Analysis Brief – October 14, 2013

Just because the Federal Executive Branch is turning off websites and not issuing economic reports as a result of their Shutdown does not mean there is nothing to report.

Where are We on the Shutdown & Debt Ceiling?

(From NASBO) As of the morning of Monday, October 14, Congress has yet to reach an agreement on both ending the federal government shutdown and raising the debt ceiling. The partial shutdown of federal government services has now been in effect since fiscal 2014 began on October 1, while the Treasury Department says it will be unable to meet its obligations beginning on Thursday, October 17. For months, the U.S. Treasury has been taking what are known as “extraordinary measures” to extend the nation’s borrowing authority while complying with the statutory debt limit, which was officially reached in May of this year. Late last week, negotiations between the administration and the House broke down and most of the discussions regarding raising the debt ceiling and ending the shutdown are now taking place in the Senate. A bipartisan group of senators has been working on a plan that would reportedly extend the debt ceiling longer than the previously discussed six-week period, would include a two-year delay on the 2.3 percent tax on medical devices that was included as part of the Affordable Care Act, and would fund the federal government at least into next year. Currently, there is an impasse in the Senate regarding the length of a continuing resolution (CR) and the funding levels, with some Republicans in the Senate pushing for a longer CR that would include a second year of sequestration cuts, while Democrats have expressed concerns about new sequester cuts scheduled to be implemented in mid-January. Some Republicans have expressed a willingness to give federal agencies greater flexibility in carrying out the sequester cuts, but do not want to see the overall spending cap raised in fiscal 2014.

Need Economic Information?

As you may have noticed, agencies within the Executive Branch shut down several websites that serve as regular sources of data for public sector analysis, including that at the local level. If you are looking for substitute sources of data, please consider the following alternatives:

Google Public Data (National Unemployment & GDP)

NC Division of Employment Security (State & Local Employment Data)

AccessNC (State & Local Economic Data)

FRED – Federal Reserve Economic Data (Repository of Economic Data)

US Bureau of Labor Statistics (Employment & Unemployment Data)

NC State Data Center (Population, Economics, etc.)

How’s the Job Market?

While national reports on unemployment from BLS are suspended for now as a result of the shutdown, we do have another metric available, courtesy payroll processing firm ADP:

Private sector employment increased by 166,000 jobs from August to September… The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. August’s job gain was revised down from 176,000 to 159,000.

Strongest sector growth was in trade/transportation/utilities (+54,000). Small businesses (less than 50 employees) added 74,000 jobs, while large businesses (500 employees or more) grew by 64,000.

Consumer Debt Increasing, Optimism Muted

Total consumer debt grew by nearly $14 billion in September, with the increase entirely due to nonrevolving debt growth likely tied to purchases of housing and vehicles. Revolving debt (i.e., credit cards) actually dropped by nearly $1 billion.

The Conference Board’s Consumer Confidence Index dropped more than 2% in September, driven by a more significant drop in future expectations.

Says Lynn Franco, Director of Economic Indicators: ‘Consumer Confidence decreased in September as concerns about the short-term outlook for both jobs and earnings resurfaced, while expectations for future business conditions were little changed. Consumers’ assessment of current business and labor market conditions, however, was more positive. While overall economic conditions appear to have moderately improved, consumers are uncertain that the momentum can be sustained in the months ahead.’

Small business owners also expressed pessimism, with the NFIB Optimism Index dropped 0.2 points, with an 8-point drop in future business condition expectations.

optimism-components-nfib-201310

 

(From Wells Fargo)The September figure from the NFIB does not fully reflect the effect of the government shutdown. Still, anxious anticipation of the shutdown may have been reflected in the fact that the biggest drag on the index was an eight point drop in expectations for improvement in the economy. One of the questions in the survey asks small businesses about the single most important problem that they face. In the early stages of the recovery in 2010, the answer was overwhelmingly business concern about poor sales.

That concern has been displaced more recently as businesses now cite regulation and taxes as their top concerns. The drop in expectations for improvement in the economy combined with smaller declines in earnings trends and hiring plans were enough to swap the more modest gains in other areas. One notable bright spot was the three point increase in rising expectations for future sales.

Homebuilders are also showing some slowing of expectations.

HousingIndexSep13

 

(From Wells Fargo) Confidence among home builders has improved markedly over the past year, with the NAHB/Wells Fargo Housing Market Index (HMI) increasing 18 points. Recently, however, gains have slowed; in September, the HMI was unchanged at 58 and up only two points from July. In addition to noting continued difficulty securing financing for new developments and rising labor costs, higher mortgage rates are reportedly weighing on builder sentiment. A dip in mortgage rates since the FOMC’s announcement not to begin tapering may spur some buyers to pull the trigger and lead to a pickup in single-family sales. Prospective buyer traffic continued to rise in September, indicating buyers remain in the market, even if they are slightly more hesitant. However, with increased turmoil in Washington weighing on the outlook, it would not be surprising to see builder confidence dip in October.

 Housing Market Impacted by Shutdown (Because…)

The US Department of Agriculture’s Rural Housing Services programs, which provide approximately 132,000 home loans a year, have been shut down due to absence of continued Federal funding. At the same time, the lack of access to Federal agencies and associated records is hindering the loan approval process for many more

(From LA Times) Housing lenders rely on a variety of government data, such as verification of borrowers’ income, which are unavailable with the partial closure of the Internal Revenue Service and other agencies.

The mortgage industry has found creative ways to work around the shutdown. Banks are getting data from other sources. Sometimes they’re simply taking the risk of making loans without some information.

Nevertheless, the shutdown is delaying loans around the country. And some experts warn that home lending could be much more severely disrupted if the political stalemate in Washington persists much longer.

‘How much momentum are our fragile housing markets going to lose?’ said Debra Still, chief executive of Pulte Mortgage and head of the Mortgage Bankers Assn. ‘The longer we’re shut down, the more it’ll negatively affect housing.’

New Memos from LGC on Cost Allocations and Component Units

Memo #2014-07 (Proper Accounting Treatment for Cost Allocations) seeks to address observed, inappropriate use of transfers between funds to account for cost allocations. Proper methods for showing cost allocations are discussed.

Memo #2014-08 (Operation and Accounting for Discretely Presented Component Units, including Tourism Development Authorities) discusses how to correctly operate and account these types of units within local jurisdictions.

FAQ Available from SOG on E-Verify Requirement

Norma Houston at the School of Government prepared this FAQ on application of the E-Verify Affidavit requirements required of local governments as a result of legislation passed in the General Assembly.

Click Here for Copy of E-Verification Affidavit (PDF) for Distribution to Vendors

Department of Revenue clarifies Impact of Sales Tax Law Changes

(From NCLM) At (last) week’s meeting of the legislative Revenue Laws Study Committee, the Department of Revenue indicated that it was interpreting a tax reform provision expanding the sales tax to cover service contracts differently than had been assumed during the legislative debate on tax reform. In the fiscal note for House Bill 998, this provision was assumed to apply to all service contracts for maintenance and repair of automobiles or personal property subject to sales tax. This expansion, included in HB 998, was expected to generate $1.9 million in new municipal revenue statewide during FY 2013-14 and over $4 million in future years. The Department is interpreting the provision in HB 998 to apply only to service contracts where the retailer selling the contract is the entity that provides the service. This will reduce the number of contracts subject to the sales tax and the amount of revenue to be received by an unknown amount. The Committee will consider recommending a legislative change to make clear that the sales tax should apply to all service contracts, regardless of which entity provides the service. Such a change would not take effect until July 1, 2014, however, so revenue this year will be reduced.

League of Municipalities Releases New Legal Memos

(From NCLM) he North Carolina League of Municipalities’ Legal and Government Affairs teams have prepared a selection of memos providing additional detail on some changes of note that were made during the 2013 Session of the General Assembly. The memos address the following:

NLC Annual Report Shows Improved Fiscal Results for Cities

The National League of Cities’ 28th annual survey of city finance officersreveals an overall picture of a gradually improving economy and improving city fiscal conditions. A majority of city finance officers report that their cities are better able to meet financial needs in 2013 than in 2012.

This is largely a result of slowly improving housing markets and increased consumer spending, which are strengthening local tax bases and economic outlooks in local and regional economies. However, continued high levels of unemployment, uncertainty about federal and state actions, and long-term pension and health benefit obligations continue to constrain the potential for strong economic growth for many cities.

Click Here to Review NLC’s City Fiscal Conditions in 2013 report

What is the Future of Fiscal Federalism?

(From ABFM) Originally, the first plenary session of the 2013 ABFM Conference, held Thursday, was meant to focus on the impact of this year’s Federal Budget sequestration on state governments.

For the panelists and audience, however, the presentations and discussion provided an opportunity to look beyond sequestration and consider other factors impacting the intergovernmental fiscal relations…

Click Here to See the Rest of This Article at ABFM.org

Check out these slides shared during the presentation discussed above by Paul Posner of George Mason University.

How is North Carolina Looking?

Check out these charts from the latest update of economic indicators provided by the Federal Reserve Bank of Richmond


In his latest update to NC’s Leading Economic Indicator Index, NC State’s Mike Walden sees some overall improvement for the Tar Heel State, though much work remains to be done:
NCLEI13Oct

The NCSU INDEX OF NORTH CAROLINA LEADING ECONOMIC INDICATORS, a forecast of the economy’s direction four to six months ahead, took a strong jump in August, rising 4% from July and almost 8% from the year earlier. All components of the Index improved except for initial jobless claims, which rose 7%. But even initial jobless claims are well down from their recessionary peak, and the other components also were much improved from a year earlier. The Index suggests the state economy is in recovery mode and will continue so. However, this may not translate to large job gains, as this recovery has been marked by much stronger growth in output than in jobs.

Regional Economic Survey Results

From Federal Reserve Bank of Richmond

Where Do Gas Prices Stand?GasBuddy101413

 

Fuel prices are about 10% below the same time last year, and North Carolina is a few cents below the National Average, though we remain significantly above our neighbors to the south and north (sub-$3/gallon unleaded was spotted at pumps in Virginia this weekend).

Free Course Available on Pension & Retirement Finance

Click Here for More Information & Registration

In this (FREE) eight-week course, you will learn the financial concepts behind sound retirement plan investment and pension fund management. Course participants will become more informed decision makers about their own portfolios, and be equipped to evaluate economic policy discussions that surround public pensions. The course begins with the principles of financial economics, such as the distribution of outcomes when investing in stocks, bonds, or annuities. These serve as the building blocks for an understanding of different retirement strategies that can help you improve your asset allocation. Finally, the course applies these principles to government programs and policies.

The Finance of Retirement and Pensions will culminate in an interactive symposium about the challenges of U.S. pension systems. Held in January 2014 at Stanford Graduate School of Business, the event will feature representatives of the MOOC teams with the five most promising ideas for pension reform, who will present their proposals to a distinguished panel of faculty and experts in finance and public policy. Expenses will be covered by Stanford Graduate School of Business and the Hoover Institution.

(Instructor) Joshua Rauh is a Professor of Finance at the Stanford Graduate School of Business, a Senior Fellow (by courtesy) at the Hoover Institution, and a Research Associate at the National Bureau of Economic Research (NBER). He studies corporate investment and financial structure, private equity and venture capital, and the financial structure of pension funds and their sponsors. Rauh’s research on state and local pension systems in the United States has received national media coverage in outlets such as the Wall Street Journal, New York Times, the Financial Times, and The Economist. Before joining the Stanford faculty in 2012, he taught at the University of Chicago’s Booth School of Business and the Kellogg School of Management.

Lacker Discusses Importance of Human Capital as a Financial Investment

Click Here for Speech Transcript & Additional Information

Highlighted Points

  • Many efforts are aimed at helping students decide how to finance college. But these efforts beg an important question: Is college the right investment for every student
  • On average, the payoff to college is large, but only students who graduate realize high returns on their investment. Currently, the dropout rate is about 50 percent, perhaps because many students do not have an accurate assessment of their own readiness for college.
  • The flipside of the dropout problem is the failure of relatively high-achieving students to apply to college, perhaps because they overestimate the costs of college or underestimate the future payoffs.
  • This suggests that students would benefit from accurate information about the returns to schooling, the level of preparedness that is required to succeed in college and options such as community college, vocational training and apprenticeship programs.
  • In addition, research shows that poor and minority children are much less likely to have access to high-quality early education, which lays the foundation for future academic and labor market success. Greater investments in early interventions could help ensure that children’s future choices about human capital investment aren’t limited by their backgrounds.

Click Here for a Recent Presentation by Jeffrey Lacker on the History of the Federal Reserve

Analysis Roundup for September 7, 2012

Here’s this week’s collection of topics discussed in economic reports of note from financial institutions and government agencies.

NC State
Walden’s Leading Economic Indicator Index remains flat for August

Dr. Walden’s August Update of Leading Economic Indicators for North Carolina fell a slight 0.1% compared to July. This also happened to be the year-to-year rate of decline.

Initial jobless claims and manufacturing job hours and earnings for North Carolina workers all declined, offsetting gains seen in construction permits. The index also countered national leading indicators, which increased 0.7% for the month.

The state economy is essentially “treading water”, with no clear direction up or down.  The manufacturing sector has certainly slowed, but residential housing is showing some promising signs. Investors may be waiting for clearer signs from the upcoming election results.

Bureau of Labor Statistics
US Unemployment Rate drops to 8.1% because of some job growth, more labor pool decline

The seasonally-adjusted national unemployment rate for August was 8.1%, according to this morning’s report from the Labor Department’s Bureau of Labor Statistics. They report a 96,000 increase in total nonfarm employment for the month, moving the monthly average for 2012 to 139,000 (down from 153,000/month in 2011).

Including agricultural employment, total employment declined by 119,000 jobs in August to 142.1 million.

The total labor force contracted by 368,000 (seasonally-adjusted) reducing the participate rate to 63.5%. This is the lowest percentage since September 1981.

Private-sector employment grew overall nationally by 103,000 jobs, all of it due to service sector growth (+119,000). Goods-producing industries lost 16,000, with manufacturing (major component to North Carolina workforce activity) declining by 15,000.

Wells Fargo Economics Group’s analysis this morning of the report reaffirms their belief that overall national economic growth will remain below 2% for the rest of 2012.

An RBC economist also offered this assessment of how today’s employment report might influence action in the coming week from the Federal Reserve.

To help generate even greater job gains, the Fed is expected to keep policy highly accommodative. Fed Chairman Bernanke in hisJackson Hole speech last week signalled a preparedness to introduce additional ease if conditions warranted. Thus, next week’s Federal Open Market Committee (FOMC) could see the central bank extending the forward guidance (as to the maintenance of the current range for fed funds) to “sometime in 2015” from the reference to “late 2014” as indicated following the last FOMC in August. The disappointing August job gain will likely prompt discussion at the FOMC about the need for another round of asset purchases.

Richmond District – Federal Reserve
What do you know, and not know, about migration?

The Richmond Fed’s Region Focus is a quarterly publication highlighting their research on various economic and statistical topics. Their latest issue (published this week) includes an interesting article on residential migration, an activity that often dramatically-impacts local government operations and finances.

While the article is written from the premise of trying to figure out if common arguments for recent decline in migration (underwater mortgages, telecommuting, etc.) are relevant with respect to actual data, the work really is a more effective means of understanding some common characteristics associated with migration and the demographic variables that influence its growth or decline, especially at the local level.

The latest Region Focus also includes two more great articles of interest to local governments. Their cover story focuses on the factors contributing to the declining size of our national labor force. They also include a short feature on the concept of “Charter Cities” and the recent establishment of them in Honduras.

Click here for all of the content from the latest Region Focus.

 

Wells Fargo Economics Group
Chartbook: How does commercial real estate factor into all of this?

The commercial real estate market did not see as much valuation volatility as the housing market did during and after the economic crisis in 2008 caused in part by the proliferation of risky mortgage-backed securities. However, the commercial property market could still pose a threat, and would have possibly over the last couple years if not for the Federal Reserve’s two prior rounds of quantitative easing. The latest commercial property chart book from Wells Fargo offers some background on the subject, which may be of interest to cities with high levels of commercial property.

The huge mountain of commercial real estate loans maturing around the middle of the decade has been one of the motivating forces behind the Fed’s monetary policy strategy, which has driven long-term interest rates down to historic lows and removed
much of the near-term interest rate risk. Lower interest rates have also made it possible to refinance and restructure a larger proportion of maturing and potentially problematic loans maturing later in the decade. Moreover, the drop in Treasury yields has also pushed liquidity into other areas, including stocks and real estate. Furthermore, higher stock market valuations have allowed insurance companies and pension funds to allocate a larger portion of their investment portfolio to real estate. A healthier equity market has also made it easier for REITS to raise funds.

However, investors should remember that all magic comes with a price. Ben Bernanke outlined what he believed the costs of the Fed’s asset purchase program have been and by his account they have been manageable. The yield curve has narrowed and inflation premiums, as measured by TIPS, have remained relatively low. This analysis misses one key point, which is the large increase in the demand for liquidity arising from the uncertainty surrounding the Fed’s unprecedented policy moves. Investors’ increased preference for liquidity has manifested in a number of ways, including significantly higher prices for assets with more certain cash flows. No cash flow is more certain than Treasuries, which means the Fed’s measure of potential costs may be flawed.

The drive for liquidity is also affecting commercial real estate. Demand has soared for well-located properties with strong tenants in deep, liquid markets like New York and San Francisco. While that sounds perfectly logical, it means that the most significant gains in commercial real estate values have been limited to a relative handful of projects in a small number of markets.

In other words, while the commercial real estate sector may seem somewhat healthy, it could be thrown into turmoil very easily. Future Federal Reserve policy, especially in light of sluggish overall economic growth and employment activity, could have profound impact.

 

Fuel Update

Crude oil prices remained between $94-$98/bbl for the week after Labor Day, and average North Carolina prices for regular unleaded stayed at or close to the $3.80/gallon mark influenced prior to the holiday by summer driving, rising corn prices and storm activity in the Gulf of Mexico.

Corn prices remain a concern with respect to their impact on ethanol.They are below highs experienced in mid-to-late August, but still at an oppressive price in trading.

 

USDA
Continued crop export growth expected for 2013

US Secretary of Agriculture Tom Vilsack expressed optimism following release of future export estimates should remain above and near record levels set in the recent past.

This year, total farm exports are expected to reach $136.5 billion, close to a record level set last year. The record is expected to be set again in 2013, when exports are projected to reach $143.5 billion.

Export value growth has been 50% since 2009, influenced by increased demand from developing countries along with higher food prices.

Analysis Roundup for August 10, 2012

NCLGBA will post a collection of topics discussed in economic reports of note from financial institutions and government agencies on a regular (not necessarily weekly) basis.  Here is what we’ve found recently:

US Census Bureau
Annual Survey of Public Pensions: State-Administered Defined Benefit Data Summary Report: 2011 (Click Here for PDF Report) (Click Here for Website)

Based on self-reporting of states for their administered pension funds, North Carolina ranks 7th best in the country among states, with funds matching 94.4% of the State’s actuarial obligations for employees.  Only 15 states achieved obligation coverage of at least 85%.

Nationally, state-administered pension fund assets grew 14.6% in 2011, totaling $2.5 Trillion. Their national obligation coverage is approximately 75% (i.e., approximately $833 Billion Underfunded).

Given the variances in self-reporting due to differences in actuarial methods and assumptions for investments and costs of employee benefits, survey results are likely to change significantly over time as new GASB standards for reporting actuarials and obligations are implemented.

Wells Fargo Economics Group
Weekly Economic & Financial Commentary (Click Here for 8/10 Commentary)

Agency reports this week on trade balance, hiring plans and productivity point to emerging strength within the national economy. Volatility in Europe eased through most of the past week, while reports of dwindling demand for goods from China are creating concern in Asia and elsewhere. Growth for the remainder of the year in the US is projected to be less than 2% of GDP, impacted significantly by cutbacks in personal consumption.

USDA
Crop Production Report (Click Here for PDF)

The impact of severe drought is now being more accurately quantified with respect to anticipated crop yields. Corn and soybean production are expected to drop 12% and 13% respectively compared to last year. This will likely keep futures prices elevated and have an impact on the price of any products that utilize these common staples (fuel, clothing, food, etc.).

Domestic cotton production, on the other hand, is expected to grow 13%. As a result, prices for this commodity have returned to normal levels have severe spikes last year, providing revenue potential for North Carolina farmers.

Federal Reserve Bank of Richmond
Regional Profiles, 2011 (Click Here for Site)

The Richmond Fed updated these overviews for District, State, Metro and County-level economic performance this week.

Click Here for Richmond District Profile

Click Here for North Carolina Profile

The Richmond Fed also produces a monthly “Snapshot” report of economic indicators for the District and its member states (including North Carolina), which were last updated last Friday.

Highlights from these profiles and the Snapshot of North Carolina will be featured in the a future Analysis Roundup.

 

Tar Heel State “Weak” in latest Richmond Fed Snapshot

Tar Heel State “Weak” in latest Richmond Fed Snapshot

North Carolina is part of the Richmond District of the Federal Reserve Bank. Each month, Richmond Fed economists prepare an Economic Snapshot of the district and provide detailed information on each of its states, as well as summaries of MSA performance.

Click here to access the latest Richmond Fed Economic Snapshop, released on October 7, 2011

Summary of the District Overall

  • Performance is “sluggish”
  • Net month-to-month job losses of 7,500 in August, fueled mostly by government employment reductions; total jobs still 50,000 higher compared to last year
  • District unemployment rate is lower than National Average, due in large part to strong performance in Washington, DC MSA (i.e., federal government influence)
  • Business conditions “did not change notably”; new manufacturing orders “fell sharply”
  • New housing permits rose, but new housing construction starts fell
  • Revised personal income estimates (via BEA) show a more significant drop in personal income during the official recession period than thought before. Pre-recession incomes were at a higher per capital level, and the level of decline during the recession was greater as well (revised from about 2.5% to 4%)

Observations on North Carolina

  • Conditions “remained weak in recent months, with mixed conditions in labor and housing markets”
  • State did gain 16,500 jobs in August, with the net made entirely possible by the rehiring of public school teachers (+16,800), Year-to-year total employment is up more than 21,000, while government employment is down 14,700.
  • State unemployment rate is above 10% and is higher than the national and Richmond District rates
  • Housing construction activity is up from recent droughts, still below last year’s (depressed) levels
  • Revised personal income estimates from BEA show a similar trend to the Richmond District as a hole. Unfortunately, while District PCI has already rebounded to eclipse pre-Recession levels, North Carolina PCI is still approximately 2% below full recovery (not including inflation). Overall drop as a result of the recession to per capita income (from highest point to lowest point) was revised from 4.1% to 6.5% (and this does not take into account the impact of inflation.

Richmond Fed Survey shows mixed results

Richmond Fed Survey shows mixed results

By Kenneth Hunter

NOTE: The following represents the analysis-based opinion of the author and do not reflect those of his employer or any other affiliations.

On July 26th, the Federal Reserve Bank of Richmond published the results of its most recent surveys of manufacturing and service sector activity. Overall, manufacturing in the mid-Atlantic region, which includes North Carolina, slowed down during July, while indicators in the service sector showed improvement.

Manufacturing Survey Highlights (Click Here to Access Report)

  • Shipments and new orders both declined in July into negative territory
  • Inventories declined slightly, but are still strong
  • Employment activity declined, yet remained in positive territory
  • Wage growth continued
  • Expectations over the next six months indicate less optimism on new orders and activity associated with manufacturing growth
  • Raw material prices increased at a 3.4% annual rate in July, and expectations are for another 4.3% increase (annualized) over the next six months
  • Expectations show finished prices will increase about 3% (annualized) over the next six months; compared to expectations of a 2% increase last month
Survey Sector Survey Highlights (Click Here to Access Report)
  • Retail sales increased significantly and expectations of retail demand are strong
  • Hiring activity is flat, though wages are improving
  • Sales and expectations of activity reflect strong non-retail service sector performance
  • Price increases averaged less than 1% annualized growth in July, with expectations indicating prices will only increase about 1.34% (annualized) in the next six months
The Richmond Fed maintains several online information resources, including updates to its economic surveys and a directory of economic snapshots & indicators.