The Collapse of the U.S. Economy and Government Finances
Reuters - California will force state employees to take a third unpaid day off work per month starting in July if the legislature cannot close a mounting budget gap, Governor Arnold Schwarzenegger said on Friday.
State Controller John Chiang has said he will start paying state bills with IOUs on July 2, a day after the fiscal year starts, if the $24.3 billion budget gap is not closed with a new spending plan, since the state is running out of cash.
State employees who already are required to take two unpaid days off per month will get a third furlough day, Schwarzenegger said in a statement, repeating that he opposed any partial effort to fix the finances of the largest U.S. state.
McClatchy Newspapers - ...Across the country, the job shortage has created a buyers' market for traditional summer employers who can now pick from an abundance of laid-off and older workers whose experience, reliability and hunger make them more attractive as short-term seasonal hires.
However, the added competition has left the nation's teenagers facing the worst summer jobs outlook in more than 60 years as millions of 16- to 19-year-olds must compete with better-qualified workers in the most depressed jobs market in decades.
"Employers are thinking 'If I can hire an adult who's at least a proven worker, why would I hire a high school kid?' So the job market for teenagers is going to be very soft this summer," said Andrew Kehow, an economist at James Madison University in Harrisonburg, Va.
Last year, only 32.7 percent of U.S. teens ages 16 through 19 held summer jobs, the lowest level since the government started tracking the data in 1948, said Andrew Sum, the director of the Center for Labor Market Studies at Northeastern University.
With jobs still scarce, the teen employment rate probably will hit a new low of about 30 percent this summer, Sum said. That figure doesn't include some 400,000 to 500,000 low-income teens who are expected to get summer jobs thanks to $1.2 billion in stimulus funds for youth job programs. However, Sum said that these jobs — some of which will go to adults ages 20 to 24 — will boost teen summer-employment rates only by another 1 to 1.5 percent, which, if accurate, would still be a 61-year low.
"All the reports from the field are that (teens) are at the back of the hiring queues," Sum said. "We've talked to amusement parks, hotels, motels. They don't even want to take their applications, because they've got hundreds from people 30 to 55 years old."
Kings Dominion amusement park near Richmond, Va., typically hires about 2,500 people each summer. This year, it's received three times the usual number of applications, and the median age of job seekers has jumped to roughly 25 to 26 years old from 18 to 22 years old. "That's a significant jump within a year," said John Pagel, the park's marketing manager.
Because labor laws restrict the hours that teens can work, the older applicants often are preferred, Pagel said. "They're getting a job to pay the bills and put gas in the car and put food on the table, so they're showing up for work on time. They're looking for extra hours. And they have more experience and more interpersonal skills," Pagel said. "So it's definitely a benefit to us and our guests, because we feel that they're getting a better product with these folks."
In the Cape Cod resort town of Barnstable, Mass., college graduates and early retirees are getting a larger share of the 600 recreation department summer jobs that local teens typically covet. Again, the older applicants' greater experience has made a noticeable difference. "They're more outgoing and friendly," said Patti Machado, Barnstable's assistant recreation director in charge of programs. "You can tell they really want the job. They really want to be here."
After 40 teachers were laid off because of budget cuts, six were hired as beach gate attendants for the summer, Machado said. They'll share the same duties as their teen colleagues. "We like them to work side by side. It's a wonderful intergenerational teaching tool. It prepares the younger kids to be ready for the work force," Machado said. As with most summer jobs, Machado said, the pay is low, ranging from about $13 an hour down to the minimum wage, which jumps from $6.50 an hour to $7.25 on July 24.
The increase will be the last of three scheduled rate hikes since 2007, which will have raised the floor wage by 41 percent from $5.15 an hour...
McClatchy Newspapers - The tough economy and tight labor market have tarnished the luster of a bachelor's degree for young college graduates seeking employment...
Research has shown that college graduates who take jobs below their education level not only earn less, but also can take years to match the earnings of graduates who land career-track employment upon graduation.
These so called "mal-employed" workers also compound the unemployment problem by taking jobs that non-college graduates and even high school students are often qualified to hold.
The problem of "mal-employment" — working outside one's field of education, training and choice — has increased sharply for young college grads since the recession began and all signs suggest the trend will continue for the foreseeable future.
Employers expect to hire 22 percent fewer graduating seniors for entry-level positions this year than in 2008, according to a recent survey by the National Association of Colleges and Employers. And 17 percent of surveyed firms said they'd trim college hiring even more this fall...
Bloomberg - The number of Americans filing claims for unemployment benefits unexpectedly rose last week, a reminder that companies will keep cutting staff even as the economy stabilizes...
The contraction in first-quarter GDP, which was less than the 5.7 percent drop estimated last month, capped the worst six-month performance in half a century, the revised figures from Commerce showed. The world’s largest economy shrank at a 6.3 percent annual rate from October to December.
The biggest slump in business investment and inventories since records began in 1947 and the worst contraction in homebuilding since 1980 paced the decline last quarter.
The housing recession, now in its fourth year, is showing signs of abating. Builders broke ground on more homes than forecast in May, with single-family starts posting a third straight gain, Commerce figures showed earlier this month.
Business investment may also be on the mend. Orders for non-defense capital goods excluding aircraft, a proxy for future spending on new equipment, jumped in May by the most since 2005, Commerce reported yesterday.
Some companies are seeing signs of stabilization. Nucor Corp., the second-largest U.S. steelmaker, may boost plant operating rates to as much as 60 percent of capacity in the third quarter as customers use up inventories, Chief Executive Officer Dan DiMicco said.
“We have seen distributors begin to order at a level consistent with real demand,” DiMicco said in a Bloomberg television interview yesterday in New York. Still, “we will not be happy, and our competitors will not be happy, until we are north of the 80 percent levels again,” he said...
LA Times - As lawmakers rejected the core of a Democrat-backed budget plan intended to tame California's $24-billion deficit, a top finance official warned that the budget crisis could force him to begin issuing IOUs next week.
Controller John Chiang announced that he would have to start paying many of the state's bills with IOUs on July 2 if the partisan tug-of-war over the deficit isn't ended by then...
Republicans in both houses voted against the measure, even though it consisted of government cuts normally embraced by the GOP and did not include $2 billion in Democrat-endorsed tax hikes on the oil and tobacco industries. They were joined by two Democrats in the Senate and one in the Assembly. Democrats vowed to fight on, but resolution of the crisis is expected to require closed-door meetings between legislative leaders and Gov. Arnold Schwarzenegger.
Schwarzenegger has offered a plan that includes deep cuts to government services and the elimination of some health and welfare programs... Schwarzenegger has been warning Democrats for weeks that they should drop any hope of a tax hike and embrace his deep cuts... The governor advanced two new proposals Wednesday in lieu of an earlier plan to borrow $1.9 billion from cities and counties. He would instead save $1 billion by stopping the state's contribution to its workers' health benefits and $890 million more by slashing the state's share of funding for child welfare services and foster care.
Chiang, meanwhile, described the state's money troubles as unlike anything "since the Great Depression," with an anticipated $2.8-billion shortfall in July that could grow to $6.5 billion by September. "IOUs are almost an admission of guilt that we can't pay our bills," said Garin Casaleggio, Chiang's spokesman.
Without a budget solution, the controller expects next month to issue more than $3 billion in IOUs to some of the state's most vulnerable citizens. Those would include the aged, blind and disabled, college students who receive state grants, welfare recipients and patrons of regional centers for the developmentally disabled.
Los Angeles County officials said IOUs would delay nearly $645 million expected by the end of September -- a shortfall the county can't cover. "This is the beginning of the statewide meltdown," said Supervisor Zev Yaroslavsky. "People can't go to Ralphs and buy their groceries with an IOU. They can't go to the doctor or catch the bus with an IOU."
The controller had to delay payments in February as the state grappled with a smaller cash crisis. The new shortfall would be nearly five times larger. Chiang met with legislative leaders earlier this week to warn them of the consequences of further delays in adopting budget revisions. He said in a news release that resorting to IOUs "sends a signal" from Wall Street to Main Street that California is out of options. Lawmakers said they were aware of the stakes.
"If this drags out into August and September, we will be in a world of hurt," said Paul McIntosh, executive director of the California State Assn. of Counties.
"The clock is ticking and it's ticking fast," declared Assemblywoman Noreen Evans (D-Santa Rosa), chairwoman of the legislative budget panel that crafted the deficit-reduction package.
"Everybody's talking about jumping off the cliff," said Sen. Bob Dutton (R-Rancho Cucamonga). "We're already off the cliff."
Wall Street Journal - Welfare rolls, which were slow to rise and actually fell in many states early in the recession, now are climbing across the country...
Bloomberg - Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago...
CNBC - Marc Faber points out that prior to the establishment of the Federal Reserve the United States experienced stable prices and a deflationary boom...
Reuters - U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp's lending portfolio, in another sign that consumers remain under severe stress.
Delinquency rates -- an indicator of future credit losses -- fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.
"I find it hard to believe that it is really a trend. You need to see stabilization in unemployment before you see anything else," said Chris Brendler, an analyst at Stifel Nicolaus. "It is too early to see some kind of improvement."
Bank of America Corp -- the largest U.S. bank -- said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.
The bank is paying the price of expanding rapidly in recent years and of holding one of the highest concentrations of subprime borrowers among the top card issuers, analysts said.
In addition, American Express Co, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized.
The credit card company also holds a large exposure in California and Florida, two of the states most affected by the housing crisis and unemployment.
Citigroup -- the largest issuer of MasterCard branded credit cards -- reported credit card chargeoffs rose to 10.50 percent in May from 10.21 percent in April.
"Chargeoffs went up to record highs," said Walter Todd, a portfolio manager at Greenwood Capital Associates, referring to the entire U.S. credit industry.
Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4 percent and is expected to peak over 10 percent by the end of 2009.
If credit card losses across the industry surpass 10 percent this year, as analysts and bank executives expect, loan losses could top $70 billion.
"Until lenders show stabilization then trend-bucking improvement over a several-month period, we remain bearish on credit card lenders -- and the U.S. consumer," said John Williams, an analyst at Macquarie Research.
"We continue to believe that macro challenges and credit quality concerns will pressure U.S. card issuers over the next 12 months," he added.
However, some smaller credit card companies such as Capital One Financial Corp and Discover Financial Services reported defaults rates grew less than expected.
Capital One said its credit card default rate rose to 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to 8.91 percent from 8.26 percent.
JPMorgan Chase & Co -- the second-largest U.S. bank and the biggest issuer of Visa-branded credit cards -- said its default rate rose to 8.36 percent in May from 8.07 percent in April, but it still holds the best performance among the largest credit card companies...
The Associated Press - ...Senate Democratic Leader Darrell Steinberg said Tuesday that lawmakers were working on a budget plan that would not require local borrowing.
He said Democrats are working on their own budget plan that closely follows the proposed budget Schwarzenegger introduced earlier this month.
The governor proposed $16 billion in cuts to education, health care, in-home support services, prisons and other core areas of state government. In addition to borrowing from local governments, Schwarzenegger's budget plan calls for a number of other steps to close the deficit.
They include accelerating tax collections--such as those from self-employed people who pay their taxes quarterly--shifting money between various state funds, charging homeowners an average of $48 a year to boost funding for emergency services and allowing limited oil drilling off the coast of Santa Barbara.
Steinberg said Democrats would counter with $13 billion in cuts. He wants to take most of the rainy day fund Schwarzenegger has proposed--$4.5 billion--and apply it to college aid and other programs that otherwise would be eliminated. The governor said Tuesday his rainy day fund is necessary in case the state has a costly wildfire season.
The Democrats' budget plan would prevent the elimination of health insurance for 1 million low-income children, welfare and college fee assistance programs, as Schwarzenegger has proposed.
Steinberg said he will not propose new taxes but would push to close some corporate tax loopholes. "It would be a mistake, in my view, to lead with taxes," he said.
In February, the Legislature and the governor passed a two-year budget package that contained at least $2.5 billion in corporate tax breaks and credits, including ones for the film industry and a change in the tax formula that will save businesses hundreds of millions of dollars.
Quickly declining tax revenue sent that earlier budget into the red just weeks after it was signed.
Lawmakers face a deadline Monday to pass a budget bill for the fiscal year that begins July 1 and send it to the governor's desk, a deadline they are likely to miss.
Bloomberg - The dollar weakened beyond $1.43 against the euro for the first time in 2009 on bets record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.
The euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency. The pound rose to the highest level since October and the Canadian dollar traded near an eight-month high on speculation signs of a recovery in U.S. and U.K. housing will spur higher-yield demand.
“There’s been a lot of talk out of Russia about a new global currency, and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s largest currency trader. “These latest comments are just adding to the general dollar weakness we’ve seen recently...”
Sacramento Bee - Gov. Arnold Schwarzenegger on Friday disputed claims that illegal immigrants caused California's $24.3 billion deficit, while he praised their economic contributions and said he is "happy" they have access to services.
The Republican governor, answering wide-ranging questions from The Bee's editorial board and its readers, also vented about roadblocks to his authority posed by political foes and warned that government can't sustain the current level of "unbelievable benefits" for public-sector workers.
In response to dozens of questions from readers who say the state ought to wipe out the deficit by eliminating services for illegal immigrants, the governor said it is a "myth" that those immigrants are to blame.
He said the cost of services to illegal immigrants, which has been estimated at $4 billion to $5 billion annually, is a "small percentage" of the deficit California faces. "Yes, it is something that ought to be dealt with, but the fact of the matter is, I think it's an easy scapegoat for people to point the finger and say, 'Our budget is out of whack because of illegal immigrants.' "
"It's not," he added. "Our budget is out of whack because we have self-inflicted wounds that the Legislature and this state has never really sat down and had the will to go and make the necessary changes that have to be made."
The governor noted that the federal government requires California to provide emergency health care and education to illegal immigrants. Schwarzenegger in 2006 renounced his 1994 vote for Proposition 187, the initiative to block most services for illegal immigrants, which courts deemed unconstitutional.
"You know something, as far as I'm concerned, I'm happy that they can get the services," he said Friday. "Because I would like to have the services if I'm somewhere in another country … if I have an accident with a motorcycle and I go to an emergency room, I don't want someone to say, is he here legally?"
Schwarzenegger also highlighted the economic contributions of illegal immigrants.
"Everything we eat today is picked and created by undocumented immigrants, to a large extent," he said. "And every time we go to a restaurant and every time we go and move into a building, a lot of those buildings are built by undocumented immigrants' hands."
Schwarzenegger has two budget proposals that affect immigrants. He proposed asking the federal government to deport up to 8,000 illegal immigrants in state prisons to save $182 million. He also wants to save $120 million by eliminating benefits for newly legal low-income immigrants who do not yet qualify for federal assistance.
The governor has said he believes the United States should enforce tougher border controls, and he has advocated for immigration changes such as a guest worker program.
A Federation for American Immigration Reform study released in 2004 said illegal immigrants cost the state $9 billion annually, including $7.7 billion on education. But University of Southern California demographer Dowell Myers has disputed that number and said it is difficult to quantify the full economic impact of illegal immigrants.
Jim Gilchris, president of the Minuteman Project, accused the governor of "pandering to political correctness." He acknowledged that costs of some goods and services could increase without illegal immigrants, but he said that would be outweighed by tax savings. "The money for services comes from increased sales taxes, increased property taxes, increased DMV fees," he said.
Sen. Gil Cedillo, D-Los Angeles, praised the governor for saying immigrants are not to blame. "Our economy is very, very dependent on the immigrant work force," he said. "They're a very disciplined, very stable, very productive work force. Our economy would collapse without them."
Facing a $24.3 billion deficit after signing a $92 billion spending plan in February, the Republican governor accepted some blame for what has transpired since he was elected on the promise of fiscal rescue.
WSJ - ...With their maze of walkways and fast-food courts, malls have long been an iconic, if sometimes unsightly, presence in the American retail landscape. A few were made famous by their sheer size, others for the range of shopping and social diversions they provided.
But the long recession is helping to empty out the promenades. Some analysts estimate that the number of so-called "dead malls" -- centers debilitated by anemic sales and high vacancy rates -- will swell to more than 100 by the end of this year.
In the 12 months ended March 31, U.S. malls collectively posted a 6.5% decline in tenants' same-store sales, according to Green Street Advisors Inc., a real-estate research firm. The recent slump was led by an average 7.3% sales drop at Simon Property Group Inc., the operator with the largest number of mall locations.
The industry's woes are worsening. Thinning customer traffic, and subsequent hits to tenants' sales and profits, prompted Standard & Poor's Corp. last month to lower the credit ratings of the department-store sector. That knocked Macy's Inc. and J.C. Penney Co. into junk territory and pushed others deeper into junk. Sears Holdings Corp., a cornerstone tenant at many malls, is expected to close 23 stores this month and next.
General Growth Properties, which owns more than 200 U.S. malls, filed for bankruptcy protection April 16, due mainly to its failure to refinance billions of dollars of debt coming due. While the real-estate investment trust has said the filing will have no impact on its mall business, analysts say a prolonged bankruptcy proceeding could make retailers nervous about sticking around once their leases expire.
The severity of the recession is turning some malls that were once viewed as viable into potential casualties. "Any mall that's sitting on life support is probably going to get its plug pulled" as the economy stalls, says Michael Glimcher, chairman and CEO of Glimcher Realty Trust, which owns 23 U.S. properties, including Eastland Mall in Charlotte...
Four months ago, executives at J.C. Penney headquarters in Plano, Texas, called a "triage" meeting to discuss a recent study of the financial condition and health of the 550 malls housing Penney stores. The study's conclusion: 15 of its stores are located in malls at risk of failure.
"We started to see things heading south," says Penney CEO Myron "Mike" Ullman III. It was important, he notes, to "get ahead of this" mall problem by reviewing Penney's new store strategy to determine whether it might relocate existing mall stores. Over the past 18 months, Penney's weekly sales have been trending better at stand-alone stores that aren't attached to traditional malls...
Saks CEO Stephen Sadove is talking with mall owners about closing a few of the retailer's 53 Saks Fifth Avenue stores. "You have to ask yourself: Do you believe the prospects for a given store or mall are going to be positive? Can you make money over the long term?" he says.
For towns and cities that are home to dying malls, the fallout can be devastating. Malls hire hundreds of workers and are significant contributors to the local tax base. In suburbs and small towns, malls often are the only major public spaces and the safest venues for teenagers to shop, hang out and seek part-time work.
Commonly, "the mall will be a meeting place, or, in some cases, like a city center," says Carl Steidtmann, chief economist at Deloitte LLP. The deterioration of a mall can spawn broader problems, he notes. "It can become a crime magnet."
The gradual fade-out of marginal malls has prompted a thriving Web culture dedicated to sharing information about dead or dying properties. Sites such as Flickr.com, Deadmalls.com and Labelscar.com are drawing traffic from mall employees, shoppers and other mall mourners who swap stories, photos and predictions about the status of centers on their way out...
During past economic cycles, dead malls were frequently redeveloped into mixed-use space that includes apartments, offices or parks. Repurposing mall space today will be more difficult. Lenders and investors are moving away from commercial real estate as property values decline and delinquencies rise on debt used to acquire or develop properties. Retail real estate has been hit especially hard, as declining retail sales and store closures hammer mall landlords...
Associated Press (Townshend, Vt.) – For weeks, Greg Noel roamed the spine of the Green Mountains with a handheld GPS unit, walking dirt roads and chatting with people as he helped create a map of every housing unit in the United States.
Work was good: The sun was out, the snow was gone and the blackflies hadn't begun to hatch. But now that work is over and Noel, 60, and more than 60,000 other Americans hired in April to help with the 2010 census are out of work once more.
It's a familiar predicament in today's economy, in which some 2 million people searching for full-time work have had to settle for less, and unemployment is much higher than the official rate when all the Americans who gave up looking for jobs are counted, too.
Because of the surge of hiring for the census, April unemployment only rose to 8.9 percent — a much slower increase than had been feared. Figures out today show unemployment now stands at 9.4 percent.
But consider these numbers:
- The 9.4 percent May unemployment rate is based on 14.5 million Americans out of work. But that number doesn't include discouraged workers, people who gave up looking for work after four weeks. Add those 792,000 people, and the unemployment rate is 9.8 percent.
- The official rate also doesn't include "marginally attached workers," or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.6 percent.
- The official rate also doesn't include "involuntary part-time workers," or the 2.2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level. Once those 9.1 million workers are added to the unemployment mix, the rate would be 16.4 percent.
The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland. Many economists now predict unemployment won't peak until 2010. And since employers generally increase the hours of existing workers before hiring new ones, workers could be looking for full-time jobs for some time...
For tens of thousands of people like Noel, a part-time job isn't their dream, but it beats the alternative... When the Census Bureau offered him a part-time job mapping houses nearly an hour from his Windham home, Noel jumped at it. The money, $10 to $25 an hour plus 55 cents per mile, was a big factor. But Noel said he also wanted to be part of a larger community effort, and the 2010 census is nothing if not a large community effort.
When the first numbers are released in December 2010, the Census Bureau will have spent more than $11 billion and hired about 1.2 million temporary employees... But last week, he was unemployed again, a victim of the Census Bureau's efficiency. Since the government was able to draw from a well-qualified but mostly out-of-work pool of applicants, the work done by more than 140,000 field employees went far more quickly than expected.
"We've always done well, but this time around was amazing," said Stephen L. Buckner, a Census Bureau spokesman. "It's a tough economic time..."
Noel, though, is uncertain about the future. It's possible he'll be called back to work later in the fall for the final push. The Census Bureau expects to send roughly 1.2 million workers out to count people who don't return their questionnaires; the hiring will push down unemployment numbers for several months during that period.
For now, Noel says, he and his wife are living without frills. He looks for another job and she runs Green Mountain Chef, a catering business near Stratton Mountain. Demand has slowed dramatically since the economic meltdown began, as it has for most tourism-dependent businesses in Vermont.
Noel hopes to avoid being a statistic for too long. Unemployment insurance will give him about $425 a week — enough to pay the mortgage and maybe the health insurance bill. Right now, the couple pays about $280 a month, but that will climb to $850 in September, when his government-subsidized COBRA policy expires.
"I hope something comes up," he says. "But there's not an awful lot out there."
AP - As Wal-Mart Stores Inc. opens about 150 new or expanded stores in the U.S. in 2009, the company expects to hire about 22,000 people for new positions. Those positions include plenty of cashiers and stock clerks, but the world's largest retailer will also be adding store managers, pharmacists and personnel workers...
Wal-Mart, still the target of criticism from union-backed groups for its pay and benefits, has improved its health insurance coverage and opened it to full- and part-time employees. The company says 94 percent of its employees have health coverage, either through Wal-Mart or another family member...
Wal-Mart has more than 2.1 million employees in the U.S. and abroad. The company had sales last fiscal year of $401 billion.