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Economic Update

February 10, 2014

Economic themes: S&P 500, Employment, International Trade.

  • S&P 500: Of the companies that have reported thus far, 76% have beat profit forecasts, and 66% have beat sales forecasts.  Testimony from new Fed Chair Janet Yellen is scheduled for this week, where she is expected to discuss monetary policy and the future of tapering amid a growing, though fragile, economy.  She is likely to take into account weak payroll growth, struggles in emerging markets, lack of inflation, and potential asset bubbles. 
  • Employment: The economy created 113k jobs in January, below forecasts of 181k, and the unemployment rate fell to 6.6%.  The labor force increased by 523k.  Gains were seen in professional and business services, goods producing, construction, and manufacturing; with declines seen in government and retail sectors.  The quit rate, which measures those who voluntarily leave their jobs, rose to a post-recession record of 1.8%, though still below the pre-recession pace of 2.1%.
  • International Trade: The trade deficit expanded to -$38.7 billion in December, wider than forecasts of -$36 billion, due to weaker exports, and a wider petroleum deficit. 
  • Economic highlights for the week ahead:
    • Thursday, 2/13/2014: Jobless Claims, Retail Sales.
    • Friday, 2/14/2014: Industrial Production, Consumer Sentiment.

Municipal market themes: Puerto Rico, University of California, Placentia.

  • Puerto Rico: Last week both Standard & Poor’s and Moody’s Investors Service downgraded Puerto Rico to BB+ and Ba2, respectively.  They both cited a lack of economic growth and challenges associated with accessing the capital markets.  The improvements made under the Padilla Administration, including controlling spending, reforming retirement systems, reducing debt issuance and stoking the economy have been notable, though not sufficient to offset its high fixed costs, narrow liquidity, and constrained market access.
  • University of California: Fitch Ratings downgraded the University of California to ‘AA’ from ‘AA+’, as the negative operating margin increased to -8.9%, representing the sixth consecutive deficit.  The stable outlook reflects anticipated improvements in the operating deficit, strong financial cushion, strong reputation, and strong student demand.
  • Placentia: Facing deficits from increasing retirement costs, the Orange County City is dealing with rising operating deficits, scheduled to be as high as 15% by fiscal 2018.  A recent report from consulting firm Management Partners stated the deficit could lead to insolvency.  The current fiscal budget, absent of corrective actions, is projected to be $1.2 million, and the city has $1.3 million in reserves.  The City denies being insolvent, and is working on increasing billboard advertising, closing its police department, and raising property taxes to balance its operations.  The report is a reminder of how critical the proposed Pension Reform Act of 2014 is for many local governments.

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