Axios Macro

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February 21, 2023

... And we're back. This short week will include the latest release of Fed minutes tomorrow afternoon, with January data on personal income, spending and inflation out Friday.

  • Today, a look at one of the big differences between this expansion and the one that followed the global financial crisis: flush state and local governments. Plus, bond yields keep on rising.

💸 Situational awareness: In one more data point for the "the job market is actually strong" file, Home Depot said it will spend an extra $1 billion to give its frontline workers a raise.

Today's newsletter, edited by Javier E. David, is 638 words, a 2½-minute read.

1 big thing: Economic tailwind from flush states

Illustration of a hundred dollar bill folded like a roadmap with navigation points dropped around it.

Illustration: Aïda Amer/Axios

State and local governments are facing very different circumstances than they did during the yearslong slog that followed the Great Recession: They are swimming in cash.

Why it matters: State lawmakers have begun to hash out budget plans for this fiscal year. There are exceptions — California being one — but for the most part, state coffers are fat and generally finances are in good shape. That enables state-level spending to help keep growth humming.

Federal Reserve chair Jerome Powell acknowledged this tailwind as one reason why the economy will continue to grow this year.

By the numbers: In nominal dollars, states' total balances — a tally of rainy day funds and other reserves — have roughly tripled over the past two years, according to a report by the National Association of State Budget Officers released last month.

  • Total balance levels are expected to decline somewhat in the most recent fiscal year, from a record $343 billion reached in the prior year. That reflects "plans to spend down a portion of their larger-than-expected ending balances ... including for one-time investments."

What they're saying: "Reserves are at an all-time high in many states, and budgetary liabilities have been paid down — or even eliminated," Fitch Ratings' Eric Kim said at a recent event, hosted by the Volcker Alliance and the Penn Institute for Urban Research.

Flashback: In the aftermath of the 2008 crisis, state finances came under stress and miserable conditions lingered, with revenues plunging. To plug the hole, there were deep cuts to state programs.

  • Following the pandemic-induced recession, conditions were generally the opposite. Tax revenues soared, helped in recent months by pricier goods that have buoyed sales tax revenues.
  • State and local municipalities received historic support from government aid packages, some of which haven't been fully spent yet.

What to watch: State officials are paring back expectations for tax revenues, bracing for an economic slowdown.

  • New York and California are preparing for a drop in personal income tax receipts, thanks in part to the slowdown from the technology sector and on Wall Street.
  • "It's not entirely clear yet whether California or New York are the leading edge or outliers because of some aspects of their economy. We are still seeing steady revenue growth across most other states right now," says Kim.

Go deeper

2. Bond yields keep on rising

Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

Day by day, financial markets worldwide are adjusting to the reality that rates are going to go higher.

  • That's the takeaway from the upward march in bond yields that has taken place throughout February and continued today.

Why it matters: In December and January, it looked like inflationary pressure was cooling, and that central banks worldwide were on track to be able to declare victory on inflation and even cut rates later this year.

  • Now, a series of economic indicators point to robust growth and continued inflation pressure, and that outlook is shifting — and not just in the United States.
  • Markets are now betting that major central banks will push rates higher, and that they will keep those high rates in place longer in their efforts to quash price pressures.

By the numbers: Ten-year U.S. Treasury yields are up another 0.08 percentage points, to 3.91% as of mid-morning. That rate was under 3.4% on Feb. 1.

  • German bond yields are up 0.45 percentage points from their recent lows Feb. 2. The British 10-year rate is up 0.6 percentage points in the same span.

Between the lines: Steeper borrowing costs are also translating into lower prices for stocks and other risky investments. The S&P 500 is down 1.4% as of mid-morning.

The bottom line: For much of last year, financial markets were adjusting to the prospect of tighter monetary policy as stock and bond prices moved together. December and January offered a break from this pattern, but it returned with a vengeance in February.