A survey released by the National League of Cities says most U.S. cities face worsening fiscal situations, and local governments will have to cut personnel or stop new projects over the next few years. Three out of four city officials claim overall economic and fiscal conditions have gotten worse this past year, with over 90% expressing concern about unemployment and increased joblessness in their communities. More than six in 10 report that poverty has intensified. The survey also found that 71 percent of cities have cut personnel and 68 percent have had to delay or cancel infrastructure projects.

“City budget shortfalls will become more severe over the next two years as tax collections catch up with economic conditions,” the report said. “These will inevitably result in new rounds of layoffs, service cuts, and canceled projects and contracts.”

Nationally the gross domestic product was up 3.2% in the first quarter of this year and thousands of jobs have been created in the last three months but this is not reflected at the local level yet as Local and state economies take more time to recover from a recession. This is because the demands for public assistance rise just as tax revenue falls.

The city of Central Falls, Rhode Island, needed help to restructure their debt after state budget cuts, weak revenues and the increasing cost of pension benefits for its workers. They were placed in a temporary receivership on Wednesday. Also Philadelphia passed a budget which will lay off 300 people, and the mayor of Washington, D.C., said their proposed budget cuts “will devastate an already under-resourced city.”

The National League of Cities, which advocates for 19,000 cities, towns and villages, said, “Many cities have also taken more unprecedented measures such as cuts to public safety, reductions in health-care benefits and revisions to union contracts.”

“Unfortunately for cities, the fiscal difficulties they are facing appear likely to continue beyond the current year,” the report found.

The Conference Board released a report Tuesday morning showing a larger than expected improvement in consumer confidence in the month of May. This is the third consecutive month of improvements bringing the consumer confidence index to its highest point since March 2008. The index rose to 63.3 in May from a revised reading of 57.7 in April. This is a higher than expected increase as most economists had expected 58.3 in May from the 57.9 originally reported for the previous month.

Lynn Franco, Director of the Conference Board Consumer Research Center, said, “Consumer confidence posted its third consecutive monthly gain, and although still weak by historical levels, appears to be gaining some traction.”

According to the Conference Board’s press release:

Consumers’ assessment of current-day conditions continued to improve in May. Those saying conditions are “good” increased to 10.0 percent from 8.9 percent, while those saying business conditions are “bad” declined to 39.3 percent from 40.0 percent. Consumers’ appraisal of the labor market was also more positive. Those claiming jobs are “hard to get” decreased to 43.6 percent from 44.8 percent, while those saying jobs are “plentiful” was virtually unchanged at 4.6 percent.

Consumers’ optimism about the short-term future was significantly better in May. The percentage of consumers expecting business conditions will improve over the next six months increased to 23.5 percent from 19.7 percent, while those expecting conditions will worsen declined to 11.5 percent from 12.4 percent. Consumers were also more confident about future job prospects. Those anticipating more jobs in the months ahead increased to 20.4 percent from 17.7 percent, while those anticipating fewer jobs declined to 17.7 percent from 19.9 percent. The proportion of consumers anticipating an increase in their incomes improved to 11.3 percent from 10.5 percent.

The National Association for Business Economics released a survey showing that economists see the pace of U.S. growth picking up as consumers and businesses alike accelerate spending.

“Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects,” said Lynn Reaser, the group’s President and Chief Economist. “Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished.”

The results of the survey:

• The NABE forecast panel has boosted its expectations for growth in 2010 to 3.2 percent for real GDP from 3.1 percent in its February forecast. The panel is also predicting a 3.2 percent pace of real GDP growth for 2011, meaning a sustained two-year stretch in excess of the economy’s potential—or “trend’—rate of growth. The panel estimates the economy’s potential rate of growth at 2.8 percent over the next five-year period. NABE panelists date the expansion as nearly one year old, with the trough of the previous recession in June of 2009.
• Many of the forecasters believe that the traditional cyclical forces of pent-up demand and inventory building are becoming more important. Although financial headwinds will temper the pace of growth, concerns about credit conditions have eased somewhat compared to February’s survey. Inflationary pressures are expected to gradually build, but a “stagflation” scenario—a combination of slow growth and high inflation—is considered highly unlikely.
• Job growth is now on a steady footing. Except for a third-quarter slowdown related to a reversal of Censusrelated hiring, job gains are expected to remain robust throughout the forecast horizon, as output gains remain steady but productivity gains progressively slow. The jobless rate is forecast to steadily decline to 9.4 percent by yearend 2010 and 8.5 percent by year-end 2011, though it remains high by historical standards and is ranked by panelists as their second greatest “concern.” Additionally, NABE panelists increased their estimate of the unemployment rate consistent with full employment to 5.5 percent from 5.0 percent previously.

The dollar will retain much of its recent gains vis-à-vis both the euro and a trade-weighted basket of foreign currencies. With respect to the risk of a Greek default, views are mixed. Fifty-one percent believe that a default will not occur, though some debt restructuring will be required. Twelve percent expect outright default within the next twelve months and 37 percent expect default after some short-term maneuvering only buys time. (It should be noted that these responses were collected prior to the May 9 announcement by the EU, IMF, and ECB of the program to address the European financial crisis.) As for China, forecasters assigned a 30 percent probability to it presently experiencing a “bubble,” though there was a wide dispersion on this. The top quartile assigned a 60 percent probability of a bubble, while the bottom quartile assigned only a 20 percent probability.

New claims for unemployment benefits dipped for the fourth straight week, a sign the job market is improving at a slow but steady pace. Employers, encouraged by a recovering economy, are hiring again, but are not progressing at the level needed to reduce the jobless rate.

The Labor Department said Thursday that initial claims dropped last week by 4,000 to a seasonally adjusted 444,000. That’s slightly above analysts’ estimates, according to Thomson Reuters. The previous week’s total was revised up to 448,000.

The four-week average, which smooths out volatility, registered a steeper decline. It fell by 9,000 to 450,500 — close to the average’s lowest level this year reached in late March.

After dropping steadily last year from a peak of 651,000, first-time claims have fluctuated at around 450,000 since January. Many economists would like to see claims fall faster, which would be a sign of more hiring.

Retail sales in April were not quite as strong as the few months prior, but with a seventh-straight month of positive figures the Government’s Monthly Retail Trade report provided another signal that the economic recovery in the United States is sustainable.

David Wyss, Chief Economist at Standard & Poor’s, says “retail sales were stronger than expected in April, showing that once again we’ve underestimated American’s ability and willingness to shop.”

The Commerce Department said retail sales gained 0.4% in April, ahead of Wall Street’s expected 0.2% rise, but below the 2.1% jump in March. Peter Newland, Economist at Barclays Capital, notes that the total was driven by a 0.5% increase in both autos and gasoline, and a 6.9% jump in building material sales. All of that is nice, but core sales, which exclude these elements, actually fell 0.2%, which is much weaker than excepted.

Within the core figure, food sales were down 0.5%, clothing slid 1% and general merchandise decreased 0.4%, which Newland says may partly reflect payback for very strong sales at the end of the first quarter.

“Indeed, core retail sales was revised up in February to 1.4% and March to 0.7%,” Newland says. “All in all, this report underlines the strength of consumer spending at the end of the first quarter.” He continues, saying that while the second quarter has gotten off to a sluggish start, he is still looking for solid growth in the quarter as a whole.

Newland’s view was echoed elsewhere. “In our view, last month’s dip in core retail sales was a consolidation of strong-prior month gains, and does not call into question a cyclical recovery underpinned by improving employment and income trends,” says Alan Levinson, Chief Economist at T. Rowe Price.
Michelle Girard, an Economist at RBS, views the modest retreat in core sales as part of the typical ebb and flow in the data. “Indeed,” she says, “it would not have been surprising to see an even more significant pullback in April.” She continues, saying that she’s confident that consumer spending will continue at a healthy clip throughout the year, as employment and income improve.

Elsewhere on Friday, the Federal Reserve reported industrial production rose 0.8% in April, ahead of the Street’s expected 0.7%. In an encouraging sign, the increase came with gains in all of durable and non-durable goods, with the exception of autos, which fell 2.2% and transportation equipment, which slipped 0.8%. “This represents a very strong start to the quarter in the manufacturing sector, supporting our view that gross domestic product growth will accelerate in the second quarter, relative to the first quarter,” Newland says.

Construction of new homes rose more than expected in April but new building permits fell sharply, signaling the industry’s rebound could be short-lived. The results show builders ramped up to meet demand from buyers seeking to take advantage of federal tax incentives, but are now scaling back their plans.

Building permits, a gauge of future activity, sank 11.5% to an annual rate of 606,000, the lowest since October 2009, according to the Commerce Department. Analysts were expecting a slight dip to a rate of 680,000.

Home sales have rebounded this year, helped by low mortgage rates and two government tax credits; $8,000 for new buyers and $6,500 for current owners who buy and move into another property. To receive the tax credit, borrowers had to have a signed offer by April 30 and must close the deal by the end of June.

“There is little doubt the housing numbers have been boosted,” by the tax credit, wrote Dan Greenhaus, Chief Economic Strategist with Miller Tabak + Co. Without the tax credits, many experts anticipate home sales will slow in the second half of this year. In addition, high unemployment and tight standards for mortgage lending continue to keep many buyers on the sidelines.

Construction of new homes and apartments rose 5.8 percent last month to a seasonally adjusted annual rate of 672,000. The increase was from an upwardly revised March level of 635,000.

The result was the highest since October 2008 and was driven by a 10 percent increase in the single-family market. Housing construction is now up more than 40 percent from the bottom in April 2009 but down 70 percent from the peak in January 2006.

Analysts surveyed by Thomson Reuters had expected construction to rise more modestly to a rate of 650,000. Nevertheless, a survey Monday showed homebuilders are feeling more optimistic. The National Association of Home Builders said its housing market index, which tracks industry confidence, rose three points in April to 22, the highest reading since August 2007. Readings below 50 indicate negative sentiment about the market.

Sales of new homes rose 27 percent in March, the biggest monthly increase in 47 years. Still, new home sales are down 70 percent from their peak in July 2005.

U.S. small-business owners are slightly less pessimistic about their outlook, and in the face of continuing weak sales they do not plan to boost capital spending or employment, a monthly survey of small businesses showed. The National Federation of Independent Business’ optimism index rose 3.8 points in April to 90.6, but the gain is not enough to signal that a solid recovery is in place, the association said on Tuesday.

Nevertheless, the latest report showed the optimism index rose above 90 for the first time in months. The index was below 90 for 22 of the last 25 months, including 18 consecutive months prior to the April reading. Nine of the 10 index components were up, compared with March.

Everyone knew that April’s sales numbers were going to be lower than March. The early Easter holiday this year bumped up sales in March by as much as 5% while depressing business by the same amount in April. However, the results came in weaker than expected, with many retailers missing Wall Street estimates, according to Thomson Reuters. Analysts are studying the combined March and April receipts to get a better gauge of consumer spending. Cooler weather last month also played a hand in depressing sales of seasonal goods . Still, despite these disappointments, the results marked the eighth consecutive month that retailers logged same-store sales increases. However, to put this in perspective: Retailers would have to post 13 months of double-digit same-store sales gains in order to get back to the level of sales they reported at the industry’s height in 2008.

A recent consumer survey conducted by RBC Capital Markets showed consumers are beginning to shed their anxiety about the economy. However, despite their growing optimism, their actions are showing continued reserve.

For example, the majority of consumers said they are planning to forgo expensive vacations this summer. Some 63% of those surveyed said they would stay at home on “stay-cation” or drive somewhere for a vacation (59%).

“The economy is getting better—slowly, but surely—but you’re not seeing people running to their banks to take out huge amounts of loans to buy everything and anything,” said Marc Harris, co-head of Global Research at RBC Capital Markets. “Money isn’t flowing out of their pockets. It’s still a tough time for a lot of people.”

On a positive note, the month ended what’s expected to be a decent first quarter for many retailers. A number of merchants, including Target Corp., Gap Inc., J.C. Penney Co. and Macy’s Inc. all raised their earnings outlook amid encouraging signs that they didn’t have to discount aggressively because shoppers were buying full-priced merchandise.

Home prices rose in nearly 60 percent of U.S. cities in the first quarter of this year, as the housing market started to stabilize thanks to billions of dollars in federal spending.

The National Association of Realtors says the median sales price for previously occupied homes rose in 91 out of 152 metropolitan areas tracked in the January-March quarter versus a year ago. There were double-digit price increases in 29 cities.

That’s a sharp improvement from the fourth quarter of last year, when prices rose in about 40 percent of cities. The national median price was $166,100, or 0.7 percent below the first quarter of last year. Sales of foreclosed and other distressed properties made up 36 percent of all sales in the first quarter.

The Commerce Department said consumer spending rose 0.6 percent in March, matching economists’ expectations. Personal incomes edged up just 0.3 percent, raising new worries about lackluster income growth. The March surge in spending was propelled by savings, which drove the personal savings rate down to 2.7 percent of after-tax incomes, the lowest level since September 2008.

The fear is that income growth will remain weak, reflecting severely high unemployment, as the job market continues to show the effects of the nation’s worst recession since the Great Depression. Unless businesses boost hiring, households will not have the incomes needed to support consumer spending, which accounts for 70 percent of economic activity. That would put the economic recovery in jeopardy. The government reported Friday that the broadest measure of economic activity, the gross domestic product, grew at an annual rate of 3.2 percent in the January-March period. That marked the third quarterly increase since last summer. Most economists believe the recession, which began in December 2007, probably ended in either June or July of last year.

The healthy first quarter GDP gain was driven by a big rebound in consumer spending, which powered ahead at an annual rate of 3.6 percent, the best showing in three years. But economists said spending gains of that size cannot be maintained without greater income growth. The 0.3 percent rise in incomes in March followed a tiny 0.1 percent increase in February and a 0.4 percent advance in January. The 0.6 percent rise in consumer spending, which matched last October’s gain, followed a 0.5 percent rise in February and a 0.3 percent January increase.

Disposable, or after-tax incomes, rose by 0.3 percent in March. The combination of a rapid rise in spending and a smaller gain in incomes left the personal savings rate at 2.7 percent in March, down from 3 percent in February and the smallest showing since the savings rate stood at 2.2 percent in September 2008.

During the housing boom of the last decade, the annual savings rate had fallen as low as 1.7 percent in 2007. Consumers felt wealthier as their home values soared and therefore felt less of a need to save. However, after housing sales and prices collapsed, helping to send the country into a deep recession, Americans began saving more. The savings rate rose to 4.3 percent in 2009, the highest level in a decade.

An inflation gauge tied to consumer spending showed a slight 0.1 percent rise in March and the same 0.1 percent increase excluding food and energy. Over the past 12 months, prices excluding food and energy are up by just 1.3 percent, well within the Federal Reserve’s comfort zone.

Construction spending rose in March for the first time in five months, but all the strength came in government activity as private sector building fell to the lowest level in a decade. Weakness in construction remains a major drag on the economic recovery. The Commerce Department says construction activity increased by 0.2 percent in March, the first advance since last October. The small gain took economists by surprise. They had been forecasting a 0.3 percent drop. The strength came from a 2.3 percent rise in public building projects, the largest increase in 13 months. That helped to offset declines in the private sector, where activity fell to the lowest point since January 1999.

A private trade group says the U.S. manufacturing sector expanded at the fastest pace in nearly six years, as factories continue to lead the economy’s rebound. The Institute for Supply Management, a trade group of purchasing executives, says its manufacturing index rose to 60.4 in April from 59.6 in March. It’s the ninth straight month of growth. A level above 50 indicates expansion. It is the fastest pace of growth since June 2004, when the index was at 60.5. Economists polled by Thomson Reuters had expected a reading of 60. New orders, a gauge of future production, jumped to 65.7 from 61.5 in March. ISM says its employment index, which measures employers’ willingness to hire, rose to 58.5, the strongest level since January 2005.

On Friday, seven more banks were closed by U.S. regulators. Out of the seven failed banks, three were in Puerto Rico, two in Missouri and one each in Michigan and Washington. This brings the total number of bank failures to 64 so far in 2010, compared to 140 in 2009, 25 in 2008 and 3 in 2007.

Although the economy is showing signs of a gradual recovery with large financial institutions stabilizing; tumbling home prices, soaring loan defaults and rising unemployment continue to take their toll on small banks. While we expect the economic recovery to gain momentum soon, there remain lingering concerns in the banking industry. Failure of both residential and commercial real estate loans as a result of the credit crisis has primarily hurt banks. As the industry tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

• San Juan, Puerto Rico-based Eurobank, with total assets of $2.56 billion and deposits of $1.97 billion.
• Hato Rey, Puerto Rico-based R-G Premier Bank, with $5.92 billion in total assets and $4.25 billion in total deposits.
• Mayaguez, Puerto Rico-based Westernbank, with total assets of $11.94 billion and deposits of $8.62 billion.
• Port Huron, Michigan-based CF Bancorp, with assets of $1.65 billion and total deposits of $1.43 billion.
• Creve Coeur, Missouri-based Champion Bank, with total assets of $187.3 million and deposits of $153.8 million.
• BC National Banks of Butler, Missouri, with $67.2 million in total assets and $54.9 million in total deposits.
• Everett, Washington-based Frontier Bank, with $3.5 billion in total assets and $3.1 billion in total deposits.

These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for these banks and will cost approximately $7.3 million. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund. However, the FDIC has about $66 billion in cash and securities available in reserve to cover losses arising from bank failures. Also, the FDIC has access to the Treasury Department’s credit line of up to $500 billion.