Wednesday, October 05, 2011
Challenger, Et Al
ADP employment report: ADP notes that its headline job add at 91K is not very consistent with a "stable employment rate", i.e. we are seeing signs that unemployment could go up. This report only covers private sector hiring and the trend for state and local, plus armed forces, is not that strong. Plus you have new entrants. A lot of people went back to school because of the recession and a wave will be building of graduates with loans seeking employment, so the picture for next year is not that hot. Job cuts occurred at large companies; job adds were concentrated at small companies.
The fiscal problems at the state and local level are intense. Look at CA alone. In the first two months of the fiscal year, the cash deficit (revenues - expenses) was 5.37 billion, compared to the previous year's cash deficit for the same two months of 3.93 billion. A tremendous amount of the problem exists at the local level (see Stateline.org article) and it can't be resolved easily. Mr. Push is shaking hands with Mr. Shove right before the wrestling match begins, and it promises to be an ugly bout.
Then consider a state like Illinois. Although its economy is in relatively better shape than CA's (CA state motto - "The New Michigan"), Illinois passed a very large tax increase to deal with its finances. And sure enough revenues have come up - note the very large increase in personal income taxes, which derives mostly from the very large increase in personal income tax rates. Still, the current fiscal year deficit is projected to be along the line of 8 billion dollars:
In all, the state will be $8.3 billion short on June 30 if nothing is done, according to the report. The majority of that money, roughly $5.5 billion, will come in the form of unpaid bills from companies that provide everything from meals for the elderly to toilet paper for prisoners. Another $1.2 billion is composed of Medicaid payments the state will push off until the next budget year, while the remaining $1.6 billion is owed to companies for tax returns and health insurance bills for state workers.The third "recovery summer" in a row is not going to bail them out. They can't keep increasing taxes. Illinois' state unemployment rate was actually a tiny bit higher in August 2011 compared to August 2010, according to BLS - a sharp change from July's YoY pace, although the unemployment rate did not increase this summer - it's just that last year it rapidly improved. CA is at least notching improvements in its unemployment rate although its current rate of 11.9% is higher than Michigan's rate of 11%, which is not something of which to be proud.
The final solution for Illinois is going to have to involved cutting retirement benefits and probably services. More tax increases are unlikely to increase revenues much at this point. So once again, Mr. Push shakes hands with Mr. Shove.
Michigan's economy is growing after its long depression - it is increasing high-tech hires and unemployment continued to fall over the summer. So it is not all grim news.
Without a stronger pace of private job growth over the country, weaker states are going to have a very difficult time over the next year.
To properly understand the full impact, I recomment this Rockefeller Institute briefing on state and local taxes. On page four you will find a graph showing the real change in taxes over time. Note that sales tax (the early warning system) fell right through the recession floor between the second and third quarter of 2007, meaning a recession had started.
Although tax receipts have been rebounding, they still haven't gotten back to where they were in real terms in 2006 except for property taxes, which of course kept growing. But in a real sense, property taxes are now probably not keeping up with inflation (see page 5 in the review). With high inflation this year, the nominal growth being reported over the last few months doesn't look very good in real terms, and it is obvious that many of these states cannot keep raising tax rates. Sooner or later you create Camdens and Detroits if you keep doing that, and a nation of Camdens and Detroits would be a tragedy.
Still, the tighter tax picture, especially for localities, wouldn't be that much of a threat if it were not for demographics. It is really pension and retirement medical benefits costs that are destroying the the budgetary outlook in so many places. Despite any reasonable adjustments that can be made, there will be decades of high expenses and low current investment and hiring - that is inescapable.
Despite any reasonable adjustments that can be made, there will be decades of high expenses and low current investment and hiring - that is inescapable.
I'm not sure that's really possible. We do have one example of such a place: Detroit. But Detroit has continued to operate on Federal and state largesse due to its outsize voting population. That condition is coming to an end, as outmigration has reduced Detroit's population. The same thing will happen to any city or state that tries the same thing.
I can't quite see the endgame here, but I'm beginning to suspect it involves either cat food or a renewed interest in hippie communes. Or both.
Detroit will in-fill and gentrify a bit as the price of property falls.
The towering edifice of state and local obligations is truly terrifying.
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