performance exceeded expectations for many U.S. public finance sectors. Even with 500 basis points of official rate increases, the U.S. economy has been resilient in the face of 2023's market stresses that included debt ceiling negotiations and banking sector uncertainty. Despite a variety of macroeconomic challenges, strong consumer spending coupled with higher inflation contributed to healthy tax collections. Real estate was also stable in 2023 but we expect that could shift as commercial real estate values decline in certain areas of the country.

Federal stimulus funds and strong reserves have provided flexibility for many governments and not-for-profit entities to avoid issuing debt in a higher interest rate environment, but we expect this flexibility will be diminished next year. This hasn't been universal, however, with many utilities having to proceed with capital improvements driven by regulatory requirements and in these instances, higher fixed costs will have long-term fiscal implications. We also expect that elevated inflation will continue to pressure budgets and present affordability difficulties.

We invite you to hear more about our forward-looking sector views at our 2024 Outlook Webinar Series; register here.

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Economic Outlook

S&P Global Ratings' chief U.S. economist updated the forecast on Nov. 27 (see "Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking"). The U.S. economy has outperformed expectations following consecutive quarters of contraction in the first half of 2022. Real GDP grew at about a 2.9% annual rate in four quarters leading up to September of this year. For the entire 2023, the economy is on track for 2.6% growth on a fourth-quarter-over-fourth-quarter basis (Q4/Q4), which translates to 2.4% annual average growth--just about the average of the previous expansion period (2010-2019). The forecast does not include a recession in the next 12 months and factors in another interest rate hike over the next few months before rate cuts from the Fed start in mid-2024.

The continued solid growth comes even amid sharp monetary policy tightening during the past year and a half. We remain of the view that the ongoing resiliency will be tested going forward, as real interest rates stay relatively high in the coming year (relative to the last monetary cycle as well as the longer-run equilibrium rate) and the lags of monetary policy tightening feed through the economy. Businesses are facing higher costs of capital, the outcome of which will lower capital expenditure and hiring. Consumer spending is poised to be more in line with real income growth, as the firepower from excess cumulative savings has dwindled.

S&P Global Ratings now expects the U.S. economy to expand 1.5% in 2024 on an annual average basis (up from 1.3% in the September forecast) and 1.4% in 2025 (unchanged from the September forecast), before converging to the longer-run sustainable growth of 1.8% in 2026. Although we revised up our 2024 growth forecast, it had partly to do with the statistical "carry-over" effect. In fact, on a Q4/Q4 basis, growth is expected to come in a little over 0.8% in 2024, with the second half of the year half as strong as the first half.

2023 Selected Thought Leadership: In Case You Missed Them

General U.S. public finance
Charter schools
Health care
Higher education
Housing
Local governments
Public power
States
Transportation infrastructure
Water and sewer utilities

Appendix

Table 1

S&P Global Ratings' U.S. economic forecast overview
November 2023
2019 2020 2021 2022 2023F 2024F 2025F 2026F
Key indicator
annual average % change
Real GDP 2.5 (2.2) 5.8 1.9 2.4 1.5 1.4 1.8
change from Sept (ppt.) 0.1 0.2 0.0 0.0
Real GDP (Q4/Q4) 2.6 (1.5) 5.7 0.9 2.6 0.8 1.7 1.9
change from Sept (ppt.) 0.4 (0.2) 0.1 0.0
Consumer spending 2.0 (2.5) 8.4 2.5 2.2 1.8 1.6 2.1
Equipment investment 1.1 (10.1) 6.4 5.2 (0.0) 0.8 2.2 2.7
Nonresidential structures investment 2.5 (9.5) (3.2) (2.1) 11.3 0.4 0.3 1.5
Residential investment (1.0) 7.2 10.7 (9.0) (11.1) (0.1) 3.9 2.5
Core CPI 2.2 1.7 3.6 6.2 4.8 2.8 2.3 2.1
Core CPI (Q4/Q4) 2.3 1.6 5.0 6.0 4.0 2.4 2.2 2.1
Annual average levels
Unemployment rate % 3.7 8.1 5.4 3.6 3.7 4.3 4.6 4.5
Housing starts (mil.) 1.3 1.4 1.6 1.6 1.4 1.3 1.4 1.4
Light vehicle sales (mil.) 17.0 14.5 15.0 13.8 15.4 15.4 15.6 15.7
10-year Treasury % 2.1 0.9 1.4 3.0 4.1 4.3 3.5 3.1
Federal funds rate % 2.2 0.4 0.1 1.7 5.1 5.3 3.2 2.9
Federal funds rate % (Q4) 1.6 0.1 0.1 3.7 5.5 4.7 2.9 2.9
Note: All percentages are annual averages, unless otherwise noted. Core CPI is consumer price index excluding energy and food components. F--forecast. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, The Federal Reserve, S&P Global Market Intelligence Global Link Model, S&P Global Ratings Economics' forecasts.

This report does not constitute a rating action.

Primary Credit Analysts:Robin L Prunty, New York + 1 (212) 438 2081;
robin.prunty@spglobal.com
Eden P Perry, New York + 1 (212) 438 0613;
eden.perry@spglobal.com
Jane H Ridley, Englewood + 1 (303) 721 4487;
jane.ridley@spglobal.com
Secondary Contacts:David N Bodek, New York + 1 (212) 438 7969;
david.bodek@spglobal.com
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
geoffrey.buswick@spglobal.com
Suzie R Desai, Chicago + 1 (312) 233 7046;
suzie.desai@spglobal.com
Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Jenny Poree, San Francisco + 1 (415) 371 5044;
jenny.poree@spglobal.com
Nora G Wittstruck, New York + (212) 438-8589;
nora.wittstruck@spglobal.com
Jessica L Wood, Chicago + 1 (312) 233 7004;
jessica.wood@spglobal.com

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