Welcome to Thoughts on the Market. I'm Michael Zesis, head of Public Policy Research and Municipal Strategy for Morgan Stanley.

Along with my colleagues bring you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and

financial markets.

It's Wednesday, May 6th at 11 a.m. Eastern.

Last week, we assured Muni investors that states aren't about to go bankrupt.

That's still true this week, but the whole in-state budgets can impact investors beyond the muni bond market, both negatively and positively.

We're forecasting state budgets will fall short of expected revenues by about $180 billion and as much as $375 billion if the economy doesn't bounce back to positive growth in the third quarter of this year.

States can bridge some of that gap through spending freezes and

using reserves, but barring a big enough aid package from the federal government, we'd still

expect cuts in spending and employment. For the economy that means that the state and local sector is likely to drag on GDP growth even as the private sector rebounds.

Consider that about 75% of the state and local contribution to US GDP comes from government employee compensation.

For the equity market, this hurts some sectors and helps others.

The machinery and construction sectors will likely see less revenue from state and local capital spending,

which accounts for about 90% of the non-residential

construction spend in the US. But state budget gaps aren't all bad news for investors.

For example there's a silver lining for the gaming sector.

States needing revenue may increasingly look to unconventional sources,

and legalizing and taxing online gaming could be one of those,

opening up new markets to the sector.

Thanks for listening. If you enjoy thoughts on the market, please take a moment to rate and review us on the

Apple Podcasts app.

It helps more people find the show.

...