Sunday, November 27, 2011

notes on the week ended Nov 26th

as was expected, the congressional supercommittee announced it would not reach an agreement on monday, & the focus of the economic blogosphere turned to post mortems and what happens next...most of the concern is over the expiring programs that we discussed last week; the prospect of emergency unemployment rations not being extended, abandoning those out of work longer than 26 weeks without a safety net; whether the payroll tax cut will be extended, the "doc fix", and other annual budget provisions that congress had hoped their supercommittee would solve with one package; with the short week i didnt see any congressional activity on any of the budget related items, although some congresscritters & several commentators made a point that the supercommittee's failure likely doomed renewall of the bush-obama tax cuts for the rich, which were extended till the end of 2012 last december and the continuation of which were one of the elements of the republican supercommittee's proposals (ie, they alleged the rich would create so many jobs that the deficit would fall)...

what we're facing now is the spending cuts sequestered by the budget control act; the act's provisions allows the debt ceiling to be raised $1.2 trillion, tripping in the automatic $1.2 trillion in cuts over 10 years, half to defense, & half to other non-safety net discretionary spending...however, for all the weeping & gnashing of teeth that the defense hawks have been doing about this provision, these so called cuts arent even cuts at all; the defense budget had been expected to rise 23% over the period, the sequestered reductions would apply to that, and as a result, the defense budget would only rise by 16% over the ten year period...nonetheless, the militarists are still talking about undoing even those reductions, but they wont get past obama's threatened veto unless they raise tax revenue to pay for the increases...

those of you who have been on the receiving end of these missives from me since last spring might remember that during an earlier deficit debate, i mentioned a "do nothing plan" that was proposed by annie lowrey, then of Slate, now writing for the NY Times; wherein if we let all the laws currently in effect expire as scheduled, the federal budget would come into balance by the end of the decade...strangely enough, a version of that plan was advanced this week by her husband, ezra klein, at the washington post; the chart to the left shows the deficit reductions that occur if laws currently in effect are allowed to continue or expire without congressional intervention; the lions share, of course, would come from allowing the bush-obama tax cuts for the wealthy & estate taxes to finally expire, the budget would also be reduced by the budget cuts initiated last spring, the aforementioned sequestered cuts, skipping the doc fix, the expiration of the annual exemption under the alternative minimum tax, and various & sundry other "temporary" tax cuts that congress passes almost automatically every year...

however, all is not a bowl full of cherries if we just send congress home & have them do nothing; glance at the table of expiring programs from JP Morgan in the upper right corner; that shows the projected impact to GDP from over the next two years if fiscal policy is unchanged & ongoing programs are not renewed; notice that they project a 2.4% hit to GDP this year, and a 2.6% hit next year, if all temporary cuts and programs expire; similar, but less severe, GDP projections were made by goldman sachs, shown in the adjacent chart; the dashed blue line is with unemployment & the payroll tax cut extended; the dashed grey line is with both of them expiring; & that chart should open larger in a new window if you click on it...

while i'm talking about the potential future paths of GDP i should mention that this year's 3rd quarter GDP growth was revised downward, from the first reported “advance estimate” of 2.5% annualized, to 2.0% annualized, based on more complete source data than they had a month ago; the downward revision was mostly due to a large decrease in the "change in real private inventories", which is now reported to have sliced over 1 1/2% off 3rd qtr GDP growth; the silver lining in that is that it sets the stage for a rebound in inventories and a better report in the 4th quarter…even so, with a first quarter report of 0.4%, & the second quarter at 1.3%, it will take at least 4% annualized growth in the 4th quarter to bring the GDP growth for 2011 up to an anemic 2% for the year…and because an alternate measure, GDI, (gross domestic income) only rose 0.4% in the third quarter, it led at least one economist to point out that “we are only one small data revision away from declaring the US is in a recession, which began in mid-2011”...and there’s no good estimate of how much contagion from the worldwide slowdown will affect our exports, either; china’s manufacturing purchasing managers index surprised everyone by contracting in november for the first time in 32 months, reading 48.0, down from 51.0 last month, on a scale where 50 is stagnant; japan saw its exports decline 3.7% in october from a year earlier…and the Eurostat release of new industrial orders for september showed they fell by 6.4% for the 17 nations in the euro area, which is an indication that europe is seriously contracting….

Stress Testson tuesday, the Fed announced plans to "stress test" the nation's largest 19 banks in light of those deteriorating conditions in europe, to see what kind of losses they'd incur, and ostensibly to insist that they build defensive capital buffers against what the Fed thinks might be worst case repercussions... furthermore, the 6 TBTF banks will have to present their plans for dealing with this scenario...unlike the widely mocked stress tests that were conducted in conjunction the bank bailouts in 2009,  i believe these stress tests are supposed to be annual, a provision of dodd-frank, and somewhat less of a smokescreen, although their seriousness has been questioned...if we look at some of the stress test's scenario provisions (PDF - pp 32 &33) we see that the Fed wants the banks to report their condition should the US GDP contract 7.98%, unemployment rise to 13.1%, the Dow drop more than 50% from its current level to around 5600, housing prices decline another 20%, and commercial real estate go in the tank even more than that; there's 8 other domestic conditions in the test, including inflation, bond rates, etc, and 11 conditions in major economies, if you want to peruse the whole scenario in the table on p32 & p33 of the cited pdf; offhand, it looks tough enough to me, with the one caveat being that the worst europe gets is a 6.91% contraction in the 3rd quarter of 2012, which isnt even as serious a hit as the 10.81% they took in the 1st quarter of 2009...after chartmeister bill mcbride got wind of how the worst case scenario in these stress tests would influence housing prices, he produced the adjacent inflation adjusted housing chart, which includes the popular 20 city case shiller price index (yellow), the national case shiller index(red), and the corelogic index that the Fed uses (blue), extended into the future to show the future home price drop that the banks will be testing against...in this scenario, real house prices drop to a level not seen since 1984…

TANF 11-21-11pov-f2 a couple weeks ago we talked about the new measure of poverty, called the Supplemental Poverty Measure (pdf), that the census bureau released in order to better measure actual disposable income; this week, another part of that report was released which likely includes many of us, the 51 million americans who are considered "near poor", or those who have effective disposable income less than 50% above the poverty level; not only was that number was a surprising 76% higher than the official poverty count published in september, it shows that 100,000 americans, almost a third of the population, were living in poverty in 2010 or were right on the edge of it...note that that census measure is on stats from 2010, and thus includes unemployment rations that some were collecting then as part of their disposable income...but remember, the big layoffs occurred at the end of 08 & early in 09, so there's less than half of the unemployed still receiving a check late in 2011, and thus the current numbers are much higher than the census or the cited articles alludes to...a separate survey, released by the advocacy group Wider Opportunities for Women (WOW), found that 45 percent of us are living in households who are struggling to make ends meet; considered "economically insecure"...these are the 39% of the adults & 55% of the children among us who are in households living paycheck to paycheck without savings for emergencies or for future plans such as college or retirement...also this week, analysts at the center on budget & policy priorities produced an extensive look at the TANF program; the 1996 clinton initiative also called "welfare reform" and found that the safety net is failing miserably; another 6 states & the district of columbia have cut allowances over the last 12 months, and rations for needy families have now fallen to below 30 percent of the poverty line in the majority of states, and below 50% of the poverty line in all states; much less than they were worth when the program was initiated in 1996; the adjacent map is taken from that report, which also has several other graphics & state by state tables; it shows TANF rations per state as a % of the federal poverty level; you can see that only a handful of dark blue states approach a dole of 50% of the poverty line, while there’s the whole southern tier of grey states where the rations are only 10% to 20% of what is needed to live in poverty; in those 14 states, monthly rations are less than $300 for a family of three…in addition, the department of agriculture reported that in 2010, over 17 million households, or 14.5%, lacked the resources to provide enough food for all family members, and 6.4 million of those had normal eating patterns disrupted due to lack of food…the nonprofit network of foodbanks called Feeding America also reports one in five children are at risk of hunger…

since too much happened in europe this week for me to easily summarize, you’ll have to check this week’s blogpost to get the whole story again; for now, ill just note some of the week’s low points; the irish goverment was embarrassed to have their budget for 2013 publically discussed in the german bundestag before it was released in ireland & complained to the EU; the Spanish voters ousted their government and installed conservatives who promised more austerity; because of this economists at JP Morgan expect Spanish unemployment to hit 27% by the end of next year; after considerable maneuvering and arm-twisting, Antonis Samaras, leader of the minority party in greece finally signed a letter of submission to the troika; austrian bank supervisors restricted lending to eastern europe, necessitating a formal request of aid from hungary to the troika; Portugal, Hungary & Belgium were hit with credit rating downgrades (portugal & hungary are now junk), and a german attempt to sell 6 billion worth of their bonds failed, forcing the german central bank to retain nearly 40% of the bunds they were attempting to sell, after which interest rates pretty much all over europe soared to new records the rest of the week…if you've got any interest in reading about the collapse of western civilization in real time, there's links to over 100 articles on the news in europe in the last quarter of this weeks blogpost, best catch it today rather than wait for the history books to be written...

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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