Detroit not prepared for recession, Moody's report says

click to enlarge Construction at Detroit's Hudson's site project. - Lee DeVito
Lee DeVito
Construction at Detroit's Hudson's site project.

Detroit and Chicago are the two weakest big cities in the U.S. when it comes to preparedness for a recession, according to a report by Moody’s Investor Service.

The 14-page report, released by the ratings agency on Tuesday, examines the largest 25 cities in the country and their pension risk, financial flexibility, fiscal volatility, and budget reserves in the face of a financial downturn similar in magnitude to the one that hit the country over 10 years ago.

The report found that Detroit and Chicago are the least prepared, with Detroit rated below investment grade at Ba3, while nearby Chicago rated at Ba1.

Cities that would still be in good credit standing after a recession include San Antonio, San Francisco, Charlotte, Seattle, Boston, and Denver, according to the report. The remaining 17 cities were found to be moderately prepared for such a downturn.

"A majority of local governments have used the broad economic expansion of the past decade to strengthen their finances," Nicole Serrano, a Moody's VP-senior analyst, said in a statement. "Additionally, they have been able to keep their debt and related fixed costs in check."

Detroit, which went bankrupt in 2013, was released from the oversight of the state in April 2018 after the city restructured $18 billion of debt. Despite the low score, the report also highlights the fact that the city has taken steps, like increasing reserves, to mitigate future downturns.

"However, Detroit has taken steps to prepare for a potential downturn: establishing an irrevocable trust to smooth spikes in pension contributions, developing a capital improvement plan that identifies a variety of sources to finance capital investments, and continuing to increase its already strong reserves," the report states. "If these trends continue, Detroit’s overall preparedness for a future recession will be more in line with major city peers.”

Could another recession be near? Multiple signs point toward the possibility.

Earlier this year, the bond market experienced a so-called "inverted yield curve," where yields on two-year Treasury bonds were higher than those on 10-year ones. The phenomenon is widely viewed as a harbinger of an imminent recession — the last time it happened was June 2007, just before the Great Recession.

There's also the so-called "skyscraper curse," a theory that the construction of tallest buildings is typically a signal of an economy on the verge of a downturn. Detroit's Hudson's site project was supposed to be the tallest building in Michigan, though its final height is up in the air as the project has been delayed. For now, the building is a stinky hole in the ground.

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