Monday, February 28, 2011

More on Personal Consumption

In response to my post Something Sustainable reader Tom Lindmark commented:

As I understand the numbers, real PCE declined 0.1% and disposable income was up only 0.1% if you net out the effects of the reduction in withholding taxes and the expiration of Making Work Pay.
From a quick look it appears taxes actually rose $55 billion in the period in nominal terms (not sure real terms), but Tom is correct that real PCE declined in January, but predominantly due to a decline in real energy consumption (though nominal consumption remains high). This can be seen in the below chart that compares components of real PCE over 3 and 12-months. Notice that real consumption has declined in all areas, with the exception of services and energy.

Source: BEA

Something Sustainable

Over the past twelve months the rate of personal spending is up even though personal savings has risen (the obvious key is that personal wages have risen more than consumption).

Why is this such good news? It means that the consumer is rebuilding their personal balance sheets and is not causing a drag on the broader economy by reducing their spending.

Source: BEA

Friday, February 25, 2011

Q4 GDP Revised Down to 2.8%

Breakdown of the 0.4% shift below.

Source: BEA

Thursday, February 24, 2011

Durable Goods Orders Up... Not Exactly What it Seems

Marketwatch with the details:

Orders for U.S.-made durable goods rose 2.7% in January on stronger demand for civilian aircraft, the Commerce Department reported Thursday. The increase in total orders was very close to the 2.5% gain that was the consensus forecast of economists polled by MarketWatch. This is the first increase in durables in four months. Orders for December were revised up sharply to a decline of only 0.4% from the prior estimate of a 2.3% decline.
Nondefense aircraft orders were up a whopping 4900% (after a crash in December). Without nondefense aircraft, orders were actually down a bit (though smoothing December, durable goods orders were actually up 2% ex nondefense aircraft).

Source: Census

Tuesday, February 22, 2011

Growing Secular Volatility?

The Big Picture notes that today's S&P 500 performance (-2.05%) was the worst in 6 months.

More interesting is the frequency of -2% days over the past 60 years. The chart below shows the number -2% days over 100 trading day periods over that time. As can be seen, while we had a "great moderation" from October 2003 through February 2007 (a whopping 850 trading days without a 2% down day), the frequency seems to be growing steadily since the early 1970's when there are periods of market duress.

Source: Yahoo Finance

Confidence Improves... Still Poor Jobs Outlook

Home Prices Heading Down

Source: S&P

Thursday, February 17, 2011

Case Shiller Price Index

Haven't posted this in a while...

As I've previously detailed, CPI may not reflect actual price levels for an individual who:

  • does not own a home
  • would like to own a home
  • will likely soon buy a home

Why? Full details here, but in a nutshell the CPI measure includes a 'home owners equivalent rent', which has not fluctuated nearly as much as the actual home price level in recent years (both on the way up and on the way down).

The below shows headline CPI vs. a "Case Shiller Price Index" that swaps in the actual home price levels (per the Case Shiller) for the equivalent rent figure (assuming a constant ~25% weighting of owners equivalent rent within the broader index and flat price levels in December and January).

By this measure we see much higher inflation pre-crisis than reported, much greater deflation post-crisis, and the potential beginning stage of another divergence.

Source: BLS / S&P

Leading Indicators Up Slightly in January

Marketwatch details:

The economy's expansion is expected to continue in coming months, though current conditions, which are slowly improving, remain weak, the Conference Board said Thursday as it reported that its leading economic index rose 0.1% in January.

Six of the 10 indicators included in the LEI made positive contributions in January, led by the interest rate spread. The largest negative contribution came from building permits. Economists polled by MarketWatch had expected the overall index to rise 0.2% in January.

Source: Conference Board

Wednesday, February 16, 2011

Producer Prices Continue to Rise... Feeding into Core

Bloomberg details:

Wholesale costs in the U.S. increased for a seventh consecutive month in January, led by higher prices for fuel.

The producer price index rose 0.8 percent, Labor Department figures showed today in Washington. The figure matched the median forecast in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

Source: BLS

Tuesday, February 15, 2011

Deficit Financing

The AP details:

Not since World War II has the federal budget deficit made up such a big chunk of the U.S. economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.

The budget plan President Barack Obama sent Congress on Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy — the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of U.S. gross domestic product.

The good news (if you want to call it that) is that low borrowing costs via the Fed pushing rates (at the front-end of the yield curve) to zero has caused the borrowing cost (in the form of interest payments) to plummet as a percent of GDP, even in the face of record debt. Using interest expense figures from Treasury Direct, the chart below details the cost of debt financing (interest expense / total debt outstanding) and interest expense as a percent of GDP. Neither appears worrisome at first glance.

The concern is what happens when rates begin to rise, if there is not offsetting growth and/or inflation to keep costs low on a relative basis. Back to the AP:

"The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," says Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business.

Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle.

Retail Sales Up... Inflation Edition

Marketwatch details:

The biggest increase in sales took place at gas stations, grocery and liquor stores, auto retailers and online and catalog merchants. Sales fell at clothing and building-supply stores.
It's not a surprise that this was the result in a period when commodity prices (in the form of food and energy) spiked. Removing these volatile sectors of the retail market and we get a much more mundane 0.04% increase in the month.

Source: Census

Monday, February 14, 2011

Natural Rate of Unemployment

Bloomberg details:

The new “normal” unemployment rate may now be 6.7 percent, rising as much as 1.7 percentage points from 5 percent before the recession began, according to researchers at the Federal Reserve Bank of San Francisco.

High rates of long-term joblessness, extended unemployment benefits and a mismatch of skills between workers and available jobs may be impeding a return to the previous level, said John Williams, the bank’s research director, and research associate Justin Weidner in a paper released today.
That's one explanation (and I can't disagree with the above facts), but perhaps the "natural" rate of unemployment was never as low as it appeared from the late 80's through late 00's either.

Source: BLS

Budget Still Out of Control

You can argue that the dialogue around cutting the budget going forward is a good start, but increasing the deficit to $1.6 billion from an initial $1.4 billion is the wrong direction. Bloomberg details:

President Barack Obama will send Congress a $3.7 trillion budget that would reduce deficits by $1.1 trillion over a decade, setting up a battle with Republicans who have already deemed the plan insufficient to reduce federal debt.

The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from $1.4 trillion the administration estimated previously, according to documents released this morning by the administration.

Source: GPO Access

Sunday, February 13, 2011

Japan's Lost Decade(s)

BusinessWeek details the latest:

Japan’s gross domestic product fell less than estimated in the fourth quarter in a pullback that may prove temporary as overseas demand revives production after the nation fell behind China as the world’s second-largest economy.

The annualized 1.1 percent drop in GDP in the three months through December was driven by a slowing in exports and fading of government stimulus programs, Cabinet Office figures showed today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 2 percent drop.

Source: ESRI

Tuesday, February 8, 2011

Inflection Point?

Source: Yahoo

Monday, February 7, 2011

Has Re-Leveraging Begun?

Non-revolving credit is now at new all-time highs and the revolving cliff dive has hit a bottom (i.e. it is turning up... for now).

On the Prospects of G

The chart below shows the annual change in government spending and investment since 1960 (left hand side) and contribution to overall GDP growth (right hand side).

The takeaway? The government sector has been a consistent source of growth (positive in 36 out of 37 years), but with states acting like Europe (i.e. austerity) and the need to cut back, expect this to reverse course in the years to come.

Source: BEA

Friday, February 4, 2011

EconomPics of the (Since my Last EconomPics of the) Week

Economic Data
On the Job Non-Recovery
ISM Services Growth at Fastest Pace in 5 1/2 Years...
ISM Manufacturing Up for 20th Straight Month
The Importance of Small Business
Productivity Continues Hot Streak
European Retail Sales Decline
Auto's Continue Rebound
Chicago PMI Points to Heating Economy / Input Pric...
GDP Growth at 3.2% in Q4
Consumer Confidence Improves in January
Europe's Industrial Rebound: The Power of Mean Reversion
Housing Starts Quite Low
Empire Manufacturing Outlook at Seven Year High
Still Too Much Capacity

Asset Classes
Odd Month
The Bulldog Bubble
Taking a Look at the Cash Hoarders
Dividend vs. Buyback Yield... The Importance of Timing
Case Shiller Index Points to Housing Double Dip
China Hearts Silver... Market Top?
Housing Market Drives Leading Economic Indicators?...
The Equity Market is in Trouble... J-E-T-S Edition...
China Still NOT Selling Treasuries

And your video of the week... Passion Pit with Little Secrets

On the Job Non-Recovery

The disappointing jobs data this morning, perhaps due to weather, detailed by Bloomberg:

The U.S. jobless rate unexpectedly fell in January to the lowest level in 21 months, while payroll growth was depressed by winter storms.

Unemployment declined to 9 percent from December’s 9.4 percent, the Labor Department said today in Washington. Employers added 36,000 workers, short of the 146,000 median gain projected by economists in a Bloomberg News survey.
As we've detailed for some time the improvement in the unemployment rate is due to the denominator (in the unemployed / labor force equation) dropping off a cliff. The chart below details this phenomenon over the past twelve months according to the household survey. As can be seen, jobs are finally being added (~900 thousand), but during a time when the population of working age individuals in the U.S. grew by ~1.9 million. Add in a drop in the labor force (~420k) and you get ~2.3 million MORE individuals than last year that could be working, not working.

We need to do better than this.

Source: BLS

Thursday, February 3, 2011

ISM Services Growth at Fastest Pace in 5 1/2 Years

ecPulse details:

The Institute for Supply Management released today the ISM services index, where the ISM Services index rose in January to 59.4 from the prior reported estimate of 57.1 and well above the expected estimates of 57.2. The services sector expanded in January at the fastest pace since August 2005.

The business activity index rose to 64.6 from 62.9, while the prices paid index rose to 72.1 from 69.5, new orders increased to 64.9 from 61.4, while the employment index rose to 54.5 from 52.6, new export orders slightly eased to 53.5 from 56.0 and imports increased to 53.5 from 51.0.

Source: ISM

Productivity Continues Hot Streak

Bloomberg details (bold mine):

The productivity of U.S. workers unexpectedly increased in the fourth quarter at a faster rate as companies sought to contain costs.

The measure of employee output per hour rose at a 2.6 percent annual rate, compared with a revised 2.4 percent gain in the previous three months, figures from the Labor Department showed today in Washington. Economists projected a 2 percent advance, according to the median forecast in a Bloomberg News survey. Labor expenses fell for fifth time in six quarters.

“There is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output,” Paul shworth, chief U.S. economist at Capital Economics Ltd. in Toronto, said in a note to clients. “That is good news for the unemployed.”

Source: BLS

European Retail Sales Decline

Reuters details:

Euro zone retail sales unexpectedly fell in December with equal declines in food
and non-food sectors, a sign that consumers in the single currency bloc were reluctant to splurge even in the key holiday period.

The European Union's statistics office Eurostat said on Thursday retail sales in the 16 countries using the euro fell by 0.6 percent month-on-month, for a 0.9 percent year-on-year decline.

Economists polled by Reuters had expected a 0.5 percent month-on-month rise and a 0.2 percent increase year-on-year.

The new data came while European Central Bank policymakers met to decide on interest rates. Economists said they did not expect weak retail sales to prevent the ECB from issuing a warning on inflationary pressures.

The chart below shows the three month change by country and clearly shows the slowdown in aggregate demand within the region.

Source: Eurostat

Wednesday, February 2, 2011

The Importance of Small Business

It's where the growth is...

Source: ADP

Tuesday, February 1, 2011

Auto's Continue Rebound

Source: Autoblog

ISM Manufacturing Up for 20th Straight Month

Marketwatch details:

Conditions for the nation's manufacturers improved for the 20th straight month, the Institute for Supply Management reported Tuesday. The ISM index rose to 60.8% in January from 58.5% in December. This is the highest level of the factory index since last May. The report was much stronger than expected. The consensus forecast of estimates collected by MarketWatch was for the index to remain steady at 58.5%.

Readings above 50 indicate expansion. Below the headline, the report was also strong. The key employment index improved to 61.7% in January from 58.9% in December. New orders jumped to 67.8% in January from 62% in the prior month. Input prices soared in January. The price index jumped to 81.5 from 72.5 in the prior month.

Source: ISM