State sales taxes flash recession warning

By Joan Gralla - Analysis

NEW YORK (Reuters) - About half of all states are collecting less from their sales taxes than expected, which could signal a recession lies ahead as the home market fades.

The receding housing boom could then reveal the underlying economic weakness it had camouflaged, according to Philippa Dunne, a co-editor with the New York-based Liscio Report, published by an economic research firm.

To Dunne, the recession warning light is flashing yellow.

"There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels," she said, adding about 25 states are seeing disappointing sales tax revenues.

It's not just jobs in construction, lending and real estate that are at risk. Less demand for materials, from cement to carpets, could cause malls and manufacturers to slash workers.

Despite Midwest growth pockets, such as Chicago, surrounding areas that never tapped the housing boom could get hit if credit-wary consumers buy fewer clothes or services.

The Northeast's economy now is imperiled because banks and brokerages have been cutting jobs since this summer when the subprime mortgage sector morphed into a profit-eating ogre.

Florida, once a paradise for speculating "home flippers," has already tipped into a recession, some economists say.

Even the Northwest, despite still vibrant employers in the high-tech and aircraft sectors, could suffer because housing-related employment was so overblown, said Mark McMullen, a Portland, Oregon-based senior economist with Economy.com.

He puts the likelihood of a U.S. recession in the next couple of years at 40 percent, mainly due to the broad reach of the housing market's slide.

How sales taxes perform is one of the most useful ways to judge a region's economy because the data are released fairly promptly and reveal trends in consumer spending that otherwise are hard to discern, Goldman Sachs noted in a July report.

These revenues are often one of the biggest sources of funds for states because sales taxes are applied so broadly.

Cars, clothes and restaurant meals are all usually taxed, along with all the materials, from wood to drapes, needed to build or renovate homes or commercial buildings.

WORST PERFORMERS WERE HOUSING HIGH-FLIERS

It's no coincidence that some of the states whose sales taxes are the worst performers are also on the list of those whose housing markets once soared the fastest and highest.