Detroit Business is Up

Story first appeared in The Detroit News.

Not since the upbeat days of the Archer administration have so many Metro Detroit business and civic leaders shared so much optimism as they again converge on Mackinac Island for their annual confab, starting today.

Despite serious financial challenges at City Hall, a growing amount of private capital is flowing into the beleaguered city to claim first-mover advantage on the ground floor of a new Detroit. Driving the change is an inter-generational entrepreneurialism that sees business opportunity and the chance to reshape positively the city's battered, undervalued assets.

The conditions are right: The hometown auto industry, on the verge of collapse three years ago, is roaring back with profitable sales driven by innovation, new leaders and lean, competitive operations. The state, led by the Governor, is delivering financial stability and more business-friendly policies just as the auto restructuring is taking hold and the national economy is improving, however slowly.

And Detroit? A looming financial collapse that required still-evolving state intervention promises, if nothing else, to arrest a slide that has been accelerating under the pressure of weak leadership and even weaker financial management. Still, that would be progress.

It is a good chance, anyway, if conditions that the region's business and civic leaders cannot control -- the details of Detroit's financial workout, the economic impact of political instability in the eurozone, the outcome of November's elections at the state and federal levels -- cut the right way and quicken an unmistakable sense of momentum.

The emerging set of players do think differently, in many respects, because they've been entrepreneurial.

The optimism is legitimate, bolstered by the fact that the painful economic decline of Michigan's "lost decade" and the automotive meltdown finally are forging the real structural reform that '90s-era leaders in autos and the city failed to deliver. Instead of fleeing a manifestly troubled and poorly managed city, savvy business is investing heavily in the municipal equivalent of an undervalued stock.

They're also bringing more taxpaying employees into a city desperately in need of them, a critical precondition for reversing Detroit's population flight, bolstering its tax base and attracting new investment in retail and other services.

What gives you confidence now is some of those structural issues are fixed at the autos and are on their way to being fixed at the state.

Investment in Detroit, focused on downtown and Midtown, increasingly is less dependent on do-good philanthropy and what Cullen called "huge levels" of public subsidies. It's important to note these things are more market-driven. Do we need some support in Detroit? Yes, we do. But the gap continues to shrink.

And the evidence mounts:

Two hospital systems -- Detroit Medical Center and Henry Ford Health Systems -- together are spending more than $1.5 billion in their respective Detroit locations. Blue Cross Blue Shield of Michigan, among other corporate players, is concentrating its workforce downtown.

Gilbert's Quicken Loans Inc. has acquired nine buildings downtown totaling 2.5 million square feet, spent roughly $250 million on renovations, consolidated 5,000 employees in the city and claimed the role as Detroit's corporate change agent-in-chief. Chrysler Group LLC is opening an office in Gilbert's Dime building, to be renamed "Chrysler House," to house its Great Lakes region sales staff and CEO Sergio Marchionne -- when he's in town.

Downtown office buildings, relics of Detroit's golden age, are being eyed for possible conversion to lofts to satisfy growing demand for rental space. Whole Foods, the trendy Texas-based food retailer, is beginning work on a Midtown store that arguably is as valuable for the statement it makes as the fresh produce it will offer the city.

The list goes on: The Ilitches, owners of the Detroit Tigers and Red Wings, are moving ahead with plans to build a new arena near their Foxtown headquarters -- a development that would make that quarter of the city a year-round hub of professional sports and likely spawn a whole new round of spin-off investment in restaurants, bars and small retail.

People see opportunity, not reasons we shouldn't be doing something. There's enough positive momentum. It really is about building that sense of confidence.

And not growing complacent, a recurring malady in a town -- and state -- that has suffered the hard lessons of arrogance, confrontation and ignoring the competition. There is another way, and it's beginning to unspool in the heart of a city given up for dead.

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Michigan Gov. Supports Immigration and Chrysler/Fiat

Story first appeared in The Detroit Free Press.

The Michigan Governor said Monday that he considers talent to be the state’s most valuable resource and said his goal is to keep people in the state who have valuable skills, including foreigners who study at the state’s colleges.  He told a group of about 40 recently hired Chrysler employees that he is probably the most pro-immigration governor in the United States.

The United States became economically strong in part because immigrants who came to America seeking a better life became entrepreneurs and sought degrees in higher education.

There are now immigration laws set up in the U.S. that say we’re going to educate these really bright people, and then basically tell them to get out.

Snyder’s comments came in response to a question about the promotion of diversity in Michigan from a Chrysler employee. The governor spoke to employees for about 10 minutes before fielding questions about tourism, the state’s unemployment outlook and the quality of available jobs in the state.

Michigan’s unemployment rate has dropped from a high of 14.2% in August 2009 to 8.5% in March as the automotive industry has begun to recover and hire more workers. But the Michigan governor feels that the rate is still too high.

Chrysler’s progress under majority owner Fiat is a model that the state should follow as the state works to reinvent itself.

Under majority owner Fiat, Chrysler reported its first profit in years in 2011 and its first quarter earnings of $473 million were nearly four times its earnings for the same period last year. As Fiat and Chrysler get closer to a full merger it is hoped that the state’s available talent and proposal to reform the state’s personal property taxes will encourage the company to pick Auburn Hills as its global headquarters.

They are an industrial company that is dong fabulous work, that reform would actually make Michigan a much more competitive place and really encourage them to be here.

The governor declined to provide any specific updates to his efforts to reach an agreement to build a new international bridge across the Detroit River.

Snyder met in Windsor Thursday with the Canadian Transport Minister to work on a plan with Canadian officials, despite a lack of support from the Michigan Legislature.


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Michigan Tourist Economy Gets Boost from Early Spring

Story first appeared in The Detroit News.
The Grand Hotel on Mackinac Island officially opens this weekend, signaling the beginning of Michigan's spring-summer tourism season. Its staff is already smiling wide, not only because this year marks the 125th anniversary for the iconic hotel, but because reservations for the 385-room hotel are up 4 percent over this period last year. Some summer weekends are nearly sold out.

Guests are ready to vacation and planning earlier, which bodes well for the travel industry.

So, too, are other businesses that make up Michigan's $17 billion tourism industry. The state expects a 6 percent jump in tourism spending this year, according to a forecast by Michigan State University tourism professors Dan McCole and Sarah Nicholls. That's even after last year's busier-than-expected travel season, marking a third consecutive year of a travel spending recovery.

Furthermore, average gasoline prices statewide fell below $4 a gallon during the past month, lightening the travel budget burden.

Even if fuel costs spike above the sensitive $4-a-gallon threshold, the impact will be low. People are going to vacation no matter what, they will find a way to afford it. They will cut back on souvenirs or dinners out to offset any rising gas prices.

Mother Nature will be the driving force behind a superior season. Just as Michigan's warmer-than-usual winter weather hurt the snowmobiling and ski industry this year, a rainy or cool summer can scare off the all important last minute traveler.

Research finds that 30 percent of travelers book trips six days or fewer before departure, allowing them to consult the weather forecast. If the traveler is affluent, the number climbs to 38 percent.

The weather has already helped businesses in Saugatuck, a western Michigan arts community. March's warm temperatures brought vacationers to Saugatuck earlier than usual. People began planning earlier because of the early spring.

It helps, too, that there is pent-up demand to take an escape, since many winter jaunts were canceled after lack of snow.

Michiganians also will be competing for reservations with tourists from other states.

The Tim Allen-voiced Pure Michigan ad campaign brought record numbers of out-of-state visitors to Michigan in 2011, a study by Longwoods International shows. It motivated an estimated 3.2 million trips to Michigan last year, with 1.2 million tourists crossing borders to get here.

Those visitors spent $1 billion at Michigan businesses, paying $70 million in Michigan taxes. Michigan increased the advertising budget to $12 million this year, so those numbers should be even bigger.


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Can Detroit be Saved?

Story first appeared in The New York Times.

DETROIT — Other cities and towns have teetered at the edge of financial disaster lately, but Detroit, the capital of America’s auto industry and once the nation’s fourth-largest city, has just become the most striking test case for a key question: Can a city that has fallen so far be saved?

A giant plot of land — 139 square miles — with only half the residents it once had, Detroit has watched in recent years as tax revenues have slipped too low to support its costs, its debts have swelled to a stunning $12 billion, and, this spring, its money nearly ran out. Now, after months of wrangling over how and when and whether the State of Michigan should intervene to stem the hemorrhaging finances, officials here said that a historic deal, approved Wednesday, granting the state oversight powers puts Detroit on a path to recovery at last.

The deal, which creates an advisory board to oversee financial decisions, spared the city from fates that many viewed as far worse: a complete takeover by a state-appointed manager, bankruptcy or default. But Detroit’s problems are far from over, and the new deal by no means assures success.

The financial woes of this city, now dependent on a tax base of just 713,000 residents (amounting to what is now only the 18th most populous city in the nation) are huge and fundamental — too sizable, some critics say, to be solved by monitors. Oversight agreements tried in other places have taken many years in some cases, and results have been mixed.

And, unlike full state takeovers that some cities have unhappily undergone, these sorts of deals require a high degree of political compromise and getting along, those who have worked on them elsewhere say. Detroit is still bitterly polarized over whether state involvement is needed at all.

Around Detroit, residents tell of a city where streetlights fail, buses run late and no one can be sure when the police will turn up. While some business owners and young entrepreneurs tell of a renaissance of private industry in the city, the poor level of municipal services has created a deep-down pessimism about the notion that things will change now.

States have long used a range of methods to step in when municipalities have fallen into trouble, and some have worked. In the 1970s, a financial control board helped pull New York City from the edge. But the powers — and results — of such boards and appointed receivers vary widely, and some experts expressed doubt that Michigan’s oversight of Detroit would go far enough.

Under a so-called consent agreement, approved reluctantly this week by divided Detroit leaders, a nine-member financial advisory board will be appointed to guide the city, which will be required to report any budget shortfalls swiftly and to hire a program management director to help oversee reforms. The agreement also will reopen union contract talks, and permit sharp cuts.  It also considers the possibility of privatizing some city services and consolidating departments — powers that union leaders, who had been negotiating separate concessions with city leaders in recent months, object to furiously. And the deal cleared the way for refinancing of debt to solve the city’s imminent cash crisis.

Though many residents objected to the agreement as a seizure of city control, the Governor could have chosen a more sweeping step under Michigan law and called for an emergency manager to take over many of the powers of the local officials, as well as the ability to throw out existing labor contracts. Detroit leaders loudly opposed that plan, as the Governor, who has been widely criticized over his use elsewhere in the state of the emergency manager law, which is now the target of a repeal effort.

The political pressure not to send in an emergency manager grew intense in months of debate here. Some saw the question through a prism of race, arguing that it would amount to a white takeover of the state’s largest city, where 82 percent of residents are black. Others called it a union-busting maneuver by Lansing, the Republican-held capital.

But the governor’s spokeswoman, said that the Governor had always preferred some alternative to a full takeover.

Yet some critics wondered whether the city might be too far gone for anything short of the powers of an emergency manager, whether an advisory board would be willing to go far enough to fundamentally change the city.

Those who have worked within such oversight arrangements in other states offer a mixed picture of how well they work, in part because much rests in the individual details of the troubled city’s supervision deal and how much (or little) power an oversight body is granted. John F. Street, the former mayor of Philadelphia, said an oversight board there that began in the 1990s mostly proved to be useful.

The  managing director of an independent advisory firm, Public Financial Management, who works on such arrangements in states like Pennsylvania, said that the boards were rarely instant fixes, and can take years for cities to emerge from. They also require a high level of collaboration and consensus-building, he said, under sometimes tense political conditions. In the case of Detroit, feelings seemed  to have reached a boil for some already — even before the new board has been named.

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Michigan Economy Up After Mild Winter

Story first appeared in The Detroit News.

Bolstered by the mild winter and continuing weakness in housing, the auto rebound is spreading to other parts of the Michigan economy, boosting economic conditions to their best level in six years.

According to a new Comerica Bank estimate of the state economy, the recovery is starting to reach beyond Detroit's Big Three. That trend also is reflected in the February jobs report released Wednesday, which showed that during the past 12 months the state added as many jobs in business and professional services as it did in manufacturing.

Another piece of encouraging economic news released Thursday was the state's announcement that personal income in Michigan grew at the strongest rate since 2000, just before Michigan entered its decade-long "one-state recession."

Comerica's index measures nonfarm payrolls, exports, sales tax revenues, hotel occupancy rates, continuing claims for unemployment insurance, building permits and motor vehicle production.

All seven of those improved in January, sending the index up 7 points, to a level of 98, the highest since January 2006.

Despite potential threats, including higher gas prices and defense spending cuts, Dye sees the economy emerging from its halting recovery to a stronger expansion.

While the economy got a bit of a boost from the mild winter, which kept home heating and other bills down and left more money in consumers' pockets, there's more to the current improvement than warmer temperatures and short snowfalls.

With auto sales recently topping an annualized rate of 15million vehicles, consumers seem to be unleashing some of the pent-up demand they've been holding in since 2007. The auto industry also benefits from the lack of any significant improvement in the housing market. With home values down and still dropping in most of the country, consumers aren't shopping for new homes.

Experts see rising gas prices as a threat to auto sales for the Detroit carmakers, now that they're offering more fuel-efficient models. The experts added that they see gas prices easing and dropping to $3.60 to $3.70 a gallon by summer.

And while higher gas prices may trim some pickup and SUV sales, car sales won't be lost to the foreign nameplates as in past periods of increased fuel prices.

AP Analysis: Economic Stress is Easing More Slowly

Associated Press

Two-thirds of U.S. counties became economically healthier in May, thanks to more manufacturing jobs in the Midwest and fewer home foreclosures in the Sun Belt, according to The Associated Press' monthly analysis of conditions around the country.

Yet the improvement appeared to slow in May compared with April, the AP's Economic Stress Index shows. And concerns are arising that the nation's recovery is losing momentum.

Economic stress declined month to month in 33 states in May, aided by lower unemployment. In April, by contrast, stress had eased in every state except two — and in 90 percent of the nation's 3,141 counties.

Bankruptcy rates around the nation also inched up in May.

The AP's Economic Stress Index calculates a score for each county and state from 1 to 100 based on unemployment, foreclosure and bankruptcy rates. A higher score indicates more economic stress. Under a rough rule of thumb, a county is considered stressed when its score exceeds 11.

The AP's index found the average county's Stress score in May was 10.3, down from 10.6 in April. It was the lowest score since November's 10.2.

"As the government's stimulus winds down and as long as the labor market remains weak, an acceleration in the economy is probably not in the cards," said David Huether, chief economist at the National Association of Manufacturers. "If I were a betting man, I'd bet the economy won't double dip into recession, but it will grow at a much slower pace."

Still, conditions did improve in most of the nation in May. Just under 40 percent of counties were deemed economically stressed in May, compared with 42 percent in April. Job gains in manufacturing, farming and hotels and restaurants helped some of the counties where stress declined the most, according to the AP's analysis.

For the first time since the AP began the stress index in May 2009, the four states that have shown the most stress each month — Nevada (21.75 in May), Michigan (16.22), California (16.14) and Florida (15.26) — improved from the prior month. These states benefited from declining unemployment and foreclosure rates.

Arizona rounded out the list of the five worst-performing states in May with a Stress score of 15.04. That was a slight increase from April.

The best-performing states in May were North Dakota (4.03), South Dakota (5.21), Nebraska (5.83), Vermont (6.49) and Iowa (7.5).

Despite better conditions in May, analysts say the economy's rebound might be stalling as it enters the second half of this year, when the benefit of federal stimulus spending will start to fade.

A growing number of economists are scaling back their growth forecasts. Michael Feroli, an economist at JPMorgan Chase, for instance, thinks the economy will grow at a 3.2 percent annual pace in the July-to-September quarter, down from a previous 4 percent estimate.

The improvement in May occurred before renewed concerns about the economy emerged last month. Consumer confidence, for instance, tanked in June, and stock prices have sunk. Businesses remain wary of ramping up hiring.

Still, the economy's bright spots — namely manufacturing — were evident in May.

Among the states, Michigan, Vermont, Idaho (11.3), Illinois (13.7) and Iowa saw the biggest month-to-month decreases in stress. Economists pointed to gains in manufacturing jobs, which helped reduce unemployment in those states. Counties in the Midwest led the nation in improvement for a second straight month.

Louisiana (8.63), Oklahoma (8.61), Pennsylvania (10.49), Mississippi (12.58) and Arizona (15.04) suffered the biggest month-to-month increases in economic stress. Higher unemployment was the main reason.

The stress in the Gulf states of Louisiana and Mississippi resulted from the BP oil spill. People who lost jobs as a result of the spill are likely to be compensated for their lost income from funds BP announced in June.

Pennsylvania's problems are related, in part, to a slowing in the manufacture of chemicals. Oklahoma's are a result of moderating energy prices. And Arizona's stress is likely related to continued damage from the housing bust.

Economic stress was higher in May than a year ago in 35 states, particularly in the West. Over the past year, stress has grown the most in Idaho, Montana (7.89), Nevada, New Mexico (9.48) and Utah (10.81).

In Utah's case, the state experienced the housing boom about a year and a half behind the Sun Belt states of Arizona, California, Florida and Nevada. That explains why the housing bust and foreclosure crisis hit Utah later than it did others, said James Wood, director of the Bureau of Economic and Business Research at the University of Utah.

Counties of at least 25,000 residents that were the most stressed in May were Imperial County, Calif. (31.74); Yuma County, Ariz. (29.14); Lyon County, Nev. (27.30); Merced County, Calif. (24.55); and Nye County, Nev. (24.45).

The economically healthiest counties were Ward County, N.D. (3.35); Burleigh County, N.D. (3.66); Grand Forks, N.D. (4.02); Ellis County, Kan. (4.13); and Brown County, S.D. (4.25).

Recovery Could Skip Michigan

The Detroit News

Irv Reid, the former Wayne State University president turned big-idea impresario, puts it simply: Could the nation's nascent economic recovery pass Michigan by?

Auto sales are surging, a harbinger that Detroit's automakers at long last may be poised to make solid money again. Stock markets are moving higher. Consumer confidence is improving. There are even encouraging, if somewhat contradictory, signs coming from unemployment reports -- all of it signs an economic recovery is starting to take hold.

Could the Big Mitten miss out this time?

"Michigan does not have the robustness in its future right now that has been in other states," Reid said in advance of a daylong symposium being held today at Wayne State -- "The Michigan Economy: Will it get better, can it get worse?"

He continued: "We do not have a steady structure here that will bring us back. We have a shifting economy," whose emphasis on the service sector over traditional manufacturing disciplines is a "changed paradigm" that too many still have not come to accept.

The impact of the shift cannot be overstated. The state's per-capita income, now ranked 37th out of 50, is declining. Payrolls are slimmer. Tens of thousands of manufacturing jobs are gone, never to return. Tax revenue is evaporating, pressuring education budgets, public pay and benefits and the services offered by state and local government.

Even more troubling is a lack of consensus about how to attack the decade-long malaise. In politics, Democrats -- starting with Gov. Jennifer Granholm -- want more federal aid, an expanded sales tax and to target politically acceptable business sectors with tax incentives. Republicans and pro-business Democrats focus on the business environment of taxes, regulation and whatever measure of certainty can be had in Lansing.

There's not much consensus in business circles, either. Some blame the lack of access to capital and bureaucracy; others blame the heavy hand of organized labor and the costs associated with it. The net effect, as the national economy shows signs of revving, is a Michigan economy stuck in lower gears for what seems like forever.

"You have to start with where you are," said Alice Rivlin, a visiting professor at Georgetown University's Public Policy Institute and a former vice chair of the Federal Reserve, in town to address Reid's symposium. "Focus on skills, infrastructure and making Michigan an attractive place to do business."

Easier said than done, professor. We can't even agree on what "an attractive place" looks like much less how to get there with enough conviction to capture the sustained attention of would-be investors who have choices, lots of them.

"When you're coming out of a deep recession, there's bound to be uncertainty," said Rivlin, also a senior fellow at the Brookings Institution and director of the Clinton White House's Office of Management and Budget in the mid-1990s. "The private sector is always hardest hit in a recession. What makes the public sector a stabilizer is it doesn't go down in a recession."

But a heavily indebted public sector, reaching historic levels in the Age of Obama, is a threat to the overall economy. Ask Rivlin to identify the biggest threat to the U.S. economy -- and, by extension, a recovery for Michigan -- and she doesn't predict a "double-dip" recession or point to the likelihood of rising income tax rates or the prospects of slow growth and a slow recovery in employment.

"We've got to start quickly to address the deficit and the debt problems of the federal budget," she said, an unsustainable trend that has implications for everything from tax rates and entitlement programs to foreign policy and the value of the U.S. dollar on world markets.

We know a thing or two about entitlements, unsustainable trends, crushing debt and unrealistic assumptions about the present and future. We know it doesn't end well because we lived it -- and in many respects still are.

State Population Now Below 10 Million

Michigan Messenger

With the continuing reduction of the manufacturing base in Michigan, the state’s population has now dropped below 10 million according to new data released by the U.S. Census Bureau. The Detroit News reports:

The July 1, 2009, population estimate shows the state lost an estimated 32,759 people, the fourth consecutive year the population fell. Only Maine and Rhode Island saw their population go down in the last year.

Michigan has been bleeding people since 2005, and at the heart of the decline has been the growing exodus of people moving out looking for work. The current estimate puts Michigan’s population at 9,969,727, down from 10,002,486 in 2008. The state has seen a net loss of more than a half-million people to other states since 2001 — a number that swamps the natural increase from a greater number of births than deaths.

Last year’s decline was actually slower than in previous years, probably because the recession reduced opportunities in other states that might prompt residents to leave Michigan. As the recession lifts and Michigan lags behind the rest of the country in terms of jobs, the rate of decline in Michigan’s population may well speed up.

This has a real impact on the state in a number of ways. Declining population means dropping state revenue through income, property and sales taxes. It also means losing a good deal of federal aid and, after the 2010 census, will almost certainly cost the state one or two seats in the U.S. House of Representatives.

As Unemployment Runs Out, Welfare Numbers Rise

Story from the Wall Street Journal

Welfare rolls, which were slow to rise and actually fell in many states early in the recession, now are climbing across the country for the first time since President Bill Clinton signed legislation pledging "to end welfare as we know it" more than a decade ago.

Twenty-three of the 30 largest states, which account for more than 88% of the nation's total population, see welfare caseloads above year-ago levels, according to a survey conducted by The Wall Street Journal and the National Conference of State Legislatures. As more people run out of unemployment compensation, many are turning to welfare as a stopgap.

The biggest increases are in states with some of the worst jobless rates. Oregon's count was up 27% in May from a year earlier; South Carolina's climbed 23% and California's 10% between March 2009 and March 2008. A few big states that had seen declining welfare caseloads just a few months ago now are seeing increases: New York is up 1.2%, Illinois 3% and Wisconsin 3.9%. Welfare rolls in a few big states, Michigan and New Jersey among them, still are declining.

The recent rise in welfare families across the country is a sign that the welfare system is expanding at a time of added need, assuaging fears of some critics of Mr. Clinton's welfare overhaul who said the truly needy would be turned away.

"To me it's good news," says Ron Haskins of the Brookings Institution, who helped draft the 1996 welfare-overhaul law as a Republican congressional staff member. "This is exactly what should happen."

Welfare cases peaked at above five million in 1995 and declined sharply after the 1996 law put time limits on benefits and emphasized moving recipients from welfare to work. The time limits vary by state, but the federally mandated maximum is five years with some exceptions; after that, benefits end.

The cash-assistance program, called Temporary Assistance for Needy Families (TANF), was created by the 1996 law and replaced previous welfare and jobs-training programs. Funded partly by the federal government and partly by the states, it primarily assists women who have children and no job, or a very low-paying one. The number of families on welfare had been falling steadily and, nine months into the recession, stood at 1.6 million in September 2008, the most recent date for which national tallies are available.

'First Real Test'

"This is the first real test," said Liz Schott, a welfare analyst at the Center on Budget and Policy Priorities, a liberal Washington think tank. "We always said, how is it going to perform? How is TANF going to perform in an economic downturn?"

One clue, she says, can be found in a different measure. Although the TANF program seems to be accommodating increased need, it is doing so at a slower rate than another government initiative: the food-stamp program. The number of food-stamp recipients has risen in every state and was 19% higher in March than a year ago, a much bigger increase than the number of welfare cases.

Food-stamp eligibility is significantly easier than the criteria for receiving welfare, so food-stamp assistance tends to rise first. The food-stamp program covers a much larger pool of people who have trouble making ends meet but make more money than the allowable limits under TANF.

In general, a family of four must have a monthly income of less than $2,297 to qualify for food stamps. Welfare, on the other hand, is designed as a last resort.

The average monthly welfare benefit in 2006, which reflects the most current data collected by the government, was $372.

Antoinette Tatum has been receiving food stamps since September when she and her 4-year-old daughter moved to Kensington, Md. When her car transmission failed, Ms. Tatum couldn't commute to her job in Baltimore, about 45 minutes away by car, so she quit. Unable to find a full-time job, Ms. Tatum did temporary work but found that the more she earned, the fewer government benefits she received; ultimately she couldn't make ends meet.

"The government, they help the extremes. But people in between have the hardest time," said Ms. Tatum, 28. "You don't make enough money to get by but you make too much to get help." She turned to welfare, and expects to begin getting checks at the end of this month. She is considering staying on welfare and going to college instead of seeking another low-wage job.

The recession is straining many state welfare programs. State budget woes often mean more cases without more employees. And the demand for cash assistance is squeezing funds for job-training programs targeted both at the unemployed with little work experience and unemployed professionals with extensive work experience.

In South Carolina, for example, the vast majority of welfare funding is being directed to the cash-assistance program, leaving little to actually help people find jobs and get off welfare. "When we really are talking about how to put people back to work or get them retrained, with the budget problems our state is having, I really worry," says Sue Berkowitz, the director of the South Carolina Appleseed Legal Justice Center, which advocates for low-income people.

Stimulus Grants

The federal government's fiscal stimulus includes $5 billion for states where more families receive welfare or spending increases on employment subsidies or short-term emergency assistance. That provision sparked concerns from the Heritage Foundation and other conservative groups that President Barack Obama was undoing the provisions of the 1996 law intended to encourage states to get people off welfare and onto payrolls.

So far, only California and Ohio have received stimulus grants, but 38 other states and territories said they plan to apply, said Jeffrey Kelley, spokesman for the Department of Health and Human Services' Administration for Children and Families.

The lag in the increase in welfare cases during the worst recession in a generation is curious to some some scholars. "In many respects, the mystery that had been operating until now had been how can there be such a rapid increase in unemployment and long-term unemployment and not show up in the welfare [system]?" says Mark H. Greenberg, director of Georgetown University's Center on Poverty, Inequality and Public Policy.

The extension of unemployment benefits by Congress -- for as long as 59 weeks in some states -- may be one reason.

"To some extent unemployment [compensation] is doing what we hoped it would do, which is being the first safety net for unemployed workers," says Don Winstead, the deputy secretary of Florida's Department of Children and Families. Without those extensions, he added, the number of families on welfare in Florida would have risen even more than it has: up 14% in June versus a year ago.

Another cause of the delay may be that welfare is targeted at women and children, and this recession has been hardest on men. The lag in the increase in welfare cases may simply show that it took longer for the recession to hurt women than men, says Mr. Haskins of the Brookings Institution.

Despite the deep recession, a few big states still have declining welfare rolls.

In Michigan, for example, welfare caseloads were down 4.8% in April from a year ago even though the number of residents receiving food stamps was up 13% in March to more than 1.4 million people.

Some advocacy groups for the poor complain that strict front-end requirements -- which force welfare recipients to look for work in a state with a 14% unemployment rate before even meeting with a caseworker -- deter many from seeking help.

A further explanation is that income limits for welfare eligibility are set so low, and haven't been adjusted for so long, that having a low-wage part-time job can disqualify an applicant. In New Jersey, a family of three earning more than $636 a month is ineligible. "These are the people who really will fall through the cracks because they're not eligible for any help," says Donna Gapas, who oversees the welfare program in Hunterdon County, N.J.