Sunday, October 30, 2011

notes on the week ended Oct 29th

there were a number of reports out this week that i felt were related; so hopefully as i run through the list we'll be able to connect the dots....let's start at the top of the list with the report that covers the value of all goods & services in the US, the first estimate for 3rd quarter GDP from the BEA, which grew at an annualized rate of 2.5% over the weak 2nd quarter, the best growth since the 3rd quarter last year...and the GDP component which i've learned to check first, inventories, were down a little over 1%, so this was solid growth, not just shelf stocking; & as there is a known relationship between GDP & unemployment, we can at least say that growth at this rate will not lead to an increase in job losses, though it's not at a level to bring it down rapidly either...in a change from previous reports, government was not a drag; federal spending increased by 2%, with defense spending more than offsetting the decline in non-defense spending, and that was enough to neutralize the decline in the state & local components...probably the most important component, personal consumption expenditures, anchored the GDP increase by growing 2.4% (all figures are annualized rates, 3rd qtr over 2nd), with a 4% increase in durable goods, reflecting the rebound in autos from the japan supply disruption of the 2nd quarter...(auto sales, btw, are looking good for october as well)...what really pulled the GDP up, though, was investment spending; there were increases in non-residential structures of 13.3%, and equipment & software of 17.4%; even residential investment increased 2.4%...

what i want to focus on next is the personal consumption expenditures, because consumer spending is still 2/3 of the economy, and the Personal Income and Outlays report for september was also released by the BEA this week; consistent with the kind of numbers i've been seeing the past couple of months, it showed that consumer spending rose 0.6 percent last month, but disposable personal income only increased 0.1% for the month...this has been the pattern, with expenditures outpacing income, for several months; ie, in august, both were lower, with spending up only 0.2 while incomes were down 0.1; so obviously personal savings have been falling, and they're now at their lowest level since december 2007, which was before the recession really took hold...so the spending at the rate we're now seeing doesnt appear to be unsustainable...

  the box people are in may be what we're seeing in the 3 reports on consumer sentiment that were reported this week; first, we saw the Conference Board index of consumer confidence fall to 39.8, its lowest level since March 2009 & the lowest non-recession reading of all time, from an already low reading of 46.4 in September…the WSJ further reported that confidence fell most among high income consumers; not a good sign for the coming season, as you’ll recall we’ve observed that retail sales gains have been concentrated in the upscale chains; the next report was the final reuters / UofM index of consumer sentiment for october, which showed a slight uptick to 60.9, up from the 59.4 reading for september; & lastly, the bloomberg consumer comfort index Index dropped to -51.1 from minus 48.4 the prior period; moreover, 95% of the people surveyed had a negative opinion about the economy, a low reading comparable to the depth of the recession…

   although not directly related to consumer spending or sentiment, the congressional budget office came out with a senate requested study which compared trends in the distribution of household income over the 1979 to 2007 timeframe; it showed that although real average household income grew 62% across the entire population, when the gains were separated by income groups, households at the higher end of the income scale incomes rose quite a bit more than it did for households in the middle and at the lower end of the income scale…ive got one chart from the report here; labelled "growth in real after tax income from 1979 to 2007", what it shows exactly is that for the lowest 20%, incomes gained only 18%; for the middle 60%, income gains averaged under 40%, & for the top quintile, household income grew by over 65 percent…this meant that of the total household income in the US, 53% was going to the top 20%, compared with 43% in 1979…further separating out the top 1% of households, the CBO found that their real (inflation adjusted) after-tax household income grew by 275 percent; thus the share of after-tax household income for the top 1 percent of the population more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007…let me explain this further by creating my own example; a typical family with a $20,000 income in 1979 would have had their income grow to $23,600 by 2007, on the other hand, a typical corporate CEO making $500,000 in 1979 would have seen his income grow to $1,875,000 by 2007…

  this is something bloggers & the media should be aware of when writing about personal consumption expenditures, disposable personal income, and household saving rates; essentially, more than half of those gross reported figures really only apply to 20% of the population...we really need separate reports for consumption, income, & savings rates for the rest of us....

the Center on Budget and Policy Priorities observed that this report meant that virtually all of the decline in the bottom 80% of households share of the nations income ended up going to the top 1%; this can be illustrated by a table from a similar earlier study, which shows that if national household incomes were all growing at the same rate, a family in the middle quintile should have been seeing an annual income increase of $10,100, instead, the lion's share of increases in national household income has been going to the top 1%...the adjacent table was posted this week by kevin drum with a comment that "for practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich"...

the home price index most used by the media, the Case-Shiller index, was released this past week for the 3 months ending august; not seasonally adjusted, both the 10 city & 20 city composites were up 0.2%, about in line with a normal seasonal increase for the summer months…bill mcbride, who seasonally adjusts case-shiller’s index, has the 10 city down .2% and the 20 city down .1%, with the composite 20 down 32% from the peak; S&P had 10 of the 20 cities showing price gains, seasonally adjusted, prices only increased in 6 cities; the WSJ produces an interactive sortable table of home prices of the 20 cities in the index, if you’re interested in more detail…the FHFA (Federal Housing Finance Agency), which heads up Fannie & Freddie, also reported home prices for august, showing they fell 0.1% from july and 4% from a year ago; regions hardest hit were the southwest & far west…other price indexes which reported earlier include CoreLogic, which reported home prices for august decreased 0.4 percent on a month-over-month basis; FNC, whose 30 city index showed 0.8% decline in august, and Radar Logic, whose 25 city index also declined 0.8%… the census bureau reported seasonally adjusted new home sales for september were up 5.7% from august to 313,000, which is the number they report after the adjustment & likely has little to do with reality; they also report the median sales price of new homes sold was $204,400, down 2.2% from $209,100 in august, & that the average sale price fell to $243,900 from $246,000 in august, which was the lowest since early 2009…moody’s also reported its commercial real estate index for august, which covers prices for malls, warehouses & the like, and it showed prices up 2.4% over july, and 7.2% over the same month last year…commercial real estate is still averaging 41% lower than the peak in 2007, but the pending disaster for small banks, which hold much of the CRE paper, that we feared last year when prices were still falling seems to have been alleviated…but Moody’s warns that CMBS underwriting standards are again becoming lax, with the prevalence of interest only debt rising from 21.1% in the 2nd quarter to 33.6% in the 3rd quarter…

i should make mention of the home mortgage relief program that obama touted in several speeches this week, aka Harp II; first, this is only for homeowners whose mortgage has been owned or guaranteed by Fannie or Freddie since may of 2009; homeowners must  also be current on their house payments for 6 months to qualify; the plan doesnt include principal reductions, just refinancing at todays lower rates; and the banks may not go along any more than they did with the first version of HARP…Obama also announced a similar program for college grads with federally held student debt, whereby they could cut their interest by as much as half a percent & reduce their payback rate to 10% of their “discretionary income”, which should serve to keep them as indentured slaves that much longer...and i should also note that the 6 democrats on the supercommittee, which is charged with finding $1.2 trillion in deficit reductions over 10 years by thanksgiving, have proposed a $3 trillion dollar plan with deep cuts to medicare, a jobs package, and tax increases, which apparently will be rejected by the 6 republicans on the committee...

after 9 intense meetings over 5 days, the european leaders late wednesday came up with a plan that they hope will get them out of daily crisis mode for a while; markets rallied & there was dancing in the streets... first, they've told the bondholders of greek debt that they will voluntarily accept 50% of the face value of the bonds they now hold in new bonds of an undetermined maturity (probably long) and at a yet to be set yield (probably low)...(those bondholders have been told they will do this voluntarily, so they cant collect on their bond insurance (CDS) because no one knows where the CDS bodies are buried & we wouldnt want morgan stanley to fail like lehman would we?), & oh, btw, greek bonds held by the ECB and IMF don't get a haircut, so the greek govt didn't get half of their debt cut - only the part of it investors hold, so they'll be in trouble again soon...to help clairfy this for you, i've posted explaining yet another euro bailout plan…(a youtube animation)...the second part of the plan involves a €106 billion recapitalization of weak banks, normally done by selling stock but who would want to buy a weak italian bank? so what the banks will likely do is sell their best assets & shrink, & thats just what europe needs, monetary contraction, right? the last part of the plan is an expansion of their EFSF, aka the bailout fund, from €440bn to over €1 trillion, so that it will be large enough to cover spain & italy, not achieved by adding any funds, but by leveraging the funds currently available (less than the €440bn cause some's been spent) and trying to get suckers from china, brazil & japan to buy in; what, you say the chinese aint that dumb? of course not!! china will get to buy the senior tranches of the special-purpose vehicles (SPVs) that the EFSF will capitalise, leaving the europeans holding the subordinated debt, which is guaranteed by spain & the italians, among others...sounds like a plan, huh?  lets see if it lasts a week...& as a euro crisis bonus, i'll link you to the NY Times 18X21 euro mega-graphic, which shows the inter-connectivemess of debt in europe & around the world...

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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