US Consumers Tap Out: Personal Savings Rate Plunges To 10 Year Low While Americans Splurge

This report was originally published by Tyler Durden at Zero Hedge

The latest confirmation that the US consumer is now effectively tapped out came moments ago when the Dept of Commerce reported that in November, Personal Income rose by a lower than expected 0.3% (exp. 0.4%), while US consumers continued to splurge at an accelerated rate, with personal spending rising 0.6%, above the 0.5% expected, as Americans decided to splurge on holiday products and services.

A way of visualizing the historical change in income, spending – and savings – is the next chart below:

However, and speaking of savings, therein lay the rub, because as Americans splurged in November – and much of 2017 – the personal savings rate continued to decline, and in the latest month it tumbled from 3.2% to 2.9%, the lowest since November 2007, which as a reminder is one month before the recession started.

This incidentally explains the surge in credit card usages we noted last night. As a reminder, the 13-week annualized credit card balances in the U.S. have gone completely vertical in the last few months of 2017, a troubling sign and yet another confirmation that US household savings are almost gone, forcing Americans to resort to savings.

What is somewhat strange is that this collapse in savings took place even as US wage growth actually surprised to the upside, with wage growth rising at 4.5% Y/Y (private rose 4.8%, government 3.0%), more than core consumer spending (4.3%) for the first time since December 2015.

And yet, despite this favorable wage background, Americans were not only unable to save but saw collective savings decline by $41 billion in November to $426 billion.

At this rate the Fed will have to step in and bailout the plunge in bitcoin or else risk a complete collapse in holiday spending.

2 Charts That Might Define The Fed"s Jerome Powell Era

Authored by Daniel Nevins via FFWiley.com,

In September, we proposed a theory of the Fed and suggested that the FOMC will soon worry mostly about financial imbalances without much concern for recession risks. We reached that conclusion by simply weighing the reputational pitfalls faced by the economists on the committee, but now we’ll add more meat to our argument, using financial flows data released last week.

We’ve created two charts, beginning with a look at cumulative, inflation-adjusted asset gains during the last seven business cycles:

According to the way that the Fed defines its policy approach, our first chart stamps a giant “Mission Accomplished” on the unconventional policies of recent years. Recall that policy makers explained their actions with reference to the portfolio balance channel, meaning they were deliberately enticing investors to buy riskier assets than they would otherwise hold. Policy makers hoped to push asset prices higher, and they seem to have succeeded, notwithstanding the usual debates about how much of the price gains should be attributed to central bankers. (See one of our contributions here and a couple of other papers here and here.) But whatever the impetus for assets to rise, it’s obvious that they responded. In fact, judging by the data shown in the chart, policy makers could have checked the higher-asset-prices box long ago, and with a King Size Sharpie.

Consider the measure on the vertical axis, percent of personal income. From the risky asset trough in Q1 2009 through Q3 2017, households accumulated asset gains, in real terms, equivalent to 139% of personal income. (Nominal gains were much greater, but we used the CPI to deduct the amount of purchasing power that households lost on their asset holdings. Also, we defined asset holdings as the four biggest categories that the Fed computes gains for—equities, mutual funds, real estate, and pensions.)

In other words, households are enjoying an investment windfall that amounts to nearly sixteen months of personal income, which is larger than the windfalls accrued in any other business cycle since the Fed began tracking asset gains in 1947. Not only that but the gap continues to widen—as of this writing, we’re likely approaching 145% of personal income and well clear of the previous peak of 128% from the 1991–2001 expansion.

Getting back to policy priorities, the chart seems to tell us that asset prices no longer need boosting. The Fed’s pooh-bahs proved they could boss the investment markets, and they’ve almost certainly moved on to new endeavors.

Bull, bear, or donkey?

But record asset gains are just one of the reasons the Fed’s priorities are likely to be changing. To describe another reason, we’ll first show that policy makers may wield a King Size Sharpie but that it’s not a Permanent Marker:

As you can see, our second chart looks like the first, except that we pinned the tails on the asset price donkeys.

We tacked on the down halves of each cycle, showing that the portfolio balance channel has a reverse mode.

So what should we make of the result that asset price cycles, adjusted for inflation, have ended with busts that reverse a large portion and often the entirety of the prior booms?

According to our beliefs about how investment markets work, the up and down phases of asset cycles are closely connected. Also, monetary stimulus influences both phases at the same time. It helped fuel the giant gains of recent expansions, but it also helped create the imbalances that led to giant losses. And after the accelerated advances of 2016-17, it’s fair to wonder if today’s imbalances are approaching the extremes of 2000 and 2007. Even some FOMC members are gently acknowledging that risk.

But we think the committee members are even more concerned than you would know by just reading their meeting minutes. We expect financial imbalances to become their biggest worry, bigger than the risk of recession, which should matter less and less to the central bankers’ reputations as the business cycle expansion continues to lengthen. In fact, a garden variety recession would barely affect their legacies at all by mid-2019, when the expansion, if still intact, would become the longest ever. By that time, the FOMC’s greatest reputational threat would be another financial market debacle, which would suggest that manipulating asset prices maybe wasn’t such a good idea, after all. In other words, the committee’s reputational calculus will change significantly during Jerome Powell’s first few years as chairperson.

All that said, Powell probably wants a recession-free economy in, say, his first year or two in the position. Moreover, he’ll certainly stress continuity with his predecessors’ policies. But once he becomes comfortable in the job, the Fed’s priorities will look nothing like they did under Janet Yellen and Ben Bernanke. Instead of fueling asset gains, Powell’s biggest challenge will be containing imbalances connected to prior gains. He and his peers will aim to avoid pinning another oversized tail on the donkey—or at least to manage the fallout from said tail—and that’s a challenge that could very well define his regime.

Could Trump"s Tax Bill Trigger A Mass Exodus From Manhattan? Goldman Seems To Think So...

New York"s billionaire hedge fund managers have blazed the trail south in recent years with the likes of David Tepper, Paul Tudor Jones and Eddie Lampert all ditching the Empire State for Florida...a state which brings not only pristine beaches and year-round golf weather but also the added benefit of a 0% personal income tax rate. 

Meanwhile, as Bloomberg once again points out this morning, the decision to ditch the over-taxed states of New York, New Jersey and Connecticut will be even easier if Trump"s tax plan succeeds in eliminating the state and local income tax deduction...a deduction which could cost a New Yorker making $1,000,000 a year a cool $21,000 in extra taxes.

The problem for the Connecticut hedge-fund set -- and, more broadly, for a lot of the Wall Street crowd -- is that Republican proposals in both the House and Senate would drive up taxes for many high-earners in the New York City area. By eliminating the deduction for most state and local taxes, an individual making a yearly salary of $1,000,000 -- a figure not uncommon in the financial industry -- would owe the Internal Revenue Service an additional $21,000, according to a preliminary analysis by accounting firm Marcum LLP.

 

“It would almost be irresponsible if you weren’t thinking about moving,” he said.

 

Not surprisingly, Miami is exploiting the potential tax change to woo Manhattan"s most successful "millionaire, billionaire, private jet owners" (to cite Obama) as Miami"s luxury real estate agents say they"re having a hard time keeping up with the sudden surge in demand.

The Miami Downtown Development Authority is throwing a party next month during the annual Art Basel show, and Nitin Motwani, a real estate developer, has invited wealthy Northeasterners who’ve expressed interest in moving to the area. Because the proposed tax changes are practically begging them to relocate, Motwani expects a crowd.

 

State and local taxes, also called SALT, “can and should be a major catalyst,” said Motwani, a development authority board member. Tax reform will “certainly be something we’re highlighting” at the party, in the Perez Art Museum. “Inertia is a tough thing, but you add on another tax bill and maybe that pushes you over the edge.”

 

Jeff Miller, director of luxury sales for Brown Harris Stevens in the Miami area, said he’s fielded a half-dozen calls from clients motivated by higher taxes to step up their search for South Florida property.

 

Two clients who work at New York City financial firms have scheduled tours of a newly completed 7,000-square-foot (650-square-meter) home on the Venetian Islands, Miller said. The $22.5 million asking price buys views of Biscayne Bay and a spot to moor a yacht.

 

“Usually it’s a snowstorm that would push them to pick up the phone,” Miller said. “The tax plan has the same effect.”

So what does this mean for the overall impact on domestic migration patterns?  Well, Goldman figures that the changes currently contemplated on the Senate bill could ultimately result in 2-4% of Manhattan"s top earners relocating to lower taxing jurisdictions...

The increased effective tax differential between high- and low-tax areas may increase movement from the former to the latter. Exhibit 4 shows the increase in effective tax rate differentials for a few relevant pairs of states. For instance, we estimate that the TCJA would increase the gap between the combined S&L income tax rates in New York City vs. Connecticut by about 2pp to 5-6%. States with zero income tax such as Texas and Washington would experience the largest gains in relative tax competitiveness. The simple median increase in the tax gap across the six illustrative pairs is a bit above 1.5pp.

 

For our initial analysis of the potential migration effects, we review the academic literature on taxes and mobility. The reviewed studies shown in Exhibit 5 focus on high-income earners, because the literature tends to ?nd only small tax effects among lower- and middle-income earners. The studies are mixed, but the median study suggests a 2% decline in the number of top-income earners after 3-10 years per percentage point increase in the tax rate gap. Combining this median 2% mobility estimate with the 1-2 percentage point increase in the tax gap between New York City and New Jersey/Connecticut suggests that the TCJA would eventually lower the number of top-income earners in New York City by 2-4%, for example.

...and if that"s not at least somewhat concerning to legislators in Albany, Trenton and Sacramento...it should be.

Tepper, who heads Appaloosa Management, relocated to Miami Beach in 2015 from Short Hills, New Jersey. Jones kept Tudor Investment Corp. in Greenwich, Connecticut, when he moved to Palm Beach, Florida, last year. In 2012, Lampert, best known as Sears Holdings Corp.’s chief executive officer, took his hedge fund to Miami from the same tony Connecticut town.

 

State budgets feel the impact. When Tepper moved his firm to Florida, forecasters warned it could jeopardize New Jersey’s budget because the firm generated more than $100 million in state income tax. In 2013, state income tax generated by residents of seven of the wealthiest towns in Fairfield County amounted to $1.8 billion, according to the Hartford Courant, or about 9 percent of the Connecticut state budget.

 

“There is a certain amount of burying one’s head in the sand and naivete in Hartford,” Connecticut’s capital, McGuire said. “I don’t think they believe it can happen.”

Oh well, it"s not as if New Jersey is teetering on the edge of solvency courtesy of a massively underfunded public pension ponzi...

Monaco Has To Build Into Mediterranean Sea To House Super-Rich

The principality of Monaco is about the same size as New York’s Central Park and slightly bigger than London’s Regent’s Park. Besides hosting the Monaco Grand Prix it is home to thousands of multi-millionaires, including tennis player Novak Djokovic and F1 driver Lewis Hamilton, who enjoy the fact that Monaco does not levy income tax or capital gains tax. As the Financial Times notes.

Monaco’s enduring popularity for tax exiles also rests on its year-round climate, unrivalled security and its wealthy, multicultural society...

 

It has an opera house, a philharmonic orchestra and concerts throughout the year. It has good transport links: Nice International Airport is just six minutes away by helicopter.

The problem for Monaco is that more and more millionaires want to live there – even though property is the second most expensive in the world after Hong Kong - and there simply isn’t the space. Furthermore, the average Monegasque home only changes hands once every 37 years.

In another bizarre sign of the financial bubble, is will build 120 new luxury homes by reclaiming 6 hectares (15 acres) from the Mediterranean Sea. According to The Guardian.

Construction has begun on a $2bn (£1.5bn) scheme to reclaim land from the sea around Monaco so that more luxury apartments can be built for the thousands of extra millionaires expected to move to the principality in the next 10 years. Nearly 35 in every 100 Monaco residents are millionaires and more of the global super-rich want to join them. Around 2,700 more are expected to call Monaco home by 2026, according to research by estate agent Knight Frank, taking the total to 16,100 out of a total population of under 38,000.

But the sovereign city-state – which is only slightly bigger than Regent’s Park in London – has run out of space for those seeking the “fiscal advantages” that the tax haven offers. To attract the world’s wealthy, Prince Albert II, the reigning monarch, has approved the “offshore urban extension project”, which will add six hectares (15 acres) to Monaco’s 202 hectares. This will allow the creation of 120 luxury homes selling for more than $100,000 per sq metre – more expensive than One Hyde Park in London and 15 Central Park West in Manhattan.

The new Portier Cove ecological neighbourhood, near Casino de Monte-Carlo, is regarded as vital for the continued growth of the principality; according to state statistics body L’Institut monégasque de la statistique et des études économiques (IMSEE), not one new-build apartment went up for sale last year.

Monaco has been down this route before, when a larger reclamation was shelved due to the 2008 financial crisis and environmental concerns. While another financial crisis could still affect the current project, the environmental opposition has been placated this time.

Previous plans for a larger reclamation scheme were dropped after the financial crisis and environmental concerns. But Bouygues, the construction company behind the project, has promised there will be no detrimental effect on the environment. Important species on the seabed have been moved to a new reserve and the company said 3D-printed artificial coral reefs on the 18 trapezoid reinforced concrete caissons used to create the boundary of the new land would provide an artificial reef for wildlife.

True to form, a “global super prime” estate agent in the principality is expecting prices to continue rising into a new “stratosphere”. The Guardian continues.

Edward de Mallet Morgan, global super prime residential partner at Knight Frank, said huge demand and a severe lack of supply had sent Monaco prices “through the roof”. A cool $1m in Monaco will buy 17 sq m of prime residential property, less than a third of the space it would buy in Paris and just over half of the 30m of space it would command in prime central London.

Only 70 of the Portier Cove apartments – some of which are designed by The Shard architect Renzo Piano – will go on sale (the others being retained by the developer). Mallet Morgan said that by the time the development was finished “who knows what stratosphere Monaco’s prices will have reached”. “Such is the demand for new waterfront homes that price will be little deterrent to buyers – and their tax advisers - who are thinking ahead with wealth preservation in mind for future generations of their families,” he said.

Having crunched the numbers, Knight Frank estimates that 1,220 of Monaco’s 38,000 residents were worth more than $30 million in 2016, a 10% increase on the previous year. Using this definition of ultra-high net worth (UHNW), Monaco has 320 UHNW individuals per 10,000 citizens compared with 2 in every 10,000 citizens in the US. Speaking to the Guardian, Mallet Morgan discussed the tax issue…and how much “ready” cash you’d need to apply for residency.

“In their private lives and business lives, they naturally want to structure themselves so that they are only paying as much tax as they need to. You can’t avoid that Monaco is a tax haven, you can dress it up as a low-tax environment, but it is a tax haven with a lot of tax breaks for families, businesses and importantly inheritance tax.

“Inheritance tax is important for a lot of families who have developed wealth over generations, because here there is no tax at all on passing wealth over to children.” The inheritance tax break applies to assets held in Monaco or overseas.

There is no personal income tax in Monaco. In the UK, income above £150,000 is taxed at 45%. Companies incorporated in Monaco are exempt from taxes if most of their business is based in the principality. In order to apply for Monaco residency, applicants must open a Monaco bank account and deposit at least €500,000 (£440,000).

Security is another attraction, as is the "ease of commute".

Nick Edmiston, the founder and chairman of superyacht builder Edmiston & Co, said a high sense of personal security was a big draw for the super-rich. “You can walk around wearing expensive jewellery and feel safe,” said Edmiston, who has lived in Monaco since 1989. “Many wealthy people are used to always being surrounded by bodyguards but that’s not necessary in Monaco.”

However, Mallet Morgan warned rich prospective buyers that they were not likely to get much space for their money. “You can pay the best part of €500,000-€750,000 for a parking space,” he said, and a €6m two-bed apartment is going to be “quite pokey compared to London”. But a lot of people commute to London or Paris. “It is easy to go anywhere from Nice airport, which is a short helicopter ride away,” he said. “You can easily go and have a meeting with your trustees in Geneva, and then go to the Opera in Vienna that evening.”

We wonder what the reaction of the "established" Monaco residents will be to the "nouveau refugees" if, this time, the project can be finished before the next crisis.

 

A Quarter Trillion Dollars In US Savings Was Just "Wiped Away"

As part of its historical revision to GDP, the BEA also had to adjust personal income and spending, with the full results released in today"s July report. What it revealed was striking: over the revised period, disposable personal income for US household was slashed cumulatively by over $120 billion to just under $14.4 trillion, while spending was revised higher by $105 billion, to just above $13.8 trillion. There were two immediate consequences of this result.

First, as the following table shows, while government pay has remained roughly flat over the past 3 years, growing in the mid-2% to mid 3% range, wages and salaries for private workers have been steadily declining as the blue line below shows, and after hitting a 4% Y/Y growth in February, wage growth has slumped to just 2.5% in June, the lowest since January 2014 when excluding the one-time sharp swoon observed at the end of 2016.

But a more troubling aspect of today"s revision is what the drop in income and burst in spending means for the average household"s bank account: following the latest annual revision, what until last month was a 5.5% personal saving rate was revised sharply lower as a result of the ongoing downward historical adjustment to personal income and upward adjustment to spending, to only 3.8%.

In dollar terms, this revision means that a quarter trillion dollars, or $226.3 billion, in savings was just "wiped away" from US households - if only in some computer deep in the bowels of the BEA buildings -  who as a result have that much less purchasing power, and following the revision the total personal saving in the US as calculated by the BEA is now down to only $546 billion, down from $791 billion before the revision.

This means that either households will have to incur this much incremental debt to continue on the previous spending "trendline", or a quarter trillion in potential growth from the future economy (recall 70% of US GDP is the result of consumer spending), has just been chopped off.

Source

Illinois Taxoholics Wear Down Rauner: Massive Tax Hikes In The Works

Authored by Mike Shedlock via MishTalk.com,

Total capitulation by Governor Bruce Rauner is in the works. The taxoholics wore him down.

In the emergency session, Rauner has agreed to hike the personal income tax rate to 4.95% from the current 3.75%. The corporate income tax rate will rise to 7% from the current 5.25% rate.

For what? Nothing. Reforms are non-existent.

Another Deadline Come and Gone

Illinois failed to approve a budget today and thus heads into its third fiscal year without one.

A vote has been scheduled for Sunday.

I do not expect your opinion will matter, but in the slim chance I am wrong, Please Email Your Representative voicing displeasure of the tax hike.

The preceding link will find your rep based on your address.

Rule of Nothing

A zombified Rauner has capitulated in every way but the final signing.

Tax hikes have been agreed to with no reforms in return.

The Rule of Nothing is clearly in play.

Rule of Nothing

In any given political situation, the best outcome one can reasonably expect generally happens when politicians do nothing.

Implied corollary#1: When politicians attempt to fix any problem, they are highly likely to make matters worse.

Corollary #2: Politicians almost never do nothing. It’s why we have a messed up healthcare system, education system, public pension system, etc..

Taxoholics Win Again

Chicago schools will not get fixed. The hikes will not shore up pension plans.

Within one month of tax hikes, public unions will ask for more money. And people will leave the state. So will corporations.

Rauner pledged 44 reforms. He is 0-44 on his pledges.

The property tax freeze currently under debate has so many holes it is as useful as a bucket with no bottom.

Trading tax hikes for nothing is a horrible deal. Nonetheless, the taxohalics won again.

More business flight and human capital flight is the guaranteed outcome. Doing nothing at all would have been a far better outcome.

It's Not Just Illinois: Connecticut Faces Friday Day Of Reckoning

With Illinois facing a Friday night deadline by which it has to come up with its first fiscal budget in three years or face a downgrade to junk resulting in what a policymaker called a "death spiral", another mini drama is taking place in Connecticut, which is also facing big budget problems as wealthy residents, hedge funds and major corporations flee the state"s high taxes and its fiscal future gets murkier by the day.

Just today, we reported that Aetna, the insurance giant founded in Hartford where it has been for the past 164 years, announced it would move its headquarters to New York City despite intensive lobbying efforts by Connecticut officials. The move, which followed a departure by GE of its Fairfield HQ of 40 years, is a blow to the company’s hometown, which is facing severe financial problems. Hartford"s problems are a representation of the troubles facing the entire state: while Illinois" story is familiar, Connecticut has the distinction of the third-worst ratings in the country, only behind Illinois and New Jersey after S&P, Moody"s and Fitch all downgraded the state last month in what officials described as a "call to action" for state leaders.

“We’ve been downgraded by everybody in the last six months, and in the last year two or three times,” Senate Republican President Len Fasano said cited by Fox news. “If we don’t pass a budget, I think we will see a further downward spiral.”

And, just like Illinois (and 14 other states), Connecticut faces a Friday day of reckoning: the state has yet to pass a fiscal 2018 budget by the June 30 deadline.

“We must immediately take the necessary steps to mitigate the current year deficit and then balance the ... budget with recurring measures to reduce spending and structural solutions to our long-term problems,” a spokesperson for the Connecticut Office of Policy and Management said in response to Moody’s downgrade.

It"s not just the rating, however.

Connecticut’s deficit has reached $5 billion, and according to an analysis by Pew, the state only has $240 million in its "rainy day fund"; just five states have a smaller cushion. Much of the financial troubles are tied to the state’s pension system, which two-term Democratic Gov. Daniel Malloy’s office is seeking to address with a new plan to save the state $24 billion in “coming years.” One solution offered by Malloy is to require new state employees to be covered under a new hybrid pension system. The agreement, which Malloy’s office made with the state union, is tentative and awaiting legislative approval.

“Connecticut can and will adopt a responsible, balanced budget for the coming biennium—the question is how best to handle our finances until that happens,” Malloy said. He offered a short-term “mini-budget” to allow “more time to negotiate a full budget, without making our current problems any worse and without further jeopardizing the state’s bond rating.”

But, like in Illinois, Republican Fasano told Fox News the governor’s budget is not seeing support on “either side of the aisle.” “His proposal decimates municipalities, social services and has no support, so we did our own budget,” Fasano said. “He has really shown the propensity of turning this state in a very negative direction.”

What makes things even more complicated is the even split in the State Senate:

Fasano serves as the State Senate’s Republican president in conjunction with the Democratic president. This is a special situation, as for the first time in decades, the State Senate is split evenly in the historically blue state.

“We are tied, 18-18, and that’s making it more difficult because the Democrats can no longer plow across the finish line a progressive agenda, fiscally speaking—so they can’t figure out what to do,” Fasano said. “Senate Republicans are the only ones with a line-by-line, detailed and balanced budget.”

Fasano claimed the budget put forth by Senate Republicans changes taxes and includes structural provisions that would help keep businesses in the state, although if Aetna is any indication, it"s not nearly enough.

“We are doing things to try to attract people to stay here as best we can, given the fact that we have a $5 billion deficit,” Fasano said. “If we do not pass a budget by June 30, we have sent a message, I think to everyone, that we have no idea what we’re doing, and that is not going to give [comfort] to people to buy or stay here.”

Those who have already left the state, mostly affluent hedge fund managers who have migrated to Florida, already got the message.

And while Aetna"s depature was a hit to the state, the state capital Hartford has been struggling with a financial quagmire of its own, even as we reported in early May, meeting last month to discuss the option of filing bankruptcy. “We know that now more than ever, we are in competition across all industries –not just with Massachusetts or New York state, but more specifically with Boston and New York City,” Malloy said last month.

Another problem is the fundamental deterioration in the state"s economy.

Connecticut’s unemployment rate rose to 4.9 percent in April, up from 4.5 percent in January. “Keeping those employees in Connecticut is far more important than where Aetna plants its corporate flag,” Malloy said. Malloy is looking to boost jobs with the approval this week to begin construction on the state’s third casino.

The Democratic governor remains optimistic, however, and his office told Fox News that companies like Xerox, Sikorsky, and Vineyard Vines, among others, have committed to the state over the last two years. But Fasano said he spoke with GE executives before they left and they cited state financial issues.

“They said Connecticut continues to tax at rates that make it unaffordable for businesses, people to stay here and didn’t see what Connecticut looked like seven or eight years from now,” he said. “... That’s the same analysis I’ve heard from a number of businesses as to why they’re leaving. The progressive agenda this governor put forth is now coming home to roost.”

* * *

So will CT pass a state budget? There was some 11th hour hope on Thursday, when AP reported that Connecticut House Democrats said they"ve come up with a two-year budget proposal that could be ready for a vote on July 18. The last minute $40 billion two-year plan would increase the state"s 6.35% sales tax to 6.99% to help maintain funding to cities and towns. It would also provide municipalities with additional ways to generate local revenue and restore the local property tax credit against the personal income tax.

The proposal was being offered up Thursday as lawmakers grappled over whether to pass Democratic Gov. Dannel P. Malloy"s three-month, stop-gap budget before the fiscal year ends on Friday. Malloy says it will be less draconian than having him run state government using his limited executive authority.

And, of course, there"s disagreement, about whether to vote on the mini budget. If the disagreement is not overcome by Friday, Connecticut could soon be in the same financial straits as Illinois.

Incidentally, the muni bond market - with its usual glacial delay - finally noticed that not all is well, and today yields on AAA-rated 10-year muni bonds rose 7 basis points to close at 1.95% , the biggest one day absolute increase since Dec. 15. There was a similar move for 5-year muni bonds which rose 5bps on the day to end at 1.34% now up 10 bps week-to-date, also the largest day-over-day move since December 15.

Illinois' Economic Growth Is Worse Than During The Great Depression

Authored by Michael Lucci via IllinoisPolicy.org,

Illinois’ total state economic activity has increased by only 4 percent since 2007, which is lower than the U.S.’ 10 percent GDP growth during the worst decade of the Great Depression.

There are fewer Illinoisans working today than there were 10 years ago. Millions of Illinoisans are feeling the brunt of the state’s economic pain and financial meltdown in the form of joblessness and hopelessness. Too many families are dealing with unemployment and underemployment, and too few are able to find their dream jobs in the Land of Lincoln. That’s because Illinois has the Great Depression economy of the Midwest.

In fact, Illinois’ economic growth is worse than during the worst years of America’s Great Depression. Illinois’ gross state product, which measures total economic activity, has increased by barely more than 4 percent over the past decade. In comparison, the U.S. gross domestic product during America’s Great Depression increased by nearly 10 percent during the worst decade of the Great Depression, from 1930-1939.

America’s Great Depression started off worse from 1930-1932, but the recovery came on stronger. By contrast, Illinois did not have as steep of a fall during the first years of the Great Recession, but Illinois’ recovery from the Great Recession has been abysmal.

Illinois suffers from depressed economic growth, and state policymakers have repeatedly chosen the path that prevents prosperity. Illinois lawmakers hiked state personal income taxes by 67 percent in 2011. While those income tax rate increases partially sunsetted in 2015, local property and sales taxes have also risen. In the face of economic calamity, Illinois has tried to tax its way back to prosperity.

Taxes keep going up because the state has failed to address its deepest problems –gargantuan pension and retiree health care debts and uncontrolled spending on government payrolls. Illinois’ debts are spiraling out of control, its bonds are headed for junk status, and politicians have responded by repeatedly raising taxes.

The debts need to be brought under control because good job opportunities, economic growth and income-earning power are fleeing the state. That’s why Illinois has the worst personal income growth in the entire country – tied only with Nevada – over the Great Recession era. Personal income has grown by only 0.8 percent per year in Illinois from the end of 2007 through 2016.

Illinois’ governing class has failed to make the state sustainable for future generations. Illinoisans are fleeing the state, and millennials – made up of college students and young working adults – are getting out fastest.

Illinois now loses, on net, one person every 4.6 minutes to other states. As a result, Illinois has been shrinking since July 2013, according to the U.S. Census Bureau. Illinois’ population is down by 78,000 over the last three years due to massive out-migration. In contrast, all states around Illinois are growing.

Illinois’ problems have been caused by political failure to embrace reforms that would bolster economic growth and bring debts under control. The state’s political leadership has racked up hundreds of billions of dollars in debts that likely can never be repaid, yet the General Assembly refuses to change course. Taxes have consistently gone up, debts are spiraling out of control, and yet the Illinois legislature hasn’t changed anything of substance.

More taxation is not the answer, and Illinoisans have had enough. Sixty-four percent of Illinoisans oppose another income tax increase as part of a budget deal, according to a May poll commissioned by the Illinois Policy Institute. More taxes would simply sink into a black hole of debt that politicians have shown no interest in fixing.

Illinois needs to choose a course of reform or accept the inevitability of state and municipal bankruptcy. The state is bleeding red ink, and will continue to do so until lawmakers bring debts under control. The state’s economy is struggling under the current burden of debt, taxation and regulation; more of the same will inevitably fail.

It’s time to change course, or Illinoisans will continue to change their residence to other states. Until the state adopts meaningful reform, Great Depression economic growth will be the norm in the Land of Lincoln.

Connecticut Credit Risk Soars To Record High As Tax Receipts Tumble

Connecticut’s general-obligation bonds are riskier than ever as plummeting income-tax collections and a $2.3 billion budget deficit moved all three credit rating companies to downgrade its debt.

As Bloomberg details, tax receipts for the current fiscal year ending in June will be about $451 million short of estimates from January, prompting Governor Dannel Malloy to empty the state’s already small budget stabilization fund. To help close the gap, public employees agreed to accept a 3-year wage freeze and to contribute more for their pension and health-care benefits under a tentative deal that would save more than $1.5 billion over the next two years.

As we previously detailed, The state of Connecticut has been hit hard by the double whammy of a deteriorating local economy, coupled with a plunge in hedge fund profits - as well as hedge fund managers permanently relocating to Florida - leading to a collapse in tax revenues. According to the the latest Connecticut budget released last week, the state is reeling from the consequences of sliding tax revenue from the super-rich, i.e. the state"s hedge fund managers. The latest figures showed that tax revenue from the state’s top 100 highest-paying taxpayers declined 45% from 2015 to 2016. The drop adds up to a $200 million revenue loss for Connecticut.

In a dramatic, if of questionable credibility, soundbite Department of Revenue Services Commissioner Kevin Sullivan says these wealthy people are “dramatically less wealthy than they were before.” He was referring to annual income, not actual asset holdings, because judging by the all time high in the S&P, the local financial elite have never had a higher net worth.

“When you look at the top 75, top 50 ... this is a group of wealthy people who are dramatically less wealthy than they were before,” said Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services. “These folks, for a number of reasons, are either not realizing as much income or don’t have as much income.”

Just don"t expect tears from the general public. Sullivan also noted how several international hedge funds have recently failed, resulting in “significant retrenchment” from investors. That drop in tolerance for risk brings smaller margins and ultimately less personal income for the state to tax, he added. It"s fascinating how the Fed"s central planning, superficially meant to restore "confidence" in a rigged, manipulated market is having such proound and adverse 2nd and 3rd order effects on state budgets.

Sullivan also acknowledged part of revenue decline can also be attributed to “a handful” of wealthy individuals who moved to more tax-friendly states — an issue frequently raised by legislative Republicans, who argue Connecticut’s tax policies encourage the state’s super-rich to move out.

None of this should be a surprise... it"s no wonder more people than ever are looking to leave the increasing tax burden of this troubled state?

Trump's Tax Reform Plan: A Cheatsheet Of What Is Known, Leaked, And Is Still Unknown

On Wednesday, the President will reveal a "broad-stroke" vision on his tax reform plan. Coutest of Citi and various media sources, here is a detailed cheatsheet of what is known, what remains unknown and what has been leaked.

All the latest: Tax reform, shutdown, protectionism & Fed buzz

• To keep the Administration tax reform priorities live amid Congressional budget shutdown aversion negotiations, President Trump has signaled the release of a preview of the pending June OMB budget, this Wednesday. That means tax reform details.


• There is no set time for President Trump’s announcement. Spicer did not commit to timing during the daily White House briefing but there’s been a chorus of warnings:
  
  • Spicer said: “And so we will continue to engage in that discussion and outside stakeholders to try to get a plan really put together and details laid out in the next several weeks once we make the announcement tomorrow.”
  
  
  • Mulvaney says budget with detailed scoring still is projected for release in June, but the White House will focus upon “principles, ideas, and [tax] rates” for Wednesday.
  
  
  • Senate Majority Lead Mitch McConnell has provided similar sentiments, saying that reform rumors “not worth anything at this point.” He favors treating all businesses “similarly” when it comes to tax reform and says it’s clear Congress will need to use a reconciliation vehicle for tax reform.
  
  
  • “We will be disappointed on Wednesday when we see that this is the big announcement,” one lobbyist told Politico. “They should not be building this up for a big nothing burger.”
  
  


• Remember, US Treasury Secretary Mnuchin is slated to discuss tax reform initiatives as a part of The Hill’s Newsmaker Series on Wednesday from 8:00 EDT to 9:35 EDT. The Hill previews this event saying that he will be interviewed, “about the administration’s priorities and timeline for tax reform.” See the announcement here, which also notes: “After the interview with the Treasury secretary, tax and budget experts will participate in a panel discussion about the prospects for tax reform.


• On Tuesday, the market saw the following leak. Note that most of this is no different from the vision Trump has communicated before:
  
  • WSJ says Trump’s plan intends to extend the 15% corporate tax rate to pass-through businesses, which while a standing part of Trump’s vision, an important detail.
  
  
  • WSJ also claims White House officials also are considering proposing a territorial tax system, the people said. In such a system, US corporations would pay little or no tax on future foreign earnings.” Read more here.
  
  
  • Politico has published an article detailing what is currently expected of the Trump tax plans. It claims:
    
    • Marquee policy ideas are expected to include infrastructure spending and a childcare tax credit. Infrastructure looks to be linked to corporate repatriation.
    
    
    • Not likely to include the border adjustment tax (BAT), which House Speaker Paul Ryan hoped would generate USD1.2bn in revenues to fund other aspects of reform. NYT followed in late NY backing this with reports, which also suggest that BAT–lite is out the picture as well.
    
    
    • Expected to tout a corporate rate of 15% (as noted other places); and not expected to include details on ways to offset new spending, or deep tax cuts.”
    
    
  
  
  • Senate Majority Lead Mitch McConnell has lifted spirts by saying he’s hopeful well get a spending agreement in the next few days; doesn’t want to talk about a short-term CR yet.
  
  


• Late on Tuesday, Bloomberg reported that repatriation of corporate foreign earnings will be taxed at 10% in President Trump’s tax plan, according to a White House official.


• CNBC reports that Trump"s tax reform plan may include a placeholder for border tax, citing an official.


• Trump’s tax proposal doesn’t call for repealing the corporate alternative minimum tax, as Trump’s campaign plan stated


• There have been no major leaks regarding how defense will fit in the big picture but note these are important aspects of the conversation. Citi Economics expects the plan to up spending in these areas at the expense of nondefense.


• There have also been no major leaks (outside of the childcare tax credit) regarding personal income tax changes. Trump, before, has been a proponent of:
  
  • Alleviating taxes for Americans making less than 50k
  
  
  • Simplifying the American tax code into four brackets – 33%, 35% and 12% - down from seven brackets ranging 10% to 39.6%, while also eliminating the marriage penalty and Alternative Minimum Tax.
  
  
  • Eliminating the death tax
  
  


• As Mnuchin has emphasized in recent days, the reform plan is based on the idea of dynamic scoring.  Dynamic analysis accounts for the macroeconomic impacts of tax, spending, and regulatory policy, while dynamic scoring uses dynamic analysis in estimating the budgetary impact of proposed policy changes. Ultimately, the Trump Administration believes its policies will generate growth above 3.0%YoY, which can pay for the plan. The challenge is that it has to sell this view to Congress.


• McConnell is aiming for a long-term government bill and sees it clear that Congress will need to use a reconciliation vehicle for tax reform. This point is very important but to illustrate this, one has to understand the reconciliation process.
  
  • The Center on Budget and Policy Priorities helps define it. Created by the Congressional Budget Act of 1974, reconciliation allows for expedited consideration of certain tax, spending, and debt limit legislation. In the Senate, reconciliation bills are approved with a simple majority of 51. To start the reconciliation process, the House and Senate must agree on a budget resolution that includes “reconciliation directives” for specified committees in the House and Senate. Those committees must report legislation by a certain date that does one or more of the following:
    
    • Increases or decreases spending (outlays) by specified amounts over a specified time;
    
    
    • Increases or decreases revenues by specified amounts over a specified time; or
    
    
    • Raises or lowers the public debt limit by a specified amount. 
    
    
  
  


• Republicans could pursue tax reform under the budget reconciliation process, meaning the Senate would pass bills related to the budget – but reconciliation requires a bill to reduce the deficit over the long-term.Post 10y, scoring has to indicate that the bill will be revenue neutral or revenue positive or it doesn’t work.  


• That looks to be exactly why Republicans wanted to prioritize healthcare reform: the Congressional Budget Office estimated the American Health Care Act would reduce federal deficits by USD337 billion over the next 10y. Given that tax reform estimates signal a revenue burden, various political analysts posit that Republicans have been looking to repeal Obamacare to pay for some parts of tax reform.


• Without healthcare reform, Republicans could face challenges getting a revenue neutral, long-term tax reform.
  
  • The Tax Policy Center estimates that Trump"s plan for a 15% corporate tax rate would decrease federal revenues by USD2.3tn between 2016 and 2026. Trump"s campaign tax plan for corporations and individuals could cause revenue to drop by roughly USD6tn between 2016 and 2026, according to the projections.
  
  
  • The Tax Policy Center is left-leaning but is being heard out. Even Senate Finance Chairman Orrin Hatch has said a 15% corporate tax would increase the deficit and if the overall plan doesn’t include border adjustment tax – or borrow funds via healthcare reform – Republicans will haveto find revenue streams.
  
  

Obama Oversaw The Weakest Growth In American's Personal Income On Record

Submitted by Eric Bush via Gavekal Capital blog,

Over the past 10-years personal income in the US has increased at a 3.39% annualized rate which is the slowest 10-year annualized growth rate since the data began in 1960.

Clearly, there has been a ‘stair-step’ decline in the growth rate of personal income over the past several decades. In the 1980s personal income averaged a 9.5% annualized growth rate, in the 1990s it averaged a 6.4% annualized growth rate, and in the 2000s it averaged a 5.2% annualized growth rate. Thus far in the 2010s, the average annualized growth rate has fallen to 3.9%.

Even as the growth rate in personal income has slowed during the course of this decade, the American consumer is saving more money by spending less than they are making. In the chart below we show the spread between the 10-year, annualized change in personal income and the 10-year, annualized change in personal consumption expenditures. When this spread is positive, as it has been since 2010, it indicates that consumers are spending less than they are making.

This chart illustrates just how rare it is for Americans to spend less than they earn in the post-WWII era. From 1976 – 2011, US consumers regularly spent more than they made. 

The global economy needs to recognize that there is a new “smarter” American consumer out there as two-thirds of Americans now say they prefer saving over spending compared to just about 50% agreeing with that statement prior to the GFC.

Disposable Income Per Capita Grows At Weakest Rate Since 2014

For the 3rd month in a row, annual US spending growth has outpaced annual income growth (+4.2% spending vs +3.5% income).

However, both spending and income growth MoM disappointed (with incomes unchanged MoM - the weakest since Feb 2016).

Combine these two and the savings rate in November plunged to its lowest since March 2015.

Finally we note that Disposable Real Personal Income per Capita dropped from 39,292 to 39,247, increasing just 1.5% YoY - the weakest growth since 2014.