Sunday, June 2, 2013

trustees on Social Security & Medicare, April income & outlays, 1st qtr GDP revision, & March Case-Shiller

Friday of this week saw the release of both the Annual Report by the Trustees of Social Security and the Annual Report by the Medicare trustees, covering condition and changes for both trust funds in 2012; for the year, Social Security took in roughly $28 billion more than the fund payed out in benefits, and combined with the interest earned on the Treasury bonds owned by the Fund, the Social Security trust fund reserves increased by $54.4 billion...with the economy improving, Social Security is now expected to run a surplus through the end of the decade, with the trust fund expected to increase from $2.76 trillion at the end of this year to a peak of $2.92 trillion in 2020; thereafter, with the majority of the baby boom generation retired, the trust fund is expected to be drawn down as benefits exceed payroll taxes collected and be exhausted twenty years hence, which is essentially the same forecast as last year's report; thereafter, assuming no changes are made, revenues from the payroll tax would still enable an annual payment of 77% of promised benefits...the obvious solution to that shortfall would be to raise the cap on the payroll tax; currently, incomes over $113,000 are not taxed; raising that cap to just $250,000 would guarantee the program for 75 years; all the rhetoric about social security's insolvency is obfuscation originating with those upper middle income types who dont want to see that extra 6.2% payroll tax applied to their earnings; there is no need for a stealth benefit cut in the form of chained CPI changes to the cost of living adjustment such as proposed by the president...

  in contrast to the Social Security trust fund, for which the situation was essentially unchanged from last year, the Medicare Trustees projected that Medicare’s finances would improve and reamin solvent until 2026, two years more than projected last year, due to lower than expected cost inflation and changes in the system relating to the Affordable Care Act; then, even after 2026, when the trust fund is expected to be exhausted, incoming payroll taxes and other revenues will be adequate to continue paying 87% of the program's costs...Medicare spending is expected to grow from the current 3.6% of GDP to 5.6% of GDP in 2035, down from the 5.7% projected in last years report...mandated to project revenues and outlays for an impossible 75 years, the trustees found that the 75-year shortfall would be 1.11% of taxable payroll, which is down from last year’s estimate of 1.35% and the 3.88% shortfall estimated before health care reform...

FRED Graphthe key monthly release of the past week was on April's Personal Income and Outlays from the BEA (Bureau of Economic Analysis), which revealed that seasonally adjusted personal income decreased at an annual rate of $5.6 billion, down to $13,675.1 billion, or less than 0.1%, disposable personal income (DPI), or income after taxes, decreased at a rate of $16.1 billion to $12,046.8 billion, or a bit more than 0.1%, and personal consumption expenditures (PCE) decreased at a rate of $20.5 billion to an annualized $11,739.9 billion, or roughly 0.2%...revised figures for March showed personal income up $36.2 billion, or 0.3% over February's rate, and DPI up $25.4 billion, or 0.2%, both of which were slightly higher than the first estimate, and a somewhat lower revised spending increase of $14.2 billion, or 0.1% over February's annual rate...April was the first month to show a decline in spending since October of last year, when spending on the east coast was curtailed due to the arrival of hurricane Sandy, and since personal consumption expenditures are still roughly 70% of GDP, this foreshadows a weakening second quarter and indicates that the expiration of the payroll tax cut and the sequester may be starting to impact the broader economy....of the components of personal income, private wage and salary income increased at an adjusted rate of $1.6 billion in April, while government wage & salary income increased $0.2 billion; proprietors' income decreased $8.3 billion in April, mostly because farmer's incomes fell at an annual rate of $11.3 billion, other business owners saw incomes increase $3.0 billion; rental income fell to a half billion, compared to the $12.6 billion from rentals in March, and returns on other assets increased $12.6 billion; meanwhile, personal transfer receipts decreased $13.7 billion in April, mostly due to a $9.6 billion smaller payout from social security...taxes took a $10.4 billion bigger bite in April than they did in March; nonetheless, adjusted for inflation, which was negative for the month, real disposable personal income increased 0.1% in April....included in the $20.5 billion decrease in personal consumption was a $4.7 billion increase in purchases of durable goods to $1,273.5 billion, a $25.0 billion decrease in purchase of non-durables, down to $2,599.4 billion, and a $4.5 billion increase in spending on services, up to $7,499.8 billion (which includes medical expenses paid for by private and government insurance); although it's not broken out, it's possible much of the spending decrease may be due to lower gas prices, which were down 8.1% for the month...personal outlays, which includes PCE, interest payments and personal current transfer payments decreased $21.7 billion for the month, leaving personal savings, which is disposable income less outlays, at $306.9 billion in April, up a bit from the $301.4 billion in March; nonetheless, this still left the personal savings rate, which is personal savings as a percentage of disposable income, at 2.5%, a historically unsustainable low rate, as low as any time since just before the recession started at the end of 2008...our FRED graph to the right above shows the savings rate since 2008 in green, with the scale on the left; it also shows monthly gross real disposable personal income in blue, and gross spending in red; these amounts do not take into account the increase in population; on a per capita basis, real disposable personal income is still below the levels of 2008, and only up .27% year over year...the price index for PCE, issued with this report, showed overall prices paid for goods and services lower by 0.3%, on the heels of a 0.1% decrease in prices in March; this left the year over year change in headline inflation at 0.74%, a decrease from last month's 1.01%; year over year core PCE inflation, which excludes food and energy prices, was at 1.05%, an all time low, down from the 1.17% annual core inflation logged in March; this is the inflation measure that the Fed gears monetary policy towards, supposedly targeting a 2.5% annual increase in the price index for PCE; however, the Dallas Fed's measure of trimmed mean inflation, which "trims" the most volatile components, came in negative at  –0.01 percent for April; making expectations that the Fed will pull back on QE by September increasingly unlikely..

this week also saw the release of the second estimate of Gross Domestic Product for the 1st quarter of this year from the BEA, which was based on more complete data than was available for the "advance" estimate issued a month ago...unlike the large swings we've seen in other revisions, the changes in this report from the last were modest; overall output of goods and services during the 1st quarter are now seen to have risen to $16,004.5 billion, a seasonally adjusted annual increase rate of 2.4%, compared to the originally reported rate of 2.5%, mostly because inventories, imports, and exports were seen as less than first estimated...nominal GDP was 3.39% higher than the year earlier figure of $15,478.3 billion; however, real GDP, adjusted for inflation, is only 1.78% higher than last year's 1st quarter... as always, personal consumption expenditures were the largest component of GDP, and the revision showed they increased at a 3.4% seasonally adjusted annual rate in the first quarter, up from the 3.2% increase in the first estimate; this encompassed an addition of 2.40% to 1st quarter GDP increase by itself, rather than the 2.24% resulting from the earlier estimate; therefore, without consumer spending, the rest of the GDP increase nets out to near zero; spending on durable goods increased 8.2& and contributed .63% to the quarter's GDP, spending on nondurable goods was up 2.2% and added .35% to the rate of GDP increase, and spending on services increased 3.1 percent and added 1.42% to the GDP growth rate...within the investment component of GDP, the fixed investment aggregate was virtually unchanged in this revision, while areas of investment were marginally changed; while residential investment increased 12.1% and contributed .30% to the annual rate of GDP increase, nonresidential fixed investment increased 2.2% in the quarter and contributed .23%; of that, investment in nonresidential structures fell at a 3.5% rate, and investment in equipment and software increased at an annual rate of 4.6%; there was, however, a rather large change in investment in inventory, and the swing within inventories was even larger; instead of adding to GDP, business inventories are now seen to have subtracted .21%, while the seasonally adjusted change in farm inventories was even greater than first estimated and contributed .84% to the GDP rate increase (that, obviously, must have been an artifact of the drought which lowered normal summer & fall inventories and distorted the seasonal change to winter farm inventories)...there were also sizable swings the revised estimates of exports and imports...inflation adjusted exports of goods & services just increased by .8% in the 1st quarter, not the 2.9% first estimated, and thus exports only contributed .11% to the 1st quarter GDP change; however, imports, which subtract from GDP, were up just 1.9%, not the 5.4% increase earlier reported; so instead of subtracting .90 from the rate of GDP increase, they just subtracted .32....and lastly, both federal and state and local government saw decreases in expenditures and investment; federal spending was off by 8.7%, led by a 12.1% decrease in defense spending, which took .63% off the reported GDP by itself; meanwhile, state and local government expenditures and investment decreased 2.4%, with their decrease in spending taking .06% off GDP and their decrease in investment reducing the annual rate of 1st quarter GDP increase by.22%...all of those charges are neatly summarized by the little table from Ed Dolan at EconoMonitor we've included in the right corner above...

as it was the last Tuesday of the month, the widely followed Case-Shiller home price indexes for March and the 1st quarter (pdf) were released on the 28th of May; these indices average the prices received in repeat sales of homes over the three months ending with the named month and are not seasonally adjusted, although the release includes seasonally adjusted changes...with this release, all three headline indexes showed double digit year over year home price increases; the 10 city index showed prices up 10.3% since last March, the composite 20 showed indicated a 10.9% year over year jump, and the national composite index showed a 10.2% increase in home prices over the last four quarters...even with these significant price gains over the past year, S & P relates that the the peak-to-current prices for both Composites is approximately 28-29%  from their June/July 2006 peaks, on not seasonally adjusted data...Bill McBride, who uses seasonally adjusted indexes, has the 10 city index down 27.3 % from the peak and the Composite 20 index 26.6% off the peak...both the 10 city and the 20 city indexes were up 1.4% since the February report; and the national composite saw a 1.2% first quarter gain; homes in 15 of the 20 composite cities saw month over month price increases, led by San Francisco, where prices jumped 3.9%, Seattle, where home prices increased 3.0%, Portland and Las Vegas, where prices were up 2.7% since the February report, and Tampa, where home prices increased 2.6%; meanwhile, Minneapolis saw home prices decline 1.1% for the month, New York saw prices down 0.4%, and prices of homes in Chicago, Cleveland and Detroit were unchanged for the month...all cities showed year over year home price increases, as they have over the previous two reports...prices in Phoenix had increased 22.5% from March to March, while San Francisco saw a 22.2% increase over the same period...other large home year over year price increases were seen in Las Vegas, up 20.6%, Atlanta, up 19.1%, and Detroit, where prices increased 18.5%...on the other end of the spectrum, home prices in New York at 2.6% higher than last March, were up the least...we have two graphics to illustrate these changes; to the right, from the Wall Street Journal, we see the decline in home prices from the peak for each city covered by Case-Shiller on the left in red, and the rebound from the bottom for each city on the right in black (note that the peak and bottom for individual cities can occur in different months than the index extremes)...below, we have a graph from Felix Salmon at Reuters going back to 1987 which includes each of the 20 cities graphed in a different color, with the bottom scale giving the dates in 5 month intervals...the thicker blue line tracks the Case-Shiller 10 city index, and the red line tracks the Case-Shiller Composite 20 since its inception in January of 2000, at which time all 20 cities indexes were set to equal 100...this graph will enlarge somewhat if you click on it, and if you're good with colors you should be able to make out the separate tracks for home prices in each of the major factors underpinning these booming home prices has been mortgage interest rates, which were at near record lows between 3.41% and 3.57% for a 30 year fixed rate loan during the period of this report; incomes certainly havent kept pace with these rapid price increases; Ironman at Political Calculations shows that since July 2012, the median sale price of new homes has increased at an average rate of  over $22 for each $1 increase in median household income...however, mortgage interest rates have been moving up in recent weeks and after Bernanke's hint that QE might be scaled back; Freddie Mac now reports that fixed mortgage rates are now the highest in a year, with the 30 year loan averaging 3.81% and the 15 year mortgage averaging 2.98% this week... Zillow is forecasting mortgage rates of 4%, so we'll have to watch to see if that takes the air out of this mini-bubble..

(the above is my weekly commentary that accompanied my sunday morning links emailing, which in turn was mostly 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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