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Reported by Chris Dixon, Senior Manager, Industry Analysis, Deltek

Deltek's Take:

Key state and local government consumption categories, from which IT consumption and investment are derived, continue to show resilience, as they have  over the last two years.

Thanks to upward revisions in some figures, annualized state and local revenue collections were only $23 billion off the last peak and revenue stability has improved significantly in recent quarters.

However, while unemployment rates are slightly better than would be expected in many states, most revenue sources remain well below their previous peaks, dictating guarded optimism for incremental state and local revenue growth in 2011 while employment and benefits issues are sorted out.
 
The tapering of federal stimulus funds as well as a surge of anti-tax governors and legislators will result in more budget cuts, but state and local budgets should be "right-sized" and poised for net gains by 2012, if an externally or politically induced recession does not occur in the interim.

I. Consumption and Investment

State and local government consumption and investment in IT related goods and services is nested within the context of larger consumption and investment categories, which are tracked on a quarterly basis by the U.S. Bureau of Economic Analysis (BEA) in NIPA tables 3.9.5 and 3.10.5.

• Equipment and Software - Investment in equipment and software previously peaked at $63.9 billion in 2008-II (not shown) and then declined to $62.1 billion (-2.8%) by 2009-I before rebounding to a new peak of $64.1 billion (+3.2%) in 2010-IV and 2011-I.
• Services - During the period shown above consumption of services saw no quarterly declines and enjoyed a steady increase (+4.8%) with the largest quarterly gain ($4.1 billion) coming in 2011-I.
• Structures - Investment in structures, which includes data centers and other IT facilities, hovered in the $290 billion range for a year (2008-III to 2009-III) before declining $26.2 billion (-8.9%) from its 2009-II peak.  Spending  rebounded $16.0 billion (+6.1%) from the 2010-I low to $283.0 billion in 2010-III.  With the end of federal stimulus for public facilities, the total dropped 5.2% in to a new all-time low of $262.1 billion in 2011-I.

Context: Total state and local government consumption of intermediate goods and services (of which the data cited above is a subset) peaked in the third quarter of 2008-III at $1.47 trillion (not shown) and then rapidly declined (-3.4%) to $1.42 trillion as of 2009-I.  Consumption has rebounded (+2.7%) to a new all-time high of $1.48 trillion as of 2011-I.  However, all 2011-I figures were revised significantly downward by the BEA in June from May estimates.

II. Revenues

The U.S. Census Bureau's quarterly summary of state and local tax revenues provides insight into the stability (nonvolatility) and revenue generating capacity of state and local governments on an annualized basis.

Annualized Revenue Collections

Category	Last Peak (for 12 Months Ending)	Last Bottom (for 12 Months Ending)	Latest (for 12 months ending 01/2011)
Total Collections	$1.32 trillion (12/2008)	$1.26 trillion (09/2009)	$1.30 trillion
Volatile Sources
Individual Income	$304.7 billion (09/2008)	$249.0 billion (12/2009)	$261.7 billion
Corporation Net Income	$61.5 billion (09/2007)	$44.2 billion (09/2010)	$45.6 billion
General Sales and Gross Receipts	$309.9 billion (09/2008)	$282.1 billion (03/2010)	$292.6 billion
Motor Fuel Sales	$38.9 billion (03/2008)	$36.4 billion (03/2010)	$38.8 billion
All Other*	$143.2 billion (09/2008)	$127.0 billion (12/2009)	$137.2 billion
Nonvolatile Sources
Property	$477.4 billion (12/2010)	$467.5 billion (03/2010)	$471.9 billion
Tobacco Product Sales	Currently at peak.	$16.9 billion (12/2009)	$17.7 billion
Alcoholic Beverage Sales	Currently at peak.	No bottom since 1996.	$6.1 billion
Motor Vehicle Operator's Licenses	Currently at peak.	$23.5 billion (09/2009)	$25.0 billion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Note: The “All Other” category includes gaming revenue, severance taxes, stock-transfer taxes, inheritance/estate taxes, gift taxes, and so forth.

Color Coding Key:

• Green = Above last peak, rising
• Yellow = Below last peak, rising
• Red = Below last peak, falling

Continued gains among the volatile revenue sources, including a small gain in corporate income taxes (after 12 consecutive quarters of decline) compensated for the shortfalls in the nonvolatile sources as total collections (for the 12 months ending 01/2011) were only $23 billion off the last peak (for the 12 months ending 12/2008). Growth in total collections since September 2009 points to stabilization.  However, the minor declines among the nonvolatile revenue sources dictates guarded optimism for anything more than meager growth in state and local revenues.

Overall Revenue Stability: Improving

The nonvolatile sources of revenue declined to roughly 45 percent of total revenue collections in the month just prior to the beginning of the last recession.  Over the course of 12 consecutive quarters, the nonvolatile portion of total collections rose to 51.3 percent (for the 12 months ending 12/2010), the highest level recorded by Census data going back to 1996.  However, the nonvolatile portion dipped slightly to 50.7 percent for the 12 months ending 01/2011 due to a small decline property tax collections.  While this is not a major decrease it does indicate a continued volatility to state and local revenues.

III. Employment

Historically, each state has a distinct level of unemployment in recessionary and non-recessionary periods based on a variety of social and economic factors.  The U.S. Bureau of Labor Statistics' (BLS) monthly unemployment figures can be compared to the annual and multi-quarter data on Alternative Measures of Labor Underutilization for States to determine whether a state has a worse-than-expected unemployment rate (underperforming) or better-than-expected unemployment rate (overperforming) in a given month.  This data also provides a more consistent indicator than basic (U3) unemployment data with no historical context.

State Unemployement Performance, April 2011

 

The greener the state, the more likely that its labor force has either stabilized or surpassed its expected level of employment as compared to its unique historical average.  These states are the most likely to see stable or growing revenues due to economic growth.

IV. Economic Activity

Chicago Fed National Activity Index (CFNAI)

"Led by improvements in production-related indicators, the Chicago Fed National Activity Index increased to –0.37 in May from –0.56 in April. Two of the four broad categories of indicators that make up the index improved from April, but only the production and income category made a positive contribution to the index in May. Employment-related indicators made a small negative contribution to the index for the second straight month."

State and local governments rely heavily on volatile corporate, sales, property, and other taxes that tend to rise and fall in tandem with regional and national economic trends; therefore,INPUT tracks the trends in the national economy in order to determine likely course of revenue collections.  The Federal Reserve Bank of Chicago's National Activity Index (CFNAI) is a less politicized source for guaging the monthly status of the national economy than most major indexes.