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Schmohl Talk:  Weekly Bullets

January 7, 2013

Economic themes: Fiscal Cliff, Future Cliffs, Employment, Manufacturing.

  • Fiscal Cliff: If we have learned one thing from the Fiscal Cliff debate, it is that the Federal government is enamored with threatening to voluntarily walk off of a cliff.  Despite leaking into the New Year, the American Taxpayer Relief Act of 2012 was passed, making the Bush tax cuts permanent for incomes under $400k for individuals, $450k for couples, the top capital gains rate increases to 20%, estate taxes increased to 40% above $5 million, AMT was adjusted for inflation, and the payroll tax cut expired.  Tax revenues as a percentage of GDP will remain near 60 year lows (a win for Republicans) we avoided reforming our social insurance programs to be sustainable for the long term (a win for the democrats); resulting in short term gain for long term pain. 
  • Future Cliffs: Spending and debt ceiling debates are likely to continue.  We should reform our social insurance programs to be sustainable for the long term.  The debt ceiling debate is interesting in that the government already approved spending, and then essentially refuses to fund it, which I would consider a reckless way to play with the Government’s full faith and credit pledge.
  • Employment: 2012 resulted in bringing the unemployment rate down to 7.8%, after beginning the year at 8.3%.  The 0.5% improvement can be viewed as positive, but some of the improvement is attributed to the shrinking labor force, and if we continue to create jobs at the 150k/month pace, it would take an estimated six years to reach full employment.
  • Manufacturing: The ISM Manufacturing Index posted a 50.7 figure for December, reflecting a mild expansion, led by new export orders. 
  • Economic highlights for the week ahead:
    • Thursday, 1/10/2013: Jobless Claims.
    • Friday, 1/11/2013: International Trade.

Municipal market themes: Redevelopment, School Funding.

  • Redevelopment: Over a year has passed since redevelopment was eliminated in California, and many agencies are left with more questions than answers.  Municipal bonds for the agencies are readily considered valid enforceable obligations under the Recognized Obligation Payment Schedule, however, the validity of certain projects such as football stadiums have not been recognized, resulting in a wave of lawsuits. 
  • School Funding: California Governor Jerry Brown is lobbying to shift funds to less fortunate school districts, and make certain programs mandatory.  Expect more details in the upcoming budget proposal. 
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