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A New York Nightmare

Wall Streeters and New Yorkers, you may want to skip reading the following post if you don’t want to ruin a good day. Reuters’ Joan Gralla reported Monday:

New York Gov. David Paterson on Monday said Wall Street might lay off 40,000 workers in a worst-case scenario following Lehman Brother’s bankruptcy filing and problems at other big financial firms…

New York’s banks and brokerages generate one of every five tax dollars in the state. The state’s budget is already suffering from declines on Wall Street, and Paterson last month had said that tax revenues would be hurt by declines in Wall Street bonuses.

Paterson, who got lawmakers to cut the state’s budget by more than $400 million in August in an emergency session, on Monday said he might have to recall lawmakers again, saying he would not be surprised if the deficit spiraled back up.

In addition to job cuts on Wall Street, Paterson said as many as 120,000 jobs might be cut if positions in service industries that rely on Wall Street are included…

Financial sector jobs help create as many as four other positions in services ranging from legal to sales, according to Ross DeVol, director of regional economics, for the Santa Monica, California-based Milken Institute.

Gralla also noted that:

Bankers, brokers and traders earned an average salary and bonus of $340,312 a year in 2006, according to James Brown, a labor market analyst with the state Labor Department…

Wall Street’s job force totaled 181,000 in July, which was down 11,000 from July 2007, Brown said. Employment on Wall Street peaked at 200,300 in December 2000.

Sounds like there’ll be a lot of used Maseratis for sale soon…

For Sale (model not included)

Source:

“NY gov sees Wall St losing up to 40,000 jobs”
Joan Gralla
Reuters, September 15, 2008

Second Stimulus Package Taking Shape?

Had an idea this would be a hot topic after the carnage on Wall Street today. CNN Money’s Corey Boles and Michael R. Crittenden wrote this evening:

Sens. Carl Levin, D-Mich., and Sherrod Brown, D-Ohio, said that the federal government needs to step in and help people on Main Street, urging Republicans on Capitol Hill and the White House to work with the Democratic majority in Congress to finalize an economic assistance package.

“The uncertainty about the future of the market underpins the need for another economic stimulus package,” said Levin…

Levin and Brown were speaking on a media conference call Tuesday morning.

Meanwhile, Senate Majority Leader Harry Reid, D-Nev., called on Republican presidential candidate Sen. John McCain, R-Ariz., to work to pass a second stimulus package…

House Majority Leader Steny Hoyer, D-Md., said the news from Wall Street underscored the need for another stimulus package, and said he hoped to bring a recovery plan to the House floor soon.

Speaker of the House Nancy Pelosi, D-Calif., said she hoped the Bush administration would come to the table to talk with Democrats.

Brown said elements of a stimulus package needed to include an extension of unemployment insurance benefits, spending to repair the country’s infrastructure, an increase in grants to states to help them pay for rising Medicaid costs, and an extension of tax credits for companies investing in research and development, and renewable energy sources.

According to CNN Money’s Boles and Crittenden, another goal of a second stimulus package could be to rescue the battered U.S. housing market. They wrote:

Democratic aides in the Senate said that lawmakers could attempt to do more with part of a second stimulus bill to bolster the housing market, which is at the root of the problems affecting banks like Lehman Brothers and Merrill Lynch due to their exposures to the subprime mortgage market.

The aides said that discussions were beginning Monday as to what that assistance could be, and that details weren’t available yet.

Boles and Crittenden also noted there are some who would like to see any housing initiatives include a halt to foreclosures. From the CNN Money piece:

John Sweeney, president of the AFL-CIO, the largest group of U.S. labor unions, renewed his call for a government-imposed moratorium on home foreclosures to allow the problems in the housing market to settle down.

Source:

“3rd UPDATE:Market Woes Reinforce Need For Stimulus -US Dem Sens”
Corey Boles and Michael R. Crittenden
CNN Money, September 15, 2008

New York State Faces Worst Economic Hardship Since Great Depression

New York Governor David Paterson appeared on CNBC earlier today and warned that the state of New York is facing its worst economic hardship since the Great Depression. As a result of the crisis, New York state lawmakers were gathering for an emergency session. According to Governor Paterson:

• The state of New York is forecasting that Wall Street bonuses will be slashed 20% and capital gain losses will amount to 24% for the year.
• Governor Paterson’s “personal fear” is that investment bank and brokerage bonuses will be slashed by up to 40%, and capital gains reduced by the same amount.
• Wall Street supplies New York with one out of every five tax dollars.
• The state of New York could potentially lose $1.7 billion from slumping profits on Wall Street.

The New York governor told CNBC:

This is a combination of events. I wouldn’t compare it to the Great Depression, but I can’t cite a time since that period where we have had this amount of stress on our economy.

Paterson pointed out just how bad the financial situation is:

In June 2007, the sixteen banks that pay the most taxes on their corporate earnings remitted $173 million dollars to the New York state treasury. This June, those same sixteen banks paid $5 million. That’s a 97% decrease over last year. I don’t know if people really are getting how severe this problem is in New York and the ancillary effect it will have on the rest of the states, and even our federal economy.

You can view the 8 minute 33 second interview here.

Even Worse Than King Kong

Source:

“NY State’s Economic Emergency”
CNBC, August 20, 2008

No Property Tax Relief In Sight

More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.

The Journal’s Conor Dougherty wrote on April 24:

…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:

But the job expansion could later cause financial problems for governments that are spending too much.

“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”

Ain’t that the truth…

Sources:

“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty
Wall Street Journal, April 24, 2008

“Hiring leaps in public sector”
Dennis Cauchon
USA Today, April 29, 2008

State Governments Battered By Slowing Economy

Earlier today, Bloomberg’s William Selway reported that state governments are projecting a $26 billion shortfall in the next budget year as the slowing economy erodes tax receipts, according to a national survey. The National Conference of State Legislatures study found:

With a few exceptions, state finances are deteriorating, in some cases considerably…

If the national economy continues to struggle and indeed falls into recession, the state fiscal situation will worsen.

While economists argue over whether or not the U.S. economy is in a recession, the group said:

Whether or not the national economy is in recession — a subject of ongoing debate — is almost beside the point for some states because their fiscal situations have declined so much that they appear to be in recession.

According to the survey, deficits are forecast in 23 states for the 2009 budget year. 16 states, including California and Florida, were forced to deal with shortfalls of $11.7 billion that appeared after their spending plans were already set. 33 states say they are concerned about the outlook for the coming year. Not surprisingly, states that benefited most from the housing boom are now seeing the most pain. The widest deficits for next year, measured as a percentage of the budget, are in Arizona, Nevada, California, Alabama, and Florida.

And how do the states plan to deal with the budget shortfalls? Selway wrote:

At least 16 states will respond to their shortfalls by cutting back spending, according to the report. At least eight, including California, are considering moves to raise taxes or fees. Massachusetts is considering a $1 per pack increase in the cigarette tax to raise $175 million, the report said. New York lawmakers balanced next year’s budget in part with a $1.25 per pack cigarette tax boost.

Others are looking at selling assets or using bonds sales to pay for projects. Illinois may sell its lottery, while Maine is looking at selling surplus land. Nevada is considering using bonds, instead of general fund money, for capital works.

More “pole taxes” to come?

Source:

“U.S. States ‘Deteriorating’ as Slump Curbs Taxes, Lawmakers Say”
William Selway
Bloomberg, April 25, 2008

Economists Predict 6% Jobless Rate, 2 Million Lost Jobs

Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:

While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.

Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.

Mark Zandi, chief economist at Moody’s Economy.com, said:

All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.

“Safe” Jobs:

• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government

“Unsafe” Jobs:

• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)

Source:

“Job winners and losers in hard times”
Martin Crutsinger
Associated Press, April 7, 2008

State Budgets Hit Hard By Housing Bust, Slowing Economy

Back on January 28, I read in Bloomberg that the Washington D.C.-based research group The Center on Budget and Policy Priorities announced half of all U.S. states were projecting budget deficits for the next fiscal year as the U.S. economy slows and tax revenue disappears. According to their report (revised on February 1):

At least twenty-four states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 24 states, 20 have already made specific estimates; the combined deficits of these 20 states are expected to total at least $34 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.

The center explained why this was happening:

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The slower growth in tax receipts is coming at a time when state lawmakers hammer out spending plans for the next fiscal year, which begins in July for all but four states. According to the center, states, unlike the federal government, typically cannot borrow all the money they need when revenues fall short, which leaves them with no other choice but to draw down reserves, cut spending, and/or find new sources of money (new taxes) . In California, which faces a $14.5 billion deficit, Governor Arnold Schwarzenegger has proposed releasing prison inmates early and closing state parks, in addition to selling $3 billion of bonds to help pay the bills. A number of states are getting creative when it comes to finding new sources of funds. In a January 28 article entitled “Cash-Strapped States Resort to Odd Taxes,” Michael Gormley of the Associated Press wrote:

Need a few million dollars to fill a budget deficit? Lease a toll highway, like Indiana and Virginia did, or cash in on future lottery profits as a half-dozen states are considering. You could slap a tax on pornography as six states already have, or tax strip joints like they do in Texas, where they call it a “pole tax.”

Some states take a slice out of pumpkin sales at Halloween. And most states tax Shaquille O’Neal and Barry Bonds when they visit, using a “jock tax” on professional athletic events.

Amused? That will cost you, too. Many states collect an amusement tax for live performances.

Nate Bailey, of the nonpartisan Tax Foundation, had this to say about the new funding initiatives. He told the Associated Press:

They range from the outright crazy to the absolutely insane. People at the local level already feel overtaxed and politicians, in a somewhat spineless way, look for a hidden way to increase revenue without raising taxes.

Shortfalls are anticipated to be significant in states whose economies were driven by the recent housing boom. Arizona is expecting a budget deficit of between $1.3 billion and $1.7 billion, or 12.1% to 16.2% of its FY 2008 general fund. Nevada is forecast to have a shortfall of $565 million, or 7.8% of its budget.

Back on October 11, 2007, I talked about a Retuers article which noted half of all U.S. states were collecting less from their sales taxes than expected, which could signal a recession was ahead. I wrote:

Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.

Wall Street, Financial Services Jobs In Jeopardy

Several news services today are announcing that Boston-based Fidelity Investments told some of its managers to begin letting employees know of impending layoffs. One report from the Wall Street Journal says that 200 employees could receive their layoff notices today. According to CNN Money this morning, James Lowell, editor of the independent Fidelity Investor newsletter, told the Journal that he’s expecting “the largest number of layoffs Fidelity has made in years.” Back in 2002, Fidelity cut 1,695 jobs, or 5% of its staff.

The situation at Fidelity is part of a growing trend of layoffs in the financial services sector that are taking place on Wall Street and elsewhere in the United States. 140,000 financial services jobs have already been cut in the United States this year, according to Chicago-based Challenger, Gray & Christmas. This number surpasses the previous record of 116,647 pink slips issued back in 2001. Wall Street alone has already lost 42,404 financial jobs in the first 10 months of the year. On October 23, BusinessWeek stated that the job cuts have spread well beyond brokers in the subprime mortgage business, and are affecting senior mergers-and-acquisitions bankers, financiers, and traders.

Broker-dealers have been active is reducing their workforces. Morgan Stanley (900), Bear Stearns (310), Lehman Brothers (1,200), and Credit Suisse (320) announced cuts in residential mortgages, banking and leveraged finance. Those institutions with significant losses, particularly UBS (1,500), Citigroup (15,000), and Bank of America (3,000), are trimming their workforces even further and issuing warnings that more layoffs may be ahead. On October 26, Reuters reported that Merrill Lynch is expected to issue pink slips after a third-quarter net loss fueled by mortgage and leverage loan losses.

Significant job losses in the financial services industry can wreak havoc on the local economies that depend heavily on the sector. On October 28, Challenger, Gray & Christmas’ James Pedderson told The Times (UK) that:

The last two months’ cuts have been dominated by the mortgage, credit and lending areas. The biggest fear now is that with all the foreclosures and lack of confidence, consumers will stop spending. Then these problems could spread into other areas. But we haven’t seen that yet.

Pedderson said the layoffs were likely to have a significant impact on the local economies of New York, Chicago, and other cities with a thriving financial services component. He added, “You are talking about people who were making $300,000 (€200,000) a year suddenly being out of a job.” he said. The Manhattan Institute recently published a report that claimed New York City could lose two jobs for every one cut on Wall Street. On Monday, Bloomberg reported that New York Mayor Michael Bloomberg halted city hiring and cut agency budgets this year and next as he anticipated a fall in Wall Street profits. The financial industry accounts for 9% of the city’s tax revenue (about $3.3 billion in fiscal 2007) and as much as 20% of the state’s revenue ($9.6 billion).

While the employment outlook depends on the health of the U.S. economy going forward, of course, headhunters who help bankers and traders find jobs see layoffs ahead, according to Reuters. Korn/Ferry headhunter Jonathan Kim said:

There could be massive layoffs in areas that were built up quickly over the past three to four years. We’ll see a number of cuts in the areas that lost money.

Some on Wall Street are upset that their bonuses will take a hit this year. Maybe they should be thankful that they still have a job…

Hide And Seek

Kudos to MarketWatch, as I didn’t encounter the following anywhere else in my research today. A congressional report conducted by the Joint Economic Committee said that 2 million subprime-mortgage foreclosures will occur by 2009 if home values continue to decline. The report also estimated that $71 billion in housing wealth will be eliminated, and the states will lose $917 million in property tax revenue. Joint Economic Committee Chairman Senator Charles Schumer (D-NY) and other lawmakers used the findings as ammunition in their attempts to convince the White House to step up foreclosure prevention counseling, let Fannie Mae buy more loans, and encourage loan servicers to work out modifications with borrowers.

Back on June 5, I talked about some of the foreclosure projections in my post for that day. To recap:

Based on a survey of the nation’s 100 largest real estate markets, HousingPredictor.com predicts that at least 2 million residential properties will be foreclosed within the next two and a half years. Another study by the Center for Responsible Lending predicts an even worse scenario. This non-profit organization, which focuses on abusive lending practices, is forecasting a total of 2.4 million foreclosures nationwide. The figure exceeds the 2 million homeowners thought to have been created by the housing boom (2 million being the most optimistic estimate).

As you can see, the JEC numbers are not that far off these earlier projections. It is estimated that there are approximately 80 million homeowners in the United States today.

Sunday Edition: October 14, 2007

It’s great to be back from my “fall break.” While out, I managed to keep on top of the latest financial news, so I have lots of material for upcoming posts in Boom2Bust.com. Now, let’s get down to business…

Import Prices Starting To Hit Home
Back on October 11, the Bureau of Labor Statistics of the U.S. Department of Labor reported that the U.S. Import Price Index increased 1% in September following a 0.3% drop in August. A 5.4% rise in petroleum prices for the month helped contribute to the September increase.

Another negative influence on import prices has been the weakening U.S. dollar relative to other currencies. Consider the following data from the Wall Street Journal’s MarketBeat Blog on the same day the BLS report was issued:

• Canada- change versus dollar +16.5%, change in import prices +5.3%
• Euro Zone- change versus dollar +13%, change in import prices +1.4%
• UK- change versus dollar +7.1%, change in import prices +3.3%
• China- change versus dollar +5.4%, change in import prices +1.6%
• Japan- change versus dollar +.1%, change in import prices -.5%

Luckily, import prices haven’t mirrored the gains of the producer country’s currency against the dollar. Perhaps foreign companies are willing to settle for lower profits to maintain a presence in the massive U.S. marketplace. As an American consumer, I hope the present situation can last. As a realist, I’m inclined to think that it’s wishful thinking.

Wall Street As An Economic Barometer
The Wall Street Journal’s Economics Blog caught up with Merrill Lynch economist David Rosenberg back on October 2 as he examined the effects of Federal Reserve interest rate cuts on the U.S. stock market. Rosenberg found that the stock market always rises in the first month after an initial interest-rate cut, and the average increase is almost 4%. It’s interesting to note that since the federal funds rate cut back on September 18, the Dow Jones Industrial Average and the S&P 500 are up 2.6% and 2.8%, respectively.

Rosenberg also looked at whether or not recessions happen while the stock market is booming. In looking at the 1990-91 recession, he saw that the S&P 500 peaked on July 16, 1990, after rising 3.4% over the previous month. The recession also happened to start that July. Looking back further, Rosenberg studied the recession of the early 1980s and found that the stock market peaked on February 13, 1980, even though a recession had started the month before. He said, “From our lens, the stock market is doing what it always does in the month after the first cut in the Fed funds rate — and that is to rally on the sugar rush of the liquidity infusion.” Yet, Rosenberg also noted that the performance of equities further on down the road depends more on how the real economy responds. On the present situation, he says, “What we do know is that the economic backdrop has become worse, not better,” and put the probability of a recession in the next 12 months at 70% in a recent Journal survey.

Speaking About Recession…
According to Reuters on October 11, about half of all U.S. states are collecting less from their sales taxes than expected, which could signal a recession lies ahead. Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.

Parting Shot
Last Thursday, U.S. Treasury Secretary Henry Paulson said ahead of an October 19 meeting of finance ministers and central bankers of the Group of Seven major industrial nations that, “A strong dollar is in our nation’s interest and the currency values should be set in a competitive marketplace based upon underlying economic fundamentals.”

It just so happened that the U.S. dollar hit a lifetime low against the euro last week and has recently plummeted to record lows against a basket of major currencies.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com