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'There is no safe state' as states, cities retrench

States and cities could face “major headwinds” going into the second half of the year given their recent loss in revenue amid the COVID-19 pandemic, says Diane Swonk, chief economist at Grant Thornton.

“There is no state that goes untouched, and we really need to continue to see fiscal stimulus out there,” Swonk told Yahoo Finance’s On The Move.

“California is the first was the largest state to go in at the beginning of the shutdown, but we've got places like Florida and Nevada, Texas, all being affected by these closures because of the loss in revenue that they suffered for nearly two months time,” she said.

June 1st is when the fiscal year starts for many state and local governments budgets.

VENICE, CALIFORNIA - JUNE 06: Customers are seen dining on the outdoor patio of Kreation Organic Kafe & Juicery on June 06, 2020 in Venice, California. In an effort to contain the spread of COVID-19, restaurants in Los Angeles County have only been able to offer take-out service since late March. As part of Phase 3 of reopening California, many restaurants are now open with dine-in options available (Photo by Amanda Edwards/Getty Images)
VENICE, CALIFORNIA - JUNE 06: As part of Phase 3 of reopening California, many restaurants are now open with dine-in options available (Photo by Amanda Edwards/Getty Images)

“We've already seen the cuts continue at the state and local level, and that could be a major headwind to the economy, gaining momentum in the second half of the year, if we don't see transfers to state local government,” said Swonk.

She’s calling for more targeted stimulus to get through the summer and make sure the recovery takes hold —and “doesn't dip into a double dip in the fourth quarter” if there’s a second wave of the infection.

“To declare victory too soon is really a dangerous thing to do. And I think it's really important to understand where our cliffs are,” said Swonk, noting that expanded unemployment benefits end on July 31st.

Swonk predicts state higher education and public schools are at risk of getting hit the hardest by budget cuts.

“This also exacerbates the inequalities that we’re seeing out there, and it really is something that kind of undermines the entire infrastructure of the US economy” said Swonk.

Black Americans, Hispanics and women have been impacted the most by job losses due to COVID-19.

“The social unrest we’re seeing out there, this ups the ante on that as well, because you’re taking away much needed services from localities that are the least served as it is,” she added.

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