Why we needn’t worry too much about municipal bankruptcy.
– In every downturn, tax revenues decline and spending on social programs—food stamps, unemployment insurance, etc.—increases. Both of those elements push budgets, local or federal, into the red. For Washington, that is not much of a problem: The government just runs deficits. But every state save for Vermont and virtually every town and city, including Harrisburg, is required to keep funds going out equal to funds coming in, recession or no. So during downturns, local and state governments cut their budgets and find new sources of income to remain afloat. They use up their rainy-day funds, amassed during surplus years. They cut spending on nonessentials, like streetlamps. They hike taxes and fees. They fire employees, slash salaries, reduce pension contributions, trim school budgets, abandon building projects, cut back on firefighting and policing services. Sometimes they even issue bonds just to stay afloat. For the most part, municipal bonds make safe, low-risk, low-reward investments. They are not quite the equivalent of Treasury debt, which is considered basically risk-free. But historically, their rates of default come in around one-third of 1 percent, far lower than the rates for, say, corporate bonds.
How Fast Will the Economy Recover?- I have been pretty pessimistic about the speed of the recovery. The worry is not about a double dip — I think the probability of that happening is pretty low. But I have been worried about an "agonizingly slow recovery," particularly for employment, one that is measured in years rather than months. However, recent news such as the rise in long-term interest rates, which appears to be due to the expectation of a better economy ahead, along with better than expected Christmas sales, changes in the yield curve, falling jobless claims, increased consumer spending, and other signs of an improving economy had me thinking that I may need to reassess my pessimism. Perhaps the recovery will still be drawn out, but not quite as slow as expected. That would be good news. But two pieces of data released today have me moving back toward the more pessimistic outlook. Consumer confidence is down, and house prices are still falling. The fact that the fall in consumer confidence seems to be related to a fall in job market prospects adds to the worries. Overall, recent data has been mixed with some encouraging signs coupled with signs that we still face significant hurdles.
The Holiday Stimulus Package, Continued
– There will be almost three million fewer jobs next month than in December, and this outcome reveals a lot about how the labor market works. As I noted last week
, employment normally falls sharply after Christmas, for the obvious reason that consumer demand is significantly less in January than in the preceding December. Next month should be no exception. Three million is a lot of jobs – that happens to be the total number of jobs that the Obama administration contended
that it had “created or saved” over the entire life of the stimulus law passed in 2009. Yet next month’s multimillion loss of employment will be largely ignored by news organizations, because it will not be much different than it has been any other January.
The Recovery That Was – and Then Wasn’t
– We’ve talked before here
about whether a fleeting economic recovery began early this year. Two pieces of data mentioned in my column this week
offer more evidence that a recovery did in fact start, only to falter in the spring. The first is stock prices, which appear in this graphic
reviewing the 2010 economy. The second is the data from the New York Times/CBS News polls
. It shows a stronger pattern than I expected. Altogether, the data offers a consistent picture: employment, stocks and public opinion, among other indicators, each improved in 2009 and early 2010, only to deteriorate again in mid-2010.
Fire and Ice
– It may seem a strange time
to say so, but 2010 remains on pace
to be the hottest or second-hottest year ever recorded, according to NASA: By email, Reto Ruedy of NASA elaborates: … the 2010 mean will most likely be 0.65 C [above the 1951-80 mean], statistically indistinguishable from 2005 (0.63 C), and barely distinguishable from 2007 (0.58 C), 2009 (0.57 C), 1998 and 2002 (0.56 C), 2003 and 2006 (0.55 C), but definitely warmer than 2004 and 2001 (0.47 C) and 2008 (0.43 C). All other years are below 0.4 C and all years before 1981 are below 0.2 C above the 1951-1980 mean.
Here’s hoping Congress takes some action
China Squeezes Foreigners for Share of Global Riches – Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world’s biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe. General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market. General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE’s existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.
Fed Watch: Curiously Weak Consumer Confidence
– There was a bit of angst regarding yesterday’s Conference Board consumer confidence report
. See, for example, Mark Thoma
and Brad DeLong
. The report appears to contradict the generally positive Univ. of Michigan report – still weak compared to pre-recession, but at least moving in the right direction. More interestingly, it is at odds with recent consumer spending reports, not just early reports of the best Christmas season
(in terms of year-over-year gains) since 2005, but also the most recent trends in personal consumption expenditures
. Something is off-kilter, and has been since mid-year. Consumer confidence appears too low relative to actual consumption. Either confidence should be moving higher, as the Univ. of Michigan survey suggests, or consumption needs to slow dramatically. Place your bets. Consider the recent trends in real consumer spending (percentage change are log difference approximations):
Sob story of the day, Cat Rock edition
– Today’s WSJ features the sad, sad story
of retired churchman Fred Osborn, who might have to sell his family home. It only has single-pane windows, making it expensive to heat in the winter. And even after renting it out in the summer, Osborn ends up losing money on the old place. On top of that, his son has moved in, along with his four kids. If it got sold, three generations of Osborns would be kicked out at once. “I want to enjoy retirement now, but I really can’t afford to do that,” Osborn tells the WSJ’s Anne Miller. “It’s a very conflicting, emotional thing.” But here’s the rub: the story is in the WSJ’s real estate section. It’s basically about a home for sale. The price is $200,000, plus $1,000 a year in taxes. Will you help poor Mr Osborn out? Hang on, I might have missed out a zero. Actually, the price is $2,000,000, plus $10,000 a year in taxes. A little bit less sympathetic now, I guess. Wait, I’ve just found another order of magnitude down the back of the sofa. Osborn, it turns out, “will entertain offers above $20 million”, while taxes are “about $100,000 a year”.
‘Doubling Up’ in Recession-Strained Quarters
– Census Bureau data released in September showed that the number of multifamily households jumped 11.7 percent from 2008 to 2010, reaching 15.5 million, or 13.2 percent of all households. It is the highest proportion since at least 1968, accounting for 54 million people. Even that figure, however, is undoubtedly an undercount of the phenomenon social service providers call “doubling up,” which has ballooned in the recession and anemic recovery. The census’ multifamily household figures, for example, do not include such situations as when a single brother and a single sister move in together, or when a childless adult goes to live with his or her parents.
As the economy gradually recovers, some big U.S. companies are cranking up their recruiting and advertising thousands of job openings, ranging from retail clerks and nurses to bank tellers and experts in cloud computing.
Job Postings Surge as Economy Warms – Many of the new jobs are in retailing, accounting, consulting, health care, telecommunications and defense-related industries, according to data collected for The Wall Street Journal by Indeed Inc., which runs one the largest employment websites. It said the number of U.S. job postings on the Internet rose to 4.7 million on Dec. 1, up from 2.7 million a year earlier. The company daily collects listings from corporate and job-posting websites, removing duplicates. Its figures may undercount available jobs because some companies don’t post all listings online, an Indeed spokesman said. Farming, manufacturing and construction jobs tend to be under-represented in online postings, while skilled computer and mathematical jobs are overrepresented
Wall Street Execs Whine To Politico About Their Hurt Feelings
– This morning’s Politico
features another piece ("Obama and Wall St.: Still Venus and Mars
") in a continuing series that present Wall Street people whining about all those times White House higher-ups have ever-so-mildly allowed certain language to slip from their larynxes that makes the financial industry out to be some kind of villain for that time its over-leveraged, incompetent speculation led to the near-collapse of the entire economy and required taxpayers to shovel untold billions of dollars at too-big-to-fail banks so that they could survive. They are sad, you see, and the record-setting profits they have made are no comfort to them, because hey, maybe The Huffington Post
will say something really mean! That is literally a thing that appeared in a newspaper, today!
Hard Call for FDIC: When to Shut Bank
– More than 300 U.S. banks and savings institutions failed in the past four years. But there are huge differences in how sick they were when regulators seized them. About a dozen of the dead financial institutions had a tangible common equity ratio, a widely used measurement of a bank’s cushion to absorb losses, of more than 8% when they failed. That isn’t much worse than the median ratio of 9% among the 50 companies in the investment bank’s regional-bank stock index. In contrast, a total of 50 failed banks had negative capital by the time regulators swooped in, meaning their capital was depleted by losses. And those shutdowns came as long as two years after government officials issued their first warning about financial inadequacies, analysts at the KBW Inc. unit found. "There’s just not enough manpower and coordination to catch all these failing institutions at once." Killing a bank too soon could mean getting rid of a financial institution that might recover to make solid, profitable loans. Waiting until all of a bank’s capital is gone deepens the losses suffered by the FDIC’s deposit-insurance fund, putting additional strain on surviving banks that pay into the fund.
Mangano Lowers Taxes but Leaves Nassau County in a Fiscal Crisis…
Facing a huge budget deficit when he took office in January, Nassau County Executive Edward P. Mangano did not impose a hiring freeze. He did not stop borrowing to subsidize some of the richest school districts in the country. He did not eliminate the Police Department’s beloved mounted unit. Instead, Mr. Mangano, a Republican who won one of the first upsets of the Tea Party era, did what he had promised: He cut taxes, adding $40 million to the county’s deficit, which has since reached nearly $350 million. Now, with its bonds suddenly downgraded and a state oversight agency preparing to seize its checkbook and credit cards, Nassau is on the verge of a full-fledged fiscal crisis. That things could get so dire in this wealthy county, where property taxes are the second highest in the nation, offers a lesson in what happens when anti-tax fervor meets the realities of disappearing revenues and a punch-drunk economy.