Special Briefing: War, Inflation, and the Impact on the Economy and State and Local Budgets

Economic uncertainty driven by geopolitical conflict and inflationary pressures has reshaped expectations for growth, public finance, and investment across the United States. For a discussion of how the war in Iran, elevated energy prices, and policy shifts are influencing economic growth and fiscal conditions for states and municipalities, Penn IUR and the Volcker Alliance convened a panel of leading experts for “Special Briefing on War, Inflation, and the Impact on the Economy and State and Local Budgets” on April 17, 2026.

William Glasgall, Penn IUR Fellow and Public Finance Adviser at the Volcker Alliance, and Susan Wachter, Co-Director of Penn IUR, co-hosted the Special Briefing. The panel included Natalie Cohen, President and Founder, National Municipal Research; Julia Coronado, President and Founder, MacroPolicy Perspectives LLC; Kim Norton, Mayor, Rochester, Minnesota; Brian Sigritz, Director of State Fiscal Studies, National Association of State Budget Officers (NASBO); and Mark Zandi, Chief Economist, Moody’s Analytics.

Zandi opened with a cautious assessment of the macroeconomic outlook, emphasizing both resilience and fragility: “The economy's growing. It's moving forward, but it's a very fragile growth.” He said that GDP is expanding “somewhere around 2 to 2.5%,” but below its full potential: “it's not enough to generate enough jobs to maintain even stable unemployment. Unemployment is steadily moving higher, and we aren't creating any jobs.” He highlighted the central role of energy markets: “Every $10 per barrel increase in the price of oil raises inflation in the subsequent year by 20 basis points and reduces growth by 10-15 basis points.” He cautioned, “to get a recession, we’re not that far away. Oil would have to rise to about 125 bucks a barrel… That would be enough to push this fragile economy into an economic downturn.” At the same time, he pointed to AI as a key growth driver: “all of the investment, the data centers…is adding significantly to economic growth.” Conversely, “there's also the ongoing concern about the pace at which AI is adopted and the impact that has on productivity,” he said. “It's an economy that's okay…but it's a very, very tentative, fragile economy,” Zandi concluded.

Coronado reinforced the theme of resilience under strain, highlighting structural constraints: “We don't have any labor supply anymore. Labor supply is effectively zero,” which limits future growth potential. Factoring in geopolitical shocks, she said, “we are going to experience the shock from higher energy prices…that will take a bite out of growth,” estimating that “our forecast is for GDP to grow about 1.5% in the U.S. this year.” She also emphasized global spillovers, warning, “the hit overseas is much greater…and that has some spillover into the US.” Coronado underscored the policy volatility facing states, describing “a massive policy whipsaw” and noting that public-sector hiring, which “was a real source of significant jobs growth,” has slowed sharply. “When we look at the structure of hiring, as it's all health care, and beyond health care, there’s very little in the way of sectors really adding jobs,” she said. “It feels like we are resting on a very narrow pillar of a lot of AI enthusiasm holding the market up.”

Norton provided a ground-level perspective from Rochester, Minnesota, highlighting how inflation and supply constraints are reshaping local budgets. “We are seeing significant cost pressures for 2026 and 2027,” she said, adding that “the traditional 3% annual inflation assumption no longer reflects the current conditions.” She detailed rising costs: “Since 2020, construction input prices have increased more than 43%,” while “tariffs are adding another 5% to 8% to material costs,” she said. Labor shortages further complicate delivery: “Fewer bidders reduce competition, increasing prices,” and in one case, “we received exactly one bid, and it exceeded the amount that had been planned.” Despite these challenges, she emphasized continued investment: “We are not slowing down,” even as “projects are more expensive, more complex, and they require longer to deliver.”

Sigritz highlighted the fiscal condition of states, marked by a shift from surplus-driven expansion to tighter budgeting. “While we're not seeing significant budget shortfalls right now, what we're seeing is that budget conditionings are tightening across states,” he said. “2026 is marking the fourth consecutive year of slow growth in general fund revenue,” with “0.3% on a median basis.” At the same time, “a lot of surplus funds have now expired,” forcing states to adjust. He pointed to rising spending pressures, including high medical inflation, education costs, and affordability concerns, noting that “one of the top priorities is the need to address affordability.” Despite these challenges, he emphasized resilience: “State fiscal conditions are stable,” supported by “rainy day funds remain near record levels,” and “debt levels are low.” Wachter asked whether this cautionary approach reflects a long-term shift to more responsible state budgeting. “What we saw after COVID-19, when states were initially assuming that revenues would sharply decline, was record growth along with the federal COVID-19 aid,” said Sigritz. “States recognized that double-digit revenue growth that we saw in that ‘21 and ‘22 time period wasn't going to continue. It wasn't sustainable. So, they took measures to [bolster their rainy day funds].”

Cohen shared insights from the municipal bond market, highlighting strong issuance trends. “There has been record bond market volume…2024 had $514 billion, 2025, $580 billion,” with continued momentum into 2026. She noted that “much of it is new money for projects,” reflecting infrastructure demand. At the same time, she emphasized structural challenges, including “labor shortages creating bottlenecks” and competition from private-sector AI investment, with “$700 billion in capital spending for 2026” announced by major tech firms. Cohen also highlighted demographic and economic shifts, including migration patterns and affordability challenges. Of particular concern is “student loan overhang, currently at $1.8 trillion,” she said. “The Federal Reserve recently stated that for every $1,000 of student debt, there's a 1.8% decrease in home ownership.”

Wachter framed the open discussion segment of the Special Briefing by asking the panel about the economic impact of moratoriums on new data centers: “What's the risk that the growth driver falls flat due to moratoriums?” Panelists emphasized that while some states are considering restrictions, the broader outlook remains intact. Zandi responded, “The economics here are so compelling that I think that they'll win the day… We're seeing the peak of the political opposition to it right now, and it will abate going forward.” Cohen said “there are some states like Maine, for example, looking at a moratorium,” but underscored continued private-sector momentum.

Wachter then turned to infrastructure investment under current economic conditions, asking how elevated costs and interest rates are shaping decisions. Norton responded: “We are at a time of rapid growth. We have to accommodate that. So we are not slowing down,” while acknowledging that “other cities are pulling back because of the budgetary impacts.” Sigritz added that “there remains a lot of pent-up demand for infrastructure projects… I think you'll continue to see infrastructure spending,” though potentially at a slower pace and with increased reliance on borrowing. Coronado supported this view from a macro perspective, noting that investment growth “has slowed…but that's a pace that we saw before the pandemic,” emphasizing that “the needs are still there…but just much more slowly.”

The conversation then shifted to inequality and the risk of a K-shaped economy. Coronado said that “it was really the high-income households driving the spending,” while lower-income households were under greater strain. She warned that reliance on wealth effects raises sustainability concerns, particularly given concentrated stock market gains. Zandi reinforced this point: “Folks in the top 20% of the income distribution account for 60% of the personal outlays.” This dynamic “poses a bunch of challenges,” she said, including vulnerability to market corrections and broader societal implications.

Panelists agreed that while the U.S. economy continues to grow, it faces significant crosscurrents from geopolitical risk, inflation, labor constraints, and structural inequality. State and local governments, while fiscally stable, must navigate tightening budgets, rising costs, and shifting federal policies, even as infrastructure needs and investment demands remain high.

This Special Briefing was the latest in a series of 60-minute online discussions featuring distinguished guests from PennIUR and Volcker Alliance’s national research networks, along with other leading academics, economists, and federal, state, and local leaders. These convenings are made possible by funding from The Travelers Institute, members of the Penn IUR Advisory Board, and the Volcker Alliance.