Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

TAXES

NEW$ & VIEW$ (12 JUNE 2014)

SMALL BUSINESS SENTIMENT: IMPROVES A BIT

…but seems to be breaking out, finally!image

NFIB owners increased employment by an average of 0.11 workers per firm in May (seasonally adjusted), the eighth positive month in a row and the best string of gains since 2006. Fifty-five (55) percent of the owners hired or tried to hire in the last three months and 46 percent reported few or no qualified applicants for open positions. Twenty-four (24) percent of all owners reported job openings they could not fill in the current period (unchanged), providing some downward pressure on the unemployment rate. Fourteen (14) percent reported using temporary workers, unchanged for several months. Job creation plans continued to strengthen and rose 2 percentage points to a seasonally adjusted net 10 percent, approaching “normal” levels for a growing economy, even with no growth last quarter.

Actually, job openings are at a cyclical high:image

Wages are accelerating, along with prices:image

Three percent reported reduced worker compensation and 24 percent reported raising compensation, yielding a seasonally adjusted net 20 percent reporting higher worker compensation, unchanged and among the best readings since 2008. A net seasonally adjusted 15 percent plan to raise compensation in the coming months (up 1 point), the strongest reading since 2008.

Seasonally adjusted, the net percent of owners raising selling prices was a net 12 percent, unchanged from April after an 8 point rise in March. Overall, there is more upward pressure on prices. Twenty-two (22) percent plan on raising average prices in the next few months (down 3 points) and only 2 percent plan reductions (down 1 point). Seasonally adjusted, a net 21 percent plan price hikes (down 1 point). If successful, the economy will see a bit more “inflation” as the price indices
seem to be suggesting.

I have been writing on this for a while (e.g. FACTS AND TRENDS: THE BIG WAGER in April) but more people are now writing about this:

Martin Feldstein: Warning: Inflation Is Running Above 2%

Inflation is rising in the United States and could become a serious problem sooner than the Federal Reserve and many others now recognize. There are three basic reasons why the Fed is too optimistic in its current forecast that inflation will remain below its 2% target until after 2016.

First, data indicate that prices are already rising faster than 2% and have accelerated in recent months. Second, the low rate of short-term unemployment may be creating pressure for faster inflation despite the large total number of unemployed and underemployed individuals. And third, the rhetoric of Fed officials indicates that the central bank may not react quickly and aggressively enough if inflation continues to rise above 2%. (…)

The key to the future is how the Fed will respond when prices steadily rise above its 2% target rate while the overall unemployment rate is still relatively high. A misinterpretation of labor-market slack, and a failure to create a positive real federal-funds rate, could put the economy on a path of rapidly rising inflation.

Crude Tops $111 on Iraq Unrest

(…) Iraq has been ramping up production in recent months, and has a target of 4 million barrels a day by the end of 2014. Most of the country’s oil production is in the south, far from the current violence. (…)

OPEC Dismisses Oil-Supply Concerns Rising non-OPEC oil production will be sufficient to meet growing demand in the second half of the year, the oil-producers’ group said, dismissing concerns over supply in the coming months.

In its monthly report on the oil market, OPEC—which produces one in every three barrels of oil consumed globally—forecast non-OPEC oil supply would rise by 1.2 million barrels a day in the next six months.

The rate of growth is slightly slower than in previous months but should still be sufficient to meet growing demand when combined with OPEC output and healthy stock levels, the oil-producers’ group said.

In a reflection of its view that the market is balanced, OPEC decided to maintain its official output quota at 30 million barrels a day at its semiannual meeting in Vienna on Wednesday.

Last month, however, the International Energy Agency warned that OPEC could struggle to keep up with rising oil demand as many of its member countries contend with significant supply disruptions. Output from Libya has dwindled to less than 200,000 barrels a day this year amid strikes, protests and conflicts between rival factions in the country. Iran’s oil production is still hobbled by Western sanctions, while a growing insurgency in Iraq has cut off exports from its northern oil fields.

According to the IEA, OPEC will still need to boost its output by 800,000 barrels a day in the second half of the year to meet demand.

OPEC’s output has hovered below 30 million barrels a day for most of the year, falling to 29.4 million barrels a day in March. It has since rebounded, rising to 29.8 million barrels a day last month, but remains below the 30.3 million barrels a day the group predicts it will need to produce to meet demand in the second half of the year.

Investors Face Tough Walk on Easy Street A Chicago Fed index shows financial conditions are at their easiest since 1994. That might not worry the Federal Reserve, but it should give investors pause.

The Federal Reserve Bank of Chicago on Wednesday reported that its financial conditions index, with over 100 measures ranging from debt issuance to consumer surveys on credit conditions, showed America last week faced its easiest financial conditions in 20 years. Indeed, the last time the measure was so loose was in early February 1994, the point at which the Federal Reserve began a series of rate increases that would give stock and bond investors fits for the remainder of that year.

High five (…) a separate index from the Chicago Fed suggests financial conditions aren’t especially easy after factoring in the recent performance of the economy. There will need to be more labor-market improvement, and probably higher inflation readings, before the central bank begins the process of raising its target for overnight rates.

Moreover, the easy readings on financial conditions aren’t translating into wide credit availability. Mortgage rates are extremely low, for example, but the bar that first-time home buyers must clear to secure a loan remains very high. So, although some Fed policy makers worry the financial environment could lead to credit excesses, there are scant signs that is actually happening. (…)

China’s New Loans Top Estimates in Boost for Economic Growth China’s new yuan loans and money supply topped estimates in May as the government supports economic growth while reining in shadow banking.

Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website today, higher than 42 out of 43 analyst estimates in a Bloomberg News survey. M2, the broadest measure of money supply, rose 13.4 percent, compared with a median projection for 13.1 percent.

ECB Says Deflation Risk Remote

(…) But the ECB argued Thursday that weak demand weighing on prices in some countries doesn’t equal a broad-based, generalized and prolonged fall in prices across the entire currency bloc. In fact, the share of items in the euro zone with negative annual inflation growth rates isn’t “exceptionally high,” when compared with earlier episodes of deflation, the ECB said.

The central bank also cited its latest staff projections, which see inflation increasing gradually to 1.5% in the final quarter of 2016. Economic growth is projected to pick up gradually, with gains in competitiveness supporting euro-zone exports. At the same time, unemployment is falling slowly from high levels, which should help boost prices.

“While significant relative price adjustments are taking place in some euro area countries, it is highly unlikely that those processes will result in a downward deflationary spiral,” the ECB said in the report. “The risk of deflation in the euro area appears remote at the current juncture,” it added.

The Lose-Lose Tax Policy Driving Away U.S. Business There’s a good reason why American companies are sitting on $2 trillion in unremitted foreign earnings.

(Michelle Hanlon is an accounting professor at MIT’s Sloan School of Management)

The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings.

To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. They accumulate foreign earnings rather than repatriate the earnings and pay the U.S. taxes. This lowers a company’s tax burden, but it imposes other costs. (…)

In short, our international tax policy encourages U.S. multinational corporations to keep cash abroad, borrow more in the U.S. and invest more in foreign locations than they otherwise would. Everyone loses: The U.S. government gets little if any tax revenue from the foreign earnings, and shareholders and the U.S. economy are deprived of valuable resources.

(…) Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. (…)

The real solution is a tax system that attracts businesses to our shores, and keeps them here. Members of both parties have acknowledged concerns about the competitiveness of U.S. corporations. Consensus on what to do, however, has been elusive.

The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system.

Congress and President Obama should make tax reform a priority. That could end the death spiral and send out a signal, loud and clear, that the U.S. is also still open for business.

That said, large U.S. corporations are finding ways to remain competitive. Note that this Goldman Sachs chart (via Zerohedge) uses the median S&P 500 tax rate. In effect, the S&P 500 can almost be split in two between those companies with international tax planning capabilities and the others which suffer from the higher U.S. rate.

US companies keep buying and keep borrowing 

Highly respected Andrew Smithers looks at the recent drop in U.S. profit margins but sees no immediate danger to it.

I wrote in an earlier blog that I would become more cautious about US equities if profit margins came down. We have just had the figures for the first quarter of 2014 and profit margins have narrowed. I should therefore keep readers up to date and explain why I do not think the latest data are signalling the top of the market. (…)

The new data, published on May 29, show that profit margins fell in Q1 2014 (see chart one). Nonetheless, I think it would be premature to treat this as a clear bear signal, because it was a quarter in which corporate output fell, even when seasonally adjusted, and the severe weather can reasonably be held to blame for the decline.

The decline in profit margins means that corporate cash flow has fallen, but the message on profits is more complicated. National income and product accounts profits fell on one measure and rose on another and, importantly, the measure on which they rose is nearer than the other to the way that companies report their profits to shareholders.

The main difference between the two measures lies in the capital consumption, or CC, adjustment. The national accountants include this in their preferred profit figure. It aims to show the rate of capital consumption (aka depreciation) that allows for the impact of inflation. But companies report their profits at book values, so the capital consumption without the CC adjustment is a better guide to the profits that US companies show in their accounts.

Corporate cash flow fell, whichever way profits are defined. New data on US financial accounts, the “Z.1” published earlier this month, show that this did not affect corporate share buying. Buy-backs continued unabated at an annual rate of $400bn, which is 2.5 per cent of gross domestic product. Despite slightly lower investment and a slight fall in dividend payments, non-financial corporate debt grew even faster than before and has expanded by 9.2 per cent over the past 12 months, with the result that US non-financial companies’ leverage is now at an all-time high relative to output (see chart three).

There are therefore three reasons for not worrying too much about the fall in profit margins. First, this may well prove to be a one-off event resulting from exceptional bad weather. Second, profits in the way companies look at them rose, even as measured in the national accounts. Third, there was no diminution in company buying.

There are still, of course, some good reasons for caution. The new Z.1 data allow the value of the US stock market to be updated and, as shown on my website, as at June 6 2014 with the S&P 500 index at 1,949 points the overvaluation shown by q was 88 per cent for non-financials and 87 per cent as shown by the cyclically adjusted price/earnings ratio, or Cape, for quoted shares. (…)

The Fed is tapering, but that only slows the growth of liquidity, it does not reverse it and the more liquidity there is, the less pressure there is on other, non-corporate investors to sell.

The next lot of data on profit margins, corporate balance sheets and equity buying are due in September. There seems to me to be a good chance that profit margins will have recovered or at least stopped falling, and that companies will have continued to buy shares and raised their leverage to even greater heights.

Maybe there is immediate danger to this:

Investors lap up ultra-long bonds Sales of corporate bonds maturing in 50 years reach record levels

Issuance of the so-called ultra-long bonds has been rising in recent years, but has picked up in 2014 to reach a record $33.5bn as of Wednesday, according to Dealogic. Total issuance of ultra-long corporate debt jumped to $56.5bn in 2013, a rise of 84 per cent from 2012. (…)

On Tuesday, building-supply maker Johnson Controls sold $450m in 50-year bonds as part of a $1.7bn offering. Demand for the 50-year tranche surpassed the $3bn mark, according to people familiar with the sale. The 50-year bonds offered yields 30 basis points higher than those offered by the company’s 30-year debt.

Ghost If You Only Look at One Picture Today, Make it This One

(…) To see just how many advisors have turned bullish on stocks, I really want you to look at the below chart of the Investors Intelligence Bull Index. Under the chart, you will see a black line, indicating the S&P 500.


Chart courtesy of StockCharts.com

(…) Whenever this index has gone over 60, the stock market has come down hard. (…)

Dear reader; the odds of a very deep stock market sell-off are high. Investors have become too complacent; the past has been forgotten. The economy isn’t improving; we even had negative GDP growth in the first quarter of this year. The Fed has supported this entire stock market rebound with years of artificially low interest rates and a money printing program so aggressive that mankind has never seen anything like it before. (…)

High five Mike Lombardi is quick to conclude along his own bias. In reality, this particular indicator is useless (see INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!).

NEW$ & VIEW$ (5 JUNE 2014)

ECB cuts deposit rate below zero Central bank hopes historic move will help to avert deflation

The ECB cut its main refinancing rate to 0.15 per cent, from 0.25 per cent, and its deposit rate from zero to minus 0.10 per cent, becoming the first major central bank to venture into negative territory.

The ECB hopes the move will lift inflation by weakening the euro and spurring lending in the bloc’s more troubled periphery.

Fed Survey: Demand for Skilled Workers Stirs

Rising demand for skilled workers could push up salaries across more sectors of the U.S. economy, according to the Federal Reserve’s latest survey of regional economic conditions.

Hiring activity in general was “steady to stronger” across the U.S. from April through late May, according to the Fed’s “beige book,” based on anecdotal information about economic activity throughout the central bank’s 12 districts. Overall, the report pointed to an economy that was improving from its weak performance earlier this year, boosted largely by stronger consumer spending and job growth. The report comes two weeks ahead of the Fed’s June 17-18 policy meeting.

Companies in several regions reported difficulty filling jobs for highly skilled and upper-management positions. (…)

The Fed banks in Minneapolis, Kansas City and San Francisco reported pay increases were concentrated among workers in information technology, engineering, professional services and some skilled trades, according to the report. Outside of those jobs, few workers are seeing salary bumps.

In the Cleveland region, “skilled trade workers are very difficult to find and are driving up wages,” according to the report. In the Dallas region, a staffing firm said employers are paying higher relocation bonuses for talented employees, “particularly engineers.”

A New York-area employment agency said many candidates are getting multiple offers and that could put upward pressure on salaries going forward. A Maryland staffing agency echoed that sentiment.

The report highlighted steady improvement across other parts of the economy after a harsh winter. More than half the Fed districts pointed to strong auto sales, with other regions seeing “steady” sales. In the Philadelphia region, dealers reported “phenomenal” sales in April and have a bullish outlook for the rest of the year. (…)

Welcome back dropouts: data suggests Americans rejoining workforce

For the first time in six years, the share of people who either have a job or are looking for one is on the rise in a majority of U.S. states, a sign one of the deepest scars of the economic crisis could be healing.

Most states have experienced sharp declines in labor force participation since the 2007-2009 recession, but a Reuters analysis of government data found a reversal could be underway.

Anecdotal reports suggest that in many parts of the country, demand for labor appears to be growing enough to get people who had dropped out of the workforce to restart their job hunts.

“We are getting more job creation and we are seeing more people come in,” said Paul Turek, a labor economist with Washington state’s Employment Security Department. (…)

The state data, which can diverge from the national statistics because of adjustments the government makes to account for seasonal swings and other local economic factors, suggests she [Yellen] may be right to wait. (…)

Some more facts on housing

from a recent survey conducted by the MacArthur Foundation titled “How Housing Matters” (via Zerohedge):

As MarketWatch reports, “although mortgage rates are still quite low, down payments, poor credit and tighter lending standards remain three of the biggest hurdles for buying a home, especially among young people, Blomquist says. “The slow jobs recovery for young adults has made it harder for them to save and to get a mortgage.” Some 84% of young people are delaying major life decisions due to the poor economy, according to a 2013 survey by Generation Opportunity, a nonprofit think tank based in Arlington, Va.”

What’s more, at least 15% of American homeowners (or residents of 78 counties across the country) were living in housing markets where the monthly mortgage payment on a median-priced home requires more than 30% of the monthly median household income — long considered the maximum for rent/mortgage repayments. Housing costs above that threshold are “unaffordable by historic standards,” says Daren Blomquist, vice president at real estate data firm RealtyTrac. In New York county/Manhattan, mortgage payments represent 77% of the median income and in San Francisco County represents 70%.

As a result of a broken economy and lack of good job opportunities the “American dream” is now on its last legs: more than half of Americans, or 54%, believe that buying a home has become less appealing than it once was while some 43% of respondents have indicated that it is no longer the case that owning a home is “an excellent long-term investment and one of the best ways for people to build wealth and assets.” Even as seven in 10 renters (70%) aspire to owning a home, high proportions (58%) believe that “renters can be just as successful as owners at achieving the American Dream.”

But there is hope as younger people find jobs, they normalize their lives:

U.S. Household Formations Normalizing

The number of U.S. households climbed 1.38 million in March 2013 from the previous year (according to the Census Bureau’s population survey), in line with the two-decade median (1.35 million). That’s a marked improvement from the post-recession low of 0.36 million in 2010, and the third straight year above one million. Of note, the number of households headed by someone younger than 25 rose for the first time in seven years, likely due to the improved labor market. While household formations likely slowed more recently, according to the Census Bureau’s Household Vacancy Survey, the pent-up supply of potential homeowners should drive housing activity for some time. (BMO Capital)

image

Stats on mortgage apps for purchase remain weak on the surface but Raymons James notes that the seasonally adjusted index is up 11% since February 21, which marked a 19-year low.

The service sector is uber important in the U.S. and is a big job creator:

Services-Sector Growth Accelerates The U.S. non-manufacturing sector expanded further last month, according to data released Wednesday by the Institute for Supply Management. Employment, however, continued to lag other activity indicators.

The Institute for Supply Management’s nonmanufacturing purchasing managers index increased to 56.3 in May from 55.2 in April. It was the highest reading since August 2013.

The report said that 14 industries reported increased business activity in May, with one reporting decreased activity.

Some ISM subindexes increased further after posting big advances in April. The new orders index rose to 60.5 in May after it advanced to 58.2 in April from 53.4 in March.

The ISM business activity/production index increased to 62.1—the highest level since February 2011—after jumping to 60.9 from 53.4 in March. The ISM employment index increased to 52.4 from 51.3 in April. (…)

Non-manufacturers maintained their pace of inventory building last month. The ISM inventory index held at 55.5. The prices index edged up to 61.4 from 60.8. Just as in the manufacturing report, non-manufacturers report higher prices for food and steel products. (Charts from Bespoke Investment)

Hotels are a big part of the service sector and are directly impacted by the economy. In its latest weekly measure, Smith Travel Research reported that U.S. industrywide hotel revenues per available room (revpar) increased 7.7% Y/Y during the week ended May 31 from year-ago levels following growth rates of 9.2%, 9.6%, 10.6%, and 13.6% respectively during the previous 4 weeks.

And by the way, average daily room rates are up 4.7% Y/Y nationally.

Widening U.S. Trade Gap Dims Growth Views

The nation’s trade deficit widened 7% in April from a month earlier to its highest level in two years, the Commerce Department said Wednesday. Imports rose 1.2%, but exports fell 0.2%, marking the fourth decline in five months.

The report suggests American households and firms stepped up spending after snowstorms and icy weather walloped the economy in the winter. But much of their spending—on items like cars, cellphones and machinery—flowed outside the U.S. to foreign firms, undercutting domestic growth.

The export drop suggests sluggishness in overseas economies like Europe is sapping demand abroad for American-made products and services. Exports declined across the board, hitting farmers, jewelers, jet-engine makers and drilling-equipment manufacturers.

Credit Suisse economists on Wednesday said they expect the economy to grow at a 3% annual rate from April through June, down from a previous estimate of 4%. Several other economists made similar moves. Barclays Capital dropped its estimate to 2.9% from 3% in light of the trade figures.

Note that non-petroleum imports rose 5.7% in the 3 months to April, 25% saar!

China Composite PMI Employment Drops At Fastest Pace Since Feb 2009

China’s Services PMI printed at 50.7 – its lowest since August 2011, as the business expectations index dropped to an 11-month low. The Composite PMI improved (after 3 months of contraction) but most notably, the composite employment declines at the fastest pace since Feb 2009. What is perhaps most worrisome is, as Markit notes, “The latest survey signalled the second-weakest degree of optimism since the series began in November 2005.”

Euro-Zone Retail Sales Rose in April

Eurostat said the volume of sales rose 0.4% from March, and 2.4% from April 2013. That was the largest year-to-year increase since March 2007, when sales rose 3.0%.

Figures released by Eurostat Wednesday showed consumer spending rose by just 0.1% in the first quarter, and the prolonged weakness of household expenditure has been a major contributor to the weak performance of the euro-zone economy since the 2008 financial crisis.

image

High five However, core retail sales declined 0.1% in April following no change in March. January and February were up 1.6% in total. Last 4 months: +1.5% or +4.6% saar.

High five But Markit just released its May Retail PMI for the Eurozone, suggesting that retail sales were weak for a third consecutive month:

Eurozone retail sales were broadly unchanged from the previous month in May, according to the latest PMI® data from Markit. This stagnation at the aggregate level masked contrasting trends across the big-three eurozone nations, however, with a solid drop in sales in Italy countering a notable rise in trade in Germany and a slight uptick in France.

The Markit Eurozone Retail PMI – which tracks month-on-month changes in the value of retail sales – registered at 49.9 in May, broadly in line with the 50.0 mark that separates expansion from contraction and below April’s three-year high of 51.2. When measured on a year-on-year basis, eurozone retail sales were down to the greatest extent for three months, albeit only moderately.

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Pointing up This recent lull could mean troubles in coming months:

Stocks continued to accumulate, however, growing for the sixth straight month partly as a consequence of sales being lower than targeted levels. The gap
between actual sales and plans was indeed the widest since last October. As well as trimming their spending, retailers also parted with more staff during May, extending the current sequence of decline in eurozone retail employment to nine months. The rate of job shedding was little-changed from the modest pace
recorded in the previous month. Only in Germany did retail staffing levels rise since April.

May’s survey meanwhile showed a further easing of the rate of wholesale price inflation faced by eurozone retailers, to the slowest in more than four years. In spite of cost inflation having moderated, however, gross margins again fell sharply and to the greatest extent in four months.

Confused smile Expired Corporate Tax Breaks May Have to Wait Out November Elections

Businesses will likely have to wait until after the November elections to know if there will be a renewal of popular expired business tax breaks, ranging from credits for R&D to deductions for equipment purchases.

A bill to extend the tax breaks failed in May, and on Tuesday Senate Majority Leader Harry Reid (D., Nev.) said a deal is unlikely before the midterm elections in November, according to a Reuters report.

The bill to extend the tax credits had been approved by the Senate Finance Committee, but Senate Republicans blocked a vote on the bill on the floor.

In recent weeks, the House had moved to renew and make permanent the expired tax breaks, including the research credit and bonus depreciation, which would allow businesses to deduct 50% of many capital purchases up front. However those don’t stand much of a shot in getting through the Senate.

“The House and Senate…can’t even agree on which measures should be renewed, at what levels and for how long,” Corey Boles, a senior analyst at political consultancy group Eurasia Group, said in a note to clients this week.

Though these tax breaks are often retroactively renewed, businesses are already changing their business plans while they wait out the stalemate in Congress.

Previous tax breaks “allowed us to hire three or four more new positions as well as purchase over $1 million worth of equipment,” Dominic Wade, president and owner of Mohawk Fabric Co., told CFO Journal.

While larger businesses can afford to wait out Congress, many smaller businesses like Mohawk don’t have the cash flow.

“I can’t make plans today or six months from now if I don’t know… what the tax code is,” Mr. Wade said.

Berlin paves the way for fracking

Germany is set to lift its ban on fracking as early as next year, after caving in to business demands that it should reduce its dependency on Russian energy and boost competitiveness with US manufacturers.

Applications to carry out the controversial process for extracting the country’s estimated 2.3tn cubic metres shale gas reserves will be subject to an environmental impact assessment under new legislation to be discussed by the cabinet before the summer recess. (…)

Germany’s estimated reserves of shale gas are significantly smaller than those of Poland and France, which have the biggest recoverable reserves in Europe. However, German shale gas, which is concentrated in its northern states, still has the potential to provide a long-term domestic supply. (…)

“Through fracking technology, Germany could obtain more than 35 per cent of its gas consumption from domestic sources,” the BDI statement said. (…)

ELECTRIC CARS
Why Atlanta Is Juiced for Electric Cars

Atlanta has become a surprise success for electric car makers and the reasons—state subsidies and unfettered access to carpool lanes—offer a telling lesson in what it takes to lift demand for the vehicles.

Georgia provides more than $4,000 in income-tax credits on average for an electric-car purchase, cut-rate electricity, employer support of recharging stations and, in Atlanta, access to high-occupancy vehicle lanes in the city’s congested roadways.

Atlanta’s emergence as the No. 2 metropolitan market in the U.S. after San Francisco for electric-vehicle sales, according to researcher IHS Automotive, illustrates how public subsidies remain key to luring buyers away from gasoline-powered vehicles, and the extent to which employers and friends can influence plug-in car sales.

Atlanta recently leapfrogged Seattle to claim the second-highest level of electric vehicle registrations among major U.S. metropolitan areas in the 12 months through March. San Francisco is still No. 1. Cheap electric power helps: Georgia Power Co., the primary utility in Atlanta, offers a plug-in charging, off-peak rate of 1.3 cents per kilowatt-hour. The average cost across the nation is 11.88 cents a kilowatt-hour, says the U.S. Energy Information Administration.

The share of electric cars in Atlanta is small—just 2.15% of registrations—but that is more than five times the national average share of .38%, according to researcher IHS. Atlanta is the only city in the top 14 that isn’t on the West Coast and number 15 is Austin, Texas, which has .47% share of registrations.

“I think it’s because the technology and understanding and how it fits into the lifestyle of people is really starting to resonate,” said Jules Toraya, the Zero Waste manager with the city of Atlanta, which has tried to streamline the process for businesses to install charging equipment. Residents are saying, “when you factor what you pay, and what I am saving, it is essentially a free car.”

(…) Capitol City tells prospective buyers they can lease a Leaf for two years for as low as $199 a month after a $2,499 down payment. Including $1,387 in taxes and other fees, and an estimated $15 a month for electricity, that is $9,022 to drive the car for 24 months. But after factoring in the $5,000 Georgia tax credit, and savings on gasoline, the dealership says driving the Leaf will cost just $28 a month.

Atlanta’s electric car boom also highlights the risk auto makers run when they rely on government policy to support sales.

Georgia spent $943,665 on tax exemptions for 233 residents in 2012, according to the state, the most recent year for which figures were available. Auto makers said last year’s outlays are certain to have grown substantially as volumes jumped. Some Georgia lawmakers, concerned by the rising costs of electric car subsidies, want to phase them out.

“There are times when it makes sense to bootstrap a technology if that is for the greater good. But at some point, where a subsidy on a two-year lease makes it essentially free, I think that is too generous and not good policy,” said Alpharetta, Ga., Rep. Chuck Martin, who proposed the bill to eliminate the tax credit of up to $5,000 a car.

Coca-Cola’s downtown Atlanta headquarters recently doubled to 75 the number of parking spaces available with charging spots. “The idea there is that employees are here eight or nine hours a day. They will get the equivalent of half a tank,” said Eric Ganther, a transportation planner for Coca-Cola.

Coke estimates that more than 100 of its Atlanta employees drive to work in electric cars out of 4,900 workers on campus.

Tim Goudie, who works in marketing at Coca-Cola, says his Leaf cost $320 a month to lease with the credits figured in. Its electricity costs him $20 a month, compared with between $200 and $220 a month in gasoline. Combine that with access to the high-occupancy vehicle lane, and the advantages are strong for an electric vehicle, he said.

Mr. Goudie says a co-worker asked about his Leaf, “and I went through the facts and the figures and the savings and have convinced him to go buy it.”