note on the graphs used here

sometime during the third week of March, the St Louis Fed, home to the FRED graphs, changed their graphs to an interactive format, which apparently necessitated eliminating some of the incompatible options which we had used in creating our graphs, and also left us with about half the options we had available and used before the upgrade...as a result, many of the FRED graphs we've included on this website previous to that date, all of which were all stored at the FRED site and which we'd always hyperlinked back there, were reformatted, which in many cases changed our bar graphs to line graphs, and some cases rendered them blank or unreadable... however, you can still click the text links we've always used in referring to them to view versions of our graphs as interactive graphs on the FRED site, or in the case where a graph has gone missing, click on the blank space where it had been in order to view it....


Tuesday, August 9, 2011

notes on the week ended Aug 6th

what a crazy week...there's been so much in motion it's been hard to keep track of it all...at the beginning of the week a last minute long term spending cuts deal was cobbled together out of the elements of the senate plan, the boehner plan, the gang of six plan, & various catfood commission suggestions, and it passed & was signed a few hours before the government would have allegedly turned into a pumpkin on Aug 2; while that was happening european markets were going into cardiac arrest when it became obvious that there was no plan to save spain & italy as their borrowing costs hit new records; by thursday the market panic spread to asia & the US & markets worldwide ended the week with losses of more than 5%; on friday we got a "better than expected" but nonetheless lousy employment report to follow on the heels of a week of other lousy economic reports, then to top the week off, S&P cut the US AAA credit rating to AA+ after the markets closed friday night...

the essential specs of the debt ceiling deal, aka "the budget control act" start with a debt limit increase of $2.1 trillion and $917 billion in spending cuts over 10 years to discretionary programs - that means initially medicare, medicaid & social security, & the defense budget wont be touched, so that amount will come out of education, energy, environment. infrastructure, housing & other domestic spending...the act then sets up a yet to be appointed "supercongress" with 6 members from each party who will be charged with finding $1.5 trillion in additional spending cuts before thanksgiving; if seven members of that supercongress can agree on a package, that package must then approved by a straight up or down vote, without amendments, by christmas, and the president must sign it by new years...if this supercongress package fails, or doesnt materialize, $1.2 trillion in cuts spending cuts written into the law are automatically triggered, which include cuts to medicare and defense...the debt ceiling increases themselves come in 3 tranches of $400B immediately, with $500B & the remainder to be voted on later, giving the president the right to veto any part of the increase not approved by congress (this provision is only so the tea party can continue to vote against ceiling increases)...amount of the last tranche of debt limit increase depends on what happens with the supercongress and a balanced budget amendment which also must be voted on by both houses on congress...and according to mitch mcconnell, it doesnt end here; the country will once again be held hostage when the debt ceiling comes up again in late 2012 or early 2013...

the true irony of all these spending cuts is that when all is said & done, they may not reduce the deficit at all...the level of the deficit is determined by the difference between government revenues and outlays, and if the job & spending cuts (which are inherently contractionary) push the country back into a deeper recession, government revenues may fall far enough that the deficits may actually increase; that's not just my opinion; the economic policy institute estimates that the debt deal signed this week will end up costing the economy 1.8 million jobs by 2012, and even j.p.morgan estimates that "federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012"; considering our recent GDP reports came in at 0.4% & 1.3%, a 1.5% hit to our current GDP growth rate would indeed put us into another official recession...the only real way to eliminate deficits and our long term debt is to get the country back on a growth path, so that in the long term GDP grows enough annually that the debt remaining is trivial by comparison (ie, we never paid off the debts from WWII, but the country grew fast enough in the 50s & 60s that that debt, a greater % of GDP than we have now, gradually diminished as a percentage of the economy)...despite the rhetoric from both parties, we still really dont have a debt problem now; our cost of servicing our debt is low historically...in 2010, interest payments on the debt were 5.7 percent of total government spending; the average for that ratio between 1950 and 2010 was 9.8%...if we had leaders who believed that the country has a future, they would be borrowing even more at a time when they can sell 10 year bonds at 2.4%, and investing the proceeds in the country's infrastructure and it's young people...instead, we have leaders who are owned by the plutocracy who's only interest is to sell the rest of us into an austere debt slavery...the plutocracy well understands the planet's resources are limited and having a large middle class will consume too much of what's left...all the pharaohs really want is a slave class to build pyramids for them.....

and of course, it was also agents at S&P acting on behalf of that plutocracy who downgraded the credit rating of US long term debt from AAA to AA+; unable to get the kind of deficit cutting package they wanted ($4 trillion), they are attempting to apply market pressure...but its not just their interpretation of the US fiscal outlook they gave as a reason; they are clearly concerned about our government's ability to run the country; you can read for yourself from their statement  (PDF): "The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently....It appears that for now, new revenues have dropped down on the menu of policy options....Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers"...there's nothing in there that says we cant pay on our bonds; it's clearly an indictment of our dysfunctional gridlocked government...

i cant predict what interest rates will do in response to this downgrade; the Fed, the FDIC, the OCC & NCUA put out a joint press release that Treasury debt should be treated as before by the banks & the financial markets; i cant imagine that china and the other holders of US treasury bonds are going to dump them in favor of Liechtensteiner bonds or those from the handful of countries that are still AAA, either...likely US agency debt, such as Fannie, Freddie, Sallie, et al will all receive the same AA+ rating, as will any states and municipalities that were previously rated AAA by virtue of a federal guarantee...since the market has consistently judged US debt to be safe (last week US interest rates went negative in a treasury buying frenzy after the bank of NY Mellon started charging large customers a fee to deposit funds) stories in the media about credit card & home mortgage rates going up would seem to be made up out of whole cloth...

i cant tell you why the market sold off on thursday, either, but i can provide a litany of reasons that i'd been seen in the previous week that could have contributed to the weakness, foremost among them the revisions in GDP we saw last week; that was followed by notes from such as goldman sachs, PIMCO, blackrock & others that recession risks were rising; then even 5 out of 9 economists on the business cycle dating committee of NBER, the official arbiter of recessions, warned of the same...then, after the debt deal was detailed, there were also several downward revisions for GDP growth for 2012 and 2013…during the week we also got reports that consumer spending was down for the first time in 20 months after incomes grow by the least amount in 9 months, and the ISM manufacturing index fell to a two-year low, just barely above contraction; other signals of a slowdown were weakness in container shipping and rail traffic; July saw the biggest YoY decline in U.S. rail carloads in 16 months

on friday, we also had the release of the BLS unemployment report for the month of july, from household & establishment surveys taken the week of the 12th; this report was widely reported as better than expected; the establishment survey estimated that 117,000 jobs were created in july, with a growth of 154,000 private sector jobs offset by 37,000 losses of government jobs…still, at the rate of job growth that we've seen over the past 3 months, we'll never bring unemployment down, because it doesnt cover for the new young people entering the workforce....the household survey reported the percentage unemployed fell from 9.2%  to 9.1% because 193,000 people dropped out of the labor force and weren't counted; by that survey, the number of employed actually fell by 38,000, and the number of unemployed rose by 156,000…the number of workers only able to find part time jobs declined to 8.396 million in July from 8.552 million in june, so the alternative U-6 unemployment rate declined to 16.1%….if you get past the optimistic headlines, though, we saw new records in the numbers that really matter: the labor force participation rate declined to 63.9%, and the employment-population ratio declined to 58.1%, both the lowest since before reagan busted the unions & forced women into the workforce, and the average length of unemployment set a new record of 40.4 weeks...i have FRED charts for both of those records embedded below, so you can see what they look like, sans the positive media spin…44.4% of those unemployed have been out of work for six months or more, & this at a time when several states are cutting their unemployment rations to less than 26 weeks...15% or 45.8 million americans are now on food stamps, this depression’s version of the 30s breadlines, a number which is up 34% from two years ago; to qualify for that program, which is at risk of being cut, one’s income cant exceed $1174 a month…

there is much else i'd normally write about at length if this had been a slower week; for instance, LPS was out with its monthly mortgage performance data; 8.15% of mortgages were delinquent in june, and 4.12% were in foreclosure, a slight increase...most notable from this report is that the average loan in foreclosure has been delinquent without making a housepayment for a record 587 days; & as long as two years or longer in judicial states such as florida and new york...there's also separate action being taken by several state attorney generals with regards to the BofA foreclosure fraud settlement, and relevant rulings in other courts in a couple of other fraud & MERS cases...there were also at least two releases of deadly radioactive gas at fukushima reported as "highest yet" that were too high for the on site instruments to read (both surpassed 10 sieverts) and other indications of continuing troubles in japan...manufacturing indexes in asia, europe and australia also weakened...and as is always the case, you can find the complete european play-by-play at the end of this week's blog post...

\FRED GraphGraph of Average (Mean) Duration of Unemployment

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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