Session Recap

CSG West Chair’s Forum

79th CSG West Annual Meeting
Salt Lake City, Utah

Introduction

The 79^th CSG West Annual Meeting included a Chair’s Forum, facilitated by Utah Representative Paul Cutler, aimed at providing Western policymakers and key stakeholders with an overview of the state economic outlook, including trends, risks, and fiscal realities. Representative Cutler opened the session by observing that today’s economy resists easy assumptions: strong job growth alongside real affordability strain, cooling inflation alongside interest rates that remain elevated, and a wave of AI-driven investment unfolding amid persistent uncertainty. That tension framed the session, which paired a national and global economic briefing from Joe Seydl, Senior Markets Economist at J.P. Morgan, with a state fiscal outlook from Brian Sigritz, Director of State Fiscal Studies at the National Association of State Budget Officers (NASBO), followed by extended questions and dialogue among legislators.

A Resilient Economy with a Widening Split

Mr. Seydl’s central message was that the U.S. economy has proven remarkably resilient, absorbing four major shocks since 2022—the Federal Reserve’s aggressive rate-hiking cycle, a 2023 bond-market “term premium” scare, the largest tariff shock since the 1930s in 2025, and this year’s Iran conflict—without tipping into recession, despite repeated predictions that it would. But that resilience masks a growing split beneath the surface. Household finances are softening as real after-tax income growth has turned negative in recent months and consumers increasingly draw down savings to keep spending, a pattern Seydl called unsustainable if inflation doesn’t ease. At the same time, the corporate sector is booming, driven almost entirely by high-tech capital investment in data centers, semiconductors, and software. Tech spending alone now accounts for roughly half of U.S. GDP growth, even as non-tech investment contracts amid weakness in commercial real estate and transportation.

Iran Conflict and Energy Markets

The Iran conflict remains a live risk to watch. Oil prices spiked above $100 a barrel before easing on a memorandum of understanding, but renewed strikes and retaliation —including against tankers in the Strait of Hormuz and against Kuwait—have reignited tensions. Mr. Seydl warned that global strategic petroleum reserves are approaching critical thresholds and that the world has roughly a four-to-six-week window before renewed shortages could push oil prices materially higher, with outsized effects on economies less energy-independent than the United States. He expects continued volatility but another negotiated de-escalation. In the meantime, Western energy-producing states, such as New Mexico, North Dakota, Alaska, Oklahoma, Texas, and Wyoming stand to benefit modestly from higher oil and gas prices, given how large a share of their state GDP the sector represents.

Markets, Wages, and a Widening Divide

Mr. Seydl also pointed to a widening gap between stock market valuations and consumer sentiment, historically closely correlated but now sharply decoupled, a divergence he tied to returns on capital outpacing returns on labor as AI investment accelerates. That shift is widening wealth inequality even as income inequality modestly narrows, since falling demand for white-collar, college-educated labor (reflected in a declining “college wage premium”) is occurring alongside labor shortages and rising wages in construction and other blue-collar trades. Younger workers are bearing the brunt of this shift: unemployment among 16-to-24-year-olds has risen far more sharply than among prime-age workers, concentrated in entry-level, AI-exposed white-collar roles.

AI, Rural Development, and the China Challenge

On artificial intelligence more broadly, Mr. Seydl described the economy as still in an infrastructure-building phase rather than a productivity phase. AI-related jobs remain a small share of total employment, but he projected that roughly a quarter of U.S. jobs are exposed to AI-driven disruption over the next decade or more, ranging from under 5% in construction to over 40% in legal and office/administrative work. Responding to a question from a legislator about rural economic development, he noted that AI has shifted data center siting away from urban, low-latency locations toward large-scale facilities built near energy production—often in rural areas—creating a real, if capital-intensive rather than labor-intensive, opportunity for the West. He also flagged China as the most consequential long-term competitor in this space, having surpassed the U.S. in global manufacturing output and now controlling the overwhelming majority of global processing capacity for rare earths and other critical minerals—a vulnerability he described as urgent for the U.S. to address through reshoring.

Housing and the Long-Term Debt Picture

On longer-term risks, Mr. Seydl argued that declining U.S. homeownership rates reflect a structural shift rather than a temporary affordability problem, noting that wealthier countries generally have lower homeownership rates than the United States. On federal debt, he said Treasury markets show no current signs of stress but cautioned that the current fiscal trajectory is not sustainable over a 10-to-15-year horizon, and that the real long-term risk is what economists call “fiscal dominance”—a scenario in which debt becomes so large that Federal Reserve rate hikes intended to fight inflation instead stimulate it, a dynamic seen in countries like Brazil.

State Fiscal Conditions: Tightening, but Stable

Brian Sigritz then turned to the state fiscal picture, describing conditions as tightening but fundamentally stable. States are facing slower revenue growth, rising spending demands, shrinking one-time surplus funds, and new pressure from federal policy changes, and general fund revenue is now in its fifth consecutive year of modest growth following the historic double-digit growth of fiscal 2021 and 2022. Even so, he was careful to note this is not a repeat of the Great Recession: most states’ revenues continue to come in at or above projections, rainy day funds remain at or near record levels, credit ratings remain strong, and debt levels remain low.

Affordability and Diverging State Responses

Affordability, Mr. Sigritz said, was the dominant theme in governors’ state-of-the-state addresses this year—spanning housing, childcare, energy, and food costs—and it is not a partisan issue as the pressure is showing up in red and blue states alike. Most states are responding with targeted relief measures, such as childcare tax credits and property tax relief, rather than broad-based interventions, and tax policy overall is becoming more divergent across states after the broad-based cuts of 2021–2023. States are also increasingly turning to proactive budget management tools such as targeted cuts, hiring freezes, eliminating vacant positions even though most are not yet facing significant budget gaps, reflecting a forward-looking effort to align ongoing spending with slower anticipated revenue growth.

Medicaid, Federal Funds, and the OBBBA Timeline

Medicaid remains by far the largest category of state spending and represents more than half of all federal funds passed through to states, and Mr. Sigritz noted that federal funding’s outsized share of total state spending during the pandemic is now normalizing as COVID-era aid winds down—a trend already underway before factoring in the fiscal impact of the One Big Beautiful Bill Act (OBBBA). That impact, he emphasized, will play out unevenly and over many years. The effects depend heavily on each state’s Medicaid expansion status and federal tax conformity choices. Colorado, for example, faced an early roughly $1 billion revenue impact from conformity provisions, with additional changes to SNAP administrative costs, Medicaid eligibility requirements, and provider tax and benefit-match provisions phasing in through 2028 and beyond. States, he said, will be managing OBBBA’s fiscal effects for the next decade through some combination of program cuts, tax increases, and reduced services.

Federal Cost-Shifting and Healthcare Pressure

In response to legislator questions on federal cost-shifting, Mr. Sigritz explained that because Social Security, Medicare, and debt service are largely off-limits politically despite representing the largest share of federal spending, discretionary federal funding, including much of what flows to states, has become the primary target for federal budget cuts, a pressure he expects to continue in areas like disaster response (FEMA) and education even though cuts to discretionary spending alone cannot resolve the federal deficit trajectory.

On healthcare, both presenters agreed cost growth is a top-tier pressure. Mr. Sigritz confirmed rising medical costs are hitting Medicaid, state employee coverage, and retiree healthcare simultaneously, while Mr. Seydl noted that medical care inflation has roughly doubled since the 2010s, from about 1.5% to about 3% annually, and argued that the U.S. healthcare system’s position between fully socialized and fully privatized models contributes to persistently high costs.

Key Takeaways for State Legislators

Plan for a multi-year adjustment, not a one-time shock. Federal policy changes (OBBBA, Medicaid/SNAP provisions, disaster-cost shifting) and slower revenue growth will affect state budgets for the next decade, favoring early, sustained structural planning over one-time fixes.

Fiscal fundamentals remain sound; use that strength deliberately. Strong rainy-day funds, low debt, and solid credit ratings give states room to manage the transition proactively. Many states are already shifting toward stress-testing and structural balance rather than reactive budget cuts.

Track the AI/data center buildout as both an opportunity and a cost driver. Large-scale, energy-adjacent data center development is a genuine rural economic development opportunity in the West, but rising electricity costs tied to AI compute demand are state-level cost pressure to monitor, particularly for energy infrastructure planning.

Energy-producing states have a near-term fiscal offset. Elevated oil prices tied to Iran conflict volatility are a modest tailwind for states with significant oil and gas shares of GDP (NM, ND, AK, OK, TX, WY,) an effect worth factoring into revenue forecasting conversations.

Healthcare cost growth deserves sustained attention. Medical inflation has doubled since the 2010s and is pressuring Medicaid, state employee, and retiree healthcare budgets simultaneously, with no clear near-term relief expected from AI-driven efficiency gains.

Federal discretionary funding is the most exposed category. Because entitlement programs and debt service are largely politically protected at the federal level, state-directed discretionary funding such as education, disaster response, other grants is likely to remain the primary target for federal cost-shifting.

Revisit revenue forecasting assumptions periodically. Consistent above-projection revenue performance reflects conservative forecasting more than fundamentally strong growth—a distinction worth keeping in mind when evaluating structural budget health.