Economic Perspectives: Federal Debt: A Fiscal Year End Update
FAQs on the Markets and Economy
What is the Fed’s outlook right now?
The Fed remains singularly focused on bringing down inflation.
Although the recent Federal Deposit Insurance Corp (FDIC) takeover of a couple of banks has added some uncertainty, the Fed is still pushing ahead with trying to slow consumer demand. At their recent meeting on March 21, they raised the federal funds rate by 25 basis points (bps) to the median level of 4.875% — their ninth straight hike. They have plans to increase the overnight rate by another 25 bps this year. They made no hints of rate cuts for later this year.
Regarding concerns around the banking system, Fed Chair Powell recently stated that it has stabilized, and the Fed is confident there will not be any more bank runs. This news comes just two weeks after the failure of two banks jarred the view of the nation's financial security. The Fed, the FDIC, and the Treasury moved very quickly and effectively. For the Fed, it did what it does best: it used its balance sheet to provide the needed liquidity to banks. This is called the “Bagehot rule,” lending aggressively against good collateral. For the Fed, this is much easier to fix than credit concerns or an exogenous shock (like a pandemic).
With all the interest rate increases so far, is the demand for workers beginning to slow?
Yes, after one year of hiking interest rates and nine straight increases, the number of job openings is on a downward trend.
The labor report’s JOLTS report (Job Openings and Labor Turnover Survey) showed 9.9 million job openings, the first time below 10 million in nearly two years. Last March, job openings hit a record 12 million.
5.9 million people are looking for a job. That works out to be 1.7 jobs available for each person looking for a job. That is a significant imbalance, well above the long-term average of 0.6 jobs/job seeker and above the pre-pandemic level of 1.2 jobs available/job seeker.
Fed Chair Powell has pointed to the imbalance between job openings and available workers as a critical driver of inflation. The strong labor demand can drive up wages.
Is the labor market cooling?
This is usually one of the early signals that a hiring slowdown is forming. Alongside the recent sharp fall in job openings and the upward trend in the jobless claims, the labor market appears to be moving into a healthier balance of supply and demand.
For now, labor conditions remain unusually strong, and part of March’s slowdown was likely attributable to a reversal of a temporary boost in hiring over prior months due to unseasonably mild weather. Indeed, the 3-month average of payroll gains stands at 345k (well above the 177k pre-pandemic trend) and the unemployment rate fell to 3.5% from 3.6%, which is all the more impressive as the labor force participation rate rose to 62.6%, the highest since March 2020.
The recent easing in wage pressures is the result of both improving labor supply and some pullback in job openings, but perspective matters. Job vacancies remain roughly 3 million above pre-pandemic levels. With the labor force only expected to expand by roughly a fifth of that through the remainder of this year, wage growth is unlikely to push much lower until there’s a more significant reduction in labor demand.
The takeaway is employment and wage trends are heading down a more encouraging path, but they're still running at a relatively strong pace and conditions remain tight. Inflation won't ease meaningfully until the labor market cools, and we expect the latest data to leave Fed officials still inclined to raise interest rates by 25 bps at the upcoming May Federal Open Market Committee (FOMC) meeting.
What are the trends in U.S. state tax revenue collections?
State tax collection trends since fiscal year (FY) 2021 have primarily reflected strong growth in key revenue streams, such as personal income and sales taxes.
The unprecedented federal stimulus and other state policy actions led to significant budget surpluses for the sector, which positioned most states with record reserves and rainy day fund balances. For example, the National Association of State Budget Officers reported median state reserves of 12% of spending for FYE 2022, more than double the level held before the 2008-2009 recession. However, state revenue gains are projected to slow considerably, albeit unevenly, as individual state experience will vary depending on regional factors, such as economics or tax and revenue structure.
The Urban Institute recently released nominal state tax collection data through the first seven months of FY 2023 (July 2022-January 2023) showing that revenue declined 0.2% year-over-year (YoY), led by a more than 9% decrease in personal income taxes but somewhat offset by sales and business tax performance. While some states, like Texas, continue to post stronger-than-anticipated revenue collections, others, like California and New York, are recording YoY declines. With recent forecast revisions, state revenue is expected to decline by about 2% in FY 2023. Still, non-withholding income over the next two months (April and May) could lead to further downward adjustments as poor financial market performance in 2022 will likely lead to weaker collections.
The outlook for state revenue in FY 2024 is less certain as a combination of inflation, Fed policy, consumer confidence, economic momentum, and state fiscal policy decisions, such as tax relief, could underwhelm collection projections. The Urban Institute noted FY 2024 total state revenue is projected to increase by less than 1% YoY, with personal income and sales taxes growing about 1.2% and 1.9%, respectively. Despite the slowdown, states are managing their budgets from a position of strength, given the healthy buildup of their balance sheets over the past few years.
Important Disclosures
The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial infor-mation. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been inde-pendently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts and forward-looking statements presented herein are valid as of the date of this document and are subject to change.
There are inherent risks with equity investing. These include, but are not limited to, stock market, manager or investment style risks. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
Investing in international markets carries risks such as currency fluctuation, regulatory risks and economic and political instability.
There are inherent risks with fixed income investing. These may include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with in-vestments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.
Investing involves risk, including the loss of principal.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.
Past performance is no guarantee of future performance.
This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment advisor and a wholly-owned subsidiary of City National Bank. City National Bank provides investment management services through its sub-advisory relationship with City National Rochdale.
Non Deposit Investment Products are: Not FDIC Insured, Not Bank Guaranteed, May Lose Value
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Readers are cautioned that such forward-looking statements are not a guarantee of future results, involve risks and uncertainties, and actual results may differ materially from those statement. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.
Past performance or performance based upon assumptions is no guarantee of future results.
Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment adviser and a wholly-owned subsidiary of City National Bank. City National Bank provides investment management services through its sub-advisory relationship with City National Rochdale.
INDEX DEFINITIONS
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading pub-licly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.
Muni Bond: A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools. These bonds can be thought of as loans that investors make to local govern-ments.
Bloomberg Barclays U.S. Corporate High Yield Bond Index: measures the USD denominated, high-yield, fixed-rate corporate bond market.
Dow Jones Select Dividend Index: The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that include the dividend growth rate, the dividend payout ratio and the trading volume. The components are then weighted by the dividend yield.
CBO: A collateralized bond obligation (CBO) is a type of structured debt security that has investment-grade bonds as the underlying assets backed by the receivables on high-yield or junk bonds.
Moody’s: Moody’s Corporation (MCO) is the holding company that owns both Moody’s Investors Service, which rates fixed income debt securities, and Moody’s Analytics, which provides software and research for economic analysis and risk management. Moody’s assigns ratings on the basis of assessed risk and the borrower’s ability to make interest payments, and its ratings are closely watched by many investors.
Penn Wharton Budget Model: Penn Wharton Budget Model’s (PWBM) tax policy simulator allows policymakers, members of the media, and the general public (“users”) to see the impact that potential reforms to tax policy will have on many the economy and the federal budget.
NDMC: National Drought Mitigation Center (NDMC) The National Drought Mitigation Center’s mission is to reduce the effects of drought on people, the environment and the economy by researching the science of drought monitoring and the practice of drought planning.
NOAA: The National Oceanic and Atmospheric Administration (NOAA) is an American scientific and regulatory agency within the United States Department of Commerce that forecasts weather, monitors oceanic and atmospheric conditions, charts the seas, conducts deep sea exploration, and manages fishing and protection of marine mammals and endangered species in the U.S. exclusive economic zone.
USDA: The United States Department of Agriculture (USDA) is the federal executive department responsible for developing and executing federal laws related to farming, forestry, rural economic development, and food.
The SIFMA Municipal Swap Index: The Securities Industry and Financial Markets Association Municipal Swap Index is a 7-day high-grade market index comprised of tax-exempt Variable Rate Demand Obli-gations (VRDOs) with certain characteristics. The Index is calculated and published by Bloomberg. The Index is overseen by SIFMA’s Municipal Swap Index Committee.
CalPERS: The California Public Employees’ Retirement System, also known as CalPERS, is an organization that provides numerous benefits to its 2 million members, of which 38% are school members, 31% public agency members, and 31% state members.
4Ps: The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations.
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