Financial Armageddon

The Upside of the Downside?

2009-11-19T16:59:00-05:00

While many people are reportedly turning to comfort food to help them cope with the downturn, it seems that some are moving in a healthier direction, according to Britain's Telegraph, in a report entitled "Americans Run Off the Recession in Record Numbers":

Obesity be gone. Americans are lacing up athletic shoes and signing up to run in 5Ks, 10-milers and even marathons in record numbers.

In a country often lampooned as being populated with obese soda-swilling TV junkies, around 9.2 million people completed a certified foot race in the United States in 2008, up from 3.7 million in 1987.

Of those, 425,000 completed a marathon - 26.2 miles, or 42.2 kilometres - and 715,000 ran a half-marathon, according to Running USA, a non-profit group that promotes running. That is up from 143,000 marathon runners in 1980.

The numbers are expected to be even higher this year, said Ryan Lamppa from Running USA, a campaigning group that supports and promtes running as a sport. "There is still a pent-up demand for races in the country."

Marathons across the country are filling up so quickly that race organisers are adding half-marathons (13.1 miles, or 21 kilometres) along with shorter races on event day, Lamppa said.

Around 40,000 people ran the New York marathon in early November. In late October roughly 32,000 people ran the Marine Corps marathon in Washington DC, and 45,000 ran earlier in Chicago.

In Atlanta, 55,000 people signed up for the November 26 marathon - the bulk of the tickets sold online in seven hours - and 45,000 are expected at the Walt Disney World Marathon Weekend on January 10 in Florida.

Why the growth? Running is the cheapest, fastest way to lose weight, and along with walking, the easiest way to exercise.

But that's only part of the answer.

We live in a financially uncertain, violence-scarred world, and running "gives you something to control - you can't control the stock market or the economy, but you can control your health," said Lamppa.

Michael Giordana, a sports sociologist at the University of Illinois, Urbana-Champaign, believes there are three aspects fueling the running boom: people inspired by the 2008 Olympics, increased social networking - for example runners opening Facebook pages to collect money for charity - and a reaction to what he called "the obesity epidemic".

According to the US Centers for Disease Control, about one third of American adults are obese, while another third is overweight.

As more people run and enjoy the experience, word-of-mouth attracts new runners. "The stories that come out motivate people to get off the couch and be more active," said Giordana.

Race days have also become city-wide carnivals, complete with live music, free food, street vendors, and crowds cheering on the athletes.

Big sponsors have jumped into the act. While schools and local shops focus on neighborhood 5K runs, marquee names like Bank of America, ING, McDonalds and Continental Airlines have sponsored major races this year.

Training is also widely available, Giordana said. Aside from scores of books on running, there are software programmes and training programmes held at health clubs, some catering to specific interests like religion or single runners looking for a partner.

Runner's World magazine, the sport's bible, held a virtual training programme through its website that culminated in the November 14 Richmond, Virginia marathon.

Need in-person support? Bridget Bowers heads a training programme run by Pacers, a northern Virginian chain of running shoe shops.

"It's a very social thing to do," said Bowers, who also coaches the American University cross-country team.

Although the article doesn't say so, I'm assuming there are other reasons for the burgeoning interest in running, including the fact that a growing number of Americans:

Have more time available for such activities, because they are either unemployed or underemployed
Have less money available for traditional but costlier leisure pursuits such as eating out or going to a show
Need cheaper forms of stress relief (than alcohol, for instance)
Feel pressure to buff up their appearance to gain an edge in a challenging job market
Are more interested in life's simple pleasures, including enjoying the great outdoors

Big Pain at Small Firms

2009-11-18T18:08:33-05:00

If policymakers were thinking ethically, rationally, and clearly -- a big "if" considering their role in creating the mess we are in -- you would expect that the public funds (and borrowed money) they are throwing around in the name of "rescuing" the economy would be targeted at those areas which presumably offer the biggest bang for the buck (leaving aside, of course, the question of whether the government should be spending taxpayers' money like water in the first place).

In other words, instead of squandering resources on badly-managed firms and basket-case industries, perhaps it would have been better if Washington had offered a helping hand to a vibrant segment of the economy that has created the lion's share of new jobs -- not in China or India, but in the good old USA -- over the past two decades or so.

Sadly, that has not been the case, and as Time magazine reports in "Small Business, Key to Recovery, Is Still Hurting," the outlook remains poor for those businesses that lack the bought-and-paid-for political influence of corporate America and Wall Street.

Ed Brennan, an office-furniture store owner in the Philadelphia area, couldn't believe how quickly and ferociously the recession hit his business. Demand for office furniture had surged to new highs in 2008, causing him to frantically add staff to meet furniture orders and allowing him to wrap up the year with revenue surpassing the $24 million mark — the highest level since his company's launch in 1989. But all of that came to an abrupt halt in January 2009 when the recession forced companies to postpone or cancel office expansions and renovations, causing demand for Brennan's office furniture to dry up.
(See the best business deals of 2008.)

"Think of a bug hitting a windshield going 60 miles an hour — that was what January was like," says Brennan. "We had been going gangbusters — we had our best year ever [in 2008] and all of a sudden everybody stopped buying."

To adapt, Brennan cut staff to 30 employees from 60, and is bracing for 2009 revenue to fall to $10 million from $24 million.

Brennan isn't alone.

Small-business company sales fell 3.8% on average in the first 10 months of 2009, which reverses the 2.4% gain posted in 2008, according to Sageworks, which provides software and consulting services to private business. "That's almost a 6% decline in the sales growth rate," says Andrew White, the firm's chief financial officer. Large publicly traded companies fared better, with sales slipping only 1.8% on average in the first 10 months of the year, he says.

Certain sectors have been ravaged more than others: small businesses involved in the transportation and warehouse business, manufacturing, wholesale trade and retail trade took the biggest hits, with sales plunging 16.7%, 13.8%, 10.4%. and 6.7% respectively in 2009, says White. (Sageworks' results reflect data gathered from more than 10,000 banks and CPAs who work with small businesses.)

The National Federation of Independent Business offers similar gloomy findings: its latest data indicate 86% of small businesses surveyed reported that earnings either fell or were flat in the past three months and 82% posted either flat or lower sales. Over the next three months, 21% plan to cut workers and 32% expect to reduce inventory.

The recession has hit small businesses particularly hard during this recession, and government bailout programs have yet to offer significant incentive programs aimed at propping up the battered sector. Although there are some provisions for small companies, "we're not seeing it," says Brennan. "We're always left out."

Yet, the small business community has typically played a key role in leading the country out of past recessions.

Small businesses generated 65% of the job growth between 1993 and 2008, and represent about half of the private-sector employment in the U.S., according to the Small Business Administration. "So they are going to be important for us to have a true recovery that includes job growth," says White.

The meltdown in the credit markets, the housing collapse, the weak U.S. dollar and depressed consumer confidence have all taken a particularly harsh toll on small businesses. Many small companies rely on credit cards for capital because they don't have access to debt or equity capital as public companies do, and many are seeing these credit lines trimmed or even pulled altogether by skittish banks.

The housing turmoil and the weak dollar have weighed heavily on small business as demand for building contractors, which are often smaller businesses, dried up in the housing bust, and the cost of importing raw materials like copper for contracting work has risen due to the weak U.S. dollar. Large companies with overseas operations have an easier time hedging against those risks.

On the flip side, if the beaten-down U.S. dollar boosts demand for domestic products from overseas buyers, many small businesses won't be able to take advantage of it. "Your ability to meet that demand depends upon your access to credit," says Joseph Brusuelas, a director and senior economist at Moody's Economy.com.

Economists and other experts say it's critical that small businesses recover for the broader economy to truly rebound. "Smaller firms, with fewer than 20 employees, account for 25% of all jobs, but they generated 40% of the [job] growth in the last expansion in 2001," says Brusuelas. He believes the Obama Administration needs to guarantee bigger loans to small firms through the Small Business Administration, and offer either a significant tax credit or tax cut to companies that hire new workers.

"If you can get small businesses train or hire employees, that's going to impact the jobless rate," concurs White.

Brennan isn't convinced a tax credit for new hires will work. "I don't have any work for someone, so giving me a $5,000 tax credit to hire someone and pay them $40,000 a year with health benefits and vacation, that's $60-grand. Do the math," he says. Brennan would prefer the government offer a tax credit or tax cut for every dollar that small businesses spend on health care for their employees.
(Read "How to Know When the Economy Is Turning Up.")

William Dunkelberg, chief economist with the NFIB, says it's all about consumer spending, not credit. "The biggest problem is there's no sales — that's the real killer here," he says. Only 4% of those surveyed [by the NFIB] named credit as the problem. "Capital-spending plans are at 35-year lows and inventory-investment plans are at 35-year lows. They're just not borrowing — they're not asking for it," he says.

Dunkelberg believes the U.S. government needs to focus on ways to increase consumer spending and, therefore, demand for products. He'd like to see the government suspend the FICA (or social security) withholding tax and extend the Bush tax cuts that are slated to sunset within the next two years.

Brennan admits this is the worst he's seen the business environment, but remains optimistic the sector will rebound with or without a stimulus package.

"I'm more of a Warren Buffett approach — there are good times in business and bad times," says Brennan. "But this one just came like a tsunami — we were so busy we didn't see it coming."

See the top 10 bankruptcies.
See which businesses are bucking the recession.

Already in the Pipeline

2009-11-17T20:56:07-05:00

It seems to me that one reason why most economists and Wall Street strategists haven't quite figured out that things are not getting better on Main Street is because they are theorists rather than empiricists. That is, they make assumptions about what should happen when the Fed does this or Washington does that, instead of stepping back from their theories, charts, and screens and seeing firsthand what is going on at ground level. Perhaps they could take a pointer from Charles Hugh Smith, publisher of the Of Two Minds blog and author of Survival+: Structuring Prosperity for Yourself and the Nation, who wrote about his relatively brief but eye-opening stroll through economic reality in "The Next 7 Millions Jobs That Will Be Lost":

The hype is that the "recession is over." Has anyone touting this line actually walked around the real world? The next 7 million jobs to be lost are already in the pipeline.

The divergence between the reality easily observed in the real world and the heavily touted hype that "the recession is over because GDP rose 3.5%" is growing. It's obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.

According to the latest Employment Situation Summary (Bureau of Labor Statistics) dated November 7, 2009:

Total nonfarm payroll employment declined by 190,000 in October. In the most recent 3 months, job losses have averaged 188,000 per month, compared with losses averaging 357,000 during the prior 3 months. In contrast, losses averaged 645,000 per month from November 2008 to April 2009. Since December 2007, payroll employment has fallen by 7.3 million.
Civilian labor force: 154 million
Employment: 138.3 million
Unemployment: 15.7 million
Sept-Oct. change in employment: -589,000
in unemployment: 558,000
Not in labor force: 82,575,000

It is staggering that 7 million jobs lost out of 145 million (the total prior to the financial meltdown) has created a 10.2% unemployment rate. The numbers here don't add up--"only" 190,000 jobs were lost in October, but then employment fell by 589,000--huh?--but the point missing is how many jobs are hanging by a thread.

I recently traveled to Los Angeles to be interviewed by my polymath friend and media maven Richard Metzger, creator of the Dangerous Minds website which has rocketed to 50,000 page views a day since he launched it a few months ago. (The topic was of course Survival+; look for the interview in about a week on Dangerous Minds.)

(Richard also manages the L.A. Time's hot blog Brand X which will have you humming Randy Neuman's I Love L.A. in short order.)

Has anyone noticed that airports are commercial dead-zones peopled by zombie clerks suffering from terminal boredom?

One desperate young man had taken the unenviable job of hawking Chase credit cards via a weak pitch for a free ticket on Southwest Air (retail value $59). Since I like to arrive early for flights (perhaps scar-tissue remaining from being on TSA's "watch list" for months on end, and almost missing flights as a result--"papers, please!") I was able to observe hundreds of travelers stream by the young man's kiosk while he gamely voiced the pitch. Not one person even paused, much less stopped.

Translation: Up yours, Chase credit cards.

How many of these dead-zone airport retail kiosks will go dark next year?

The See's Candy kiosk: bored clerk rearranging pricey boxes of candy, no customers. Ditto the sunglasses kiosk, and every retail outlet except Starbucks, which was moving plain coffee and the pizza/beer establishment which did a brisk business around 7-8 p.m. with the "heading home Sunday evening" crowd.

(Richard and I had picked up some excellent Chicken Tikka Masala from a small indian market on Pico Blvd., so I wasn't tempted.)

I rented a brand-new 4-door Ford Focus--a nice car with plenty of zip--for $24 total, including all the ripoff airport and State of California taxes, with unlimited miles. $24 for all day, including all the new junk fees added to car rentals? Deal!

The red Mustang sat in the rental lot, a rather sad icon, while the cheapest compacts were rented and driven off the lot. What does that say?

Arriving early at the studio (natch), I had time to wander down one of the premiere open-air retail malls in the nation, the Promenade in Santa Monica (town of my birth, heh, though I never lived there). Other than one or two Asian tourists, no one carried a shopping bag of any size or type. This was noon on Sunday, a busy shopping day, and nobody was buying anything. Barney's Beanery was doing a good business but most other dining establishments were crypts.

Sauntering down blocks of America's standard-issue mall outlets--J. Crew, Apple, Pottery Barn, etc. etc.--the stores were empty though the sidewalks were busy.

Victoria's Secret was promoting 7 panties for $21--how much profit can VS rake in selling 7 panties for $21?--and the store was empty. Even the Apple store was a morgue.

Bored waiters were leaning on sidewalk cafe railings, and a few employees were sitting outside talking with their friends--tip-off--no drinks, no food, the table was bare.

OK, here's the money shot. Recall for a split second I am a writer (for better or worse) and so my "job" is to observe people closely (22 years free-lancing, man, am I dumb to keep doing this!).

So a tres-chic young Caucasian woman with two adorable kids around 7 to 9 years of age pauses a few yards from me. The woman has the casually tony attire and slim figure of someone who either is a well-educated professional pulling down major dollars or someone whose spouse is pulling down major dollars in some yuppie gig (or both spouses are doing so).

The yuppie Mom pulls her wallet out of her upscale little purse as the two kids gather round and I am thinking, "She's going to give each kid a Jackson ($20) or at least a fiver just to blow on whatever strikes their fancy."

This is, after all, Santa Monica on a Sunday, and this is a yuppie Mom with the bucks to pay for high-end casual attire, hair coloring, personal trainer, gym membership, etc.

After digging around a bit, she extracts two pennies which she gives to her kids to toss into the water feature/fountain nearby.

I think this rather neatly summarizes the entire U.S. consumer and the future of the economy.

Doesn't anyone follow the threads of what is easily observable anywhere in America?

Consider for a moment one of the few businesses licensed to print money--towing companies with city contracts. What are the odds that these towing outfits are towing cars which no one ever claims? Heck, with tickets, towing and storage fees, the cost of reclaiming your vehicle can run into the hundreds of dollars in a mere day or two.

That is more than many vehicles are worth. So what's the net result? the towing companies' lots will soon be filling with junkers and their revenues will be falling as down-and-out citizens abandon their vehicles because they don't have the money to get them un-impounded.

Net-net, when the towing company's revenues fall then somebody's hours or job gets cut.

About once a month I take my Mom out to dinner in San Francisco, "the most European city in America" and a favorite city for those with disposable income. The city contains approximately three restaurants per resident (slight exaggeration) with a Michelin one-star establishment (i.e. excellent, superb, etc.) about every block in the better neighborhoods.

Yes, it is a splurge, but it's my Mom and it's our "quality time." So we chat with the waiters and waitresses, and on opera nights and the like, business is so good it seems impossible the word "recession" is even being bandied about.

But when it's slow, it's dead. It seems almost random, which nights are busy and which are slow, but the net result is far from random. A couple of places that we occasionally frequented a mere year ago are now dark.

A friend of ours has been trying to sell an investment house in a highly desirable zip code in a San Francisco Bay Area suburb. Built perhaps a decade ago, the house would have fetched $800,000 in a heartbeat in 2006, and our friend rejected an offer of $550,000 a year ago as absurdly low. This is after he spent a lot of money having the home repainted in and out, new cabinet doors installed, new carpeting, etc.

That was the only offer the property has received in over a year. Needless to say, maintaining the mortgage is killing him financially.

How many hundreds of thousands of families are in the same situation?

The Honolulu Symphony, which I enjoyed occasionally when I lived on Oahu, recently declared bankruptcy. How many other non-profit arts, theater and community groups are hanging by a thread? Hundreds, if not thousands.

Put together the anecdotal evidence and the next 7 million jobs to be lost are already in the pipeline. I could go on and on about the small businesses whose owners are preparing to close "if things don't pick up a big way soon" and all the other signs that a new wave of massive job losses is rising. But you know that already if you've walked around with your eyes open.

Media Appearance: Russia Today

2009-11-17T16:55:00-05:00

I was recently interviewed by U.S. international correspondent Anastassia Churkina for the Russian TV channel, Russia Today. For those who are interested, here is the video (via YouTube):

Flowing Uphill

2009-11-16T20:54:02-05:00

Remittances are transfers of money by foreigners to their home countries. According to Wikipedia, these cross-border payments constitute "the second largest financial inflow to many developing countries, exceeding international aid." In 2008, for example, Mexico's central bank reported that money sent to that country from Mexican immigrants in the U.S. totaled $25 billion.

However, that sum was down 3.6 percent from the year before, which was the first drop since officials began tracking the money in 1995. But things have not improved. Since then, the ongoing downturns in housing and other industries where immigrants -- legal or otherwise -- have long comprised a sizeable share of the workforce have spurred a noticeable drop in remittances.

(Source: http://filipspagnoli.wordpress.com/2009/08/14/human-rights-facts-138b-the-effect-of-the-recession-on-remittances/)

In fact, based on the following New York Times report, "Money Trickles North as Mexicans Help Relatives," it appears that some of the funds that used to flow southward may well be moving in the opposite direction:

MIAHUATLÁN, Mexico — During the best of the times, Miguel Salcedo’s son, an illegal immigrant in San Diego, would be sending home hundreds of dollars a month to support his struggling family in Mexico. But at times like these, with the American economy out of whack and his son out of work, Mr. Salcedo finds himself doing what he never imagined he would have to do: wiring pesos north.

Unemployment has hit migrant communities in the United States so hard that a startling new phenomenon has been detected: instead of receiving remittances from relatives in the richest country on earth, some down-and-out Mexican families are scraping together what they can to support their unemployed loved ones in the United States.

“We send something whenever we have a little extra, at least enough so he can eat,” said Mr. Salcedo, who is from a small village here in the rural state of Oaxaca and works odd jobs to support his wife, his two younger sons and, now, his jobless eldest boy in California.

He is not alone. Leonardo Herrera, a rancher from outside Tuxtla Gutiérrez in the southern state of Chiapas, said he recently sold a cow to help raise $1,000 to send to his struggling nephew in northern California.

Also in Chiapas, a poor state that sends many migrants to the United States, María del Carmen Montufar has pooled money with her husband and other family members to wire financial assistance to her daughter Candelaria in North Carolina. In the last year, the family has sent money — small amounts ranging from $40 to $80 — eight times to help Candelaria and her husband, who are both without steady work and recently had a child.

“When she’s working she sends money to us,” the mother said. “But now, because there’s no work, we send money to her.”

Statistics measuring the extent of what experts are calling reverse remittances are hard to come by. But interviews in Mexico with government officials, money-transfer operators, immigration experts and relatives of out-of-work migrants show that a transaction that was rarely noticed before appears to be on the rise.

“It’s something that’s surprising, a symptom of the economic crisis,” said Martín Zuvire Lucas, who heads a network of community banks that operate in poor communities in Oaxaca and other underserved Mexican states. “We haven’t been able to measure it but we hear of more cases where money is going north.”

At one small bank in Chiapas that used to see money flowing in from the United States, more money is going out than coming in.

“I’d say every month 50,000 pesos are sent from here to there,” said Edith Ramírez Gonzalez, a sales executive at Banco Azteca in San Cristóbal de las Casas. “And from there, we’d receive about 30,000 pesos.” Fifty thousand pesos is $3,840.

With nearly half its population living in poverty, Mexico is not well placed to prop up struggling citizens abroad. Mexico could lose as many as 735,000 jobs this year and its economy may decline 7.5 percent, government economists predict, making the country one of the worst affected by the global recession.

Still, poverty is a relative concept. It is easier to get by on little in Mexico, especially in rural areas, allowing the poor to help the even more precarious.

In Miahuatlán, Sirenia Avendano and her husband may be more down and out than their two sons, both in their 20s, who wait tables at a Mexican restaurant in central Florida and have seen their hours reduced and their tips drop precipitously. But they live in their own home, on land they use to grow corn and other crops.

“We’re poor, but nobody can throw us out of this house,” Ms. Avendano said, wiping away tears at her kitchen table as she spoke of her sons’ economic travails. “They worry about that. What happens if they can’t pay the rent?” To help make ends meet, she sells chiles rellenos, a popular delicacy, around the neighborhood.

“We have an obligation to help them,” said her husband, Javier. “They’re our sons. It doesn’t matter if they are here or there.”

In other cases, the migrants are returning home, as the many passengers who hop off the bus that runs regularly from northern California to a gas station in Miahuatlán make clear. “There’s nothing up there,” said a young man with an overflowing suitcase who returned one recent night.

Still, although a study by the Pew Hispanic Center from July showed a sharp decrease in the number of Mexicans heading north, there has been no sign of a mass exodus of migrants back to Mexico. Immigrants’ families say it took great effort to scrape together the thousands of dollars needed to send relatives to the United States, a sum that includes the fees charged by the people who help them sneak in.

“It’s expensive to cross, and it was a great sacrifice for us,” said Mr. Salcedo, 43, who has sent about five wire transfers to his son Alfonso, 18, who this year lost his job as a cafeteria dishwasher.

As expected during an economic slowdown, the money sent home by immigrants has fallen. The Bank of Mexico reported recently that remittances during the first nine months of this year dropped to $16.4 billion, a 13.4 percent decline compared with the same period in 2008.

The flow of money out of Mexico is believed to be a tiny fraction of the remittances still arriving. “The evidence in this regard so far is anecdotal,” said Juan Luis Ordaz, senior economist at the Spanish bank BBVA Bancomer, who has begun investigating the reverse money flow.

Families of migrants speak proudly of their successful relatives in the United States and use the remittances they receive to do anything from buying livestock to replacing dirt floors with concrete. The importance of such money, which is among Mexico’s top sources of foreign currency, cannot be overstated. An estimated 5.9 percent of Mexican households, about 1.8 million families, receive economic support from abroad, studies show. For them, the money represents roughly 19 percent of total income for urban households and 27 percent for rural ones, according to government data analyzed by BBVA Bancomer.

For the Salcedos, the economic woes are intense on both sides of the border. The ones still here had moved to the outskirts of Mexico City seeking opportunity, but now they are on the verge of returning to Oaxaca because the owner of the land they are squatting on ordered them out.

For Alfonso, the situation has been just as difficult. He crossed into the United States in December with about $500 that his father gave him, supplemented with money he earned doing odd jobs in Tijuana. He found a job in San Diego paying enough for him to send home $170 the first month and $120 the next. The third month, he told his family he could afford to send only $40.

Then, like so many others, he lost the job and stopped sending anything.

Now his father has begun sending money the other way, usually about $60, less transfer fees. “We’ve decided to tighten our belt until we’re all working again,” Mr. Salcedo said.

Media Appearance: WNYC's 'Financial 411'

2009-11-16T19:58:38-05:00

Fellow blogger John Jansen (of Across the Curve) and I were guests on "Financial 411," WNYC radio's daily overview of financial news with host Amy Eddings, where we discussed our visit with officials from the U.S. Treasury Department. For those who are interested, below is the audio from the segment, entitled "Financial Bloggers Meet With Geithner Over Cookies":

Fueling an Even Bigger Public Safety Problem

2009-11-15T20:29:32-05:00

In a press release issued last Thursday, organizations representing state chief executives and fiscal officials had nothing good to say about the outlook for municipal finances:

"NGA, NASBO Say States Will Continue to Face Fiscal Difficulties in Coming Years"

Preliminary Findings of Survey Show Fiscal Conditions Continue to Deteriorate

In a preliminary review of the biannual report The Fiscal Survey of States, officials from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) today forecasted continued fiscal difficulties for states.

In fiscal 2009, states were forced to reduce General Fund expenditures by 4.8 percent and are expected to reduce fiscal 2010 General Fund expenditures by at least 4.0 percent, marking the first time that state spending has declined in back to back years. The severe national recession drastically reduced tax revenues from every revenue source during fiscal year 2009, and revenue collections are forecasted to continue their decline in fiscal 2010. As state revenue collections historically lag any national economic recovery, state revenues will remain depressed throughout fiscal 2010 and likely into fiscal years 2011 and 2012.

Overall, state revenues declined 7.5 percent in fiscal 2009, which for most states ended June 30, 2009. Revenues will likely continue on this downward trend for another one or two quarters before turning up slowly.

The weakening of state fiscal conditions is reflected in the $250 billion in budget gaps faced by states between fiscal 2009 and fiscal 2011. Of the $250 billion, states closed $72.7 billion in budget gaps during fiscal 2009 and $113.1 billion before the enactment of their fiscal 2010 budgets to bring them into balance with drastically declining revenues.

"These are the worst numbers we’ve ever seen in the decades of putting together this report," said NASBO Executive Director Scott D. Pattison. "States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government."

In fact, few services have been spared, including public safety. Just this past week, for example, numerous reports have surfaced detailing proposed or actual cuts in police budgets in places such as Grand Rapids (Michigan), Colorado Springs (Colorado), Tulsa (Oklahoma), San Diego (California), Milwaukee (Wisconsin), and New Orleans (Louisiana), among others.

With illegal activity poised to keep rising as economic conditions remain depressed (despite what Washington keeps telling us) -- especially given that many formerly law-abiding Americans now feel compelled to join the dark side, as I noted in "Hard Times and Bad Behavior" -- that suggests crime could touch the lives of many more Americans than it already does.

But that's not the end of it. According to a report in the Financial Times, "US Jails Set to Empty as States Reduce Deficits," some states could end end up fueling an even bigger public safety problem in their hasty efforts to address large-scale fiscal woes.

Freedom came early this week for 62 inmates of Illinois state prisons.

The former prisoners became the first of 1,000 low-level, non-violent offen-ders in the state to be let out of prison early over the next few months as Illinois battles a budget deficit that could reach $12bn (€8bn, £7.2bn) next year.

The Illinois department of corrections says monitoring the offenders rather than incarcerating them will save $5m a year. In recent months the state has also taken probation and drug-treatment measures aimed at curbing the growth in inmate numbers.

Illinois' early-release scheme is one of a string of measures that states across the US have taken as they face the twin headaches of a bloated prison population and falling tax revenues. All but two states face budget shortfalls for fiscal 2010, according to a report out this week by the Pew Center on the States.

Some 28 states have planned cuts in prison budgets next year: Kansas opted to cut 22 per cent, Nebraska 18 per cent, Illinois 17 per cent and Georgia 15 per cent - although the use of federal stimulus money has softened the blow.

The result is that the US could see the first fall in prison population since the early 1970s, says John Pfaff, a professor at Fordham University in New York who studies prisoner numbers.

States have cut budgets in previous down-cycles - such as in 2001-02 - but the extent of the current measures is larger, as states both try to stem prison admissions and release inmates early.

The measures are being taken in response to a steady growth in states' prison and associated budgets to $52bn last year.

"It costs about $35,000 a year to imprison a person," says Bernard Harcourt, a law professor at the University of Chicago. "We're now beginning to start processing some of the costs associated with some of our penal practices in this country."

More than three-quarters of state spending on prisons goes on staffing costs and a string of states have opted to cut staff and facilities.

Michigan, for example, which has a $2.8bn budget deficit, is closing six prison camps and five prisons, while New York state plans to close three minimumsecurity prison camps and parts of seven more facilities. Kansas, New Jersey, North Carolina and Washington are also closing prisons, while Alaska and Colorado have frozen prison-building plans.

While hard decisions may be unavoidable, many are concerned at the possible effects of the cost cuts.

In Michigan, for example, prison officers are on strike, saying closing facilities has led to such overcrowding that prisons are unsafe for their members and for inmates. In other states, communities have complained that prison closures will take away jobs.

There is also a worry about the consequences of letting more prisoners out during an economic downturn.

"Even if people all had sterling résumés, this is a tough time to get work," says Bill Johnson of the National Association of Police Organizations, the US's biggest union for active-duty officers.

"The fear is that many will return to a life of crime on the streets, and the citizens who live in metropolitan areas will bear the burden in terms of decreased public safety and increased crime," Mr Johnson says.

The Financial Body Count

2009-11-14T22:22:46-05:00

In 2009 alone more than 120 banks have failed. We've also seen the collapse of large financial institutions like Fannie Mae, Freddie Mac, Lehman Brothers, Bear Stearns. According to the most recent reports, it appears that the Federal Housing Administration is on the ropes, and GMAC is currently seeking its fourth (or, perhaps its fifth or sixth) bailout. But that's not the end of it. There's plenty of terminal cases still wandering the halls of the U.S. economy. In "Weak Companies Raise Risk for U.S. Pension Agency," Reuters gives us the latest on another one of them.

Weakness in the auto and airline industries, as well as retail and service sectors, has more than tripled the potential risk to the U.S. pension insurance system.

The Pension Benefit Guaranty Corporation (PBGC) on Friday said its potential exposure to future pension losses from financially weak companies had increased to about $168 billion in fiscal 2009 from $47 billion a year earlier.

It also reported a doubling of its deficit in the year that ended September 30, and said future shortfalls from retirement account defaults could be worse than forecast.

"Exposure to possible future terminations means that we could face much higher deficits in the future," Vincent Snowbarger, the agency's acting director, said in a statement.

The agency, which insures pensions covering 44 million workers and retirees, said its annual deficit grew from $11.2 billion in fiscal 2008 to $22 billion in fiscal 2009.

The deficit figure was an improvement over mid-year projections as the agency's balance sheet benefited from an improved economy and rebounding investments.

In addition, the government arranged for General Motors and Chrysler to maintain their major pension plans in bankruptcy.

The agency's deficit is the difference between assets under its control and payout obligations. PBGC assets reflect the value of terminated plans.

"We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program," Snowbarger said.

Companies with junk credit ratings are put on watch for pension plan troubles.

Automakers and their parts suppliers as well as airlines account for most of the risk. Service sector and retail companies are also a concern.

The PBGC this year has assumed responsibility for pension plans at auto parts supplier Delphi Corp, retailer Circuit City Stores (CCTYQ.PK), IndyMac Bank, Lehman Brothers Holdings Inc (LEHMQ.PK) and textile maker Dan River Inc, among others.

The financial health of the company-funded agency has been a hot button topic in recent years as faltering companies, particularly airlines, shed pension obligations in bankruptcy.

The PBGC and pension experts say the agency has plenty of cash to make payments for the next decade or more. Assumption of fully funded plans will not increase the PBGC deficit. But the recent trend has been for bankrupt companies to turn over underfunded accounts.

"These are all companies who do represent some serious risk, and historically those who do go under get significantly worse deficits before they actually go," said Douglas Elliott, a former investment banker and an expert on financial institutions and the economy at the Brookings Institution.

The PBGC is reviewing the investment strategy for its assets, having put aside a proposal to become more heavily exposed to equities. The agency has been directed by the Obama administration to "prudently rebalance" its portfolio.

"We will announce any new investment policy when it is adopted by the board," PBGC spokesman Jeffrey Speicher said.

Not Factoring in the New Reality

2009-11-13T16:43:47-05:00

Since the S&P 500 index bottomed on March 9th, the S&P 500 retail sub-index has gained 77 percent, outpacing the well known bellwether by 15 percentage points. Meanwhile, from March through the end of last month, the Census Burea's index of adjusted retail and food services sales is estimated to have gained a paultry 2.5 percent -- before inflation.

In fact, since the end of December 2007, the month the current recession officially began according to the National Bureau of Economic Research, the retail sector has outperformed the broad market by 25 percentage points and is actually higher than it was just over 22 months ago (the S&P 500 index, in contrast, is down 22 percent). At the same time, retail sales are estimated to have fallen by around 7.5 percent (again, in nominal terms) over that span.

Aside from casting doubt on equity investors' alleged forecasting abilities (which is not hard to do considering they ran the market up to record highs in October 2007), the continuing divergence between sector share price and industry revenue trends suggests to me, at least, that Wall Street isn't really factoring in the secular change in attitudes that is not only apparent in the following CBS News story, "Recession Teaching Folks To Be 'Frugal Forever,'" but in many other reports as well:

Families Are Hitting Thrift Shops, Cutting Back On Christmas, Doing Repair Projects Themselves Reporting

"Frugal Forever!" It's the new rallying cry for many Americans.

Nearly 80 percent of consumers say they've personally felt the impact of the Recession, so they're living with less.

CBS 2's Dorothy Tucker takes a look at the cutbacks some are making.

While the children in her home daycare sleep, Kim Starkey cleans. She's given up the luxury of a cleaning person in order to save $140 a month. Skipping her monthly massage saves another 75 bucks.

"That I miss deeply," Starkey said, laughing.

Eliminating luxuries? That's just one of the changes Starkey's family made when her husband lost his construction job and she lost half of her day care clients.

"We're just trying to be as frugal as we can," Starkey added.

Americans are forced to be frugal these days. According to a survey by Parade Magazine, 50 percent say they're having trouble paying their mortgage, and 80 percent are finding ways to do more with less.

Damion Lashell is among the first-time shoppers at the Brown Elephant thrift store, where sales are up 10 percent.

"Instead of buying a new item of clothes for $50, you can get several items of clothes for $20," Lashell said.

At a recent class on how to save money using coupons, CBS 2 surveyed 63 people and found that 92 percent are looking to cut back this Christmas.

""So it's really kind of getting into the mindset of how can you maximize the dollars that you have?" Ilenia Lutz said.

Our survey also found homeowners are saving money by dining out less, landscaping their own yards and -- like Starkey's family -- doing their own home repairs.

Starkey figures the family saved $800 by refinishing their own deck. They pocketed another thousand by repairing the shed. Sealing the fence added $200 to the family budget.

Spending time instead of money and giving up luxuries – it's a big change for many Americans, and it could be permanent.

Starkey says even when their income rebounds, her family will continue to do their own repairs.

"Why would you want to give somebody $800 more to do something that took you a weekend to do?" she said.

There are some luxuries people have no intentions of returning to. The number one change, according to our survey: People are eating out less and plan to continue to do so.

Hard Times and Bad Behavior

2009-11-12T22:31:00-05:00

Although scientists or statisticians might disagree, I reckon that if certain trends are now apparent in countries and cultures around the world that were not really in evidence before the financial crisis struck, then it's probably a good bet that the circumstances are somehow related.

More specifically, I (and others) asserted before the unraveling began that challenging economic conditions would lead to an uptick in illegal activity, particularly opportunistic crimes, among formerly law-abiding citizens. While that might seem obvious to some, there has in the past been some debate about the issue among criminologists.

As it happens, a report in Time magazine, "Recession Sparks Global Shoplifting Spree," seems to lend further weight that there is some correlation between economic hard times and broad pickup in bad behavior.

The global recession isn't just making jobs scarce and tightening spending — it's also turning more people into thieves. According to an annual survey released on Tuesday, incidents of shoplifting rose nearly 6% over the past year, representing nearly $115 billion in losses for businesses. One of the more surprising findings: a growing number of new shoplifters are outwardly reputable, middle-class people who are walking off with French cheeses, quality meats, cosmetics, mobile phones, clothing and other goodies that they feel they need to maintain a quality of life they can no longer afford.

"People already feeling, or merely anticipating, the negative impact of recession have taken to stealing ... at the very time retailers also suffering from the downturn have had to cut back on security staff," says Joshua Bamfield, director of the Britain-based Center for Retail Research, which documented the findings in its annual Global Retail Theft Barometer. "In addition to the usual criminals, you have lots of newcomers to stealing who figure they don't run much risk at getting caught, won't pay much of a price if they are and justify their action on the hard times we're all facing."

The researchers found that shoplifting — or what's euphemistically known as product "shrinkage" — jumped 5.9% in the past year at the more than 1,000 retail chains the group surveyed globally. In previous years, the increase hovered at 1.5% annually. Though the problem was documented across all regions, the steepest increases occurred in North America (8.1%), the Middle East (7.5%) and Europe (4.7%). In terms of total losses, retailers in North America topped the charts at $46 billion, followed by Europe's $44 billion and $17.9 billion in the Asia-Pacific region. In North America and Latin America, store owners and employees were the leading pilferers; in Europe, Asia and the Middle East, it was customers who were swiping the most loot.

Though Bamfield says theft by organized criminals for the purpose of resale remains the biggest segment of shoplifting, there's been a noticeable increase in the number of middle-class people stuffing their pockets — people who are not "stealing necessities to keep themselves and their families alive," he adds. Worse still, more than a few of these individuals regard this kind of stealing in the economic crisis as fully justified, as the researchers discovered through interviews with shoplifters and police.

"Though most thieves rationalize their acts, the current situation has many people feeling the entire system is broken, that politicians are too corrupt or inept to fix it, and that there's nothing wrong with stealing from these big companies and fancy stores that — the thinking goes — are themselves making out like thieves," Bamfield explains. "There's a real perception among many new shoplifters that if you work hard, put money away and play the game, you're asking for someone to come along and rip you off."

Of course, the idea that shoplifting is a victimless crime is easier to believe when the prey involved is a faceless business — or better yet, an international retail chain. In reality, however, shoplifting comes back to bite all consumers in the billfold in the same way that higher plane tickets do when airlines face increasing gas prices. Anytime businesses have to absorb a cost, they pass it along to their clients in some form or another. Retailers make up the money lost to shoplifting by marking up the prices of their goods. According to the Center for Retail Research, this ended up costing each U.S. household $436 in the past year and each European household $250. So much for a victimless crime.

But don't expect this to deter the world's swelling ranks of shoplifters. Even if a return to economic growth and job production weakens the rationalization for stealing, Bamfield says many people will likely continue to shoplift out of habit — and because they've gotten away with it for so long. The only way to effectively combat these thieves, he notes, is for retailers to invest in better security and for authorities to treat shoplifting cases not as "individuals stealing $50, $100, $200 worth of goods," but rather as something more serious — part of a $115 billion annual heist.