Danielle DiMartino Booth on States That Were Hit 'Particularly Hard' by the New Tax Law

Tue, Mar 12, 2019 - 9:03am

Danielle DiMartino Booth recently spoke with Financial Sense president Jim Puplava about signs that could indicate the economy is shifting toward recession. She discusses the increase in jobless claims in cyclical parts of the economy and how states like California are being impacted by the new tax law.

“What we're seeing is an increase in jobless claims being filed in the most cyclical industries and the reason we parse out cyclical versus more services type industries is they tend to be the first type of jobs to go when an economy is at an inflection point—when an economy is starting to turn. So, that is what we follow most closely. For example, if you were to look throughout the United States right now, we're seeing jobless claims begin to turn in states that have big manufacturing bases. A lot of the fear over tariffs increasing has worn off so companies that did panic hiring in order to do panic buying to try and get in front of tariffs potentially rising from 10 to 25 percent, they're realizing now that they've got stockpiled goods, inventory and not enough people to buy them. We're starting to see the cyclical sector of manufacturing back off. We're starting to see the cyclical sector of leisure, hospitality and travel get smaller. A lot of the individuals in states that have been hit by higher income taxes after the tax bill was passed are finding they don't have the money they thought they had to take that vacation. They're going to be driving instead of flying, so again it is the cyclical industries that are being affected nationwide, and certainly in California, right now."

Danielle, is that typically one of the first signs that you see when an economy is weakening or possibly heading into a recession? It's the cyclical sectors that get hit first. We're seeing a slowdown in auto sales, we've definitely seen a slowdown in housing—does this back that up?

"It certainly does…and the reason we follow cyclical industries is because they tend to lead the cycle. When households are first pinched, when they're first looking at their budget and saying, ‘Woah, I can't afford to do this or that’, the first thing we see go are discretionary purchases of any kind. Purchases like a new car they might have had their eye on and of course they're going to be staying put in their home rather than looking to trade up. You certainly see real-estate start to take a hit as well and you can follow any of the main technology sector stocks that have been hit it would have an outsized effect on California real estate."

What about corroborating evidence in terms of restaurant sales or retail sales? I have something that I call my parking lot indicator. We have a major mall that we live close to and I can remember in 2007, when it became easier to find a parking space and it just told me something was happening in the economy. When I talked to the merchants inside the stores, they were seeing a slowdown in retail sales.

"Oh, they're certainly some of the first things to go. These are discretionary purchases so as a mom and dad you're saying, ‘You know what we're not going to the Applebee's right next to the mall anymore, we're going to have just one night out as opposed to instead of maybe two in the week. They're going to start to pull back and you'll see that first and foremost in not being able to get that extra pair of tennis shoes and not being able to have that meal out. A very good way of also looking at it is if you ever see traffic flows dissipate, if you ever see that your commute is taking less time, that means there are fewer people trying to get to work. That's another good way of following the economy when you're behind the wheel."

In the last downturn with the real estate bubble, we had states like Nevada, Arizona and Florida that were hit probably harder because of the real estate boom. Can you see that happening this time around, but maybe this time it's California, New York, New Jersey where this new tax law is really having an impact? We just had governor Cuomo say New York tax revenues were shot by several billion dollars because of people moving out of the state.

"I think part of the problem you're going to see is in states that are impacted by the $10,000 cap on state and local tax deductions. They also happen to be states that benefited from federal reserve policy, and if you will, that benefited from the financialization of the economy... So you're not only going to see a blight related to increasing taxes, you're going to get a double whammy in these particular markets because markets are backing off and the prices were overly inflated to begin with. Some of these states are going to be hit particularly hard."

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