The Monday Morning Quarterback: A quick analysis of important economic data released over the past week
By Elliott D. Pollack
Fiscal Cliff Watch
As I write the year’s last MMQ, Congress and the president still fiddle while Rome burns. In an extraordinary display of their lack of leadership, no deal has been reached as of early 12/31/12. No agreements about phasing in any tax increases or spending cuts or even kicking the can down the road have taken place. It is hard to believe that our president is so stuck on tax increases that would not even produce sufficient tax revenue to meaningfully deal with the deficit without sufficient reductions in the rate of increase in entitlements. It is equally hard to believe that the Republican Congress refuses tax increases on those who earn more than $1 million in return for meaningful cuts, assuming such a deal would be accepted by the president.
It is time to look at the effects of the fiscal cliff. Here are some thoughts and facts:
- Whether going over the cliff would lead to recession and how deep any such recession might be depends on how long the policies are in place. Without a meaningful agreement immediately, 2013 will be at best a weak year. If no agreement is reached until around March, there is a great likelihood that the country would fall back into a modest recession. This would be a self-inflicted wound since a recession at this point in time is unnecessary.
- The prospect of permanent tax increases and reductions in the rate of increase in government spending could have a significant psychological impact on consumer spending and business spending and hiring. But, it could take several months before the actual tax increases would become anything but a psychological factor.
- Estimates are that the cliff would cost an estimated $670 billion for all of 2013. Again, the tax hit for most people would be slight at first. The temporary 2% social security tax cut has been in place for 2 years. The expiration of social security and income tax cuts would be spread throughout 2013. Social security taxes are likely to go up by an estimated $1,000 per household. This means less consumer disposable income at a time when the economy is already sluggish. According to the nonpartisan Tax Policy Center, taxpayers in the $40,000- $65,000 income range will see take home pay shrink by an average of $1,500 for all of 2013.
- About 1/3 of the tax increases will hit business rather than consumers. Others, such as higher taxes on investment income and estates as well as the expiration of middle class tax credits, wouldn’t come due until tax time 2014.
- Higher taxes would hit the poor harder. This is partly because many tax cuts and credits aimed at lower income households would end.
- The alternative minimum tax (AMT), originally designed to prevent the rich from avoiding taxes, was never indexed for inflation. If it isn’t fixed, roughly 33 million taxpayers, including married couples with incomes as low as $45,000 could face AMT.
- Spending cuts would also take weeks before implemented.
- Extended unemployment benefits would end for 2 million people. Federal programs now pay for about 32 weeks of extra benefits, on average, on top of the 26 weeks most states provide. Weekly unemployment benefits average about $320 nationwide.
- In the aggregate, there will really be no spending cuts. There will be reductions in the rate of increase. Most people understand cuts to mean reductions from what they are currently spending. The government doesn’t think this way. If a federal agency has a $1,000 budget this year and has a proposed budget of $1,500 next year, but, only ends up with $1,200, they don’t look at that as a 20% increase. They look at it as a 20% cut. There has been no cut but it will be advertised as such.
- If the cliff is not resolved over the next few months, the total effect on Arizona could be as high as 50,000 jobs.
This is not a pretty picture. AND, it is completely avoidable.
REVIEW OF THE LATEST DATA ON THE LOCAL AND NATIONAL ECONOMY.
Arizona Snapshot
The news remains positive. Employment continues to grow modestly, weekly unemployment insurance claims continue to decline and the unemployment rate continues to decline. Retail sales were reported to be strong for the month. Population flows, though, remain very anemic. Housing continues to improve over last year. All of this is mostly a continuation of what we have become used to.
U.S. Snapshot
Most of the data reported over the past week have been good. Real GDP was up in the third quarter at a healthy rate. Gains were experienced in personal income, savings, corporate profits, leading indicators and housing. Total new orders for manufacturers were also slightly up. The downside was that consumer sentiment declined as did manufacturers’ new orders for non-defense goods.
Arizona
Arizona employment continued to grow in November. Year-to-date, total nonfarm employment now stands 2.2% above a year ago in the state. Greater Phoenix was up 2.7% for the first 11 months of the year while Tucson was up a modest 0.7%. For the state as a whole, all sectors except for Information and Other Services were up. The largest percentage gains were in Construction, Professional & Business Services, Educational & Health Services and Leisure & Hospitality. For Greater Phoenix, only Other Services, a small employment category, was down. In Greater Tucson,
several sectors including Manufacturing, Wholesale Trade, Transportation & Utilities, Information, Educational & Health Services and Other Services were all down.
The unemployment rate continues to decline. As of November, the rate stood at 7.8% for the state, 6.9% in Greater Phoenix and 6.6% in Greater Tucson. Total claims for weekly unemployment insurance continues to decline and now stands 39.4% below year earlier levels.
The Arizona Department of Administration estimates that 2012 population growth will be a mediocre 0.9% or 60,391 people for the state as a whole. In the pre-recession year of 2006, the net increase was 191,933 people. The estimate for Greater Phoenix was 1.1% or 46,296 people. For Greater Tucson, it was only 0.4% or 4,299 people. Tucson’s result implies continued population outflows as the figure is less than births over deaths.
Arizona retail sales for October (reported as November collections) were up 9.1% over October 2011. Total sales were up 4.0%. This is good news and hopefully continued through the holiday season.
R.L. Brown reports that there were 772 permits in Greater Phoenix during November. This is a 69.2% gain over 2011. There have been 10,947 permits issued year-to-date through November. This was a 73.7% increase for the first 11 months of the year over the same period last year. In Greater Tucson, permits were up 43.4% from a year ago.
National
Third quarter real GDP increased by 3.1%. This is positive after very weak gains in the first two quarters of the year. A more modest gain is expected in the 4th quarter. Leading indicators in November were 95.8 in November. This is down slightly from 96.0 in October. The index is a very modest 1.9% above a year ago and warrants continued watching. Initial claims for unemployment insurance is now 8.9% below year earlier levels but has shown only modest progress over the past month.
National personal income stood 4.1% above year earlier levels in November and grew by 0.6% in November over October. Disposable personal income was up by 4.0% from a year ago and 0.6% from October. The national savings rate was 3.6% compared to 3.2% in November, 2011. This, combined with continued progress in debt service ratios, indicates that consumers are not finished restructuring their balance sheets. Significant progress has been made. For example, the ratio of household debt service payments to disposable personal income now stands at 10.6%, down from 11.1% a year ago.
Third quarter corporate profits now stand 7.5% above year earlier levels and were up 2.4% from the second quarter. U.S. manufacturers’ new orders were up a very modest 0.8% from a year ago and were up 0.7% from October in November. Non-defense orders (excluding aircraft) were down from a year ago.
Both major measures of consumer confidence were down in December. The University of Michigan survey was 72.9, down from 82.7 in November. The Conference Board index was 65.1 in December, down from 71.5 in November.
The news on housing remains positive. Existing home sales were up 14.5% in November when compared to year earlier levels and were up 5.9% from October. Median sales prices were $180,000, up 10.1% from a year ago. The S&P/Case-Shiller home price index was up 4.3% from a year ago for the 20-city composite index. Thus, home prices by both measures are increasing. This ultimately will lead to fewer homeowners being underwater and will cause a positive wealth effect as the trend continues. Single-family building permits now stand 25.3% above a year ago.
