Taxes: Home buyers’ tax credit extension should buoy home sales into 2010.
The Economy: Third-quarter GDP annualized growth of 3.5% was overstated.
Budget Woes: Revenue shortfalls will hit states hard in the coming fiscal year.

Taxes
Good news for businesses that are suffering losses in this recession: An expansion of carryback rules to cover large businesses, not just smalls. They’ll be allowed to carry back 2008 and 2009 losses for five years instead of two. But only 50% of income from five years back can be used to offset the carryback loss.

Extension of the home buyers’ credit should continue to buoy home sales. Under the new version, singles with adjusted gross incomes of up to $125,000 and couples with AGIs up to $225,000 qualify for the full credit on sales contracts signed by April 30 and closed by June 30. A partial credit is available for singles with AGIs up to $145,000 … for couples, up to $245,000. For first time home buyers, the full credit is $8,000, with longtime homeowners now eligible for up to $6,500. The credit is available on homes with sales prices of up to $800,000.
The previous tax break is credited with lifting sales by up to 800,000: Between 200,000 and 400,000 buyers who say the credit induced them to act plus about 400,000 who didn’t qualify for the credit. They figure that it enabled them to sell their homes to first-timers, allowing them to buy another home elsewhere.

The Economy
Third quarter GDP may not have been quite as strong as it appeared. New information about inventory changes and private sector construction hints that the 3.5% annualized pace reported was a bit of an overestimate.
Still, there are plenty of positive signals: Collectively, purchasing managers in manufacturing say, export orders and production rose in October. And managers in a half dozen business sectors now indicate that their firms intend to hire shortly.

Don’t be misled by the stunningly high back-to-back productivity gains.
Increases are real but don’t signal that the economy is being transformed. Spooked by the severity of the recession, managers laid off workers in large numbers, but they’re dragging their heels adding to payrolls now that the economy’s picking up. The pattern is common following downturns, but it’s unusually strong this time … annualized gains of 6.9% in productivity in the second quarter and 9.5% in the third.
The growth rate will slow as hiring gains steam over the next few quarters. In the meantime, it should translate into a big plus for corporate profits.

That’s what retailers are counting on this holiday season. With sales figures expected to show little or no increase over last year’s dismal tally, they’ll focus efforts on wringing greater profits from each ring of the cash register. No reversal of the trend toward slim inventories and thin staffs plus more store closings, despite holiday sales.
Lower wholesale prices for apparel, footwear, and household goods will help.

And gift cards could be one saving grace, even though sales will likely slip by up to 5% this year. Because recipients tend to see gift cards as “found money,” they bargain hunt less diligently than when shopping with cash or credit cards. Consumers often buy full priced items, blessing retailers with heftier profit margins.
Sellers will still discount heavily, though, especially early in the season, luring shoppers with bargains on flat-panel TVs, digital cameras, and the like.
After Black Friday, fair odds that deals won’t be quite as attractive. With inventories low, retailers hope they’ll clear out stock without slashing prices.

Online payment services are enjoying strong growth, tripling their share of online purchases between 2002 and 2007. Services such as Revolution Money and Bill Me Later, which don’t charge merchants interchange fees as credit cards do, now claim at least 17% of online purchases. The services appeal to consumers because customers don’t have to enter full payment information for each purchase and they ease fears of credit card fraud. Plus customers with no credit cards use them.
Eventually, credit card companies will feel the pinch and lower their fees.

Budget Woes
About three dozen state governments are facing big revenue shortfalls.
That’ll force them to rework their budgets in Jan. and Feb., about halfway through their 2010 fiscal years. Combined, the states will come up 4% short … need to find $17 billion more in savings or revenues than expected last summer.
States with the deepest holes to dig out of:
Ariz … $2 billion in the red, falling nearly 19% short of its budget. Va. needs $1.5 billion … a 9% gap for it. Ky. needs $1.1 billion, 11% of its budget. N.M. is $660 million, or 12%, shy on its revenue. Md. needs $936 million … 7%. Colo. … $561 million, about 7.5%. Kan., $183 million … a 3% shortfall. The biggest deficit in dollar terms: N.Y.’s $3 billion. But that’s just 5.5% of the Empire State’s budget. Calif.’s coffers are still lacking about $1.1 billion, but for the giant on the Pacific, that’s just 1.2% off.

Options for trimming the gaps run the gamut: Temporary sales tax hikes are pondered by Conn. and Colo. Hawaii may widen its top income bracket to catch more taxpayers. Miss. is mulling raising its gasoline tax. Ala. is expected to thin the state police. Several states will increase taxes on cigarettes and alcohol.