Sunday, December 29, 2013

November reports on personal income and consumption expenditures, durable goods

while congress was out of town for the holidays, unemployment rations for roughly 1.3 million of us who've been unemployed for more than 6 months were cut off this week because the program to pay these stipends, which are typical during times of economic distress, expired...the reason they were not renewed is due to the bipartisan agreement to eschew unbudgeted spending unless they can find cuts in other programs to pay for such spending, which apparently they could not agree on… the estimated cost of renewing federal unemployment insurance for another year is $25 billion; meanwhile, the CBO (Congressional Budget Office) put the cost of upgrading our nuclear weapons stockpile at $355 billion....

November Spending Up 0.5% while Disposable Personal Income Rises 0.1%

the most important economic release of this past week was on Personal Income and Outlays for November from the BEA, which includes several important metrics... first, it includes monthly data on national personal income from all sources, and similar data on disposable income, which is income after taxes; then it details personal consumption expenditures (PCE), which as we've noted, typically accounts for almost 70% of GDP, and also total personal savings and the national savings rate, as well as the price index for PCE, which the Fed claims as its inflation target when conducting monetary policy...since we missed covering the October report for this release earlier this month during a week when dozens of delayed economic reports were released, we'll make note of the important October changes here too, since the 2 months together give us a preview of nearly 45% of 4th quarter GDP....note that whereas dollars amounts in this release are quoted are at annual rates, the percentage changes are month over month, which often leads this data to be incorrectly reported by the media..

total personal income increased by a seasonally adjusted and annualized $30.1 billion to $14,310.3 billion in November, which was 0.2% higher than in October, when personal income decreased at a $11.7 billion annual rate, leaving the 2 month change at an increase of less than .13%...disposable personal income (DPI), which is income after taxes, increased at an annualized rate of $16.2 billion to $12,625.1 billion in November, which was a 0.1% increase over October, when DPI fell by an annualized $25.6 billion; as a result, DPI ended November 0.03% lower than at the end of the third quarter; however, disposable income is now 1.6% above the level of the fourth quarter of 2012, when accelerated bonuses and special dividends related to fiscal cliff tax avoidance schemes caused DPI to spike unnaturally...taxes rose at a $14.0 billion annual rate in November, compared with the $13.8 billion rate of increase in October...real disposable personal income, for which after tax income is adjusted for inflation, rose 0.1% in November after falling 0.2% in October; since inflation has been negligible, that too is just 0.03% lower than September's real DPI....

the following changes in sources of pre-tax income for each month are all given at seasonally adjusted annual rates: over the 2 months these included private wages and salaries, which increased at a $26.1 billion rate in November, after increasing at a $9.9 billion rate in October....wages and salaries for government workers increased at a $1.0 billion rate, after falling at a $0.1 billion rate in October...supplements to wages and salaries, such as employer contributions to private or government pension plans and insurance, increased at a $3.3 billion rate, after an increase at a rate of $2.3 billion in October...meanwhile, proprietors' income decreased at a $5.0 billion rate in November, after falling at a $18.1 billion rate in October; these declining proprietors incomes were concentrated in the farm sector; as farm owners incomes fell another $12.0 billion in November after falling at a $22.2 billion rate in October; business proprietors' income, on the other hand, increased at a $7.0 billion annual rate for the month, after increasing at a $4.0 billion rate in October.. in addition, rental income accruing to individuals was up at a $1.9 billion rate in November, compared with an increase at a $2.1 billion rate in October, and interest and dividend income rose at a $5.9 billion rate, after falling at a $5.4 billion rate in October...and also adding to personal income in November was a $0.6 billion increase in transfer receipts from programs such as Social Security and Medicare, which had fallen at a $1.0 billion rate in October, while subtracting  from the total change were individual contributions to government social insurance, which increased at a $3.7 billion rate in November, after increasing at a $1.4 billion rate in October...

personal consumption expenditures (PCE), which accounted for more than 68% of GDP in the third quarter, rose $63.0 billion to a $11,683.0 billion annual rate in November, which was a 0.5% month over month increase, and October's PCE increase, originally reported as a spending increase at a $32.7 billion rate and a 0.3% monthly gain, was revised to a 0.4% monthly gain, with personal consumption expenditures growing at a $44.2 billion annual rate...real PCE, which is PCE adjusted to remove the effects of price changes, rose by the same percentages both months, increasing by $43.8 billion at an annual rate in October and by a $56.2 billion rate in November, with November's increase the largest jump in real PCE in 21 months...on a two month basis, that's an increase in real PCE at an annual rate of 5.7%, which by itself implies a 3.8% annual growth rate for PCE in the 4th quarter, even if December PCE collapses entirely...real outlays for durable goods rose at a 2.2% rate in November, after increasing at a 1.2% rate in October, with the automotive sector accounting for more than half of the durable goods purchased; real outlays for non durable goods were statistically unchanged in November after growing at a 0.8% rate in October, while spending for services, which accounts for two-thirds of PCE and hence over 45% of GDP, rose at a 0.4% rate in November after increasing at a 0.1% rate in October...

the PCE price index, which is used to adjust personal consumption and other metrics in this report for inflation and which the Fed has targeted to rise by 2.5%, was statistically uncharged in November after falling less than 0.1% in October, leaving it virtually unchanged over the two month period, and up just 0.87% for the 12 months ending November...the core PCE price index, which excludes price changes for food and energy, rose 0.1% in both October and November and is now up 1.12% from a year earlier...a further breakdown reveals that the overall index for prices of goods was down 0.3% in both October and November, as prices for durable goods fell 0.2% in October and 0.3% in November, while prices for non-durable goods fell 0.4% in October and 0.3% in November...prices for services, on the other hand, increased by 0.1% in October and by 0.2% in November...on a year over year basis, prices for all goods are down 1.0%, with prices for durable goods down 2.0%, while prices for services have risen 1.9%...the divergence between prices for goods and services seen here is further confirmation that the method used by the Fed and the NBER to compute real retail sales needs to be refined...another price index generated by this report is for energy goods and services, which was down 1.0% in November and 2.7% year over year...since they apparently use this index, which includes natural gas and electric service, to adjust gasoline sales, it explains why our method of adjusting retail gas station sales with the price index for gasoline indicated a larger increase in sales...

personal savings is computed by subtracting total outlays from disposable personal income...total outlays include personal consumption expenditures, personal interest paid, and transfer payments such as fees and fines paid to governments, and rose at a $62.6 billion rate in November to an annualized $12,099.8 billion, compared with an increase in outlays at a $43.9 billion annual rate in October...subtracting total outlays from the $12,625.1 billion of disposable personal income total left personal savings at an annualized $525.4 billion in November, compared with an annualized personal savings of $571.8 billion in October...expressed as a percentage of disposable personal income, those savings resulted in a personal savings rate of 4.2% in November, down from the personal saving rate of 4.5% in October, and the lowest savings rate in 9 months.....our FRED graph below shows the monthly personal savings rate in green since January 2007, with the savings rate indicated as a percentage on the right margin of the graph...also shown is real disposable personal income in blue and real personal consumption expenditures in red over the same time frame, with the scale in billions of chained 2009 dollars for both on the left...note that although both appear to be rising at a decent clip, neither is adjusted for increases in the population…

FRED Graph

New Orders for Durable Goods Rise 3.5% as Shipments, Inventories and Unfilled Orders all hit Record Highs

another monthly release, the Advance Report on November Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf), also showed some significant signs of improvement....the widely watched new orders for durable goods, which are manufactured items generally expected to last more than 3 years, increased by 3.5% in November, but as we've noted previously, new orders are notoriously volatile and often swing on the strength of a few large orders for commercial aircraft, which typically aren't delivered to customers for years...for that reason we also pay close attention to inventories and shipments, which are finished durable manufactures which will be included in the next GDP report, and unfilled orders, which gives us a more complete look at how much factory backlog is yet to be manufactured...

in addition to reporting that seasonally adjusted new orders for durable goods increased by $8.2 billion, or 3.5% to $241.648 billion in November, this report included a revision of new orders received in October, which were originally reported as decreasing by 2.0%, to a decrease of just 0.7%, and an uptick to a 4.2% increase in new orders recorded in September, which was last reported as an increase of 4.1%, so on net new orders were actually 4.9% higher than the $230.3 billion in new orders reported last month...on an unadjusted basis, new orders received so far this year were worth $2,504,660,000, 5.3% higher than orders booked in the first 11 months of 2012...as is usually the case when there's a sizable month over month expansion, the November increase was driven by an 8.4% increase in orders for transportation equipment, which were $6.3 billion greater than October's orders at $81.2 billion; that, in turn, was propelled by a 21.8% increase to $11,291 million in new orders for non-defense aircraft and parts, which are now up 25.9% year to date over a year ago...new orders for defense aircraft and parts also rose, by 10.1% to $11,291 million, after falling 28.4% in October...and new orders for motor vehicles and parts were up as well, at $48,554 million 3.3% higher than October's $47,001 million, and are now 10.5 higher this year than last...

even excluding the volatile transportation sector, new orders for durables were still up a healthy 1.2% in November to $160,460 million, a year to date pace 3.6% above last year's, as orders for every durable manufacturing sector rose except for primary metals, which slipped 1.0% to $26,533 million, and orders for appliances and electrical equipment, which were down 1.2% month over month to $10,343 million....orders for important capital goods, an indication of business investment rather than consumption, rose 9.1% to $97,144 million, and even excluding aircraft and defense capital goods, orders for so-called core capital goods were up 4.5%, double the most optimistic forecast of economists polled by Bloomberg, and were running at a year to date level 4.3% above last years...importantly, orders for machinery rose 4.5% to $35,644 million, and orders for computers, which had fallen 8.8% in October after rising 8.5% in September, again rose in November by 5.3% to $2,350 million......our FRED graph below shows the monthly percentage change for total new orders for durable goods in red, the change in new orders for capital goods excluding defense in green, and the percentage change in new orders for core capital goods, which takes out volatile aircraft orders, in blue for each month since the beginning of 2012..

FRED Graph

perhaps unfilled orders for manufactured durable goods are a better measure of industry conditions than the widely watched and volatile new orders, which only represent one month's activity….here we see a slow but steady increase in the order book, as seasonally adjusted unfilled orders, which have been up nine out of the last ten months, rose again in November by 1.0%, increasing $10.5 billion to a new record of $1,058.5 billion in orders outstanding, 7.7% higher than a year earlier...unfilled orders for transportation equipment, up for the past three months, rose by 1.3% to $654,305 million; at $482,517 million, most of that was unfilled orders for commercial aircraft, which were up 2.3% month over month and 14.2% higher than November a year ago; unfilled orders fro defense aircraft fell 2.4% to $64,437 million, while unfilled orders for vehicles and parts fell 0.7% to $16,292 million....

excluding transportation equipment, unfilled orders were up 0.5% at $404,194 million in November, after rising 0.6% in October...and excluding those transports sectors we've already mentioned, every other durable manufacturing industry saw its unfilled orders increase except for fabricated metal products, where the order book fell 0.3% to $90,255 million...but unfilled orders for computers and electronics rose 1.2% to $108,707 million, with unfilled orders for communications equipment at $35,287 million 18.1% greater than the year ago order book...and while unfilled orders for machinery rose 0.3% in November to $108,707 million, the total order book for capital goods rose 1.4% to $801,861 million, while unfilled orders for non-defense capital goods rose 2.1% to $636,557 million and was up 13.1% from last year....excluding non defense aircraft and parts, unfilled orders for capital goods were up 1.0% in November and 8.8% higher than a year ago..

seasonally adjusted shipments of durable goods in November, which will be included in 4th quarter GDP as either private or government investment, personal consumption, or exports, rose 1.8% to a one month record of $238.3 billion, following a 0.6% increase in October...shipments of machinery, which have been up for four consecutive months, led the increase, rising 4.5% to $35,644 million...shipments of commercial aircraft were down in November, as they fell 7.5% to $11,291 million....but shipments of defense aircraft were up 16.7% to $5,565 million and shipments of motor vehicles were up 3.0% to $48,672 million, so overall shipments of transport equipment still increased 2.0%...excluding transports, shipments rose 1.6% to $165,547 million, the same pace by which they've increased year to date...shipments of capital goods did well, rising 2.3% in November to $85,765 million, and shipments of core capital goods were even stronger, rising 2.8% to $67,300 million, noteworthy strength in an important sector which has only seen shipments rise 1.4% year to date...

while there has been some concern that we'd see a pullback in inventories after the large inventory buildup in the third quarter; it's not yet evident in inventories of durable goods, as they increased another 0.3% in November, the same percentage increase as was posted in October, as their seasonally adjusted value increased by $1.2 billion to a new record high at $384.7 billion...inventories of transportation equipment, which have been up eighteen of the last nineteen months, were up 0.4% to $120,811 million, after increasing 1.1% in October...that was all due to a 1.8% increase to $67,447 million worth of inventories of commercial aircraft and parts, as inventories of motor vehicles and parts fell 0.9% to $25,221 million and inventories of defense aircraft and parts fell 3.1% to $12,961 million...ex-transportation equipment, inventories of other durable goods industries were up 0.3%, with inventories of computers and related products seeing the largest month over month build up, up 2.5% to a value of $7,509 million...but inventories of machinery were down 0.3% at $66,029 million, which contributed to a core capital goods inventory figure which was statistically unchanged, up just $39 million from October to $119,702 million in November..

a good reality check on whether inventories are becoming excessive or not is to compare them to the level of shipments or unfilled orders over time, which allows us to see if inventories are appropriate for the amount of orders coming in and goods being shipped...that’s what our FRED graph below attempts to do; the red graph is a simple metric direct from FRED showing the ratio of inventories to shipments of durable goods; that’s an indication of how long inventory stockpiles will last at the current sales pace, and it fell to to 1.61 months in November from 1.64 months in October, and it’s now at the lowest since March 2011…the blue graph below is a similar ratio of unfilled orders to inventories; it is created by dividing seasonally adjusted Unfilled Orders for Durable Goods Industries (AMDMUO) by Total Inventories for Durable Goods Industries (AMDMTI), with both expressed as monthly dollar amounts; what this shows is that in the early part of last decade, the dollar value of unfilled orders was less than twice that of inventories, and gradually grew to three times inventories heading into the recession, when both metrics shrunk…over the last year, that part of the graph we’re interested in, it shows that unfilled orders are growing faster than are inventories, and although that leveled off in the third quarter, unfilled orders are again growing faster than inventories…

FRED Graph

(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…)

Sunday, December 22, 2013

3rd quarter GDP revision, November consumer prices and adjusting retail sales with them; November industrial production

  we'll look at the 3rd estimate of the 3rd quarter GDP first, which was released by the BEA on Friday, and then we'll look at current data that will influence the 4th quarter GDP report, which will be released January 30th…according to the 3rd estimate, the seasonally adjusted output of goods and services produced in our country grew at an annual rate of 4.1% between the 2nd quarter and 3rd quarter of this year and stood at an annualized $16,912.9 billion in current dollars at the end of the quarter; this growth rate was well above forecasts, as were the original estimate of a 2.8% growth rate and the second estimate of growth at a 3.6% annual rate, and the strongest economic growth since the 4.9% rate in the last quarter of 2011...understand that when it's said that the economy grew at a seasonally adjusted 4.1% annual rate in the 3rd quarter, the BEA is saying that if the economic expansion that occurred during the 3 month period between July and September were to continue at the same rate for an entire year, the output of goods and services would be 4.1% larger than a year ago...the actual growth rate over each of the last 4 quarters was 0.1% for the 4th quarter of 2012, 1.1% for the 1st quarter, 2.5% for the second quarter & 4.1% for the third, which nets out to an actual growth of 1.9% over the last year...to understand each quarterly GDP repot, we have to realize all growth rates are reported in such annualized figures, and all such annualized percentage changes are adjusted for inflation using chained 2009 dollars...without that inflation adjustment, nominal current dollar GDP grew at a 6.2% annual rate in the 3rd quarter...

Additions to Spending for Health Care, Gasoline, Investment in Software Boost 3rd Quarter GDP

in contrast to the 2nd estimate, where we saw that most of the revision in growth was due to a buildup of inventories, this revision was mostly due to greater than previously estimated personal consumption expenditures (PCE)...originally seen to have grown at an anemic 1.4% rate in the 3rd quarter, PCE is now seen to have grown by a seasonally and inflation adjusted $52.3 billion, or at a 2.0% annual rate, and thus contributed 1.36% to the 3rd quarter's growth rate of 4.13%; the largest revision was in expenditures for health care, which, based on newly available data from the Census quarterly services survey, grew at an inflation adjusted $12.0 billion in the 3rd quarter, rather than the originally reported $4.0 billion gain...there was also a $4.0 upward revision to spending on gasoline & other fuels based on revised EIA data for September, while the there was a $3.1 billion extra added to outlays for real recreation services, which was mostly offset by a similar decline in outlays for transportation services...so on net, services expenditures are now seen to have grown at a $12.1 billion rate and contributed .32% to GDP...meanwhile, the quarterly increase in spending for durable goods was little changed at a $25.4 billion annual rate, and contributed 0.58% to GDP, while spending for non-durable goods was up at a $16.9 billion rate and contributed 0.46% to third quarter growth...

in addition, gross private domestic investment was seen to have grown at a 4.8% rate, or by an inflation and seasonally adjusted $102.3 billion, slightly more than the $99.7 billion of the 2nd estimate, and contributed 2.49% to the 3rd quarter growth figure...most of that, as we noted in reviewing the 2nd estimate, was due to a $59.1 billion addition to private inventories, which was barely changed in this estimate as the change added 1.67% to GDP...most of the change to investment in this revision resulted from a upward revision to nonresidential fixed investment, which grew at a $35.6 billion rate, not the $32.3 billion rate previously reported, and which contributed 0.42% to GDP...most of that, in turn, was a revision in the increase in the growth of intellectual property products, or more specifically software, which grew by $6.1 billion in the quarter, not by $1.4 billion as previously reported...so overall investment in intellectual property products increased at a 5.8% rate and contributed .22% to GDP, while growth in investment in nonresidential structures increased 13.4% and contributed .58% to GDP, while investment in equipment increased just 0.2% and added just 0.02% to the final figure...in addition, real residential fixed investment was revised lower due to revised Census new home sales and price data for July through September and showed an increase of $12.1 billion, or at a 10.3% rate, rather than the $15.1 billion or 13.0% rate of increase previously reported; as a result, resident investment added .31% to GDP, not the .38% we reported last month...

meanwhile, there were only modest changes in the amounts or contribution from exports and imports in this revision...real exports of goods and services are now seen as growing at a 3.9% rate in the third quarter to an inflation and seasonally adjusted $2,017.6 billion, compared to the increase at a 3.7% rate previously reported; thus exports added .52% to the GDP figure, not the .50% reported in the 2nd estimate...on the other hand, real imports of goods and services increased 2.4% to an inflation and seasonally adjusted $2,437.3 billion in the 3rd quarter, which was reported last month as a 2.7% increase; thus imports only subtracted .39% from the GDP growth rate, not the .43% we reported earlier...

similarly, there were only minor revisions in the amounts and contributions from government consumption expenditures and gross investment with this release...3rd quarter federal government consumption and investment decreased by an inflation and seasonally adjusted annual rate of $4.3 billion to $1,163.9 billion, which was at a 1.5% rate compared to the second quarter; that was originally reported as a 1.4% decrease in federal outlays...defense spending decreased at a 0.5% rate over the quarter and knocked 0.2% off GDP, while nondefense spending decreased 3.1% and reduced GDP by 0.9%...but real state and local government consumption expenditures and gross investment increased at a 1.7% rate to $1,743.2 billion and added .19% to GDP, turning the contribution from the government sector positive...

the zero hedge bar graph below shows by color coding how each of the major components of GDP contributed to each quarterly result since the second quarter of 2011, with the black line tracking the quarterly GDP growth rate across the chart; in addition, the pink shaded box on the right shows the clear and sizable differences between the first, second and third estimates for the 3rd quarter result, which at 45% they report is the largest cumulative revision on record….noting that additions to quarterly GDP are above the red dashed “0.00%” line and subtractions from GDP are below, the dark blue in each bar represents the increase in personal consumption expenditures for each quarter, the red in each bar represents the change in fixed investment for that quarter, while the change in private inventories, the other investment category, is shown in green, with…in addition, the change in exports, which adds GDP when its growing and subtracts when it contracts, is shown in purple, while the opposite is true for a positive change in imports, shown in teal blue; they subtract from GDP when growing while a contraction of imports would be an addition to GDP and be shown above the red ‘0’ line…lastly, in orange, the graph shows the change in government consumption and investment for each quarter, which was so small in the 3rd quarter as to not be visible…clearly, it’s been consumers in blue and fixed investment in red that have provided most of the growth over the last two and a half years..
3rd revsion, 3rd qtr GDP from zero hedge 

November Consumer Prices Unchanged as Rent Increases are Offset by Lower Energy Costs

next we're going to take a look at consumer prices for November, because we're going to want to use that data to adjust the retail sales report we covered last week, which didnt account for changes in price, for those changes...we do that because inflation and seasonally adjusted sales for the month will give us an insight into how those sales will contribute to personal consumption expenditures in 4th quarter GDP figures, which as we've just seen, are the largest component of GDP overall...

the Consumer Price Index for November from the Bureau of Labor Statistics again showed no increase in prices overall due to lower energy costs...the seasonally adjusted energy price index, which accounts for 9.6% of the CPI, fell 1.0% for the month, offsetting modest price increases in rent and other services, leaving the seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) unchanged for the month....the unadjusted index, based on 1982-84 prices = 100, was at 233.069, down fractionally from 233.546 in October and up just 1.2% from the 230.221 reading of a year earlier...driving the decline in energy prices were gasoline prices that were 1.6% lower than in October, and now 5.8% lower than a year ago...fuel oil, down 0.6% in October, rose 0.4% in November, and the composite for other fuel commodities, including kerosene, propane and firewood, also rose 0.3%..but energy services were down 0.2% in November as prices for natural gas fell 1.8%, which was only partially offset by a 0.3% increase in the cost of electricity...after October's energy price index decline of 1.7%, November's data left energy prices 2.4% lower than they were a year earlier...

increases in food prices were also modest, as the food index rose 0.1% in November, the same increase as in October; however, all of that was due to a 0.3% increase in prices for food away from home, as both fast food outlets and full service restaurants saw prices rise 0.2% while food at work sites and schools rose 0.6%... meanwhile, seasonally adjusted prices for food at home were statistically unchanged, as the unadjusted food price index fell from 234.418 to 233.639 in November, which was only 0.6% higher than the 232.295 index reading of a year earlier...of the major food groups, only dairy products, which increased 0.4%, saw prices higher in November, as prices for milk rose 2.0% and cheese prices were 0.9% higher...prices for cereals and bakery products were statistically unchanged, as a 2.6% increase in bread prices was offset by 1.5% lower prices for biscuits, rolls, muffins, 0.9% lower prices for rice, pasta and cornmeal, and 0.4% lower prices for flour and mixes...seasonally adjusted prices in the meat group were down 0.2% in November, as chicken prices fell 1.5%, pork prices fells 0.8%, seafood prices fell 0.3%, while beef prices rose 0.5% and egg prices were 1.1% higher....fruit and vegetable prices were also lower, by 0.7%, as fresh vegetable prices were 2.0% lower on 4.0% lower lettuce prices and potatoes that were 1.5% cheaper, and fresh fruits prices slipped 0.1% as apples were up 0.7% while oranges were 1.2% less, while processed fruits and vegetables rose 0.5%...beverage prices were 0.2% lower as frozen juices fell 0.5%, roast coffee fell 0.6% while carbonated drinks were unchanged...in addition, prices for the catch all grouping of 'other foods at home' were up 0.5% as the spices, seasonings, condiments, sauces index rose 2.2%, margarine prices were up 1.3%, while snacks fell 1.7%, sugar & sweets fell 0.5%, and fats and oils also fell 0.5%...

excluding price changes for food and energy, the so-called core CPI was up 0.2%, the most since July core prices rose by the same percentage...the unadjusted core index was little changed, however, as it rose from 235.162 in October to 235.243 in November, which was 1.7% above the year earlier reading of 231.263 ...the shelter index, which accounts for 31.8% of the CPI by itself, drove the increase as it was up 0.3%, with rents up 0.2%, homeowner's equivalent rent up 0.3% and prices for lodging away from home up 2.9%...in contrast, the apparel price index fell 0.4% in November, as prices for men's clothing fell 1.5%, women's wear prices fell 0.2%, footware fell 0.4%, & toddlers' apparel rose 1.9%... in addition, the index for medical care was unchanged in November, with both medical care commodities and medical care services also unchanged, as a 0.2% increase in prescription drug prices was offset by a 1.1% decrease in medical equipment and supplies prices, while a 0.2% increase in physicians services was offset by a decrease of 0.4% in hospital charges...prices for transportation commodities less energy were unchanged as used car prices rose 0.1% and new car prices were down 0.1%, while the transportation services index rose 0.3% due mostly to another 2.6% jump in airfares...meanwhile, the recreation price index was up 0.2% as recreation services were up 0.3% as cable and satellite TV and veterinary services both rose 0.5%, while recreation commodity prices were unchanged as sporting good prices rose 0.5% and TV prices fell 0.5%...finally, the last major price index, which combines education and communication, also saw 0.2% higher prices. as education and communication commodities rose 0.1% as a 2.3% increase in telephone hardware prices more than offset a 1.6% decrease in computer software and accessories prices, while education and communication services rose 0.2% on a 0.6% increase in tuitions....

our FRED graph below shows the relative price change in each of these major components of the CPI-U since January 2000, with all the indexes reset to 100 as of that date to allow for a comparison between indexes with different origination dates…in blue, we have the track of the change in the price index for food and beverages, which tracks pretty close to the track of the CPI-U, which is shown in black; in red, we have the change in the price index for housing, which includes rent and equivalents, utilities, repairs and other homeowners costs like insurance and which at 41% of the CPI also tracks close to the CPI… in violet, we have the price index for apparel, which has been the only index to show a net price decline over the decade…the transportation index, in brown, shows the impact of volatile gas prices on the cost of transportation, while the price index for medical care in orange has obviously risen the most over the entire period…in addition, education and communication prices are tracked in dark green, and the track of the recreation price index is shown in light green.. 

FRED Graph 

We Find Real Retail Sales Rose ~.91% in November

now that we have the November prices changes for all items sold at retail, we can now go back to last week's retail sales report and compute real retail sales, which adjusts what was sold at retail for inflation; we do this by adding an appropriate percentage to nominal sales when the prices declines (because that means more of the items were produced and purchased) and subtracting from real sales when the price increases.…we then compare that result to the previous month's sales to determine the actual or real change in unit sales for the month...understand that the sales numbers we generate no more represent actual current dollar sales for the month than do seasonally adjusted numbers; both are generated from the actual data as a means of comparing growth from one month to the other...

  so; first, we adjust the seasonally adjusted $76,168 million in November motor vehicle sales with the weighted price changes for new cars (down 0.1%) and used cars (up 0.1%) and find that would add $26 million to real vehicle sales; then we adjust the $9,099 million in sales of auto parts, accessories. & tires with the 0.1% decrease in the vehicle parts and equipment price index and add another $9 million to real retail sales from that adjustment...next, we'll adjust the $8,895 million in furniture sales with the 0.5% decline in prices for furnishings and supplies, which will add another $44 million to real sales....then, adjusting $8,989 million in electronics & appliance sales with appropriately weighted indices for video and audio products. which was unchanged, appliance prices, which were down 0.5%, and information tech commodities, which were off 0.3%, gives us a addition to real sales of $24 million; in addition, adjusting $26,391 million in building material & garden supplies sales with the price index for tools, hardware, outdoor equipment, which was off 0.5%, adds another $131 million to our real sales number; but while there were $54,555 million in food & beverage sales, the food at home price index was unchanged, so there will be no change accruing to real sales from this business group; similarly, there were $24,305 million in drug store sales but the medical care commodities index was also unchanged so real drug store sales will also be unchanged....adjusting $44,752 million in gas stations sales with the 1.6% decline in the price of gasoline will add $716 million to our computed real sales figure; while this may seem excessive, we have to remember that the $44,752 million gas station sales figure represents November sales that were down 1.1% in nominal dollars, and that what we're doing is restoring that to represent the increase in real sales of gallons of gasoline in November as if they were sold at October's price, which is what we must do if we want a comparable unit sales change figure...next, adjusting $21,218 million in clothing stores sales for the 0.4% price decline in the apparel price index will add another $85 million, while they'll be no real sales adjustment for the $7,676 million in sales at sporting goods, hobby, book & music stores when adjusted with the unchanged recreational commodity index....adjusting $60,292 million in sales at general merchandise stores with the index for retail commodities less food and energy prices, which was off 0.1%, adds another $60 million to real sales, while adjusting the $10,094 of miscellaneous store sales with the same index adds another $10 million....based on the top internet sales items, we'll adjust the $40,053 million in sales by nonstore retailers with a weighted combination of software and book prices, which were down 0.5%, consumer electronics, which saw no price change, and apparel, for which prices dropped 0..4% will add $86 million to real sales, while adjusting $43,074 million in food services & drinking places with the 0.3% price rise in food away from home subtracts $129 million from real retail sales...adding all these adjustments together, we find that the total dollar adjustment to convert November sales to their October price equivalents would be $1,002 million, which we then add to seasonally adjusted November sales in order to compute the month over month change in real retail sales, which we find is an increase of .91%, instead of the .68% increase in retail sales as reported by the census without adjusting for lower prices…in PCE or GDP terms, that is growth in personal consumption of goods at a 11.5% annual rate…note that even without the increase in unit sales of gasoline, all other real retail sales would have been up .86%, which is still growth in real consumer retail spending at a double digit annual rate

Cold November Helps Push Industrial Production to an All Time High

finally, we'll take a look at the Fed's current G-17 release, which covers Industrial Production and Capacity Utilization for November, and which indicated that seasonally adjusted industrial production increased 1.1% in November, while October's report was revised to show a gain of 0.1% instead of the 0.1% pullback reported last month...however, like many of the previous times we've seen a large upside surprise to this monthly number, the weather again was a major factor, as colder than average temperatures for most of the country east of the Rockies boosted demand for heating above seasonal norms...as a result, the utility index, which accounts for almost 10% of total production, rose by 3.9% to 103.9, on an index system used in this release wherein 2007 was set equal to 100 for each index...but the important manufacturing index, accounting for more than 3/4ths of production, was still up 0.6% to 97.2, its best increase since August...and the mining index, which includes oil & gas production, more than reversed its 1.5% decline in October by growing 1.7% for the month to a new record at 122.5...combined, these index increases led the industrial production index to post its all time high reading at 101.3, 3.2% higher than a year earlier...

while the changes in those three industry groups (manufacturing, mining and utilities) generate the headlines for media covering this report, it's details on industrial production by market group where we learn what's really going on...final products and nonindustrial supplies, for instance, accounts for 53.46% of all industrial output and grew at a 0.9% rate in November; of that, more than half is production of consumer goods, which grew at a 1.5% rate after edging down 0.1% in October; production of consumer durables rose 2.2% on a 3.3% month over month increase in automotive products production and a 2.6% increase in output of home electronics, while production of appliances, furniture, carpeting and other durables all also rose at a healthy 1.0% monthly rate...production of consumer durable goods is now up 9.1% on a year over year basis...production of non-durable consumer goods also rose by a respectable 1.3% in November, led by a 3.3% increase in energy production, while output of chemical products increased 1.4% and paper products grew 0.9%...the only laggards were food production, which grew 0.2%, and clothing production, which was unchanged in November...production of consumer non-durable goods has now turned positive on a year over year basis with a 0.9% growth rate..

meanwhile, production of business equipment slipped 0.5% in November after a small 0.2% increase in October;  production of transit equipment rose 1.0% after a 0.1% decrease in October and was now up 1.6% since last November, while production of information processing equipment fell 1.8% and was now up just 1.5% for the year, and output of industrial and other equipment fell 0.6%, and was now up 2.8% since November of 2012 ...in addition, production of defense and aerospace equipment also declined 0.8% in November and was just up 1.4% for the year....among nonindustrial supplies, construction supplies was up 0.6% in November and 4.9% for the year, while output of business supplies rose 1.0% for the month. which brought output 3.1% above that of a year earlier...

the production of materials to be processed further in the industrial sector, which accounts for 46.54% of the industrial production index, rose 1.4% in November, which put it 3.8% higher than last November's output..every sector saw production gains, with inputs into durable goods rising 0.9% on a 2.1% increase in the output of consumer durable parts and a 1.2% increase in production of equipment parts...materials for use in non-durable goods rose 0.2%, with a 2.4% increase in textiles production and a 0.4% increase in production of chemicals more that offsetting the 0.5% decrease in output of paper products inputs...and production of inputs into the energy sector rose by 2.7% and were up 5.7% for the 12 months ending November...

capacity utilization, expressed as the percentage of the plant and equipment that was in use during the month, is also given for each industry; capacity utilization for total industry rose from 78.2% in October to 79.0% in November; that compares to an operating rate of 77.9% a year earlier...77.5% of our manufacturing plant and equipment was in use during November, up from 77.1% in October.…manufacturers of durable goods were operating at 77.3% of capacity, up from 76.9% in October, with motor vehicles manufacturers seeing a jump in plant usage from 75.9% to 78.4%, wood products industries plant usage up from 71.1% to 73.4% and only the machinery, computer and electronics and aerospace and similar transportation equipment manufactures showing a utilization decline...manufactures of non-durable goods raised their capacity utilization from 77.2% to 77.6% as every non-durable group except food producers saw modest increases in plant utilization....meanwhile, the operating rate for mining equipment rose from 88.6% in October  to 89.7% in November, and as we'd expect with the jump in utility output, capacity utilization for those industries rose by 3.0% from 78.0% to 81.0%...over the past year, manufactures have also added 1.6% additional plant and equipment to their capacity, while mining companies, primarily oil and gas drillers, increased their capacity by 4.4% and utilities increased their potential output by 0.9%...

our FRED graph for this report, included below, shows the industrial production index for all industry in black, the manufacturing production index in blue, the utility production index in green, and the mining production index in red from the beginning of the index year of 2007, at which time they were all benchmarked to equal 100.0; we can see the overall industrial production index has finally hit a new high at 101.3, and the mining index continues to hit new highs, as domestic oil & gas operations expand…meanwhile, the utility index shows the volatility introduced by aberrant weather, and manufacturing has still not reached prerecession levels …also shown is the track of capacity utilization for total industry since 2007 in pink; note that it’s a percentage, rather than an index number like the other metrics we’re tracking on the same graph...

FRED Graph

(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…)

Sunday, December 15, 2013

the fiscal 2014-15 budget deal; November retail sales; LPS Mortgage Monitor for October

after at least three years of running the US government on short term continuing resolutions, it appears we have the first actual government budget since early in the Obama presidency and the first budget passed by any divided Congress in 27 years...the 'Bipartisan Budget Act of 2013' (pdf) negotiated by Senator Patty Murray representing Democrat interests and Rep. Paul Ryan representing the Republicans passed the House on a vote of 332-94 on Thursday and is expected to pass the Senate next week...

that said, there's not a lot more here than the symbolism of cooperation on a budget agreement, with a little redistribution of how less money will eventually be spent...this budget deal rolls back $63 billion of the $1,200 billion in automatic sequestered spending cuts specified by the 2011 Budget Control Act, with that split evenly between defense and non-defense programs over the 2014 and 2015 fiscal years...in fiscal year 2014, which started October 1, defense discretionary spending would be set at $520.5 billion, and non-defense discretionary spending would be capped at $491.8 billion, up from $498.1 billion and 469.4 billion respectively under current law...however, since Congress is still operating under the misguided policy that any previously unbudgeted spending increase must be paid for, the act provides for additional revenue and spending cuts amounting to $85 billion elsewhere in the budget; thus there will be a net contractionary impact of nearly $23 billion over the 10 years that this budget addresses..

among the provisions in this Act to pay for the sequester rollback in fiscal 2014 and 2015 is an extension of the sequester at the same percentage of mandatory cuts to Medicare in 2022 and 2023 as would be sequestered in 2021 under current law (2%), which they figure is worth $28 billion in current savings, an increase to 4.4% for the retirement contribution for new federal hires, five times what older workers currently pay, a cut of 1% annually from the cost of living adjustments for military pensions for armed forces members under 62 years old to be applied retroactively on service members reaching that age, and an increase of passenger fees to $5.60 per one way plane ticket to defray TSA costs now paid for by the Federal government...in addition, this Act approves the U.S.–Mexico Transboundary Agreement, opening up the western Gulf of Mexico to oil drilling, defunds the Ultra-Deepwater and Unconventional Natural Gas Research Program and rescinds all available funds in the Strategic Petroleum Reserve account, at a savings of $3.2 billion..

although it's not mentioned in the summary of the budget agreement provided by the House, press accounts indicate that this agreement will include a 3 month extension of the "doc fix", which reverses the provision of a 15 year old budget cutting agreement that would have slashed Medicare doctor's fees by over 24% by now if it hadn't been rescinded annually since...notably absent from the budget deal is an extension of expiring unemployment rations for the long term jobless; should the democrats be unable to pull that rabbit out of a hat this coming week, that means 1.3 million workers will have their stipends cut off at the end of this month, and another 850,000 workers will cut off over the first quarter of 2014...also not mentioned are more than 60 expiring tax provisions known as tax extenders that seem to get renewed every year; these include everything from regular tax breaks such as the research and development tax credit and the wind energy tax credit to such gems in the code as tax breaks specifically written for NASCAR and for Disney films..

November Retail Sales Rise 0.7% on Autos

the key economic release of the past week was the Advance Report on Retail and Food Service Sales for November (pdf) from the Census Bureau, which estimated that seasonally adjusted retail sales were at $432.3 billion in November, an increase of 0.7 percent (±0.5%) from October, and 4.7 percent (±0.7%) above sales of last November...October's seasonally adjusted sales were revised to $429.4 billion, an increase of 0.6% (±0.3%) over September's further revised $426.8 billion, which was up from the originally reported month over month gain of 0.4% (±0.5%), with the ± parenthesis in each estimate representing the 90% confidence range...total unadjusted November sales were estimated to be at $434,119 million, up from October's revised $422,953 million and unadjusted revised sales of $403,043 million in September...the table below from the census report breaks out the monthly and annual seasonally adjusted percentage change in retail sales by business type; the first column shows the percentage change in sales from October to November, while the second column shows the year over year sales percentage change as of this report, while in the third and fourth columns, we have those same metrics for October's report based on the revisions to it from this month...

Nov 13 retail sales table

as you can see by the above table, a 1.8% increase in sales at auto and other motor vehicle dealers again drove the overall increase, as those sales did in October...sales at motor vehicle & parts dealers rose to a seasonally adjusted $83,287 million in November from $81,779 million in October and accounted for 19.3% of November sales; without these automotive businesses, retail sales rose just 0.4%...we should note that unadjusted vehicle & parts sales, extrapolated from a small sampling of dealer reports, reportedly fell from $79,298 million in October to $75,871 in November, so the increase seen here was only in the seasonal adjustment...other businesses seeing greater than 1% seasonal increases in November sales included non-store retailers (which are mostly online sellers), where monthly sales rose 2.2% from $38,172 million to $39,011 million, building material and garden supply stores, where adjusted sales rose 1.8%, from $25,933 million in October to $26,391 million in November, restaurants and bars, where normalized sales rose 1.3% from $46,699 million to $47,283 million, furniture stores, where seasonality adjusted sales of $8,895 were 1.2% above October's sales of $8,792 million, and electronic and appliance stores, where adjusted sales rose 1.1% from $8,894 million to $8,989 million...the only retail businesses that saw sales decline in November were gasoline stations, where sales fell 1.1% to $44,752 million from $45,271 million on lower gas prices, grocery stores, where sales fell 0.3% from $48,594 million in October to $48,450 million, dragging the food & beverage retailing group down 0.1% to $54,555 million, and the small grouping of miscellaneous stores where sales fell 1.3% to $10,530 million...

there were also some substantial revisions made to the delayed advance retail sales data which we reviewed 3 weeks ago; which are included in the 3rd column of the above table....although the increase in overall sales for October has been revised from 0.4% to 0.6%, sales at auto and other motor vehicle dealers, originally reported to have increased 1.4% in October, are now seen to have increased by just 1.1%; that meant October sales excluding the automotive group rose 0.5% rather than the 0.2% originally reported....this was due to rather large revisions in the September to October sales change for several retail categories: sales at electronics & appliance stores, originally reported up 1.4%, were revised to an increase of 2.6%; the increase in sales at furniture stores was revised from 1.0% to 1.8%; October sales at clothing stores, reported 3 weeks ago as up 1.4%, are now seen to be up 2.6%; non store retailers saw a 0.8% increase rather than the 0.4% increase first reported, and sales at restaurants and bars were revised from a gain of 1.0% to one of 1.4%; in addition, the 1.9% decrease in sales at building material and garden supply stores was reduced to -1.5%, and the  sales change at miscellaneous stores went from a decrease of 0.1% to an increase of 0.4%...

if you recall, we computed real retail sales for that advance October report at ~.75 by adjusting each of the retail groups for inflation with their respective CPI component; we got a confirmation of the accuracy of our method last Friday when the Incomes and Outlays report for October showed that real durable goods personal consumption expenditures were up 0.8% and real non-durable personal consumption expenditures were up 0.7%...(see full pdf, table 7)…without undergoing such an involved computation this time, we'd estimate that these revisions to October suggest a real retail sales gain on the order of ~.95%, which is close to an annualized gain of 12%....if price changes for retail commodities are similarly moderate or negative when the CPI is released next week, we might see the two month annualized gain in real consumption of durable and non-durable goods reach double digits...since these retail sales represent roughly a third of PCE, or 23% of GDP, this report suggests that most early estimates of 4th quarter GDP will have to be revised upward... 

our FRED bar graph below shows the monthly percentage sales change for each of the 12 major retail sales categories since last November....each of the past 13 months is represented by a grouping of 12 bars, with the percentage change in each type of retail sales represented by its own color code within each bar group, wherein a monthly increase in sales for that business appears above the ‘0’ line and a decrease below it…from left to right in each group is a dark blue bar representing the percentage change in motor vehicles and parts sales, a red bar indicating the change at general merchandise stores, followed by the percentage change at food and beverage stores in green, the sales change restaurants and bars in mauve, the change at gas stations in orange, the change non-store or online retailers in sky blue, the change at building and garden supply stores in light green, the percentage change at drug stores in mustard, the change in sales at clothing stores in pink , the change at electronics and appliance stores in purple, the change at furniture stores in yellow, and the percentage change in sales at stores specializing in sporting goods, books or music in pale blue…(click to enlarge)

FRED Graph

October Mortgage Delinquencies Fall 2.8% While Foreclosure Starts Rise 9.1%

another report released this week we regularly review is the Mortgage Monitor for October (pdf) from LPS (Lender Processing Services) which gives us the most detailed monthly look at the condition of US mortgages, whether new, current or in trouble; noteworthy in this month's report was that the percentage of home loans in the foreclosure process declined from 2.63% in September to 2.54% in October, the lowest foreclosure inventory since late 2008; at the end of October, 1,276,000​ homes remained in foreclosure, down from 1,328,000 at month end September and 1,939,000 in October last year...new foreclosures started in October were the highest since April, however, as they rose to 118,837 from 108,953 foreclosure starts in September...in addition, there were 3,152,000​ home loans that were more than 30 days past due for a mortgage delinquency rate of 6.28%, down from 6.46% in September and 7.03% from October of last year; of those, 1,283,000​ mortgages were seriously delinquent, ie, 90 or more days behind on their house payments but not yet in foreclosure; so on net, a total of 4,427,000 mortgage loans were 30 or more days delinquent or in foreclosure at the end of October, at 8.80% the first time that mortgages in trouble dipped below 9% since 2008...the bar graph below is take from the data summary page (p 24) of the pdf; it shows the mortgage delinquency rate for each month over the past year…note that while the delinquency rate was down to 6.28% in October, its was still above the 6.20% rate in August and the even lower 6.08% delinquency rate in May; we can expect a seasonal increase the next two months as homeowners defer mortgage payments during the holiday shopping season…

October 13 LPS summary

a major focus of this month's report was to raise concern about the large percentage of outstanding second lien home equity lines of credit (HELOCs) that originated between originated between 2004 and 2006, most of which have draw periods of ten years, during which time only interest is due on the amounts borrowed, and after which either a balloon payment is due or the loan is amortized and payments increase...according to LPS, they've found that among the HELOCs originated prior to 2004 (ie, those that have already begun amortizing), there has been an increase in problem loans, indicating an increased risk of more delinquencies ahead...and like a mortgage or any loan where the home is used as collateral, failure to pay the amounts due in a timely manner can result in foreclosure...the rather crude graphic below from LPS shows the distribution of the principle types of home equity loans by year of origination; clearly, over three fourths of them originated between 2004 and 2009, which means they’ll start coming due in droves starting next year…although LPS doesn't indicate the quantities involved, we can get an idea of what they are from the 3rd quarter report on household debt which we reviewed 4 weeks ago, which showed that there was $535 billion in HELOCs outstanding, as contrasted to $7.90 trillion in regular mortgage debt…

October 13 LPS HELOC distribution

another focus point of the October Mortgage Monitor was that due to rising home prices, both the quantity of mortgages that are underwater (wherein the homeowner owes more than the house is worth) is and the amount of negative equity in those loans is declining....using their own Home Price Index, they find that home prices are up 9.0% year over year, although the price gain had slowed to 0.2% in September...as a result, distressed property discounts had fallen to 24.5% for short sales and to 25.9% for REO (real estate owned by banks after foreclosure)....after applying these distressed property discounts, they find that just 11.6% of loans are underwater, compared to the 18.8% that were underwater at the beginning of the year...the map below, from page 12 of the mortgage monitor, indicates the percentage of homes that were underwater as of October in each county in the lower 48 with a color code; with the darkest green counties indicating 0% of homes underwater and the darkest red counties indicating that over 20% of the properties in those locales have mortgages greater than the value of the property...presumably there is inadequate data to score the lower population counties colored white...

October 13 LPS negative equity map

a regular focus of the monthly mortgage monitor is comparisons between mortgage conditions in judicial states, where a court proceeding is necessary to complete a foreclosure, and non-judicial states, where such a proceeding isn't necessary for the banks to have the local sheriff put you out...the next graph compares the historical rate of foreclosure starts in judicial states in blue and the rate of new foreclosures in non-judicial states in red...in October, foreclosure starts were up 12% vis a vis September in judicial states, and up 5% in non-judicial states over the month...while foreclosures were started on 0.24% of all mortgages in October, it's clear from the graph that the foreclosure start rate in the judicial states was above 0.3% in October while the foreclosure rate in the non-judicial states was below 0.2%...LPS doesn't offer an explanation, but notes that new seriously delinquent mortgages are higher in judicial states and the gap is growing...

October 13 LPS foreclosure starts

the next graph shows that the pipeline ratio for the judicial states continues to fall as those states process foreclosures more efficiently; as the graphic indicates, the pipeline ratio is computed by adding those homes that are seriously delinquent to those already in foreclosure and dividing that by the average number of completed foreclosures per month over the previous 6 months; that results in the average number of months a problem loan would be in the "foreclosure pipeline" before the foreclosure process is completed; for judicial states, it was once as high as 118 months, or nearly ten years; as of October, at the current pace that foreclosures are proceeding, it would now take 47 months to clear the foreclosure backlog in judicial states, and 39 months to process all the foreclosures in non-judicial states..

October 13 LPS pipline ratios

the table below, from page 26 of the pdf, provides us with a data snapshot of the progress, or lack thereof, in unwinding the mortgage crisis…after the columns for the date and the active loan count for that month, the the next three columns show the total loan counts of delinquent mortgages by number of days delinquent, the number of mortgages in foreclosure (FC) and the foreclosure starts for each January since 2008 and each month since January 2012...in the last two columns, we see the average length of time those who’ve been more than 90 days delinquent have remained in that status, and then the average number of days those in foreclosure have been stuck in that process because of the long pipelines…generally, when foreclosure starts rise, those who’ve been delinquent the longest are moved from that 90 days delinquent column to the average days in foreclosure column…according to LPS, those in foreclosure in October have now been in that process for an average of 900 days…

October 13 LPS delinquent loan counts table

last, we'll include this month's table show the percentages of non-current (NC) mortgages for each state and the District of Columbia (from page 25 of the pdf); shown for each state are the percentage of home loans that are delinquent (Del%), the percentage of mortgages that are in foreclosure (FC%), the total mortgages that aren't current with their payments (NonCurr%) and the year over year change in the number of non-current mortgages; also note that states that have a judicial foreclosure process, where the bank must prove their right to foreclose on a homeowner in court, are marked by a red asterisk...what is notable as of this report is that the non-judicial state of Mississippi, with 15.1%, now has the highest percentage of non current mortgages, replacing Florida which had been at the center of the mortgage crisis since it started…also note that all the states that still have more than 4% of their mortgaged homes in foreclosure are all judicial states; led by Florida with 7.7%, New Jersey with 7.2%, New York with 5.5%, Hawaii with 5.3%, Maine with 4.9%, and Connecticut with 4.2%…also note that being in a judicial state doesn't necessarily imply mortgage difficulties, as LPS seems to imply, as the judicial state of North Dakota has the lowest percentage of non-current mortgages at 2.8%, while every other state has 4.0% or more mortgages that are behind on their payments…

October 13 LPS states table

(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…)

Thursday, December 12, 2013

on government deficits and the so-called "debt"

myths about deficits and the debt, followed by the reality…on topic speakers, in order of appearance:

  • L Randall Wray - Professor, Economics, University of Missouri-Kansas City. Senior Scholar, Levy Economics Institute. Author, Understanding Modern Money, Modern Money Theory. 
  • Stephanie Kelton - Professor, Economics, and Chair of the Department of Economics, University of Missouri-Kansas City. 
  • Warren Mosler - President, financial services firm Valance Co. Inc.  Author, Soft Currency Economics, The Seven Deadly Innocent Frauds of Economic Policy.

Sunday, December 8, 2013

November employment reports and the 3rd quarter GDP revision

we got hit with a bunch of important economic reports this week, most of which were released over the last few days...as is usually the case in the first business day of the month, Monday saw the release of the ISM manufacturing survey for November, which saw the PMI increase by 0.9% to 57.3%, a strong expansionary reading and the highest this year; also on Monday, the Census Bureau released the rescheduled construction spending for October, which was estimated at a seasonally adjusted annual rate of $908.4 billion, 0.8 percent (±1.8%) above September, a gain which was driven by a 3.9% increase in public construction as private construction slipped 0.5%...then on Wednesday, we had the release of the November ISM non-manufacturing survey, which saw the non-manufacturing index slip 1.5% to 53.9%, indicating slower grow in the service sector, the October report on our international trade in goods and services, which saw our trade deficit in goods and services decrease to $40.6 billion from $43.0 billion in September as October exports rose faster than imports, the November National Employment Report from payroll processor ADP, which indicated private sector jobs increased by 215,000; and the rescheduled reports on new home sales for September and October, which showed October new homes sales increased by 25.4 percent (±19.2%) above the one year low September annual rate of 354,000, revised after new home sales for June, July, and August were all revised down by a total of nearly 15% while the median new home sales price fell to a one year low of $245,800, down from the earlier high of $279,300...then on Thursday, we saw the revision of 3rd quarter GDP to a 3.6% annual growth rate from the 2.8% rate indicated by the advance estimate we reported 4 weeks ago, and the full report on manufacturer's shipments, inventories and orders for October, which adds nondurable manufactures to and revises the durable goods report we covered last week and which saw new orders for manufactured goods, which have decreased three of the last four months, decrease $4.4 billion or 0.9% in October to $486.9 billion, calling into question the overly optimistic ISM survey earlier in the week...finally, on Friday we saw the Employment Situation Summary for November from the Bureau of Labor Statistics (BLS), which is composed of two surveys of employment, one solicited from employers and the other conducted as a telephone poll of households...with the jobs report dominating the blogs and news cycle, two other important reports on Friday received little coverage: Personal Income and Outlays report for October from the BEA, which indicated that personal income decreased by 0.1%, disposable personal income decreased by 0.2%, while personal consumption expenditures increased 0.3% and the G-19 Release on October Consumer Credit from the Fed, which helped explain how October spending increased in the face of falling incomes, ie, credit card debt hit a 3 year high as consumers increased their aggregate borrowing by $18.2 billion  ...we'll start our coverage by looking at the two jobs reports...

203,000 Jobs Added Across Most Sectors in November

FRED Graph

data from the establishment survey, aka the Current Employment Statistics (CES), the monthly BLS survey of roughly 26% of all businesses and government agencies nationwide, indicated that payroll employment increased by a seasonally adjusted 203,000 jobs in November, a bit better than the average of 195,000 jobs per month this survey has indicated over the past year...October's jobs gain was revised down by 4,000 to 200,000, while the September figure was revised up by 12,000 to 175,000 for a net gain of another 8,000 payroll jobs...these changes are all included on our adjacent FRED bar graph, which shows the monthly number of payroll jobs gained above the '0' line and job losses below the line since the beginning of 2008...the unadjusted data that this report is created from indicates that an additional 421,000 payroll jobs were added in the November for a total of 137,942,000 non-farm payroll jobs; the seasonal adjustment for November lowered totals on jobs such as retail sales that normally increase with the shopping season and raises totals on jobs such as construction which typically decrease seasonally at this time of year...thus, though there were an additional 471,000 retail hires for the holidays, the seasonal adjustment writes that down to an increase of 22,300 retail jobs, ie, that many more than would normally be added at this time of year...

the seasonally adjusted job gains in November were by and large in employment sectors other than the retail and fast food sectors that have dominated recent reports; 30,500 jobs were added in transportation and warehousing industries, including 8,600 couriers and messengers, 8,400 truckers, and 4,600 in warehousing and storage; again, these are over and above the seasonal increases in these areas, as the unadjusted data shows an increase of 53,200 couriers and messengers for the month...another sector showing greater than normal job creation was health care and social assistance, where 29,600 payroll jobs were added, 26,300 of which were in ambulatory care services with 11,800 of those serving patients in their homes...manufacturing job growth at 27,000 was also strong, with 17,000 additional payroll jobs in durable goods manufacturing, of which 6,700 were in motor vehicles, while the 10,000 increase in non-durable manufacturing jobs was predominately in food manufacturing with 7,800 additional hires...the large professional and business services sector, which had been averaging 55,000 new jobs a month, also added 35,000 jobs, with an increase of 16,400 in temporary help services and another 5,500 in accounting and bookkeeping, and of the previously mentioned 22,300 jobs in retail, 13,800 were added by general merchandise stores and 11,700 were added by sporting goods, hobby, book, and music stores, while grocers cut 5,400...in addition, 17,000 jobs were added in the leisure and hospitality sector, with the addition of 17,900 jobs in bars and food service, and 17,000 jobs were added in construction, of which 12,500 were with specialty trade contractors...government employment was up by 7,000, with 8,000 additional at the state level and 6,000 for local governments offset by 7,000 job cuts at the federal level...meanwhile, payroll employment in other sectors, including resource exploitation, wholesale trade, information, and financial activities, showed little or no change...

our FRED bar graph below shows the monthly change in payroll employment in selected sectors since the beginning of 2012; in each monthly grouping of 8 bars, the monthly change in manufacturing employment for that month is indicated in blue, the change in monthly construction employment is in red, the monthly change in retail employment is in dark green, the monthly change in government jobs is in yellow, and the change in employment in professional and business services, which includes everything from accounting to janitorial, is in grey; also included are the CES employment subcategories of jobs in bars and restaurants in light green, and new health care jobs in orange, with non government jobs in education shown in violet...note that jobs added are above the 0 line, with job reductions below it, and that November on the far right is notable in that modest job gains occurred in every sector... (click to enlarge)

FRED Graph

there were also gains in pay and hours worked per week in November; the average workweek for all payroll employees inched up a tenth of a hour to 34.5 hours from 34.4 hours in October and November a year ago, with construction workers and those in resource extraction gaining 0.3 hours to 39.1 hours and 44.5 hours respectively....the manufacturing workweek also increased 0.1 hour to 41.0 hours, and factory overtime at 3.5 hours was up 0.1 hours as well...the average workweek for production and nonsupervisory employees was at 33.6 hours, reversing October's 0.1 hour loss...the average hourly pay for all workers was up 4 cents to $24.15, with utilities workers seeing an 8 cent an hour gain to $35.18 an hour, the highest average pay for any sector, while the lowest paid workers in leisure and hospitality lost 3 cents and hour to average $13.51 / hour...meanwhile, average pay for nonsupervisory workers was up 3 cents to $20.31, with utility linemen again making the most at $32.43 an hour and pay for leisure and hospitality workers again shrinking 5 cents to $11.80 an hour...

Unemployment Falls to 7% as Labor Force Participation Remains Near Record Low

the results from the November household survey, also known as the Current Population Survey (CPS), are difficult to interpret on the basis of a few factors; first, on month to month comparisons, all comparisons to October are relative to the data that was affected by the government shutdown that month, which you'll recall left some 448,000 government employees classified as "unemployed on temporary layoff" and in the confusion may have even had some of them classified as out of the labor force; so some of the November increase in employment here just reflects their return to work; in addition, due to the tight schedule resulting from the Thanksgiving holiday, the household survey's reference period was changed to the week including November 5th, not the week of the 12th as all other surveys normally based on...hence, the October survey was conducted late in that month because of the shutdown, while the November survey was a week early based on the holiday rescheduling...although Census, which conducts the survey for the BLS, likely attempts to control for the variability thus introduced, this just raises another question about the reliability of data which already has a margin of error of +/- 300,000 in the monthly change in the number unemployed, and +/- 0.2% in the unemployment rate...so we'll try to include the two month change where it's appropriate to get something closer to an apples to apples comparison...

FRED Graph

according to the seasonally adjusted household survey, 144,386,000 of us were employed in November, which was an increase of 818,000 from October but just 83,000 more than September; in addition, 10,907,000 of us were classified as unemployed, a reduction of 365,000 from those so classified in October and still a reduction of 348,000 in the unemployed count from September; meanwhile, those unemployed considered 'not in the labor force' and hence not counted when the unemployment rate is figured fell 268,000 in November to 91,273,000, which was nonetheless still 673,000 higher than those "not in the labor force" in September; hence, with 673,000 less of us not counted, the unemployment rate, or the percentage of us still remaining in the labor force who were classified as unemployed, fell to 7.0% in November... with the partial recovery of those in the labor force in November, the labor force participation rate rose from it's record low of 62.8% in October to a 63.0% reading in November; this uptick can be seen in red on our adjacent FRED graph...and with the major increase in employment from October to November, the employment to population ratio, shown in blue, rebounded from 58.3% in October to 58.6% in November, statistically the same as September...in a bit of a reality check on the BLS, we'd note that Gallup's household survey indicated that the Payroll to Population employment rate was unchanged at 43.7% in November, while their seasonally adjusted unemployment rate rose from 7.7% in October to 8.6% in November....

Graph of Of Total Unemployed, Percent Unemployed 27 Weeks and Over

the seasonally adjusted number of us working part time in November rose by 174,000 to 27,452,000; however, the number who reported that they were working part time who indicated they wanted full time work fell 331,000 to 7,719,000; hence, when combined with the decrease in the unemployed count, the alternative measure of unemployment, U-6, which includes those "employed part time for economic reasons", fell from 13.8% to 13.2% in November, a post recession low...there was, however, a jump in the percentage of those unemployed 27 weeks or longer; in October, 36.1% of the unemployed fell into that long term unemployed category; by November, it had risen to 37.3%...this is critical because the extended unemployment rations that were renewed as part of the fiscal cliff deal will be expiring at the end of December, and there is little sign that the republican controlled House would go along with another extension....should they expire, 1.3 million of us will have our rations cut off immediately, and another 800,000 will lose these stipends as their unemployment tier comes up between January and March..the adjacent FRED graph puts this group of long term unemployed in historical perspective; it's quite obvious that never before have so many been unemployed for so long...

Unadjusted Data from November Jobs Reports Continues to Diverge

finally, we want to look at the raw unadjusted employment numbers from these two surveys once again, since last week we noted there was a divergence of nearly 3 million in the unadjusted numbers of employment between the two surveys over the preceding three month period...as we showed at the time, the unadjusted payroll job count from the establishment survey had increased by 1,963,000 over the August to October span, while the count of the employed as reported by the household survey had decreased by 967,000, only to have them brought into approximate alignment by completely different seasonal adjustments applied to each....in November, an additional 421,000 payroll jobs were reported by establishments participating in the CES, which again, for the 4th month running, was cut down by the seasonal adjustments; so we now have seen an actual 2,384,000 increase in payroll jobs over the past four months, despite the seasonal adjustments which put the four month job creation total at 816,000...in the November household survey, individuals reported an actual, unadjusted increase of 631,000 in the number who said they were employed...that was ultimately reported as an increase of 818,000 in the number employed...so unbelievably once again, the seasonal adjustment added employed to the household survey after subtracting jobs from the establishment survey...we'll include our historical FRED graph of the unadjusted jobs data from the two surveys below...what we want to look at is the track over the last 4 months, which shows that payroll jobs in red have increased by 2,384,000 over 4 months to 137,942,000 in November, while the actual count of employed as reported by the household survey before adjustments has decreased by 363,000 to 144,775,000 over the same 4 months...note that we expect the household survey count to be higher, because it includes farm workers and self employed who not part of the payrolls report; the point is that the two surveys have been moving in different directions significantly over 4 months...ie, notice that the blue graph of the employed, which had been relatively hundreds of thousands above the red graph for most of the last five years, has now dipped below the red payrolls graph, which is spiking...sooner or later they must converge; one or both must return to trend...
FRED Graph

3rd Quarter GDP Growth Rate Revised to 3.6% on Massive Inventory Accumulation

as we mentioned in opening, the 3rd quarter GDP was revised from the 2.8% growth rate reported 4 weeks ago to show growth in the 3rd quarter at a 3.6% annual rate, as nominal GDP rose from a seasonally adjusted and annualized $16,661.0 billion in the 2nd quarter to an annualized $16,890.8 billion in the third...as we had discussed previously, several analysts had anticipated an upward revision to 3rd quarter GDP based on higher inventories which were not reported until after the "advance" estimate was released, but no one saw an increase of this magnitude coming....the caveat is that most of the increase, and in fact nearly half of the growth in 3rd quarter GDP, could be attributed to an increase in inventories, which we can think of as that part of the gross national product which has not yet been sold or used in production, which is still sitting on a store shelf or on a skid in a warehouse somewhere, and that eventually those inventories will either have to move or new production will cease….indeed, real final sales of domestic product only rose at a 1.9% rate in the 3rd quarter, compared to the increase of 2.1% in real final sales in the second quarter...note that while 3rd quarter GDP, adjusted for inflation using chained 2009 dollars is the basis of the percentages in this report, we'll use current dollars in any amounts in our coverage...also note that the BEA has provided pdf supplements showing itemized percentage changes from the second to third quarter and itemized contributions to the percentage change in real GDP which are more accessible than the Full Release and Tables pdf...the small insert below is from Ed Dolan and it summaries how each of the components contributed to GDP in last month’s advance estimate on the left, and on the right, how they add up to the current estimate...

real personal consumption expenditures (PCE), which at an annualized $11,522.8 billion in current dollars accounted for over 68.2% of GDP, was originally reported to have grown at a 1.5% annual rate between the second quarter to the third; that has been revised slightly lower to a 1.4% growth rate, with the change in consumer spending marked down a bit in every category; outlays for durable goods, originally reported to have grown at a 4.3% rate, are now revised to a 4.1% increase; spending for nondurable goods, originally seen as having grown at 2.7% rate, was revised to 2.4%, while spending for services, seen as growing at a 0.1% rate last month, is now revised to show a statistically insignificant contraction...on net, this lowered the contribution from PCE to GDP from an originally reported 1.04% to just 0.96%, the lowest personal consumption contribution to GDP since the third quarter of 2009...

gross private investment, when annualized as all GDP data is, accounted for $2,732.6 billion of 3rd quarter GDP in current dollars and grew at a 16.7% annual rate, compared to the original guestimate of a 9.2% rate; again, most of that annualized increase in gross investment was due to the annualized jump of $146.0 billion in private inventories, so while investment is now seen as adding 2.49% to third quarter GDP rather than the 1.45% reported last month, most of that is the result of the revision of inventory's contributions from .83% to 1.68%...meanwhile, fixed private investment grew at a 5.4% rate, a slightly stronger pace than the 4.1% rate estimated last month; which increased the contribution from fixed investment from .63% to .81%...the improvement there was from the non-residential components, as investments in non-residential structures grew at a 13.8% rate over the quarter, a bit better than the 12.3% rate earlier reported and hence added 0.36% to the GDP figure, while investment in equipment, reported last month as having decreased at a 3.7% rate, was actually statistically unchanged from the 2nd quarter...meanwhile, growth in intellectual property  at 1.7% was slightly less than the 2.2% indicated by the advance report and added 0.07%...in addition, the growth in investment in residential property was also less than the 14.6% reported at 13.0%, and hence its contribution to 3rd quarter growth was written down from .43% to .38%...

meanwhile, net exports (exports minus imports) subtracted $501.9 billion from third quarter GDP, as it always subtracts as long as we're running a trade deficit...but in computing the GDP change from the second quarter, the BEA tells us that inflation adjusted exports were up $18.3 billion, or 3.7%, while adjusted imports were down $15.9 billion or 2.7%; exports were originally reported as up 4.5% for the quarter, while imports were originally said to be up 1.9%, so in this second estimate both made the net trade deficit worse than the first estimate; as the change in exports adds to GDP and the change in imports subtracts from it...hence, where exports were seen to have added .60% to the thrid quarter grwoth rate, they're now seen as adding .50%, while imports, which had been thought to have subtracted but .30%, are now seen to have subtracted .43%, for a total negative change of .24% to GDP from trade...

the final component of GDP, real net government consumption and investment, accounted for $3,137.4 billion of 3rd quarter GDP; $1,251.2 billion of that was Federal government outlays, of which $777.3 billion was defense spending, and $1,886.2 billion was state and local government consumption and investment...note that government transfer payments, such as social security, are only accounted for in GDP insofar as they are spent by consumers...originally estimated to have grown at a 0.2% annual rate in the third quarter, this revision now estimates government outlays grew at a 0.4% pace, with Federal spending shrinking only 1.4% rather than the advance estimate of 1.7%, and state and local government outlays increasing at a 1.7% rate rather than the 1.5% rate first reported...as a result of these changes, falling Federal government outlays subtracted 0.10% from GDP, while rising state and local spending and investment added .19% to the 2nd estimate of 3rd quarter growth...

our FRED bar graph below shows the annualized change of each of the major components of GDP, over each quarter since the beginning of 2011, expressed in the billions of the chained 2009 dollars BEA uses to adjust for inflation....those components that contracted in a given quarter are shown below the zero line and subtract from GDP, those that grew during that quarter are above the line and added to GDP; the exception is imports in green, which subtract from GDP, and which we are showing on this chart as a negative, so that when imports shrunk, they appear above the line as an addition to GDP, and when they increase, as they have in the recent quarter, they appear below the zero line...the other components include real personal consumption expenditures, shown in blue and clearly the most consistent contributor to GDP, gross private investment, including structures, equipment and intangibles, shown by the red bars, while exports are shown in purple, the change in private inventories is shown in yellow...lastly, the change in state and local government spending and investment is shown in pink, while the change in Federal government spending and investment is shown in grey...(click to enlarge)

FRED Graph

(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…)