August 24, 2015
This week we look at the economic performance of the Washington D.C. area economy; discuss a blogger touching on a familiar theme; and highlight continued deterioration of employment picture in the oil patch.
Another Round of Sequesters Would be a Drag on Virginia and Maryland
In a Commentary this spring, we highlighted the drag on the economies of Virginia and Maryland caused by Federal spending cuts due to sequestration. An article in the Washington Post, speculates that the impact of future cuts could be more dramatic: a budget compromise this year to reduce sequester cuts seems unlikely, and after multiple rounds of sequester cuts, agencies like the Defense Department have fewer opportunities to reduce the impact of spending cuts.
A look at the DIVER Geo Scores for the Washington D.C. area counties demonstrates the impact of sequester cuts on the local economy. In 2012, before the cuts went into place, 13 area counties had Geo Scores above 9.5; now only 5 are above that level. The worst performer has been Charles County MD whose Geo Score is now just above 6.
We Couldn’t Have Said it Better Ourselves
Blogger Josh Brown titled one of his recent posts: “Your View of the Economy is Colored by Where You Live”.
Echoing a theme that we have discussed, numerous times, Brown wrote:
If the entire country was experiencing the same kind of economy that’s happening in New York City, Boston, DC, San Francisco or Miami, the Fed would already be at a 3% interest rate with a bias toward hiking further.
When someone from the rust belt is talking to someone from the California coast or the Upper East Side of Manhattan about the state of the economy, they are frequently talking past each other. Stock and bond market gains probably have a lot to do with that. There is a much greater wealth effect occurring in the areas of the country where the technology, biotechnology and banking booms are raining dollars down upon their participants.
Citing a report by Bank of America Merrill Lynch, Brown pointed out that States referred to by Merrill as the “Fantastic Four” (Florida, New York, Texas and California), “accounted for nearly two-thirds of the nation’s gain in building permits over the last 12 months.” Note that the Fantastic Four represent 33% of the nation’s population and 35% of the nation’s personal income.
All of Bank of America’s Fantastic Four have shown strong growth in housing prices over the last year except New York. New York’s building permits data has been skewed lately because of a rush by developers to take advantage of a tax abatement that expired on June 15. This inflated New York’s permits numbers before the expiration and will likely reduce them in the upcoming months. The decline in New York’s permits was large enough to suppress the Conference Board’s index of leading indicators released last week.
Another of the Fantastic Four is Showing Signs of Weakness
New York is not the only member of this Fantastic Four that could be experiencing declining building activity (as measured by permits).
Texas’s employment situation has been deteriorating since last fall. Prior to that time, continuing unemployment claims were improving in Texas and other energy dependent States roughly in line with national averages. Since that time, Texas has been lagging and since April claims in Texas have been increasing.
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A look at Texas sales tax revenues also points to April as a potential turning point for Texas’s economy. While Texas’s sale tax revenues continue to show year over year gains, the rate of increase has slowed dramatically.
An article in the Texas Tribune that reviewed the Comptroller’s track record on predicting oil prices. The most recent budget projected average oil prices between $65 and $75 through 2017. The same budget projected an 8.9% increase in sales tax revenues.
Have a great week,
Michael Craft, CFA