“Your Timely Roundup of Local, State, and Federal Updates”
The House and Senate return out in Washington D.C. to begin a three-week work period that may be the last chance lawmakers have for a legislative victory before campaigning begins for midterm election races. They’ll also likely be fielding numerous questions on what can be done about the latest report on inflation.
Back closer to home, a new report shows Illinois revenue has eclipsed $50 billion for the first time. Also, another report showed that outward migration isn’t as bad as once thought.
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Stunning Inflation Numbers and the Takeaway
Consumer inflation is still shooting upward despite interest rate hikes from the Federal Reserve and a host of policy responses from lawmakers over the past several months aimed at fixing supply chains. The Labor Department reported Wednesday that the consumer price index (CPI) increased 1.3 percent from May to June and was up 9.1 over June of last year, the highest rise since 1981.
Inflation dipped briefly this year from April to May, but otherwise has been steadily rising since May of 2020. There’s already been an outcry from lawmakers about the latest numbers. “Today’s consumer price inflation reading of 9.1 percent is a painful reminder that Americans’ paychecks continue to be strained by the high inflation that was fueled by Democrats’ untargeted and partisan spending spree. As the economy faces runaway inflation and rising odds of a recession and stagflation, raising taxes, killing jobs, smothering wages and imposing price controls makes no sense,” leading Senate Finance Committee Republican Mike Crapo (Idaho) said in a Wednesday statement.
Here are five takeaways from the latest inflation numbers:
Food and energy prices are hitting Americans the hardest
Economists tend to separate out food and energy prices from what they call “core inflation” since those categories tend to be the most volatile. But those are also the categories in which Americans feel price increases most acutely. Energy prices rose 7.5 percent from May to June and contributed nearly half of the overall increase, with the price of gasoline going up by 11.2 percent, according to the Labor Department.
Annually, energy prices are up 41 percent, with energy commodities up more than 60 percent. Food prices are up more than 10 percent on the year, and the price of groceries — or the “food-at-home” index — has risen more than 12 percent. Without the food and energy categories, annual core inflation dropped in June to 5.9 percent from 6 percent in May.
“But don’t get too excited,” Harvard economist Jason Furman tweeted. “This is probably not telling you what you think it is. All it says is that core inflation in the month of June-22 was slightly lower than it was in June-21.”
“That means that IF every month going forward looked like June then core inflation would eventually rise from its 5.9 percent 12-month change to something like an 8-percent or 9-percent change. Now I don’t expect that to happen for many reasons, but the new info in June was net worse, not better,” he wrote.
Chance of big interest rate hike from the Federal Reserve is growing
The Fed is in charge of the U.S. money supply and monetary policy, and the monetary response to rising inflation is typically to increase interest rates.
The Fed has been raising rates since earlier this year. Earlier in the year, the central bank said it intended to raise rates by 50 basis points, or half a percent, throughout the year. But its last rate hike was 75 basis points, indicating growing urgency about inflation that it had initially said was “transitory.” Now, the chances of even bigger rate hikes are increasing.
A market odds algorithm from derivatives exchange CME now puts the chances of a 100-basis point rate hike at more than 40 percent, up from 0 percent a week ago. Rate hikes from the Fed determine the rates at which banks and other financial institutions can borrow money from each other. This action translates down into more expensive credit markets for consumers who make payments with financing plans for things like mortgages, auto loans and credit card interest fees
Pressure on lawmakers to deliver supply side fixes for inflation increases
President Biden said Wednesday that he will urge lawmakers to use their fiscal policy powers to bring down prices on a variety of goods and services for Americans. “I will urge Congress to act, this month, on legislation to reduce the cost of everyday expenses that are hitting American families, from prescription drugs to utility bills to health insurance premiums and to make more in America,” Biden said in a statement on Wednesday.
Lawmakers have already tried to address inflation with new legislation like the Ocean Shipping Reform Act passed last month and signed into law by Biden. Lawmakers said the act would help to unclog ports — the site of shipping bottlenecks that have increased transportation costs — as well as check the overall bargaining power of the international shipping industry.
Facing various types of new regulation, U.S. businesses are advancing their own legislative agendas against rising inflation. “Inflation rose 9.1 percent over 12 months! Why hasn’t the administration cut tariffs? Why are they restricting future domestic oil & gas production? Why isn’t Congress working to expand legal immigration? Why is Congress breathing life into a bill to raise taxes on domestic investment?” Neil Bradley, head of policy at the U.S. Chamber of Congress, said in a Wednesday morning tweet.
Some economists, however, point to record profits of companies in the private sector as a key driver of inflation. “This morning’s report highlights the fact that aggressive interest rate hikes by the Fed have done little to combat the inflation that continues to take a toll on workers, families, and small businesses across the country. Additional rate hikes would push millions out of work and further raise the risk of a recession that would only worsen economic pain,” progressive economic research organization Groundwork Collaborative said in a statement.
“Policymakers must tackle inflation at its source: by addressing the rampant corporate profiteering and snarled supply chains that are causing significant financial hardship across the country,” the group said.
Markets could continue to fall and threat of a recession looms
The chances of a recession are growing. Deutsche Bank researchers launched a new research series devoted to the likelihood of a recession, writing in a note last week that “recession [fears] are boiling to a fever pitch.”
“In the US, jobless claims continued to tick higher, which our US economists have shown are one of the best leading indicators of recession risk,” Deutsche Bank strategist Tim Wessel and his coauthors wrote in a note to investors.
Since the Fed started raising interest rates in March, the S&P 500 stock index is down almost 9 percent. The Dow Jones Industrial Average is down more than 6.5 percent during the same period and is down almost 16 percent since the beginning of the year. Technology stocks, whose companies tend to have a lot of debt that’s vulnerable to rising interest rates, have been hit particularly hard. The technology-heavy Nasdaq stock index is down more than 10 percent since rates started going up and is down nearly 30 percent since January.
The geopolitical environment is still bad for inflation
Fiscal and monetary policy are both tools at the disposal of elected officials and regulators to fight inflation. But the geopolitical environment is mostly out of their control, and there’s still a lot to worry about on this front.
The BA.5 coronavirus omicron subvariant, which scientists say could be more contagious than other variants, is threatening new economic lockdowns in some parts of the world.
The war in Ukraine has continued to rage on, with Donetsk governor Pavlo Kyrylenko reporting a buildup of Russian troops in the Bakhmut and Siversk areas. The mayor has also called for an evacuation of civilians, according to media reports. The continued conflict has implications for global energy and food prices.
Moreover, the supply chain issues that most economists agree lie at the heart of inflation following the pandemic don’t show any signs of righting themselves. Just this week, Treasury Secretary Janet Yellen was in Japan to discuss supply chain restructuring, a long-term logistical process that promises no quick fixes for high prices.
State general revenues top $50 billion for first time in FY 2022
State tax revenues grew by $5.5 billion in the fiscal year that concluded on June 30, exceeding $50 billion for the first time in Illinois’ history, according to a new report from a state budgeting agency. The 12 percent base revenue growth in Fiscal Year 2022 gave lawmakers near-unprecedented flexibility in the current budget year.
That allowed the General Assembly to approve $1.8 billion in tax relief, pay $500 million more to state pensions than statutes require, retire hundreds of millions of dollars in interest-accruing debts early, and drive the state’s “rainy day” fund to its highest-ever balance of over $1 billion.
It also helped the state reach a zero-day accounts payable cycle – meaning it was caught up on its bills – for the first time in decades. But the report from the Commission on Government Forecasting and Accountability also noted that the pandemic-related drivers of growth, which led to nationwide revenue windfalls for nearly all state governments, are likely to wane in the coming months.
That’s something Gov. JB Pritzker told Capitol News Illinois last week that lawmakers planned for in April when they projected Fiscal Year 2023 revenues at $46.5 billion – an 8 percent decrease from the final FY 2022 numbers. “We wrote that into the budget, that is a decrease in revenue just in this coming year,” Pritzker said in an interview. “So, we understand that there were some temporary nature of revenues that were coming in.”
All told, the FY 2022 base revenues reached $50.3 billion without including direct federal aid. The number jumps to $51.1 billion when including a $736 million direct transfer-in of COVID-19 relief dollars. The base revenues were nearly $8 billion beyond the May 2021 projections on which the FY 2022 budget was based. Personal and corporate income tax grew $6.1 billion beyond what was projected in May 2021, while sales tax revenues were about $979 million beyond projections.
While the revenue windfalls won’t alleviate longstanding budget pressures such as a $130 billion unfunded pension liability that demands about a quarter of state general revenue funds each year, it’s a level of good financial news that Illinoisans are not accustomed to hearing – and a level of progress Pritzker has hung his hat on as he seeks a second term.
“A significant surplus and a zero-day payment cycle mean that our schools are funded, our roads are being rebuilt, and our healthcare providers are paid on time – and Illinois taxpayers are no longer dealing with hundreds of millions of dollars in interest payments because government didn’t do its job,” Pritzker said in a statement last week. “Illinois’ massive bill backlog – eliminated since I came into office – once contained bills past due for as long as 500 days.”
The COGFA report noted that even though direct federal aid was not included in the base revenue calculation, the indirect effects of federal stimulus played a major role in the unexpected growth. So major, in fact, that revenue came in beyond initial projections in 49 states in the fiscal year. One driving factor, according to the report, was the “continuation of a pandemic-related shift” in consumer spending from non-taxed service-based sales to taxable goods, which created “strong market conditions” that led to increased tax revenues from corporate profits and capital gains.
Republicans have also attributed the revenue spikes at least partially to an “inflation-induced sugar high,” noting that as prices increase so does sales tax revenue. “The influence of these particular factors is expected to wane as the state enters into FY 2023 resulting in reduced revenue expectations for the upcoming fiscal year,” the COGFA report noted.
Still, June’s receipts remained strong, growing by $736 million compared to the previous fiscal year. As a result, final FY 2022 revenues were $2.6 billion higher than the April estimate from the Governor’s Office of Management and Budget that was used as the basis of this year’s budget negotiations.
A GOMB spokesperson said in an email Wednesday that the surplus has not led to any discussion of amending the FY 2023 budget in the first week of the new fiscal year. But it’s likely to allow for some flexibility. “FY 2022 revenues continued to outperform expectations through the last quarter of the fiscal year,” GOMB spokesperson Carol Knowles said in an email. “This will allow the state to be better positioned in the coming year as we continue to monitor the national economic outlook.”
Knowles noted that the higher-than-expected revenues contributed to the improving fiscal situation which Comptroller Susana Mendoza and Pritzker highlighted in a pair of news releases last week. Those releases noted Illinois has erased its “bill backlog,” ending the fiscal year with a general revenue funds payment cycle of zero days from when vouchers are received by the state comptroller’s office.
The $1.8 billion accounts payable balance was a far cry from the height of the state’s two-year budget impasse between Republican Gov. Bruce Rauner and Democrats in the General Assembly, when the bill backlog reached $16.7 billion.
Pritzker has also touted – and bond ratings agencies have noted – that Illinois focused much of its spending of surplus dollars on relieving interest-accruing debt. Illinois has seen six credit rating upgrades – two each from each of the three major agencies – in the past year.
In a news release last week Pritzker contrasted those upgrades with the eight downgrades the state received during the tenure of Rauner, whom Pritzker unseated in 2018. While the upgrades this year mark the first upward break from a downward trend that began in the Blagojevich administration, Illinois remains in the worst shape of all states as judged by the ratings agencies.
And while Illinois lawmakers dedicated $1 billion to the rainy day fund, Mendoza said in a news release she’d push for laws mandating greater contributions to budget stabilization funds when Illinois has stronger-than-expected revenue performances in the future. “The fact that we’ll have a billion dollars saved in our rainy day fund to help us during adverse downturns certainly helps, but Illinois must save more when we are able to with stronger-than-expected revenue receipts so that we strengthen our ability to weather through these unexpected crises,” she said.
Illinois didn’t lose as many residents during the pandemic as you might think
One of the hallmarks of reporting on demographic trends since the onset of the COVID-19 pandemic has been that Chicago, Illinois and other certain areas (northern cities and the West Coast) have been losing people in droves to Texas, Florida and locales in the interior of the country. But are those trends still going?
A new report from the Federal Reserve Bank of Chicago suggests that this area and much of the Midwest, indeed, are losing people. But while the percentage of those leaving versus those arriving has grown a little, the number of departures has actually dropped. And the overall trend is unchanged.
The patterns of pre-pandemic moves were mostly the same as those of pandemic-era moves,” concludes the report by Fed economists Elizabeth Kepner and Martin Lavelle. “However, the number of moves was substantially lower after the pandemic began,” as mobility nationwide dropped.
In other words, Illinois and Chicago still have reason to be concerned. But that was just as true a few years ago as it is now. Kepner and Lavelle specifically looked at moving data as compiled by United Van Lines, a leading moving company that has an ongoing database that researchers have plumbed for years. This particular study compared 2018-19 moves to those in 2020-21.
According to that data, Florida and North Carolina have been the big national winners. The share of those moving into the Sunshine State, for instance, rose from 57.2% in 2018-19 to 61.7% in 2020-21 while North Carolina’s moving to number shifted from 56.9% to 59.5%. Texas gained, too, but only a point and a half, while California’s move-in share dropped 3.2 percentage points.
In Illinois, just 33.6% of interstate moves during the last two years were arrivals; the other two-thirds were departures. That’s nothing to brag about, but that’s only a drop of 1.7 percentage points from earlier, not a huge change. Perhaps more significantly, the number of people leaving the state has also dropped. For instance, the number of moves from Illinois to California dropped from 1,403 to 1,208. Moves to Arizona and, surprisingly, Texas were off, too, although the number of moving trucks headed from here to Florida grew from 1,336 to 1,544.
Moves within the Chicago Fed district–to or from Illinois, Indiana, Iowa, Michigan and Wisconsin–fluctuated a bit, but generally shifted no more than two percentage points. Still, there are signs that metro Chicago is losing people to the great interior with the number of moves to non-metro areas growing at 5% in 2020-21. And the share of moves that were outbound grew from 65.5% to 67.9%.
One caveat: many people don’t use a moving company, instead renting and loading a moving truck themselves. Also, keep in mind that the pattern of seniors moving to warmer areas has existed for decades, which could explain some of the warm-weather moves. Regardless, politicians on all sides will have some fun with these numbers.
What Congress is Working Through
Democrats are aiming to revive central pieces of President Biden’s stalled economic agenda, while trying to keep on track a separate, bipartisan bill targeted at boosting competitiveness with China that top Republicans are threatening to block. House Democrats also are set to roll out legislation responding to the Supreme Court ruling ending federal abortion protections. Regardless of the outcome, the bills most likely wouldn’t have enough support to pass the Senate.
Efforts to deliver the most significant changes to global tax rules in a century will face fresh delays. Negotiators Monday said it would take longer than planned to reach a formal agreement on how countries with large consumer markets collect more corporate tax revenue. The timeline could present hurdles as U.S. lawmakers would need to approve any agreement reached by the Biden administration, but Congress might be under full or partial Republican control in 2023.
US adds 372,000 jobs in June as market stays strong
The U.S. economy added 372,000 jobs and the unemployment rate held even at 3.6 percent in June as a strong labor market held firm amid rising inflation and recession fears.
Job growth in June far exceeded the projections of economists, who expected the U.S. to add roughly 278,000 jobs last month, according to consensus estimates.
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Joliet Region Chamber of Commerce & Industry