Category Archives: Economy
ULCT Economist Doug Macdonald reviews the numbers for the state of the local, national, and global economies in this month’s economic review and forecast.
The Tax Commission released its distributions on Monday. This is the largest distribution of the year, representing not only December sales, but also sales for fourth calendar quarter accounts and small annual accounts. The total distribution of the 1% local tax of $48.22 million was up 4.2% compared to a year earlier. This was a better showing than earlier reports a week ago of a possible 2.5% decline. Distributions are up 5.7% for the cities’ fiscal year. This is slightly lower than the 6.6% forecast we made for CY2013 last November.
At $4.89 million, Salt Lake City, saw its distribution increase 8.2% for December sales. This may have been partially due to the new City Creek development. Sandy’s 13.3% gain may have been forged by the addition of the new Scheels store. Similarly, Farmington’s 7.8% gain probably reflected new restaurants at Station Park. Other cities where growth beat 6% were: Draper (6.8%), South Jordan (7.1%), Bountiful (8.1%) and St. George (6.6%).
Given the hits to consumer confidence in December as the federal government came dealt with its “fiscal cliff”, it is probably no wonder that cities with large stakes in auto sales like Orem and Murray saw low growth in December.
Statewide the 1% local sales tax was up 9.6% for December at $35.38 million. Most major cities fared well except for Sandy and Murray. Salt Lake City’s distribution was up 9.2% at $3.66 million, very close to the statewide growth. Draper, South Jordan, Provo, Bountiful, and Layton had distribution growth ranging from 10.7% to 14.3%.
Boosting taxable sales growth is the resurgence in residential construction, where new permit values were up 39% statewide and 121% in Salt Lake County for the month of October. Construction growth tends to drive taxable sales from two to four quarters out into the future, based on our econometric models.
ULCT economist Doug Macdonald shares some of the more interesting possibilities for the year to come.
1. The U.S. Housing Industry is set for a come back. Housing supply is at a 4 year low.[i] Prices climbed 2% in 2012.[ii] Foreclosure rates are down. Employment continues to slowly increase. Mortgage rates are at their lowest rate in decades.
IHS Global Insight predicts a 27% increase in U.S. housing starts in 2013. Utah’s Revenue
Assumptions Committee sees a 30% increase in Utah new dwelling permits and a commensurate 30% gain in residential permit values.[iii] Expect at least a 15% growth rate.
2. Augmented “reality software” will use camera-equipped mobile devices so apps can take personal measurements, so clothes bought on line will fit, superimpose realistic representations of furniture in a consumer’s living room, and reviews and discounts when a mobile device is pointed at a store shelf.[iv]
3. The Chinese economy will pick up steam in 2013 to 8.6%.[v] This will increase or, at least, steady commodity prices worldwide. Leaders are being encouraged to focus on improving their own consumer spending instead of propelling exports. Looser monetary policy and robust regional-government spending will boost their GDP. Increased demand for commodities will be good for Pacific nation and Utah exports.
4. Smartphone apps will be increasingly recommended by doctors to monitor patients’ drug use, diets, and exercise regimens. Guidelines from the Federal Drug Administration (FDA) will be closely watched.[vi]
5. Michael Porter and Jan Rivkin from Harvard’s Business School’s U.S. Competitive Project propose the following eight policy measures to “transform” our economy: 1) Ease immigration of highly skilled foreign college graduates, 2) Simplify the corporate tax code by cutting loopholes and lowering the rate so that less profits stay overseas, 3) Tax overseas profits only where they are earned, 4) Address trade distortions to open consumer markets in emerging economies and protect our intellectual-property rights, 5) Simplify regulation, by regulating more intelligently and employ more rigorous cost-benefit analysis, 6) Enact a multi-year program to improve infrastructure. “America’s roads, ports, telecoms and energy infrastructure fail to match the world’s best. 7) Agree on a framework for developing oil and gas from shale. 8) Create a sustainable federal budget. We need to get on a structurally sustainable growth path for both revenues and expenditures.[vii]
6. FDA will also be asked to approve the digital pill, including digestible microchips. Powered by stomach acid the tiny chips relay data to nearby wireless devices, recording information on when they were taken.[viii]
7. The “fiscal cliff” will be bridged, and after a bumpy start the economy will continue to recover.[ix] “The process will be fraught with false starts, recriminations and at least one downgrade of America’s debt rating. The final product will be a contraption of trade-offs and murky accounting. Business will not get the cathartic resolution of political uncertainty it longs for, but at least the perpetual threat of fiscal Armageddon will recede.”[x] Let’s hope it is not that bumpy.
[i] The New York Times, December 20, 2012, http://www.nytimes.com/pages/business/economy/index.html?src=busfn
[ii] The Economist, “The World in 2013”, p. 43.
[iii] Utah Governor’s Office of Planning and Budget, http://www.governor.utah.gov/dea/Forecasts/econind.pdf
[iv] The Economist, p. 122.
[v] Robin Bew, The Economist, p. 22 and IHS Global Insight, “Top 10 Economic Predictions for 2013, http://www.ihs.com/info/ecc/a/economic-predictions-2013.aspx
[vi] The Economist, p. 120.
[viii] The Economist, p. 122.
[ix] IHS Global Insight, http://www.ihs.com/info/ecc/a/economic-predictions-2013.aspx
[x] Greg Ip, The Economist, p. 43.
Almost all of the indicators are improving, except for unemployment claims, which stopped falling in June. Some surprises were:
1) Consumer sentiment jumped up into the 80s, good news for car and truck dealers.
2) The average wage for the first half of 2012 shifted up from 2% to 3.5%, indicating some improvements in the labor sector for employees (consumers).
3) Residential construction values are up almost 14% this year, this adds about 1.4% to sales tax all by itself.
4) Sales tax receipts for the first quarter of fiscal year 2013 are up 7.2%, slightly below our forecast last December of 7.8% for FY2013.
Now, if we can just not go too far over the cliff.
It could be quite the exaggeration to say that the coming fiscal cliff will devastate the economy, but it will certainly shift the U.S. economy from 1st gear (the current growth rate is only 2% in real, inflation-adjusted dollars) into reverse. The nonpartisan Congressional Budget Office and IHS Global Insight both estimate that if we go off the cliff the economy will drop 4% from a positive 2% growth rate to a -2% contraction.  The subsequent changes in business investment, and other secondary effects resulting from downturns in federal spending, would undoubtedly cut into Utah taxable sales (expect a decline of at least 4%).
Before we draw conclusions though, we must look at the crux of the problem at hand—the yawning gap between federal revenues (red) and expenditures (blue) in Chart 1 below. One coming event that will lead to a decrease in expenditures will be ending the war in Afghanistan. That would be good from several standpoints: 1) lower defense spending, and 2) fewer deaths and injuries that need to be covered by the Veteran’s Administration budget. However, fixing Afghanistan permanently would take another 10 to 50 years, and some of the consequences of careening off the fiscal cliff are immediate.
While something must be done in the near-term to bring these lines closer together, it is encouraging that over the past few periods it appears that expenditures have leveled out, while revenues are in a straight up trajectory (Chart 1). This may be due to the fact that the slow recovery is starting to gain traction.
While most economists agree that cutting our economic growth by 4% would not be a good thing at this time, compounding the situation is the fact that many federal grants and programs could be indiscriminately cut by about 8 percent.
In mid-October Juliette Tennert, Chief Economist from the Utah Governor’s Office of Planning and Budget, identified the 8% cuts from the hundreds of major federal grants. Below (chart 2) is a rearranged version of her more detailed table identifying the largest cuts and those that have the greatest impact Utah cities and towns (specific cuts to grants for cities will vary upon whether they utilized CBDG or EPA grants). The bottom line is that sequestration will cause federal spending in Utah to drop $100 million. Assuming a multiplier of 2.0 on a base of $100 billion economy, that means a loss of just 0.2% to the Utah economy. More worrisome for the state’s economy is the potential for major reductions at northern Utah’s Hill Air Force Base which could very well be double the federal grant impact amounts.
While this reduction in federal spending (sequestration) will take place relatively gradually, the more immediate result of a failure to compromise in Washington will be across the board federal tax increases if the 2001 Tax Relief Reconciliation Act (aka the Bush tax cuts) expires on December 31, 2012. As soon as January 1, 2013 or February 1, 2013, when the Treasury Department changes its withholding tables, the federal government could experience $535 annual increases in revenue (Chart 3).
Results from the Urban-Brookings Tax Policy Micro-simulation Model indicate that something less than $300 billion of these possible tax increases will hit the lower- and middle-classes (116 million families, bottom 73%). The balance—$235 billion in tax increases—will impact 42 million families with incomes more than $75,000. While the so-called “average” tax increase for a family will go up $300 per month, the median tax increase will be more like $150 to $200 per month.
Since powerful influences in congress represent each of these constituencies, it seems unlikely that congress will deadlock and go over the fiscal cliff. Yet, a year ago, a congressional “super committee’s” inability to hammer out a deal is what led to sequestration in the first place, and in August 2011, congress was unable to agree on expanding the debt ceiling on a timely basis, leading to a lowering of our debt ratings.
We can only hope that congress and the president can compromise before the New Year lest these huge impacts blindside an already weak recovery.
DOUG MACDONALD – October 1% local sales tax distributions beat expectations by increasing 12.7% over the same period last year. The total local sales tax distributions of $40.56 million by the Tax Commission in October, representing sales for August in Utah were almost $5 million higher than the $36 million distributed last year at the same time
Double-digit sales were common in Salt Lake County cities. Salt Lake’s distribution of $4.18 million was up 13.5% and West Valley’s distribution was up 12.6%. Murray’s distribution was up 16.5%, suggesting auto and light truck sales did well in August. Higher auto sales were evident in September across the nation (see charts from the New York Times), suggesting next months distribution will also do well. September 2012 auto sales grew almost 15% in the U.S., the highest in four years.
Tourist-heavy cities ilk St. George (+15.6%) and Park City (+19.7%) also fared well in August.
For the first two months of the cities’ fiscal year 2013, local tax distributions were up 8.7%, slightly ahead of our December forecast of 7.9%.
Economic Policy Analyst
September’s distribution the 1% local sales tax came out earlier this week, and July turned out a slower growth month than the prior two months. Statewide the 1% took in $32.7 million for July sales, putting September distributions, up 4.2%.
Reports out today indicated that August sales nationwide rose 0.5% above July, pretty good, but much of the increase was due to increases of gasoline prices.
Also, nationally, both consumer confidence indices rose significantly suggesting increased spending over the next two months. See chart below from Moody’s Economy.com.
This was the first fiscal month of fiscal year 2013. For fiscal year 2012 growth was a respectable 8.0%. (We predicted 7.9% last December and 6.8% way back in December 2010).
Slower growth for one month does not necessarily mark a trend since we have tended to have one month in three be near zero over the past year. So if our slowest month is 4% that would be good. This is most likely due to Tax Commission cut offs and processing.
Economic Policy Analyst