1st Mariner Bank » Anirban Basu

Maryland’s Economy Outperforms Expectations

Anirban Basu — Fri, 13 Apr 2012 16:17:24 +0000

Anirban Basu, Chairman & CEO of Sage Policy Group, Inc.

Job creation has picked up in Maryland. After stumbling for much of the previous summer, recent months have been very positive from a job growth perspective. The working hypothesis is that this represents economic multiplier effects related to base realignment activities at Fort George G. Meade in Anne Arundel County and at Aberdeen Proving Ground in Harford County.

Between February 2011 and February 2012, employment in the Free State increased 1.9 percent or by 47,000 jobs according to establishment survey data provided by the Bureau of Labor Statistics. That ranks the state seventh in the nation with respect to year-over-year percentage job growth, a significant improvement from a particular period last year when Maryland ranked dead last (May 2010 v. May 2011). Leading growth sectors include construction (+5.0%), education and health services (+4.2%), professional and business services (+3.1%) and leisure and hospitality (+2.9%). Base realignment has helped to support job growth in a number of key business segments, including professional services and construction.

Maryland’s January 2012 unemployment rate represented the lowest rate in three years. The state’s jobless rate dropped to 6.5 percent in January, almost 2 full percentage points below the national average of 8.3 percent for that month (now 8.2 percent; March 2012).

Other sources of information are similarly sanguine. A recent Maryland Survey of Business Activity conducted by the Federal Reserve Bank of Richmond indicates that business activity increased at a solid pace in March with the general business activity index jumping to 26 from 8 – the highest reading since April 2011. Roughly 50 percent of respondents in the March survey expect business conditions and sales revenue to improve over the next six months.

Despite the emergence of optimism, headwinds remain. As of this writing, U.S. equity markets are in retreat and long-term interest rates are falling, an indication of ongoing concern regarding the economic outlook. The consensus forecast is for roughly 2 percent growth in America in 2012, with the implication being that the economic recovery remains fragile.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Mr. Basu is one of the Mid-Atlantic region’s most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Mr. Basu has written several high-profile economic development strategies, including co-authoring Baltimore City’s economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Maryland’s 2012 Economic Outlook with Anirban Basu

Anirban Basu — Wed, 18 Jan 2012 14:46:13 +0000

Anirban Basu Chairman & CEO of Sage Policy Group, Inc

Maryland Gained Momentum Late Last Year

For much of last year, Maryland’s economic performance was among the worst in the nation. For instance, year-over-year job growth in the state was in negative territory or close to zero for most of the summer. But like the balance of the nation, economic performance began to materially improve toward the tail end of the year. For the 12 months ending in November 2011, employment in the Free State expanded 0.7 percent (+18,300 jobs), ranking the state 33rd along this dimension. That may not sound like anything to crow about, but just a few months prior, Maryland ranked dead last. Maryland’s subpar performance mid-year appears to have been closely linked to the nation’s debt ceiling debacle and the impact of that episode on federal agency spending, including upon procurement.

Exhibit 1. State-by-state Job Growth, 12-month Percent Change, November 2011

Through it all, Maryland has managed to sustain one of the nation’s lowest unemployment rates. Statewide unemployment declined to 6.9 percent in November, the lowest level since June 2011. That is the 15th lowest unemployment rate in the country.

Other data is also largely encouraging. The most recent Maryland Survey of Business Activity conducted by the Federal Reserve Bank of Richmond indicates that business activity in Maryland increased moderately in December. The general business activity index registered a reading of 7, a meaningful increase from -3 the previous month and the first positive reading since September. The expectations index, which declined 9 points to 22, indicated that while broadly positive expectations of general business conditions six months from now have moderated slightly, survey respondents continue to predict economic growth in the near term.

All of this is consistent with the notion that some of the factors that restrained growth in 2011, including federal government gridlock, sagging home prices and issues emerging from Europe, are likely to continue to shape economic performance during the first half of 2012. However, despite these and other headwinds, the state’s economy is anticipated to continue to grind ahead for now.

Pace of Job Growth Remains Lackluster

Anirban Basu — Tue, 18 Oct 2011 14:46:51 +0000

Anirban Basu Chairman & CEO of Sage Policy Group, Inc

This was supposed to be a decent year for job growth in Maryland. With the nation’s economy now in recovery and adding jobs, positive base realignment effects, cyber-security, healthcare, higher education, the Port of Baltimore, BWI, retail and other industry drivers, expectations were probably higher coming into the year than at any point since 2007.

But the state’s job engine has generally sputtered. According to the most recent data available from the Bureau of Labor Statistics, Maryland’s economy shed 2,500 jobs in August, a 0.1 percent drop from the previous month and only up 0.1 percent from one year prior. That year-over-year performance ranks the state 43^rd in terms of job growth. During the same twelve-month period, the nation added 1.49 million jobs or 1.0 percent.

While the nation has outperformed Maryland along this dimension, data indicate that job growth has been softening nationally. This may seem like a strange claim to make since the most recent employment report from the Bureau of Labor Statistics revealed that the nation added 103,000 nonfarm jobs in September, the best performance since July and better than August’s 57,000 net new jobs figure.

But dig into the data, and the message from September is not as clear. The 103,000 figure includes roughly 45,000 Verizon workers who came back to work. Strip out those jobs, and the September figure looks more like 58,000. What’s more, those 45,000 information industry workers went missing from the August jobs data, which means that actual job creation in August was closer to 100,000. However, approximately 22,000 State of Minnesota employees came back to work in August, meaning that the adjusted August figure is around 78,000. Consequently, while many people are under the impression that job growth accelerated in September, it did not when one takes extraordinary items into account.

What’s more, the pace of job growth continues to fall well short of what is needed to bring down the nation’s unemployment. For several months, the nation’s leading measure of unemployment has been stuck at 9.1 percent and the nation still has roughly 6.6 million fewer jobs than it did when the recession began in December 2007. The industries that have suffered the largest job losses include manufacturing, construction and distribution, all key industries in the Baltimore metropolitan area.

The employment look remains cloudy. Financial markets swooned during the third quarter, perhaps implying further economic slowing in the months ahead. Were that to occur, job growth would remain lackluster at best.

Is the Cost of Living and Inflation Higher in Washington-Baltimore Area?

Anirban Basu — Mon, 18 Jul 2011 21:07:49 +0000

The Difference between Inflation and Cost of Living

Inflation is defined as an increase or change in the general price level. Generally, inflation is viewed negatively since (all things being equal) an increase in prices reduces purchasing power. The cost of living can be understood as the general price level itself. In other words, a place that is terribly inexpensive to live in can be associated with high inflation, though if that high inflation persists, that place will not remain inexpensive. Conversely, an area that is expensive can be associated with low inflation.

• Maryland is an Expensive Proposition

Data indicates that Maryland and the Washington-Baltimore area are associated with both a high cost of living and higher rates of inflation than national averages. For instance, 43 states were associated with a lower cost of living than Maryland during the final quarter of 2010 according to the Council for Community and Economic Research (Exhibit 1). Maryland’s overall cost of living is roughly 25 percent higher than the national average, housing is 69 percent more expensive and utility costs are 17 percent higher. Transportation and grocery costs are also higher in Maryland by 8 and 10 percent, respectively.

Exhibit 1. State Cost of Living Rankings, Fourth Quarter 2010

The recent housing downturn, which has been disproportionately felt on the coasts, has both reduced inflation and diminished the difference in cost of living with the balance of the nation more recently. Consumer prices excluding food and energy expanded 1.9 percent in 2009 in the Washington-Baltimore region and just 1.4 percent in 2010. According to the Federal Reserve Bank of Richmond, the average value of homes in Maryland has declined 21.4 percent since 2007. This has reduced the overall pace of inflation.

However, inflation ran at more than a 2 percent pace during the first three months of 2011 locally, in part a reflection of growing pricing power among area businesses. Between May 2010 and May 2011, core prices in the Washington-Baltimore area climbed 2.3 percent compared with 1.5 percent nationally.

Exhibit 2. Core CPI Growth by Select Metropolitan Area, 2000 v. 2010

Bureau of Labor Statistic

Implications

Despite the recent and ongoing housing downturn, Maryland remains an expensive proposition. Like other Americans, Marylanders have had to deal with a host of rising costs, including food and energy prices.

Indeed, Moody’s Analytics cites high business costs as being one of Maryland’s biggest obstacles to recovery. Operating costs are higher in Maryland because businesses consume pricey energy and transportation. Moreover, the overall higher cost of living necessitates higher wages, which creates further operating cost disadvantages.

This may help explain Maryland’s lackluster job creation in recent months, which has significantly underperformed the nation. One of the questions for state and local policymakers is whether or not there are possible shifts in policy that would help reduce business operating costs without generating substantial harm to quality of life.

Maryland’s Economy: There is Still Plenty of Reason for Concern, but the Reasons Have Changed

Anirban Basu — Fri, 15 Apr 2011 19:52:49 +0000

Focus Shifts from Growth to Inflation

Economy Now Enjoys Self-Sustaining Momentum

Coming into 2011, economists remained largely fixated on the inadequacy of demand for labor, housing, commercial real estate and other aspects of economic life. Economists have been busily pouring over reams of data regarding senior bank loan officer attitudes, consumer credit availability and other indicia of credit market thawing. The conventional wisdom has been that until banks begin lending more aggressively, the U.S. economy will continue to be lackluster and the recovery that began in mid-2009 will remain fragile.

With the first quarter now over, many of the principal economic concerns coming into the year have been largely addressed. For instance, demand is building. Retail sales are up 9.5 percent on a year-over-year basis through February. Overall consumer spending is up 2.5 percent with the purchase of durable goods up 11.9 percent on an inflation-adjusted basis. Adjusted for inflation, private nonresidential fixed investment was up 1.9 during the fourth quarter and 10.6 percent year-over-year.

Moody’s Economy.com presently predicts that consumption will expand 3.3 percent in 2011, with motor vehicle sales rising 13.6 percent. Fixed investment is predicted to rise nearly 9.6 percent this year, with investment in equipment up 10.3 percent.

Foreign demand has also been strong. Despite a sea of troubles ranging from Portugal to Japan and engulfing Tunisia, Egypt, Libya, Greece, Yemen and Pakistan, the world increasingly looks to America for output. That is very encouraging. Since January 2010, U.S. exports are up 6.9 percent on a seasonally adjusted basis and 18.9 percent on a not seasonally adjusted basis, with sales to China, India and Brazil up 17.3 percent, 42.2 percent and 7.4 percent, respectively.

The accompanying increase in production has led to the emergence of a new trend in America: employment growth in manufacturing. For six months running, the number of manufacturing jobs in America is up on a year-over-year basis, with March 2011 industry employment totals 196,000 jobs above the corresponding month one year prior.

Employment growth has generally been accelerating in America. Nonfarm payroll employment increased by 216,000 in March according to the Bureau of Labor Statistics (BLS) and the nation’s unemployment ticked down to 8.8 percent. BLS observed job gains professional and business services, health care, leisure and hospitality and mining. However, the number of long-term unemployed (those jobless for 27 weeks or more) totaled 6.1 million in March and their share of the unemployed increased from 43.9 percent to 45.5 percent over the course of the month.

All of this positive economic news has allowed equity markets to bounce higher. At the beginning of the year, the Dow Jones Industrial Average stood at 11,577. By the end of March, the Index stood at 12,320 and as of this writing has risen above 12,400. The S&P 500 is up 6.0 percent since the beginning of the year. That’s simply remarkable in light of the tragedies in Japan, sovereign debt issues in Europe, civil war in Libya and oil prices that are now above $110 a barrel.

Inflationary Pressures Have Been Building

For months, we have been suggesting that it is still too soon to tell whether or not inflation will become problematic. Indeed, recent core inflation data (all components except food and energy) indicate that inflation remains mild. Through February, core inflation was running at a 0.2 percent monthly rate and 1.1 percent annual rate in America despite increases in medical care expenses (up 0.4% for the month and 2.9 percent year-over-year).

That said, inflationary buzzards have begun to circle. There are a number of factors that collectively conspire to support the emerging view that at some point later this year or in 2012 the U.S. Federal Reserve will begin to find it necessary to constrain inflationary pressures by reducing money supply growth and increasing short-term rates.

While much of the recent focus has been upon food and energy prices, commodity prices generally have been marching higher. For instance, steel and iron producer prices are up 16.8 percent through February on a year-over-year basis. Gold now stands at $1,471 a troy ounce, up 27.9 percent from a year ago. Cotton prices recently set a record at $2.11 a pound. Certain non-commodity prices have also been drifting higher, including airline fares, which are up 12.3 percent year-over-year through February.

What’s more, import prices are also up with a growing number of nations reporting widening inflationary issues. In India, inflation is up 18.9 percent year-to-date through February. In China, the corresponding statistic is 10.0 percent. In Mexico, consumer prices are up 10.8 percent through March. Presumably, this inflation will continue to be exported to America in the form of higher priced clothing, food and household items.

Thus far, many prices have been constrained due to productivity gains and the inability of producers to pass along input price increases (including those associated with oil prices) to consumers. But with the economy steadily improving, consumers are likely to face rising prices for many goods and services, and that will ultimately prompt the Federal Reserve to begin to meaningfully chip away at the massive monetary accommodation it has been providing to the economy in the wake of the financial crisis that gripped us in September of 2008 and the accompanying Great Recession.

Implications for Investors

It has been wonderful to be exposed to equities over the past two years. The Dow Jones Industrial Average is up roughly 92 percent since its March 9, 2009 intraday low. The simple laws of gravity suggest that at some point, some of these gains will be returned. But the specter of inflation is now becoming more apparent, with the primary implication being that the current interest rate environment is about to shift. That would impact the multiple on corporate earnings and therefore stock prices.

Emerging inflationary pressures render bond investing particularly challenging. Even in the absence of inflationary pressures, bond market fluctuations have been unusually difficult to predict. Sovereign and municipal debt issues have unnerved many investors and yields have been drifting higher on various forms of debt. As of this writing, the yield on the 10-year U.S. Treasury stands at 3.59 percent, up 41.3 percent from early November 2010.

On top of that, commodities have enjoyed a remarkable run as well. It is unlikely that this can continue in conjunction with an ongoing equity market rally. To put it in the simplest terms, something has got to give. Therefore, while underlying positive economic momentum implies that substantial exposure to equities remains sensible as we approach mid-year 2011, investors should be thinking about quick response strategies to a potential market correction that could be triggered by bad news regarding core inflation.

Crystal Balls, Ouija Boards, and Basu? What’s the 2011 Maryland Economic Prediction?

Anirban Basu — Thu, 27 Jan 2011 19:42:15 +0000

Equity Markets and Economy Have Turned for the Better

Why Economic Activity may not Accelerate as Dramatically as Expected this Year

A combination of ongoing stimulus and recent economic momentum has induced many economists to ratchet up their 2011 forecasts and there are plenty of reasons to be optimistic. Consumer spending has been rising, with retail and food services sales up 7.7 percent between November 2009 and November 2010. Auto sales have also been edging higher, including among America’s big three automakers. The holiday shopping season was the best in several years.

It also helps that financial markets have been recovering. On March 9th of 2009, the Dow Jones Industrial Average sank to 6,469.95 intraday. As of this writing, it stands at well above 11,600. Since financial market performance often foreshadows broader economic performance, the implication is that the economy is in for some better times ahead.

While it is true that 2011 is very likely to be a year a solid growth, it is possible that members of the dismal science have become a bit too optimistic in their projections in recent months. There are (at least) ten factors that could act as speed governors on the U.S. economy this year.

Consumers tap their brakes
Though household spending was unexpectedly strong in 2010, in the absence of substantial income growth, this is unlikely to continue particularly if consumers are spooked by unemployment rates that still hover near double digits. Many consumers may feel buyers’ remorse during this year’s first quarter as credit card statements tumble in.
Housing market recovery scrubs much of its speed
The fear had been that once the first-time and move-up buyer tax credits expired, the housing market would begin to swoon. That is precisely what happened, with existing home sales slumping since May and new home sales performing even more sluggishly.
Federal spending cuts diminish momentum

Congress has not been as serious about deficit reduction since arguably the early 1990s. Already, the newly-seated Congress is talking seriously about substantial cuts to discretionary spending, including within the Department of Defense budget.

State/local tax increases become a source of slippage
At least 46 states struggled with fiscal shortfalls when adopting budgets for the current fiscal year, which in most states began July 1st. The collective budgetary gap for 2011 and 2012 is $260 billion.

The stimulus turbocharger cuts off
Though much of the $787 billion associated with the American Recovery and Reinvestment Act of 2009 has yet to be spent, by some point in 2011, the federal stimulus driver will begin to wind down, and that remains another reason to believe that another economic downturn could be headed our way.
European debt crisis is no formula for success
Greece, Portugal and Spain have all experienced debt downgrades. Greek debt has now reached junk status. Though members of the European Union have established a $1 billion bailout fun, there is still the possibility of a sovereign default going forward. Nearly 100 European banks are being stress tested.
State and local government spending further deflates aggregate demand
Despite ongoing assistance from the federal government, it is clear that most state and local governments have begun to decelerate spending. While there is something positive associated with the rationalization of spending levels, in the short-term the impact is negative including upon contractors.
Government spending cuts in other parts of the world puts global expansion into neutral
At the most recent G-20 summit, nations from around the globe agreed to slash their deficits over time. A number of countries in Europe, including Greece and Spain, have initiated austerity programs through a combination of tax increases and spending adjustments. Not surprisingly, recent data indicate that global economic expansion is beginning to soften.
Bond market continues to fade
Bond traders have become increasingly unnerved by sovereign debt issues, growing fears of inflation and the temptation to leave fixed-income assets for equities. If the bond market continues to experience outflows, interest rates could rise further, slowing economic progress in the process. According to Barron’s, bond mutual funds redeemed nearly $15 billion in December, the heaviest outflow since October 2008.
Unemployment remains high and private job growth has not picked up sufficiently

The key to sustained economic momentum is income growth. With employment growth still lagging and with the public sector now retrenching, the prospects for a significant acceleration in wage/salary income growth next year are weak.

Looking Ahead

Despite these risks to the economic outlook, this year is shaping up to be a good one for the U.S. and Maryland economies. The nation’s economy is positioned to expand at 3 percent or better adding an estimated 1.6 million jobs in the process. Unemployment should be closer to 9 percent by the end of the current year. Maryland is positioned to add more than 40,000 jobs this year, respectable performance by historic standards.

Based on that, more substantial exposure to equities appears warranted. Though investors must always remain vigilant, there is now more transparency regarding the direction of the U.S. economy than there has been for several years, and that has been and likely will be good for stocks in general.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Mr. Basu is one of the Mid-Atlantic region’s most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Mr. Basu has written several high-profile economic development strategies, including co-authoring Baltimore City’s economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Things are Better, but You’re Still Nervous

Anirban Basu — Thu, 14 Jan 2010 21:52:52 +0000

So are we…

Here’s the good news – 2009 is over. Here’s some more good news – 2010 will be better for the economy. Here’s the bad news – 2011 might not be and that implies that 2010 could be a volatile year for stock prices, which appear to lead the economy by six months or so. Bottom line: you should be prepared for a roller coaster ride this year as investors experience mood swings in the face of rapidly shifting economic forecasts and a world replete with geo-political uncertainty.

One might be tempted to dismiss this gloomy chatter. After all, the gloom and doomers have been talking about foreclosures, weak bank balance sheets, high unemployment, etc., for months only to watch the market surge ahead, creating significant wealth for believers in the process. In other words, since March of last year, it hasn’t paid to be a contrarian. After a January/February 2009 market swoon that left markets tapping against lows not felt for a decade, U.S. equities presided over a massive rally that began on March 9th and lasted virtually through the balance of the year with almost no interruption and reduced volatility. The S&P 500 rose nearly 24 percent for the year, while the more heavily cyclical and economically sensitive tech-laden Nasdaq was up a whopping 44 percent.

Investors in certain global markets fared even better. After a miserable 2008, the Shanghai Composite expanded 77 percent last year. Both the Borsa Italiana and Hong Kong’s Hang Seng Index were up more than 50 percent and many other global markets enjoyed returns between 20 and 30 percent.

While some observers may attribute these rallies to the liquidity-enhancing actions of policymakers across the world, the fact of the matter is that one of the primary drivers of equity performance last year was the return of corporate earnings. According to Morgan Stanley, operating earnings per share among S&P 500 companies were down 40 percent in 2008. But last year, they were up approximately 15 percent and are expected to be up 36 percent this year. It is for this reason that there are many who believe that the rally that began in March of last year can only continue.

The Case for Stepped-Up Volatility

As investors know, what makes a market is disagreement. Every exchange of assets, whether stocks, bonds or real estate is a reminder of the differential expectations and valuations between us. In our view, the gap in beliefs is growing as emerging optimism is countered by a growing sense that the good times simply cannot last forever and that reversals of momentum in corporate and economic performance may occur sometime later this year.

For now, economic momentum remains firmly in place. GDP expanded at an annual rate of 2.2 percent during the third quarter of 2009 and as of this writing the consensus forecast for the fourth quarter is north of 3 percent. Job loss has slowed to a crawl, with the Bureau of Labor Statistic’s initial estimate for December standing at -85,000, a far cry from January 2009 when the nation shed more than 700,000 jobs. In November, the nation actually added 4,000 jobs according to the standing estimate.

Reinforcing emerging domestic economic momentum is a synchronized global recovery. Economists from the IMF and other prominent institutions expect big growth years from China, India, South Korea, Brazil, South Africa among others. This creates more global wealth available to pour into equities and other assets as well as an environment conducive to expanding U.S. exports. Morgan Stanley Smith Barney economists expect that the global economy will expand more than 3 percent in 2010. Developing economies are expected to expand 6 percent while developed ones will expand about 2 percent. The U.S. is expected to outperform the collective performance of the balance of the developed world.

Based on this, how can anyone craft a case for enhanced volatility and perhaps even a reversal in market fortunes? The answer is that there are so many gray clouds out there that the likelihood of rain remains elevated. Take the inflation debate as an example – one that promises to intensify in 2010. As has been said before, inflation is everywhere and always a monetary phenomenon. Well, we got money. Both the Federal Reserve and the Federal Open Markets Committee have undertaken a set of unprecedented actions over the past 18 months as they moved the Fed Funds rate to virtually nothing and the balance sheet swelled to more than twice its pre-crisis measurement.

But what can be given can be taken back. The treasury debt purchase program that began during the spring of last year ended in October. The Fed has also announced a tentative cessation of its purchases of mortgage-backed securities at the end of the first quarter of 2010 with an aggregate purchase target of roughly $1.425 trillion. It was the commitment to the purchase of these assets that helped drive down mortgage rates. If the purchases stop, mortgage rates could rise by 1 percent or more in very short order.

Monetary policy will generally become tighter over the course of the year and increasingly the economic impact of the American Recovery and Reinvestment Act of 2009 will begin to wane as we approach 2010. Add it all up and the economy remains at risk of another recession or at a minimum an economic slowdown that batters corporate earnings growth; perhaps in 2011 or 2012 if monetary accommodation is pulled back too quickly. As theories of our collective economic future begin to diverge more forcefully over the months ahead, investors can anticipate a heightening of volatility.