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Saturday, April 17, 2010

I Can't Recommend The Latest Rockefeller Institute Report Enough

Here it is (pdf). The scope of this one is very broad, because it is not just reporting Q4 data but showing a host of comparisons with earlier recessions.

If you read nothing else, go to page 17 and look at the two graphs there, which compare real retail sales and employment declines for this recession to those for the 73, 80, 90, and 01 recessions. These are "AIIIEEEEE, don't go into the basement alone!" graphs. We're in the fiscal equivalent of a really gory slasher movie.

One aspect not covered is that the retirement drag is now going to pick UP real state spending requirements, and it will be comparatively worse for localities. So the long-term declines in revenue will be coupled with even longer-term spending increases.

I am going somewhere with all this; I have some money graphs for you later.

In terms of spending, government expenditures about about 1/4 of personal spending, and state and local are more than half:
Click on this BEA graph - what's shown is real GDP, real PCE, and government spending.

Anyway, personal PCE has to rise by quite a bit to offset a constraint in government spending - and government spending IS going to be constrained!

Here is pretty much the same graph showing percent change:

The localities get most of their income from property taxes, but they are going to have trouble raising those taxes going forward. The incomes aren't there to support it in a lot of places.


The localities get most of their income from property taxes, but they are going to have trouble raising those taxes going forward. The incomes aren't there to support it in a lot of places.

This is what happens when misguided policies transfer all of the eCONomic surplus into bank interest.


Btw, I've been saving you a nice spot in front of the fire here at camp deflation. You're heading this way whether you realize it or not. It's not crowded here by any means, but the membership is growing.

I arrived at camp deflation once I stopped worrying about the price of oil and, most importantly, gave up on the silly notion of "printing" money.
moM,no basement,but I did consider locking myself inside my gunsafe with a case of MRE's.Not Good,not a surprise.Local headline yesterday "29,000 sought work in county last month".The county population total is a little over 300k.
MAB - the camp anthem probably is not too tuneful.... If you go back aways in this blog, you'll note that I was predicting quite some event a few years ago. I still think that it is there - that we don't get out of this without taking more of a hit. The timing is what's in question now.

Tom - some places are picking up, but the worst hit are still going downhill!!
I look for an Internet sales tax within the next two years.
We'll have higher car tag fees, user fees, and lhigher
local and state sales taxes. By the way, how does MoM
feel about tariffs ?


I agree with you that we'll be seeing all those taxes (although I doubt we'll see tariffs). But I also think the Federal tax rate will come down to make room for the state tax increases.

When push comes to shove, there will be no other choice.
The end of the SS trust fund surplus is a game changer for the Federal Gov't and both major parties with the addition that the Federal Gov't is now the backstop for the economy and credit markets in particular it doesn't seem practical to assume lower tax levels.
I know it seems counter-intuitive, but I expect the state employee pensions and state infrastructure to take priority over everything else, when all is said and done. The Feds will be pared back quite a bit. As it is, over the last few years the Federal government has morphed from "Uncle Sugar" to an entity that takes more and more away and gives less and less back. There are reasons for it, and it's not fair, but that's going to be the perception.

Alternately, the Federal government could take over most of the state functions, but I don't think that forcing North Dakota to pay for California's over-generous pension system is going to be a political winner.
Sporkfed - I am not against tariffs for reasons of national security, but otherwise they have limited potential.

If you look at what I have been discussing recently, it's all about the contribution of basic costs to the erosion or support of consumer incomes. If you tariff on a widespread basis, there will be a tariff war and the effects are likely to be quite negative.

Further, the US has left itself in a very vulnerable position. We literally do not now have the industrial base to supply our own military needs. Think about it.
Neil - I don't. I think they will be pared away as a function of national spending.

Take the recent healthcare bill. For many states, the required Medicaid spending will not be reimbursed, and will effectively take huge chunks of these states' income. That is part of what the state lawsuits are based on.

The proposal for a 4.5% VAT is similar; think of what it will do to economies such as CA's.

And no, I don't think you can get the heartland states to fund the fiscal black holes of the coastal states.
I do not see any way to increase net employment
without tariffs. We can not trade services between
ourselves and maintain our standard of living.
With out tariffs we will have to devalue dollar
to balance our trade deficit. Then oil goes higher,
imported goods go higher, and savers get screwed.
M_O_M, if I'm understanding you, you think the states will default on their pension obligations, as the federal government takes an ever-larger chunk of the tax revenue people are willing to give up?

If that happens, I suspect we'll see some REAL demonstrations.
Hey MoM, have you seen this site: http://www.consumerindexes.com/?

They seem to follow the carrying wave you often refer to and the data isn't looking good.

At the end of April 18th's commentary there's a link to a really interesting interview where he says if present trends hold Q2 GDP is looking like a -1.0% to -1.5% print.

"Our data is predicting that the first quarter’s GDP will come in at about 2.5% growth, reflecting our November month end Growth Index numbers. We believe the second quarter’s GDP will show a contraction, at about a negative 1 to 1.5%, reflecting our Growth Index numbers as of the end of February. We are still seeing contraction in that same neighborhood as of the end of March."
That's about a quarter later than I expected it last summer, Allan, but pretty much that would be the lazy W I expected doing its thing. I didn't see the big 4th quarter spike - so that ran it out an extra quarter. Just never saw the uptick in business for the company I work at or the vendors we work with to justify viewing the "recovery" as anything more than a temporary phenomena.
Allan - I disagree a bit with those folks. I think we will have pretty good growth in Q2 still. However, a lot depends on pricing.

Before we would take a second dip we would see the relative effect in transportation, and it doesn't seem to be showing up just yet.

Watch rail. When rail volumes stop their growth we are looking at a real problem.
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