Think the Economy Is Bad? Wait Till the States Cut Back

I've been forecasting doom and recession since I opened this blog, but it appears I've been outdone; Gloomy, but realistic article from the NY Times:

"State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

“We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care,” said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. “But the reality is we have not pulled money off the streets yet.”

Quite the opposite, the states and municipalities have increased their spending in recent quarters, bolstering the nation’s meager economic growth. Over the past year, they have added $40 billion to their outlays, even allowing for scattered spending freezes and a few cutbacks in advance of July 1. Total employment has also risen. But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office."

Not only is unemployment going to get worse, Barry Ritholtz has taught us about Cutting Hours Aggressively instead of job losses. It would also be wise for interested readers to refer to Bracing for NFP Data and Reviewing NFP Data to learn about birth death model errors and the weak job growth since 2001 that masks how significant job losses now are. Continuing with the NY Times article:

"Sometime next year, the decline will reach an annual rate of $50 billion, Goldman Sachs estimates. “It is a big reason to expect a weak economy in 2009,” said Jan Hatzius, chief domestic economist at the firm.

The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall. (A robust economy has a growth rate of 3 percent to 4 percent, compared with the 0.9 percent or less of the last two quarters.) The $90 billion would certainly offset most of the $107 billion stimulus package now going out from the federal government to millions of Americans in the form of tax rebate checks. The hope is they will spend this windfall on consumption and in doing so sustain the economy. That might happen — for a while. But with the cutbacks in state and city outlays canceling out the consumption, the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package."

Mish has been warning about state and local governments for some time and just today he reports Muni Defaults Triple and also refer to Grim News For State Budgets.

News just keeps pouring in sealing the fate of the coming recession. A quick review:

• The Market is Overvalued with oil producers accounting for more than half of profits

• 2008 Q1 Corporate Profits reveal inventories are high and investment is low
  

• Commercial Real Estate Delinquencies Rise the beginning of another huge problem

• April Existing Home Sales show inventory is getting worse, not better

• Peak Oil is Scary!, enough said

• Looking Into the Eye of the Fed shows Fed policy has been and will continue to be ineffective in alleviating market tension and is only proving to exacerbate price inflation
  

• Stay Seated, Credit Crunch Seventh Inning Stretch Is Not Close and time has no yard stick in this arena

• Fiscal Stimulus - FAIL

• When Ambac "Suprises" with Huge Loss, Bond Insurers Revisited and second lien mortgages predict large losses in the future

• Sub prime is only the beginning in the The Great Real Estate Debate, losses will only grow from liar loans

• Banks are Trapped as demand for credit lines increase at a time when banks are strapped for capital. Small business lending, America's bread and butter growth is falling

Well that's not all that bad (overly sarcastic tone)