The U.K. economy shrank less than previously estimated in the third quarter as consumer spending stopped falling and the service industries slump eased, bringing the longest recession on record closer to an end.
Gross domestic product fell 0.3 percent from the previous three months, compared with a prior measurement of a 0.4 percent drop, the Office for National Statistics said today in London. The result matched the median prediction of 28 economists in a Bloomberg News survey.
Prime Minister Gordon Brown this week called for stimulus to stay in place to avoid “choking off recovery” as an election looms within six months. The Bank of England has expanded its bond-purchase plan three times since March to ensure Britain’s escape from recession and Governor Mervyn King said yesterday the pickup isn’t “particularly strong.”
“Over the coming quarters the economy will accelerate pretty sharply,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official. “In third quarter the U.K. was one of the sick men of Europe but it’s going to step up a few gears and will be one of the stronger performers in Europe next year.”
The pound rose 0.8 percent against the dollar today and traded at $1.6704 as of 11:04 a.m. in London. The yield on the 2-year gilt fell 6 basis points to 1.16 percent.
Lagging Behind
The U.K.’s recovery has lagged behind that of the U.S. and the euro area, which have both returned to growth. Data yesterday showed Germany’s economic growth accelerated in the third quarter, while the U.S. economy expanded at a 2.8 percent annual rate, less than the government reported last month.
Brown is trying to revive the U.K. economy in time to defeat Conservative Leader David Cameron at the election, due by June. An Ipsos Mori poll in the Observer on Nov. 22 showed the Conservatives with a six-point lead, the least since December.
Consumer spending was unchanged in the third quarter, the first time it hasn’t dropped in 1 1/2 years. Government spending rose 0.2 percent, while fixed investment fell 0.3 percent, the statistics office said.
J Sainsbury Plc, the U.K.’s third- biggest supermarket owner, on Nov. 11 reported growth in first-half profit that beat analysts’ estimates. John Lewis Partnership Plc, owner of the namesake department stores and Waitrose supermarkets, said Nov fast cash advance loan. 22 that sales gained 15 percent in the week of Nov. 21.
Inventories fell by 4.1 billion pounds ($6.8 billion), the fourth consecutive decline. The slump in inventories is now the biggest on record, the statistics office said.
Services, Manufacturing
Officials revised up the GDP data because the decline in services output was smaller than previously estimated, at 0.1 percent instead of 0.2 percent. Manufacturing dropped 0.1 percent, up from the prior measurement of 0.2 percent.
Compass Group Plc, the world’s largest catering company, today reported full-year profit that beat analyst estimates. Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, gained in London trading yesterday after it announced plans to raise a record 13.5 billion pounds in the country’s biggest rights offering.
The Bank of England forecasts Britain will exit the recession in the fourth quarter. The economy will expand 2.2 percent in 2010 and 4.1 percent in 2011, according to policy makers’ projections published on Nov. 11.
Policy makers have cut the benchmark interest rate to a record low of 0.5 percent and pledged to buy 200 billion pounds in bonds to aid the economy. While policy maker Adam Posen told lawmakers that “one hopes that we are coming to the end” of the purchase program, King said he “can’t rule out” buying more assets.
Data ‘Surprise’
Policy maker Andrew Sentance said in a speech on Nov. 16 that the “surprise” gross domestic product estimate may be revised later, and told Bloomberg Television that “the broad balance of evidence is that the U.K. economy has started to grow in the second half of this year.”
Unemployment rose at the slowest pace in 18 months in October, retail sales climbed for a second month and the inflation rate increased more than expected, to 1.5 percent. The bank aims to keep inflation at 2 percent.
Banks are still working to shore up their finances after government-led bailouts of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc during the 2008 financial crisis. Lloyds said yesterday it plans to raise a record 13.4 billion pounds in the country’s biggest rights offering.
U.S. government incentives likely pushed U.S. auto sales to a 20-month high in August, leaving analysts and the industry guessing how hard a landing to expect with the “Cash for Clunkers” program now exhausted.
Automakers could see the U.S. seasonally adjusted rate of sales, a closely watched indicator of demand for big-ticket items, jump to nearly 16 million vehicles in August under the “clunkers” program, analysts said. That would be the highest monthly sales rate since December 2007.
But with the incentive program ended and only heavily picked over vehicles left in inventories, September is expected to be a much leaner sales month, with the severity of the pullback dependent on the U.S. economy’s health.
The annualized sales rate reached 15.8 million vehicles in August under the program, but likely will drop off the rest of the year, although not back to the lows seen early in 2009, Barclays Capital analyst Brian Johnson said in a note.
“We expect sales for the remainder of the year to fall well below August results, but believe momentum from the program as well as the stabilization in the economy and improvement in consumer confidence could boost sales above the 9.5 million average seen in the first half,” Johnson said.
Johnson said the seasonally adjusted annual rate could be in the 10 million unit range in September and 10.5 million vehicles for the fourth quarter.
Among U.S. carmakers, Barclays expects Ford Motor Co sales to be up 53 percent in August from a year earlier. General Motors sales, which were strong in August 2008 due to an incentive program, are expected to be down 9 percent and Chrysler Group LLC sales up 2 percent, it said best payday loan.
For Japanese automakers, Toyota Motor Corp sales are expected to be up 22 percent, Honda Motor Co Ltd sales up 20 percent and Nissan Motor Co Ltd sales up 5 percent, Barclays said.
The top 10 “clunkers” program vehicle sales were dominated by Toyota and Honda, which had three vehicles each on the list, and by Ford with two vehicles.
‘CLUNKERS’ SUPPORT
Dealers submitted 690,114 new vehicle transactions under the “clunkers” program that started in late July and ran out three weeks into August at a cost of about $2.88 billion.
How many of “clunkers” deals landed in August is not completely clear, though U.S. Department of Transportation data suggests roughly 450,000 sales in August and 240,000 in July.
Also unclear is how many of those August deals would have been completed without the incentives, and whether they were pulled forward from the near future.
“Our only concern is how much of that will truly be incremental volumes as opposed to just borrowing from the future,” Rebecca Lindland, director of automotive research at IHS Global Insight, said in an interview.
IHS Global Insight estimated that about 250,000 vehicles were sales that would not otherwise have been made, though that figure could be higher, Lindland said.
David Payne knows well the history of his family’s electrical contracting business. He has seen the business change many times since its start in the 1950s in Flint, Mich., as a company that primarily worked servicing auto plants. He saw his father make aggressive moves to diversify the industrial projects it worked on, which included moving the company to St. Louis.
So it isn’t without precedent that Payne has stepped up and made changes of his own since taking the helm in the mid-1990s.
In 2000, he led the company in buying commercial electrical contractor Crest Electric. That move proved key in stabilizing the company’s workload and earned it larger projects as well, including work at the Lumi
Customer information taken in this case included names, addresses, customer account numbers and some billing information, all building blocks for anyone serious about committing identity theft. "Nobody knows if it was a rogue employee or somebody else. It’s a big question mark," says Ann Cavoukian, Ontario’s information and privacy commissioner, in an interview.
To its credit, Toronto Hydro was quick to act. But Cavoukian, who is investigating the breach, sees it as a wake-up call of sorts as utilities begin to modernize their networks and embrace communications technologies to better interact with customers.
She mentions Google and its plan to work with certain utilities – Toronto Hydro included – to demonstrate its new residential energy management tool, Google PowerMeter. Are the proper policies in place, for example, to make sure your personal information as a customer is protected when it’s handed over to Google?
"There needs to be a wall between Toronto Hydro customer information and Google being able to take that and connect it with other information Google possesses that may be linked through your Gmail account," she says. (Disclosure: I co-authored a book on data privacy with Cavoukian in 2002)
Her concern could just as easily extend to Microsoft and its new energy management tool, Hohm. Or the dozens of similar, much more advanced applications that will use two-way broadband and wireless networks to gather customer data, including energy use, for highly detailed analysis and feedback.
"The smart grid is a good idea, and I’m certainly in favour of it. But the focus is so much on controlling energy use that I think the privacy issue is a sleeper; it’s not top-of-mind," Cavoukian says.
That was the same message heard Friday at the Black Hat security conference in Las Vegas. That’s where Mike Davis, a security consultant with IOActive Inc. in Seattle, showed how someone could hack into a smart meter and install a computer worm that could spread to other smart meters used by homes and businesses connected to a local distribution hub.
The worm, apparently, could have been programmed with the ability to take over the meter and remotely disconnect someone’s power. Davis was able to demonstrate this under contract with an unnamed utility, which hired him to test smart meter security. He told his audience the general attitude among utilities is "We’ll fix this later," and privacy and security aren’t being taken as seriously as they should.
This raises many questions. Could a hacker remotely spread a virus through smart meters and then disconnect power from thousands of homes and businesses? If so, it could introduce tremendous instability to the grid unique business cards.
There are already conservation programs in Ontario that give a utility the ability to remotely shut off or control air conditioners, water heaters and other appliances when required to reduce the load during peak times. General Electric said last month it will offer in 2010 a "home energy manager" that can connect with and control appliances and a "smart" thermostat in the home. Could someone with malicious intentions gain access and wreak havoc?
On an individual household level, knowing hourly energy use can help thieves. If, over a few days, the load appears flat, it can tell a burglar you’re on vacation and nobody is home to catch you breaking in.
"We’re doomed to relive the 1980s and 1990s all over again," says Davis, referring to the hard security lessons learned by banks, retailers and others when computers became more networked and the Internet emerged onto the scene.
Stuart Brimley, manager of training and emergency preparedness at Ontario’s Independent Electricity System Operator, says utilities didn’t have to worry as much in the past because their computer systems were all closed-standard, proprietary systems and therefore less vulnerable to attack. "As an industry we’ve been lucky historically. But that’s changing," he says.
Brimley says the big fear is that the grid – from the customers that use power to the companies that generate it – is going to have more points of access that increase vulnerability. At the transmission level, this cyber security risk isn’t lost on the North American Electric Reliability Corporation, or NERC.
NERC has mandated that big utilities and system operators comply with eight standards related to infrastructure protection, including physical and cyber security. "Right now, cyber security standards in place today only apply to a dozen different companies here in Ontario," says Brimley. "The move to the smart grid expands that to many, many companies, every single distributor of power across Ontario."
Brimley says in his 10 years focusing on this area, he’s had high-level access to intelligence information and there has been little indication terrorist organizations or rogue states have tried to attack power grids in Canada. In April, however, the Wall Street Journal reported cyber spies had penetrated the U.S. grid and planted malicious software that could potentially cause disruptions. It’s conceivable that as an evolving smart grid sees more points of access and vulnerability emerging, Canada could become an attractive entry point for disrupting our neighbour.
"There is no border when it comes to electricity," says Brimley, "and it’s the same with the cyber threat."
The U.S. government’s $1 billion “cash for clunkers” auto sales incentive program reached its funding limit unexpectedly after an avalanche of business exhausted its funds, an Obama administration official said late Thursday.
Auto dealers began offering government-backed rebates in early July of up to $4,500 to consumers who traded-in their gas-guzzlers for more fuel-efficient vehicles.
But the Transportation Department will need additional cash after rebates for nearly 250,000 vehicles jammed the pipeline nationwide.
The White House was working with Congress to try to extend funding as lawmakers prepared to leave town for the month of August, according to the official who was not authorized to speak for attribution.
The program was part of a congressional effort to revive slumping U.S. sales and further help domestic automakers, especially General Motors Corp and Chrysler Group that briefly went bankrupt.
Sales unexpectedly spiked this week after the government began logging transactions and approving rebates that indicated consumers were opting for vehicles that get significantly better gas mileage than the models they were trading in.
The end of the month is usually the busiest time for auto dealers and automakers that have matched the government benefit.
Initially, congressional and industry officials signaled that the program was going to be suspended late Thursday or early Friday as funding ran out.
The administration opted to keep the program in place while it sought new money first cash advance. It was not clear where the administration would find additional funding in a short period of time.
“We hope there’s a will and a way to keep the program going a bit longer,” General Motors said in a statement. “Any doubt that the program would jump-start auto sales is completely erased.”
An estimated 16,000 dealers were eligible for the program and each would have to sell more than a dozen vehicles at the maximum rebate to reach the government’s funding limit, according to the National Automobile Dealers Association.
U.S. Senators Dianne Feinstein of California and Susan Collins of Maine said any extension of the incentive must require greater fuel efficiency and higher reductions of auto emissions.
Congress wrestled with both issues when it established the current incentive to give U.S. manufacturers a better chance of qualifying for the program.
U.S. auto manufacturers are scheduled to report their July sales next week.
It was unclear how the program that was to run into the fall was impacting sales at individual companies, including Asian manufacturers like Toyota Motor Corp. (7203.T) and Honda Motor Co. (7267.T) that make the most fuel efficient cars on the road.
Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said.
Rising unemployment and reductions in business spending prompted the Washington-based institute to cut its outlook from January, when it predicted non-residential construction spending would drop 11 percent this year and 5 percent in 2010.
“We’ve had a really rocky six months in the economy and in the construction sector,” Kermit Baker, the institute’s chief economist, said in a telephone interview. “People are seeing a real tough environment out there and not a lot of incentive to invest in projects.”
Sentiment among U.S. consumers dropped this month as the country’s unemployment rate approached 10 percent, according to a Reuters/University of Michigan preliminary index. The economy probably shrank at a 1.8 percent rate from April to June, according to a Bloomberg News survey. Nonresidential construction tends to lag behind the economy, Baker said.
Spending on office buildings is forecast to sag 22 percent this year and 17 percent in 2010, while retail construction probably will sink 28 percent this year and 13 percent in 2010, the architects group said payday loans.
Looking for Signs
“Why do you build new office buildings? You need to see job numbers pick up,” Baker said. “Why do you build new retail centers? You need to see consumer spending pick up.”
Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.
The Consensus Construction Forecast uses projections from sources including Global Insight Inc., Moody’s Economy.com, the Portland Cement Association and management consulting firm FMI Corp. The report forecasts U.S. construction spending, adjusted for inflation, over the coming 12 to 18 months.
Australia's Qantas Airways Ltd. said Friday it had canceled orders for 15 Boeing 787s and delayed the delivery of a further 15 aircraft due to turbulent market conditions.
Qantas Chief Executive Alan Joyce said the decision had not been influenced by Boeing Co.'s announcement earlier this week of a design issue in the 787 and further delay to the aircraft's first flight. He said discussions with Boeing about the order had started some months ago.
Qantas said it had reached a mutual agreement with Chicago-based Boeing Co. to defer the delivery of 15 Boeing 787-8 aircraft by four years and cancel orders for 15 Boeing 787-9s (which are slightly larger) scheduled for delivery in 2014 and 2015.
Joyce said Qantas remained committed to the 787 as the right choice for the international expansion of Jetstar, its low-cost subsidiary, and as an eventual replacement for Qantas' Boeing 767 fleet.
The 787 is the first commercial jet made mostly of light, sturdy carbon-fiber composites instead of aluminum. Large parts of the plane, such as the fuselage sections and wings, are made in factories around the world and flown in a huge modified 747 to Boeing's widebody plant in the Seattle area, where they are essentially snapped together no fax payday loans.
Boeing said Tuesday that it needed to reinforce small areas near the connection of the wings and fuselage before conducting a test flight of the jet.
Boeing spokesman Miles Kotay said Friday that Qantas remains one of Boeing's largest customers for the 787, with 50 still on order.
"They are committed to the 787 for their own growth and to replace their aging airplanes," he said.
The cancellation of orders for 15 787-9s would reduce the group's aircraft capital expenditure by $3 billion based on current list prices, Joyce said.
He said Qantas announced its original 787 order in 2005 and the “operating environment for the world's airlines has clearly changed dramatically since then.''
"Delaying delivery, and reducing overall B787 capacity, is prudent, while still enabling Qantas and Jetstar to take advantage of growth opportunities and market demands, both domestically and internationally," he said in a statement.
Charter Communications Inc.’s plan to reorganize in bankruptcy has "improper" legal releases for Paul Allen, the controlling chairman, and other company officers, said the U.S. Trustee, an arm of the Justice Department.
Diana Adams, acting U.S. Trustee, said in court documents filed Friday that the cable-TV provider’s reorganization plan shouldn’t be confirmed due to legal shields that protect officers and directors, including Allen, from lawsuits for violating state or federal law.
At a minimum, the plan shouldn’t release those parties from lawsuits brought by equity holders, the trustee said.
The "releasees appear to be acting in their own self-interest and seek to use those actions to justify enjoining equity holders, whose rights are extinguished under the plan," Adams wrote.
Under Charter’s proposed reorganization, secured claims will be reinstated and unsecured claims will be paid in full. Interest holders other than Allen, including common stockholders, will get nothing.
The legal releases say "holders of interest," including parties who signed a settlement with Charter, along with officers, directors and financial advisers will be released from lawsuits bad credit payday loans.
Also, U.S. Bankruptcy Judge James Peck in Manhattan has approved the "disclosure statement," or rough outline of how Charter intends to reorganize, and has said various objections, including one from by JPMorgan Chase & Co., will be considered at a confirmation hearing where Peck will be asked to approve or reject the plan.
Charter’s plan had already been amended last month to answer some concerns of the U.S. Trustee, an arm of the Justice Department that oversees bankruptcies.
JPMorgan and other creditors have argued that Charter’s debt can’t be reinstated, or replaced on existing terms, because Allen, Microsoft co-founder and the controlling chairman, cedes control of the company through its reorganization plan.
Town and Country-based Charter filed for bankruptcy protection in late March.
WASHINGTON–With the game-changing F-35 Joint Strike Fighter aircraft in early production stages, rival manufacturers are racing against time.
The F-35 may be regarded almost as much as an industrial and coalition-building policy as a warplane made by Lockheed Martin Corp the Pentagon's No. 1 supplier by sales and the world's largest aerospace company.
It is a projected trillion-dollar enterprise designed to dominate the lucrative global fighter market for decades while plugging its buyers into U.S.-built defense architecture and cementing U.S.-led alliances.
Unlike Lockheed's premier F-22 fighter, which flies faster, and higher and can range further, the radar-evading F-35 was intended for export from the get-go. It will be the first radar-evading, "stealth" U.S. warplane to be exported. And it is the costliest planned acquisition in Defense Department history.
The United States alone plans to spend nearly $300 billion for a total of 2,443 F-35s in three models to be delivered over 28 years. All are derived from a common design and would use the same sustainment infrastructure worldwide.
"The plan has firmed up" with no defections among foreign development partners, says Richard Aboulafia, a fighter-market expert at Teal Group, an aerospace consultancy in Fairfax, Virginia.
The F-35 is co-financed by the United States, Britain, Italy, the Netherlands, Turkey, Canada, Australia, Denmark and Norway. All the U.S. partners appear to be largely sticking to plans to buy a combined 750 F-35s, at least for now.
F-35 competitors include the Saab AB Gripen, the Dassault Aviation SA Rafale, Russia's MiG-35 and Sukhoi Su-35, and the Eurofighter Typhoon made by a consortium of British, German, Italian and Spanish companies.
Dassault has been pitching its Rafale to the United Arab Emirates in what would be the first overseas sale of the aircraft.
Brazil has short-listed the Rafale, Gripen and Boeing Co F-18E/F Super Hornet as finalists in a competition that could involve the purchase of more than 100 aircraft.
Next month, India is due to start year-long flight evaluations for the purchase of 126 multi-role fighters worth up to $10.4 billion, the biggest such market in decades. Indonesia and Malaysia are weighing Russian-made Sukhois. Switzerland is looking at the Eurofighter, Gripen and Rafale. Greece is evaluating the Eurofighter and the Super Hornet.
In India, Boeing is pitting its Super Hornet against Lockheed's F-16, Dassault's Rafale, Saab's Gripen, Russia's MiG-35 and the Eurofighter Typhoon.
Of the Swiss and Indian fighter competitions, Stefan Zoller, chief executive of EADS' defense and security division, told Reuters: "Both campaigns are hot; both campaigns are running exactly on schedule".
Chicago-based Boeing, the Pentagon's No. 2 supplier by sales and the top U.S. exporter, says it sees big opportunities for its F-15 and F/A-18 fighters before Lockheed works out kinks in the F-35, production ramps up and the price goes down.
"It's a great time to be in the fighter business," Bob Gower, the head of Boeing's F/A-18 program, told a briefing ahead of the Paris Air show next week.
Not since the days of McDonnell's F-4 Phantom fighter in the 1960s and 1970s has Boeing been entered into so many competitions worldwide, he said.
At the same time, Boeing is shopping for partners to co-fund development of a proposed new F-15 "Silent Eagle", a version aimed at Asian and Middle East markets that would feature special coatings to reduce its radar signature and other survivability improvements to go up against the F-35.
Chris Chadwick, president of Boeing's military aircraft division, told reporters last week: "With F-35 continuing to struggle to a certain extent, we think that we offer … the right amount of capability at the right cost at the right time for a lot of the international customers get a free credit report."
He described a four-to six-year window of opportunity including potential sales to India, Denmark and Brazil, which have competitions under way that also involve rival Russian and European fighters.
Japan, Saudi Arabia, South Korea, Qatar and Kuwait are among other countries that have shown interest in modernizing their fighter fleets in the relatively short term.
Australia has ordered 24 two-seat F/A-18F Super Hornets, with deliveries to start on July 8 and to be completed by 2012, the only Super Hornet export sale so far.
"The worst time you can buy a fighter is during the initial stages because the capability comes along later and the learning comes along later," Boeing's Chadwick said in a swipe at early purchases of Lockheed's F-35.
Boeing has offered the U.S. Navy a multiyear Super Hornet deal with a unit price of about $54 million, including advanced Raytheon Co actively electronically scanned array (AESA) radar systems and "the whole nine yards," Chadwick said.
Chris Geisel, a Lockheed spokesman, says the F-35A conventional take-off and landing model is projected to cost in the upper $60 million range per copy in adjusted 2014 dollars, when full production is due to kick in.
Three single-engine F-35 versions are under development by Lockheed: the conventional version for the Air Force, a short-takeoff-and-vertical landing model for the Marine Corps and a third for the Navy's aircraft carriers.
Lockheed's chief F-35 subcontractors are Northrop Grumman Corp and BAE Systems Plc Two rival, interchangeable F-35 engines are under development. One is built by United Technologies Corp's Pratt & Whitney unit; the other by a team of General Electric Co and Rolls-Royce Group Plc
Projected early F-35 buyers include Israel, which plans to acquire 25 in fiscal 2012 for delivery starting in 2014 with an option for 50 more. A sticking point has been Israel's efforts to add its own electronic warfare know-how.
Singapore, the other non-consortium member linked to the F-35 program through a special status, may start buying as many as 100 a year or two after Israel, Jon Schreiber, the Pentagon official who heads the program's international aspects, told Reuters in a March 17 interview.
U.S. Defense Secretary Robert Gates recommended buying 30 F-35s in fiscal 2010, up from the 14 funded this year, boosting funding from $6.9 billion to $11.2 billion. At the same time, the Navy is seeking nine fewer F/A 18s than had been projected last year and the department is planning to cap purchases of Lockheed's top-of-the-line F-22 at 187 planes.
"By accelerating the (F-35's) procurement ramp, we can lower procurement costs while also making the platform more cost competitive for our coalition partners," Air Force Secretary Michael Donley and General Norton Schwartz, the service's top officer, said in a June 3 statement to Congress.
Lockheed says all 24 countries that fly its multi-role F-16 fighter are potential buyers of the F-35, which is designed to replace at least 13 types of aircraft, including the F-16.
Overall, 2,909 fighters worth $163.7 billion are likely to be produced between 2008 and 2017, according to Teal Group, the aerospace consultancy. A total of 2,355 fighters worth $122.4 billion were built between 1998 and 2007, Teal said in a February 2009 market overview, representing a 34 per cent value growth.
"Boeing and the European primes have some strong business opportunities over the next five to 10 years," Aboulafia said in an email exchange. "But beyond these, the fighter market will belong to the F-35."
"It's quite likely that after 2020 the market will comprise the F-35 family and some Russian planes," he added.
The downfall of the American auto industry is wreaking havoc on state and local budgets from coast to coast.
The decline in auto dealerships, coupled with the drop in car sales, is costing states and municipalities millions of dollars in lost sales taxes, not to mention lost income and property taxes and other fees.
Though exact numbers aren’t available, car purchases account for about 12% to 15% of sales tax revenues in many states, estimates the Center on Budget and Policy Priorities. And sales taxes usually account for about one-third of a state’s revenue.
As the recession deepens, state tax revenues have fallen off a cliff. This has opened up yawning gaps, forcing officials to scramble anew to balance their budgets.
The drop in sales taxes are the worst since World War II, and the plunge in car sales are a major reason for it, said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government, a public policy group.
"The declines have been devastating," he said. "It comes at a time when the states can’t afford it."
Take California, which has seen new car sales plunge 43% in the first quarter and 186 dealerships disappear since the start of 2008. The Golden State, which is struggling to close a $21.3 billion budget gap, is slated to lose 32 Chrysler dealerships and possibly 100 GM dealerships as part of the automakers’ restructuring.
New car sales are the single largest component of the sales tax base, accounting for 10.6% in 2006, the latest year available, according to the state’s Department of Finance. Municipalities also depend on the sales taxes, as well as other revenues such as property tax, to fund their operations.
"Many communities are having to let go firefighters and police because the sales tax revenues are down," said Peter Welch, president of the California New Car Dealers Association.
Fewer sales, deeper budget cuts
Indiana, which is wrestling with a $1 billion budget gap, saw auto sales taxes fall by 23% in the second quarter, said Chris Ruhl, the state’s budget director Guaranteed payday loans. Car purchases are the third largest source of sales tax revenue, until recently accounting for about $550 million a year.
The state is now tightening its belt, Ruhl said, to deal with the lower revenues. On Monday evening, Gov. Mitch Daniels recommended cutting spending by 2.5% across-the-board and tapping into the state’s $1 billion-plus rainy day fund to balance its budget.
New Jersey, meanwhile, is also feeling the effects of the auto industry meltdown. The Garden State has lost 170 dealerships since the start of 2007 and could lose 90 more in the cutbacks by Chrysler and General Motors (GMGMQ), which filed for bankruptcy on Monday. New car sales are down 33% for the first four months of the year.
This plunge has a drastic effect on state revenues, said James Appleton, president of the New Jersey Coalition of Automotive Retailers. He estimates that the state loses $10 million in revenue for every 1% drop in car sales. Incomes taxes also suffer when dealers close since each employs about 65 people.
State officials are now scrambling to close a $4.4 billion budget gap, exacerbated by an unprecedented decline in sales taxes.
"Until these markets come back, the state will continue to suffer," Appleton said.
Cities hurting too
More than just sponsoring the local Little League team, auto dealerships contribute to the coffers of many cities.
For Scottsdale, Ariz., auto purchases represent 11.6% of the city’s sales tax revenues. But the category is down 29% over the past year — the most of any — and six of the 20 dealerships along the city’s Motor Mile have shuttered.
Facing not only the shriveling of car sales but a downturn in construction and tourism, officials have eliminated 200 positions and are looking at cutting more to close a $9 million budget gap.
"The loss of the auto dealers has aggravated the effects of the recession," said Pat Dodds, a city spokesman.
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