Monday, August 1, 2011

notes on the week ended July 30th

as we've discussed previously, this tuesday, april 2nd, is the date when the government allegedly runs out of money to pay its bills, because it's constricted from borrowing for legislated spending by an arbitrary debt limit set by congress, and as of this writing we are no closer to anything that looks like an agreement in congress; & personally, i'm experiencing some degree of burn out from tracking the developments, as i've probably covered a couple hundred articles on it this week, and watching our dysfunctional government function up close can lead one to despair, but i'll try to give you a brief summary anyhow...whether aug 2 is the absolute drop dead date or not is still has been disputed by several analysts,  but it does seem certain that if its not the 2nd, we certainly run into a wall on the 15th, when the quarterly treasury refunding & interest payments are due...

as the week started, there were two plans being discussed; one was from boehner in the house, the other was from harry reid in the senate...the boehner plan, as it was scored by the CBO, would reduce discretionary spending by $756 billion over 10 years, which, with an interest saving of $156 billion, would cut the deficit by $917B...on the contrived basis of one dollar of cuts for every dollar of debt ceiling extension, his plan wouldve allowed for a $900B extension of the debt limit, assuring that another go-round would be needed next year before the election...the reid plan, reported to be a $2.7 trilion plan, as scored by the CBO, would cut discretionary spending by a similar $751 billion over 10 years, but would have also capped outlays for iraq and afghanistan to score a deficit reduction of $2.2 trillion over 10 years, and allow for an increase in the debt ceiling of $2.4 trillion...since both plans came in smaller than originally proposed after the CBO score, moody's indicated that neither would suffice to keep them from putting US debt on a negative credit watch...

now, it was boehner's intention to have his plan passed on wednesday, but due to a revolt from his right, it was postponed twice until it was finally voted on & passed on friday...to get support of the tea party, he had to add a provision whereby both the house & senate would have to pass a balanced budget amendment to the constitution in order for the debt limit to be allowed to rise again in 2012.; even so, 22 members of his party still opposed it, & it barely passed the house...of course, when this went to the democratically controlled senate friday night, it was defeated on a straight party line vote...and to return the disfavor, on saturday the house defeated the reid plan, which had been passed earlier by the senate, by a vote of 246 to 173...as there are no other plans being discussed, it appears they're gonna have to pull a rabbit out of a yet to be conceived hat sometime between now & tuesday, and then turn that rabbit into legislation....

...even so, most analysts dont expect we'll get out of this without a credit downgrade...citigroup’s chief economist Willem Buiter, for instance, gives the US only a 1% chance of preserving its AAA credit rating at the end of this debacle...the specter of a US downgrade is having worldwide repercussions in markets that depend on good as cash AAA Treasury securities as well, since nearly 60% of the world's AAA rated sovereign debt is US Treasuries; eg, banks fear a multiple notch downgrade may require them to raise more capital...overall, the congressional circus is clearly impacting economic activity; everyone from money market funds to large corporations such as GE and Ford are moving to cash, some commercial real estate contracts are reportedly on hold, california borrowed $5 billion to bridge themselves over the crisis, and other states (which are all dependent on federal payments for everything from Medicaid to unemployment compensation) are making contingency plans to idle all but their essential workers...

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in other matters, there were several important economic reports out this week, probably none more important than the first look at 2nd quarter GDP, and the annual revisions to GDP from the BEA (Bureau of Economic Analysis); what we found out was that the recession we've been through was worse than first reported, and that the economy, as measured by the gross domestic product, is still below its pre-recession peak...the first guestimate for growth in the 2nd quarter came in at an annual rate of 1.3%, but the real shock was that first quarter growth was revised down to 0.4% from the earlier report of 1.9%, annualized...although supply disruptions due to the japanese disaster were expected to cut into the second quarter growth rate, it was still  weaker than most had expected, and no one had seen the hit to the 1st quarter coming….i’ll dispense with reiterating the component details today, and just include the adjacent chart of the revisions back to the 1st qtr of '07, which graphically shows what the recession looked like last week, before the revision, and how much worse it looked after it was revised this week (click chart to enlarge)

another report that was out this week that i typically cover was the case-shiller house price index; this report covered the 3 months ending May, and it was virtually unchanged from the previous report, with the 10 city index up slightly & the 20 city index down .05% over april's report...on a year over year basis, the 20 city index is down 4.5%, again the largest YoY loss since Nov 09, & both indexes remain off 31.8% from the peak...of the 20 cities, only washington DC has experienced a YoY increase in home prices...

another report i'll cover this week is orders for US durable goods, not so much because they were down 2.1% in June when surveyed economists expected them to rise like they did in May, but because Mish published the adjacent chart from doug short which provides a historical picture of what durable goods orders look like without purchases by the dept of defense (there's also a very similar chart for durables ex transport orders at the link) what these charts show is that durable goods orders have been driven entirely by transport & defense, and that orders for household durables, such as appliances, TVs, and furniture are in a long term decline, especially after adjusting for inflation...

although the cutbacks in employment at the state & local level, and especially in the school systems, have been ongoing throughout the past year & a half, this week has been the first week since the depths of the recession where i saw several reports of mass layoffs in the private sector; cisco systems and lockheed have both announced layoffs of over 6500 each; borders books is shuttering all of their stores, which will cost another 11,000 jobs, blackberry phone maker Research-In-Motion is cutting 10.5% of their workers, and drug company merck is cutting another 13,000...on top of those, this week the Post Office announced a major consolidation in which they may shutter as many as 3,700 post offices; note that none of those job losses will show up in the unemployment report that will be out next week, although this weeks first time claims at 398,000 fell below 400K for the first time in 16 weeks...a new report out this week from the National Employment Law Project showed the bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour; with the US median wage at $26,261, ongoing predictions of a recovery in new home & new car purchases would seem to be made up out of whole cloth...

after a few days of calm markets, the crisis is back in europe, with borrowing costs for spain & italy rising again, and there's also a report out that italy may not be able to keep its commitment to the EFSF (euro stabilzation fund) for the greek bailout, so in the race to the bottom of the earth, europe may still implode before us..

just a few footnotes on the week: with congress tied up in the debt ceiling debate, they neglected to renew the airline ticket tax to fund the FAA, so its now in a partial shutdown, with 4000 employees cut; the airlines are still charging the same for tickets, but they'll keep the difference...and even though the post office is closing as many as 12% of its facilities, congress still found ten minutes on friday to vote to designate the facility of the USPS in Iuka, Mississippi, as the "Sergeant Jason W. Vaughn Post Office"

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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