City revenues are slowing—another recession signal?

Overall growth for U.S. cities is weak, but not contracting (yet) Are U.S. Cities Telling Us a Recession is Fast Approaching? A report this week from the National League of Cities caught my attention. In it, 63% of finance officers from major U.S. cities predicted a recession as soon as 2020.1 A perfect storm of falling city revenues, rising expenditures, softening business investment, and a housing market that feels like it’s plateauing. The question is – could this be a basis for a recession on the horizon? The report, known as City Fiscal Conditions Report,1 looks at responses from finance officers in 554 cities with populations over 10,000, so I’d characterize it as offering a comprehensive view into economic conditions throughout America. For the data wonks out there, the Fed’s Beige Book is another example of a report that offers a glimpse into how cities and regions are performing, and I’d consider it equally insightful in helping us understand economic conditions ‘on the ground.’ --------------------------------------------------------------- [Are You Ready for a Potential Recession?]( An additional report that can help you keep a close eye on important data is our Stock Market Outlook Report. This report will give you an inside look into key economic indicators that can help you prepare your investments for a potential recession. Today, I am offering all readers a first-look into our just-released November 2019 Stock Market Outlook report. This report will provide you with our forecasts along with additional factors to consider: - What produces U.S. optimism in 2019? - Forecast for the S&P - Small-cap vs. large-cap returns - Which sectors are hot and which are not? - What industries within those sectors most merit your attention? - Odds of recession - And much more. If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released November 2019 Stock Market Outlook2]( --------------------------------------------------------------- The findings in the City Fiscal Conditions Report for 20191 undoubtedly show softening across the board. A summary of the findings includes: - In fiscal year 2018, total constant-dollar general fund revenue growth slowed to 0.6%. - Property tax revenues increased by +1.8%, compared to +2.6% growth in 2017. - Sales tax revenues grew by +1.9%, compared to +1.8% in 2017. - Income tax revenues rose +0.6%, compared to +1.3% in 2017. - Expenditures are rising: +1.8% in 2018, which is slower growth than previous years but less than what’s expected in 2019. Cities do fiscal reporting on a yearly basis, meaning that there’s about an 18 to 24 month lag for economic shifts to show up on city ledgers. In other words, the softening trend could be a signal of a slowdown that is already well underway, which is what I think has finance officers worried. A report on U.S. cities’ fiscal conditions can help us take the pulse of the U.S. economy, but it does not help us forecast corporate earnings looking out over the next six to twelve months. In terms of portfolio management, it is not enough to determine what is happening from an economic standpoint – investors need to determine what the market expects to happen and whether those expectations are being met. The City Fiscal Conditions Report gives an indication the economy is slowing, but this simply confirms something we already know. I would argue that it’s already being reflected in the market, too, with downward revisions to earnings estimates of cyclical companies over the past few months. Given the negative expectations around corporate earnings coming into the third quarter, what we’re seeing today are earnings surprising to the upside – which is helping push the market to new highs. But there’s another side to the story that few people are telling: year-over-year growth is slowing, but it is not yet contracting. Looking at the figures above from the City Fiscal Conditions Report, it is clear to see that revenues are still growing, even if they’re growing at a slower rate than previous years. In the previous recession, revenues were declining for almost two years before the recession took hold. I think we need more data before making any recession declarations. As I’ve mentioned in previous columns, I also believe some of the softer economic data we’re seeing across the board – but particularly in business spending – is tied to policy uncertainty (particularly in the realm of trade). If some of the pressure gets released over time with movement towards a deal, or perhaps even the eventual signing of a deal, I could see most of these trends reversing. Bottom Line for Investors Amid stories and data points of weakening economic growth, I believe it’s important to remember that the market is a discounting mechanism of future earnings expectations. Only two factors drive stock prices, in my view: expectations for future earnings and interest rates. Expectations for future interest rates are essentially determined by the yield curve, so the key issue is how earnings expectations change in response to changing economic expectations. In my view, it’s times when the economic outlook is completely positive – and stocks are discounting strong earnings growth – that the market is more likely to come under pressure. When the economic outlook turns more negative and stocks discount weak earnings growth, surprises to the upside can drive prices higher. This is why I’d argue the market is hitting new highs at the same time economic signals, like the fiscal condition of U.S. cities, are showing weakness. While you can’t predict what is next for the market, it is important to keep an eye on these indicators along with economic data releases, earnings reports, and other economic factors. To help you do, I am offering all readers our [Just-Released November 2019 Stock Market Outlook Report.](. This Special Report is packed with our newly revised predictions for 2019. For example, you'll discover Zacks’ view on: - What produces U.S. optimism in 2019? - Forecast for the S&P - Small-cap vs. large-cap returns - Which sectors are hot and which are not? - What industries within those sectors most merit your attention? - Odds of recession - And much more. If you have $500,000 or more to invest, learn how you may be able to prepare your portfolio for changes in the economy by reading this new report today. [IT'S FREE. Download the Just-Released November 2019 Stock Market Outlook3]( --------------------------------------------------------------- ABOUT ZACKS INVESTMENT MANAGEMENT Born from Research – Built for Performance Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. 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