State Tax Revenues Likely Decline Record 6th Straight Quarter; Investors not Compensated for Risk on Illinois, California Bonds

The managing director for Pew Center says U.S. States Face ‘Staggered’ Recovery

U.S. states face a “staggered” recovery even as the national economy shows signs of stabilizing, Susan Urahn, a managing director at the Pew Center on the States, told investors on a conference call.

They may also have to contend with three to four more years of budget woes, said Laura LaRosa, director of fixed income at Glenmede Investment & Wealth Management in Philadelphia, on the call yesterday.

“When the recovery comes, it’s going to be staggered and slow,” Urahn said. “The lag happens because it takes time for the states’ unemployment rates to come down to pre-recession levels.”

States’ personal income-tax revenue fell 7.1 percent in January and February from the same period in 2009, and there is a risk the slide will extend into this quarter, the Nelson A. Rockefeller Institute of Government said in a report yesterday.

Tax revenue likely declined for a record sixth straight quarter in the first three months of the year, the institute’s deputy director, Robert Ward, said in congressional testimony on April 15.

Lawmakers have struggled with three consecutive years of revenue shortage, Urahn said. They closed $117 billion in cumulative budget deficits last year and are estimated by Pew to face $146 billion of gaps this year, she said.

“Given the long-term ramifications of what’s going on, we could be looking at malaise through these state budgets for three to four years,” said LaRosa, who helps manage $4.5 billion in municipal bonds.

Investors in municipal bonds should purchase higher-rated debt and diversify across the states, LaRosa said. Buyers should focus on pre-refunded municipal bonds, a tax-exempt security payable from U.S. Treasuries in escrow that are left in the market after refinancing deals, and callable debt.

Lower-rated states, such as California and Illinois, are not yielding enough to merit the risk of investment, LaRosa said.

Pew thinks it will take 3-4 years before the unemployment rate drops to pre-recession levels. I think it will not happen in a decade.

Civilian Unemployment Rate



Since 1970, very few years have had an unemployment rate under 5%. We may not see that again for decades (with an s). Certainly another internet dotcom boom is out of the question and equally certain this was a once in a multi-generational housing, commercial real estate, and credit boom.

There is no driver for jobs and there is likely to be no driver for jobs for a long time coming. in the 1980's when there was a driver for jobs, it still took nearly a decade for unemployment rate to drop from the recession peak to 5%.

Now people think it will happen in 3-4 years?!

Barring another war, disease, or asteroid that wipes out a huge chunk of the world's population. I just do not think it will happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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