Obama Goal to Trim Jobless Rate Is Endangered by State, Local Budget Cuts

President Barack Obama’s goal of driving the unemployment rate below 9 percent this year is threatened by state and local budget cuts that are likely to intensify as Federal stimulus money runs out.

Austerity measures may add as much as 0.25 percentage point to the unemployment rate this year, according to Mark Zandi, chief economist of Moody’s Analytics Inc.

“This could make the difference between ending 2011 with unemployment above or below 9 percent,” he said. “There’s no more serious drag on economic growth than the severe budget cutbacks at the state and local level.”

Reductions in public payrolls will ripple through the economy, slicing revenue at companies that rely on government contracts and depressing spending among those who are thrown out of work, Zandi said. The result could be the loss of 600,000 jobs in the fiscal year that starts July 1, he said.

State and local governments cut 12,000 workers from payrolls last month, a Labor Department report showed today. Total payrolls rose by 36,000, depressed by poor weather, and the unemployment rate dropped to 9 percent from 9.4 percent.

The 18-month recession that began in December 2007 -- the longest since the 43-month Great Depression -- shrank state and local tax revenue while inflating demand for services such as Medicaid and unemployment insurance. After three years of struggling to bridge budget gaps, many governors and mayors have exhausted one-time maneuvers and rainy day funds.

State and local governments fired 260,000 people last year -- more than General Motors Co.’s entire workforce -- even as companies expanded payrolls by 1.37 million. Since state and local government employment peaked in 2008, the 435,000 public- sector pink slips have exceeded General Electric Co.’s payroll.

Pace Rises

The monthly pace of state and local-government job cuts will rise to 25,000 to 30,000 in the second half of this year from the 2010 average of 22,000, predicts economist Dean Baker of the Washington-based Center for Economic Policy Research, who warned in 2002 of a national housing bubble.

The cuts make it harder to push the unemployment rate below 9 percent, Baker said. The White House predicted in its July 2010 mid-session budget review that the rate would fall to 8.7 percent by the fourth quarter of 2011.

Unemployment will average 9.3% this year, according to the median forecast of 65 economists surveyed by Bloomberg News. Federal Reserve policy makers’ central projections range from 8.9% to 9.1% for 2011.

Sal Guatieri, senior economist at BMO Capital Markets in Toronto, says job cuts along with higher local taxes and spending cuts could add a half point or more to the unemployment rate.

Waning Stimulus

Federal stimulus funding that has helped plug state and municipal budget shortfalls will shrink to $6 billion in the fiscal year starting July 1 from $59 billion this year, according to the Center on Budget and Policy Priorities in Washington, a non-profit research group.

“The federal government has made clear they’re not going to come in and bail out the states or paper over the problems, nor should they,” New Jersey Governor Chris Christie told Bloomberg News Jan. 25. “It’s time for us to get our house in order.”

New York Governor Andrew Cuomo this week proposed firing up to 9,800 state workers to close a $10 billion budget shortfall. New York Mayor Michael Bloomberg warned Feb. 1 that planned cuts in state aid would force the firings of “thousands” of teachers and other city employees.

Elsewhere, the Texas state senate is considering a budget proposal that would eliminate 8,167 jobs. In Iowa, Governor Terry Branstad said Jan. 24 that 1,500 state workers could lose their jobs. Massachusetts Governor Deval Patrick has proposed axing 900 positions on top of 5,900 already eliminated since 2008.

Police Officer

Fired employees spread collateral economic damage as they cut back on restaurant meals and other expenses.

Raymond Wiggins Jr., 32, lost his $48,500 job as a police officer in Pontiac, Michigan the day after Thanksgiving. The 10- year veteran and his wife, Sangeya, turned down the thermostat to 70 degrees from their customary 75 degrees. They’ve cut back to basic cable and spent sparingly on Christmas presents for their five-year-old son and three-year-old daughter.

Weekly family dinners at restaurants such as Outback Steakhouse, operated by Tampa, Florida-based OSI Restaurant Partners Inc., are now monthly treats -- if they happen at all.

“You have to look at everything you’re doing,” Wiggins said.

Spending by state and local governments in 2010 totaled $1.79 trillion, or 12 percent of gross domestic product -- more than federal spending or fixed investment. Adjusted for inflation, state and local government expenditures were down 1.3% from 2009, according to the Bureau of Economic Analysis.

Constitutional Requirements

Since the recession’s 2007 onset, state governments have closed total deficits of $430 billion with spending cuts, withdrawals from reserves, tax increases and federal aid. Every state except Vermont is constitutionally required to balance its budget.

States face an estimated $140 billion gap between the cost of providing required services and expected tax revenue in the fiscal year that begins July 1, according to the Center on Budget and Policy Priorities.

“There’s going to be a huge drag from this sector,” says Don Coxe, chairman of Coxe Advisors in Chicago, an investment advisory firm.

Some economists, including Andrew Tilton at Goldman Sachs Group Inc. in New York, are more sanguine. Tilton told clients in a Dec. 17 note that state and local retrenchment represents a “modest fiscal drag” on the recovery through 2012.

Coxe, who has managed money since 1972, says most analysts are overlooking the risks posed by the public sector’s financial plight. Battles between local governments and unions will depress consumer confidence.

“There will be weeks and weeks of ugliness and resentment,” he said. “All of that is not good for GDP.”

To contact the reporter on this story: David Lynch in Washington at dlynch27@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.