Maryland isn't so reliant on a bull market

Some bigger states were spoiled by juicy capital gains

Jobs are the thing here

A Microsoft alumna doesn't have to work

Maryland's Economy

Close-up On Captial Gains

May 20, 2001|By William Patalon III | William Patalon III,SUN STAFF

When Susan Parish accepted a sales job with Microsoft Corp. in late 1989, she had a clear goal in mind: work hard for a decade, save her money and retire young.

In February 2000, after "an awesome 10 years" with the firm - as it blossomed from upstart to software stalwart - Parish achieved her goal and left the company for a new career as a full-time volunteer.

Today, the former sales representative lives in a small rancher on 6 acres in northern Baltimore County and has two pets - Gertrude the goat and Rufus the donkey. When Parish isn't jogging, swimming, biking, doing yoga or taking dance classes, she does volunteer work for such organizations as the Special Olympics or the Baltimore Zoo.

"Some people can't believe how cheaply I live," says Parish, a very private woman who gives her age as "decades away" from the mandatory retirement age of 65. "Fortunately, the things I like in life happen to be free. The money didn't change who I am. I've never been interested in the things others seem to have - a cool car, a cool house. I just didn't have to have them."

By eschewing such big-ticket toys, Parish dodged the need to cash in chunks of her Microsoft stock, which doubled multiple times during her company tenure. Her Spartan lifestyle helped in another way: When technology stocks plunged and Microsoft fell by two-thirds, Parish wasn't dangerously overextended because she hadn't crafted a budget that counted on yearly capital gains.

In that sense, Parish has a lot in common with Maryland, a state that economists say isn't overly reliant on stock market capital gains. That's a point in Maryland's favor, with the economy now slumping and the once-booming stock market now expected to generate subpar returns for several years to come, according to a recent study.

Thanks to the record stock market gains that preceded the current downturn, consumers and some states got so spoiled by the yearly profits from stocks that they built them into their budgets - figuring this trend would continue.

State governments came to rely on the extra tax revenues from the capital gains realized by consumers and corporations. And numerous consumers, counting on the market to move higher each year, increased their spending and even cashed in some of their winning investments to bolster their binges.

This all has implications in an economic slowdown, however. When an economy sours and a stock market falls far from its high, states and consumers who relied on a capital gains boost to meet their expenses will be overextended and perhaps facing trouble, economists say. That can deepen a downturn, or at least delay a recovery.

Even the Federal Reserve - in a statement accompanying an interest-rate cut last week - noted that the drop in stock market wealth "continues to weigh on the economy."

But Maryland's economy is "more driven by standard sources of future income [such as worker wages] rather than risky sources of future income like those of the stock market," said Pradeep Ganguly, chief economist for the Maryland Department of Business and Economic Development.

While wages are a key factor in the health of the consumer-driven U.S. economy, the stock market has seen its importance move higher in recent years. Households have boosted their stake in stocks - with about half having holdings - meaning that stock prices and consumer confidence are increasingly moving in lockstep. A healthy injection of capital gains from a surging stock market can help accelerate an already strong economy into an actual boom.

This was a factor in what happened in 1999 and the early part of 2000, economists said. As stock prices soared, so did consumer confidence.

Because of the so-called "wealth effect," consumers assumed a rosy financial picture, and spent bigger portions of their paychecks - or went deeper in debt, rationalizing that ever-rising stock prices would do their saving for them. Consumers increasingly took advantage of the bull market by cashing in, or "realizing," a portion of their gains, giving them still more money to spend and adding further juice to the record-length boom.

A recent study of the impact of capital gains in the Regional Financial Review underscored this trend: Nationwide, realized capital gains rose from about $164 billion in 1995 to an estimated $550 billion last year.

"By cashing in on their stock portfolios, not only are consumers saving less and spending more [of their wages], they actually have more cash to spend," said Mark A. Zandi, chief economist for Economy.com in West Chester, Pa., and a co-author of the Regional Financial Review study.

A majority of analysts predict slower growth in stock prices over the next few years, which will likely yield lower levels of capital gains. Nationally, from an estimated $536.1 billion in 1999 and $550 billion last year, investors are projected to net capital gains of $367.7 billion this year and $313.3 billion in 2002, the study concluded.

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