Mish's Global Economic Trend Analysis

Illinois Spent $650,000 on 950 "Putting America Back to Work" Signs
Municipal Bonds Benefit as States Kick the Can Down the Road; How Long can it Last?
Oakland Lays Off 80 Police Officers in Budget Crisis; What's the Real Solution?
Expect Second-Half Housing and Durable Goods Crash
Census Bureau Reports Fictional Nonsense About Retail Sales
Rockefeller Institute Confirms Rising Retail Sales a Mirage

Illinois Spent $650,000 on 950 "Putting America Back to Work" Signs

Posted: 14 Jul 2010 10:13 PM PDT

The fiscally and morally bankrupt state of Illinois leads the way in taxpayer-sponsored paid political announcements for president Obama's ~~American Reinvestment and Recovery Act~~ "Please, Please, Please Elect Democrats" midterm campaign.

I live in Illinois and the signs are everywhere I go. The most galling thing here is we are paving roads that are perfectly fine as is. Results vary. Some states spent nothing on signs.

ABC News reports Some Call it Transparency, Others Another Example of Government Waste.

As the midterm election season approaches, new road signs are popping up everywhere – millions of dollars worth of signs touting "The American Reinvestment and Recovery Act" and reminding passers-by that the program is "Putting America Back to Work."

On the road leading to Dulles Airport outside Washington, DC there's a 10' x 11' road sign touting a runway improvement project funded by the federal stimulus. [The cost of the sign, $10,000].

ABC News has reached out to a number of states about spending on stimulus signs and learned the state of Illinois has spent $650,000 on about 950 signs and Pennsylvania has spent $157,000 on 70 signs. Other states, like Virginia, Vermont, and Arizona do not sanction any signs.

In response to questions by ABC News, Jill Zuckman of the Department of Transportation said, "The best estimate is that states have spent about $5 million of the $28 billion spent on road projects on signs – or less than .02 percent of overall project spending."

At the center of the controversy are a series of guidelines provided to stimulus recipients. In the letter, Rep. Issa cites what he calls "perhaps the most overly political guidance on stimulus advertising" involving the Department of Housing and Urban Development and a stimulus recipient. According to investigators from the oversight committee, HUD provided the Office of Native American Programs with information on "signage requirements." The document suggested a sign template informing the public the projects had been, "Funded By: American Recovery and Reinvestment Act, Barack Obama, President."

Congressman Aaron Schock (R-IL) has joined the chorus of Republican outrage over stimulus signs and claims at least $20 million has been spent on them. He told ABC News, "I think it's a bit of an oxymoron to spend tens of millions of dollars of taxpayer money, borrowed money, on a bunch of signs to tell them how we are spending their taxpayer money."

The point is not what percentage of the stimulus pot went for signs, but rather whether or not the signs are good use of taxpayer money.

Every project, big or small, needs to be addressed from that standpoint. Of course, whether or not one views these signs as wise use of taxpayer money largely depends on who is sitting in the Whitehouse. If it was a Republican, you could safely bet your last dollar the roles would be reversed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Municipal Bonds Benefit as States Kick the Can Down the Road; How Long can it Last?

Posted: 14 Jul 2010 05:21 PM PDT

States continue to hope, pray, and pretend, putting off until tomorrow, fiscal responsibility needed years if not decades ago.

Please consider some prime examples from No Defaults for States as California Favors Bonds Over Workers

Illinois let $5 billion of bills go unpaid.
Minnesota is delaying corporate and sales-tax refunds, postponing school and medical aid and setting up a $600 million bank line of credit.
New Jersey is planning to refinance about $250 million of general-obligation bonds to push $202.5 million of debt-service costs into future fiscal years.
Illinois, is selling $900 million of bonds for capital projects this week.
22 states put staff on temporary leave.
Arizona sold its House of Representatives and Senate buildings.
California solicited bids for 11 of its office complexes.
Delaware saved $29,000 by eliminating flowers at the state psychiatric hospital and health department.
California Governor Arnold Schwarzenegger, facing a $19 billion budget deficit for the year that began this month, is trying to force 200,000 state workers onto minimum wages temporarily.

All of those half-assed measures assume the economy is going to get better later this year. Instead I suggest states should expect a Second-Half Housing and Durable Goods Crash.

For now, the municipal bond market seems placated with states not running out of money simply because they have stopped paying bills and/or have temporarily expedited income tax collection.

I do not know how long that can last, but the second-half is likely to be quite telling.

Too be sure, states are making some needed cutbacks. However, the fiscal game playing exceeds needed austerity measures by a mile.

California alone is $19 billion in the hole and that is after California enacted a temporary 1 percentage point increase in the sales tax rate (expected to generate about $4.5 billion in fiscal 2010) and after it accelerated income tax collection.

It is also after patching a $24 billion hole earlier in the year.

Literally no state is remotely prepared for the second-half tsunami coming down the pike.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oakland Lays Off 80 Police Officers in Budget Crisis; What's the Real Solution?

Posted: 14 Jul 2010 02:31 PM PDT

Public unions continue to display a lack of basic math regarding city budget woes.

Alternatively they simply do not care and are willing to cannibalize newest union members for the benefit of those with the most seniority. Either way, and most likely some of each, cities have seen no recourse other than to layoff workers when contract negotiations stall.

Oakland, California is a prime example. Please consider Oakland talks break down; layoffs for 80 cops

Oakland laid off 80 police officers Tuesday after negotiations between city officials and union leaders failed on one simple matter: job security.

The police union demanded that the city guarantee that its officers would not be laid off for three years in exchange for giving up some pension benefits that would have eased the city's budget problems.

City leaders, however, said it would have been irresponsible of them to agree to protect police jobs for more than one year because the city's budget problems are likely to worsen.

"Every time you lay us off, there's a gun to the citizen's head as well," said Sgt. Dom Arotzarena, president of the Oakland Police Officers Association.

My Comment: Notice the fear-mongering by Sgt. Dom Arotzarena.

Also note that he is supposed to be a public servant. If what he said was true, then he places his own amazingly greedy interests ahead of serving the public.

[Sgt. Arotzarena] compared the slaying of four officers in the line of duty in March 2009 to Tuesday's layoffs, saying the 80 were released "not by the hand of a gun, but by the hand of a pen."

My Comment: Not only did the union's actions endanger the the public, their union's stance also resulted in the deaths of four fellow police offices, assuming you take Sgt. Arotzarena's statements at face value.

The council counter-offered by saying it would agree to a one-year moratorium. But the union said no. The union also rejected an offer from the city for smaller pension contributions with the one-year moratorium.

The city has already eliminated the $42 million deficit it faced for the year that began July 1. Cuts included the police layoffs. The city now has a $407 million budget.

Next year, the deficit is projected at roughly $50 million.

With 75 percent of the budget devoted to police and fire and 10 percent to debt service, the city has no wiggle room, council members said.

My comment: Please read that again. 75 Percent of the city's entire budget goes to police and fire workers and they want still more.

Officers who lost their jobs Tuesday said the union could not sacrifice without getting anything back in return.

"My idea of negotiating is giving and getting," said Chris Peters, who was laid off Tuesday after having worked for nearly two years in North Oakland. "We're giving, but we're not getting anything back."

My Comment: The union asked for the world and gave nothing. Also note that fools who just lost their job still support the union who tossed them to the dogs.

What is it about unions that they cannot understand simple math. Cities are broke. There is nothing more to give.

The article states the union is going to the voters to ask for tax increase. I suggest taxpayers ought to have an equal right to a vote on whether to outsource the entire police force to the local sheriff's association to save money.

What Is The Correct Policy

The correct policy is the same as it has been for year: Tell the public unions to go to hell. Things have now come to such a crucial economic point that the city had no choice than to do that.

It even offered to suspend layoffs for a year. The union refused. If any citizens or officers lose their lives over this decision, the blood will be on the hands of Sgt. Dom Arotzarena and his ilk.

Looking ahead, the ultimate way out of this problem is an Oakland bankruptcy. There is absolutely no doubt the city is bankrupt, the only problem is admitting it.

Rather than increase city taxes or property taxes in a foolish attempt to sustain the unsustainable, Oakland should file for bankruptcy now which would send city pension benefits to the courts.

Indeed, my proposal for the city is to do just that. File bankruptcy. It's going to happen anyway, so the sooner it happens the better. When it does happen, that blood too will be on the hands of the public unions and the corrupt politicians who supported them.

If Oakland wants to kick the can down the road, it can in the interim outsource the whole damn police force to the local sheriff's association. However, that will not solve the problem with fireman or other unions, and it too just temporarily staves off the inevitable: bankruptcy.

To anyone living in Oakland. Please email this link http://globaleconomicanalysis.blogspot.com/2010/07/oakland-lays-off-80-police-officers-in.html to your city council member, with your comments whatever they are, noting if you would, whether or not you are in a public union.

Have your friends and neighbors do the same. It is time to insist on real reform and the only way to do that is to take personal responsibility whenever you can.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Expect Second-Half Housing and Durable Goods Crash

Posted: 14 Jul 2010 01:06 PM PDT

Those who think manufacturing is going to lead the way to a sustainable recovery need to think again. Data suggest durable goods sales are about to collapse.

Let's tie this together starting with the Mortgage Application Weekly Survey (Emphasis Mine)

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending July 9, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.9 percent on a seasonally adjusted basis from one week earlier. This week's results include an adjustment to account for the Independence Day holiday. On an unadjusted basis, the Index decreased 12.6 percent compared with the previous week.

The Refinance Index decreased 2.9 percent from the previous week and the seasonally adjusted Purchase Index decreased 3.1 percent from one week earlier. This was the lowest Purchase Index observed in the survey since December 1996. The unadjusted Purchase Index decreased 12.7 percent compared with the previous week and was 43.0 percent lower than Independence Day week one year ago.

Consumers certainly will not be buying appliances (or carpeting, or landscaping, or nick-knacks) for the homes they are not buying either.

Will Commercial Real Estate Provide Growth?

Hardly. Vacancies are rising and rent prices are falling. Looking ahead US nonresidential building seen down 20 pct in '10

Spending on U.S. nonresidential construction is likely to fall more than 20 percent this year before recovering slightly in 2011, according to a semiannual survey by an architects' trade group.

The survey's consensus forecast calls for a 20.3 percent decline in construction spending, according to the American Institute of Architects.

The AIA cites an oversupply of nonresidential facilities in most construction categories, weak demand for space, continuing declines in commercial property values, and real estate lenders' reluctance to provide credit.

Recovery of nonresidential construction activity typically lags a recovery in the wider economy, especially an employment revival, which drives demand for office and retail space.

Conditions have deteriorated over the past year, even as the wider U.S. economy has begun to rebound from recession. For 2010, survey respondents had forecast a 13.4 percent drop in January and only a 12 percent decline a year ago.

What about Business Equipment, Routers, Etc?

Intel had a blowout quarter. The equity market's reaction was ho-hum at best. Treasuries which had been in a short-term slump have rallied.

By the way, Intel had a blowout quarter in April as well. This was the result.

click on chart for sharper image

Market Priced for Perfection

It takes increased sales and/or lowered expectations to produce consecutive "blowout quarters".

The key question now is "Where to from here?"

Pundits everywhere seem to think Intel will jump-start a further stock market rally. Articles are everywhere you look. They said the same thing in April, and look what happened.

In contrast, I see little fundamental reason for business spending to pickup from here, and no technical reason to think anything other than Intel's blowouts are more than priced in.

So, if consumers are not going to be buying appliances (or cars according recent surveys), and if commercial real estate is going to remain in the dumps, technology spending is likely unsustainable, and states will be laying off workers to balance budgets, pray tell where is the second half growth or jobs coming from?

Here's a hint: Don't expect miracles from further stimulus either.

The current Congress is not much in the mood and the next Congress is likely to be downright hostile to significantly more deficit spending.

All things considered, earnings estimates and the stock market are both priced well beyond perfection, as are forward GDP estimates.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Census Bureau Reports Fictional Nonsense About Retail Sales

Posted: 14 Jul 2010 10:46 AM PDT

Today the Census Bureau posted its Advance Monthly Retail Sales and Food Services Report for June 2010.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $360.2 billion, a decrease of 0.5 percent from the previous month, but 4.8 percent above June 2009.

Total sales for the April through June 2010 period were up 6.8 percent from the same period a year ago. The April to May 2010 percent change was revised from -1.2 percent to -1.1 percent.

Retail trade sales were down 0.6 percent from May 2010, but 5.0 percent above last year. Nonstore retailers sales were up 12.1 percent from June 2009 and gasoline stations sales were up 8.8 percent from last year.

Hogwash

The only believable number in the report is gasoline sales. Otherwise the problem is in Census Bureau methodology.

The advance estimates are based on a subsample of the Census Bureau's full retail and food services sample. A stratified random sampling method is used to select approximately 5,000 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms. Responding firms account for approximately 65% of the MARTS dollar volume estimate.

The methodology misses stores that went out of business and have no retail sales. Circuit City is a prime example but also note that thousands of small strip mall stores are now shuttered as well. Some of that volume went to the surveyed stores making it appear sales went up.

The only accurate way of computing retail sales is to look at state sales tax data. Even then, tax data can be misleading because one needs to factor in changes in tax policy, notably states increasing sales tax rates.

For example, a rise in the sales tax rate from 7% to 8% would result in a 14% increase in sales tax collections (all other things being equal).

The Rockefeller Institute reports "The growth in state tax revenues is not an indication of broad state fiscal recovery, but is mostly driven by legislated changes [massive tax increases] in two states — California and New York."

Please see Rockefeller Institute Confirms Rising Retail Sales a Mirage for details.

I also addressed the issue of retail sales last Friday in Did Retail Sales Rise or Did Tax Rates Go Up?.

"Retail sales have not risen year-over-year as most people think, rather, collections are up because states have increased sales taxes and in regards to income tax, have sped up collections."

I am not aware of any major gas stations going out of business, so the Census estimates for gasoline are likely reasonably accurate. Thus, the reality is spending is up on gasoline and down on everything else (in aggregate).

Factoring in Online Sales

One more point. Online sales have likely hurt state revenues. However online sales are approximately 5% of total retail sales. Assuming the census bureau is accurate in that "Nonstore retailers sales were up 12.1 percent" the math is simple. 5% of 12% is .60%. That does not significantly change the math on state sales tax collections.

The rest of the Census report regarding retail sales is fictional nonsense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rockefeller Institute Confirms Rising Retail Sales a Mirage

Posted: 14 Jul 2010 02:58 AM PDT

Last Friday, in Did Retail Sales Rise or Did Tax Rates Go Up?, I stated that retail sales have not risen year-over-year as most people think, rather, collections are up because states have increased sales taxes.

Today, the Rockefeller Institute confirms that analysis in a very detailed report, After Disastrous 2009, States Report Modest Revenue Growth in Early 2010.

Highlights

State tax revenues grew by 2.5 percent in the first quarter of 2010, marking the first time that states reported growth in collections on a year-over-year basis since the third quarter of 2008. Thirty-three states reported total tax revenue declines during the first quarter,with five states reporting doubledigit declines.

The growth in state tax revenues is not an indication of broad state fiscal recovery, but is mostly driven by legislated changes in two states — California and New York.

State tax revenues are still below the prerecession levels, showing a decline of 9.3 percent in the first quarter of 2010 compared to the same period two years earlier.

click on any chart for sharper image

The local tax slowdown is less severe than the state tax slowdown. In the first quarter of 2010, local tax collections showed a decline of 1.1 percent. Most local governments rely heavily on property taxes, which tend to be relatively stable. However, collections from local property tax declined by 1.1 percent during the quarter, marking the first time that local governments report decline in property taxes since the start of the recession. Collections from local sales tax continued to decline in the first quarter of 2010 at 0.5 percent, while collections from local individual income taxes showed a growth of 5.1 percent after five consecutive quarter declines.

Only eight states reported growth in personal income tax collections. Thirty-five states showed declines in the first quarter of 2010, with 15 states reporting double-digit declines. Michigan and Louisiana reported large declines in personal income tax collections at 61.5 and 54.2 percent, respectively. The largest increases in terms of dollar value were reported in California and New York where personal income tax collections grew by $2.0 billion and $2.1 billion, respectively. Again, if we exclude California and New York, the national picture changes significantly — personal income tax collections for the first quarter show an 8.4 percent decline in the first quarter of 2010 compared to the same quarter a year earlier.

Thirty-three of 45 states with broad-based sales taxes had declines, and four states had double-digit declines. Wyoming led the states with the largest decline at 44.5 percent, followed by Louisiana at 19.2 percent. Preliminary figures for the 37 of 45 early reporting states with broad-based sales tax indicate that sales tax collections saw some positive growth at 6.0 percent in April-May 2010 compared to the same period of 2009.

While June data could change the picture, sales tax growth in the April-June quarter is not unexpected, as a result of stabilizing retail sales and consumption as well as legislated changes in several states.

The recent decline in consumption of durable and nondurable goods was much sharper than in the last recession. While consumption of durable goods and services has been slowly recovering, growth levels are still below those of the prerecession period. The consumption of durable goods was surprisingly strong and saw steady growth in the last few months.

Tax Law Changes Affecting This Quarter

During the January-March 2010 quarter, enacted tax changes increased state revenue by an estimated net of $4.9 billion compared to the same period in 2009. Personal income tax increases accounted for approximately $2.7 billion and sales tax for approximately $1.7 billion of the change.

In a single state, California,legislated changes increased personal income tax and sales tax collections each by an estimated $1.1 billion. Legislated changes in New York were also significant for the personal income tax. Most of the increase in sales tax was due to legislated changes in California, Massachusetts, and North Carolina.

Looking Ahead

Although state tax revenues show some growth in the first quarter of 2010, the growth is very negligible and is mostly attributable to enacted tax increases and tax processing changes.

While the revenue strength of the final quarter of fiscal 2010 for the 46 states is still being determined, the outlook is certainly not promising, particularly for income tax collections.

According to NASBO, state general fund spending already saw negative growth both in fiscal 2009 and 2010. "This two year decline is unprecedented and is only the second time that state general fund spending has declined in the history of the Fiscal Survey," which dates back to 1979.

With preliminary data for April and May now available for 42 states, tax revenue for the two months combined increased by 0.9 percent versus the same period last year, mostly due to increases in sales tax collections. About 60 percent of states reporting personal income tax data had a year-over-year decline, with a median decline of 0.4 percent, while about 84 percent of states reporting sales-tax data had a year-over-year increase of 6.0 percent. While June data could change this troubling picture, there is little reason to expect reported revenues for that month to be strong.

This was a very detailed report with 10 charts. I only displayed 4 of them so inquiring minds will want to give the article a closer look.

Fiscal Mirage

Improvements in revenue collection are mostly if not entirely due to tax increases and other legislative changes such as California speeding up income tax collection rather than an increase in retail sales as widely touted.

Looking ahead, consumer attitudes towards debt are going to act as a huge drag on growth. State budget cuts are going to act as a drag on retail spending as well. Finally, the effect of $trillions in stimulus money will be over by the 4th quarter.

The key chart in the series is chart 7, on durable goods. Note the huge dip and subsequent rally in durable goods spending. That component will be all but dead in the upcoming quarters.

New home sales have once again crashed with the expiration of tax credits. Those credits have been extended again (but only for sales already in the mix). With a crash in home sales, durable goods orders for appliances will also crash.

Moreover, and as noted in Consumption Inflection Point - No One Wants Credit consumer spending plans have plunged.

The above chart courtesy of and by permission of Contrary Investor.

So while state revenues have finally stabilized, that is likely as good as it is going to get barring more tax hikes and revenue enhancement measures.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mish's Global Economic Trend Analysis

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