doesn’t look too bad?

Highlights:

Consumer Sentiment Improves For 1st Time In 6 Months

Industrial Production Index Rose To Record 110.2 In February

March Department Store Sales Fall 1.2% On Year

Supply Of Tokyo Office Space To Drop 40%: Survey

BOJ Cuts Assessment On 8 Of 9 Regional Economies

Shirakawa Keeps Weak Economic Outlook, No Hint On Rate Action

Govt Holds Economic Assessment, Says Japan’s Recovery ‘Pausing’

BOJ Rate Cut Speculation Losing Momentum In Money Market

Labor Shortage Pushed Workers 65 Or Older Above 2mn In ’07

Japan On 11% Economic Growth Pace For ’08 In Dollar Terms

Forex: Dollar Firm At Mid-102 Yen Level On Eased U.S. Financial Turmoil

Stocks: Weaker Yen Lifts Nikkei For 4th Straight Day

I’ve been thinking that when the Fed turns its attention to inflation it will find itself way behind that curve, which it is by any mainstream standard, and that the curve then gets negative from a year or two out as markets anticipate rate hikes followed by falling inflation and rate cuts.

Didn’t know exactly how it would get from here to there, how long it would take or exactly when it would happen.

I never thought the Fed would let it go this far. Especially Governor Kohn, who has been through this before in the 1970s with Burns, Miller, and Volcker. This FOMCs inflation tolerance lasted a lot longer than I expected, even with a weak economy and perceived systemic risk.

Won’t be long before the mainstream comes down hard on this FOMC for letting the inflation cat out of the bag with a high risk, untested, counter theory strategy of aggressively cutting into a triple negative supply shock. The mainstream will see it as a ‘hail Mary’ move. If it works, fine, if not it was a foolish error with a major price to pay to fix it.

Maybe they just got what will turn out to be overconfident in their inflation fighting ability. Kind of a ‘we know how to do that and can do it anytime’ attitude.

Wrong. They will soon find out it is not so easy.

Maybe they got confused and saw the tail risk as that of the gold standard era when there were real supply side constraints to money to deal with.

Also, they probably blamed the whole 1970′s thing on labor unions; so, maybe they got blind sided this time because they thought without unions wages would be ‘well contained’ and therefore there would be no inflation.

Wrong on that score as well. It was about oil before, and it is about oil now.

And the fact is, they have no tools for fighting inflation. They think they do (hiking rates), but higher rates just make it worse by raising costs and jacking up rentier incomes. (Incomes of savers who do not work or produce = more demand and no supply)

The inflation broke in the early 80′s only because of a supply response of about 15 million barrels of crude per day that buried OPEC and caused prices to collapse for almost 20 years. (And even during the 20 years of low oil prices and falling imported prices inflation still averaged around 3%.)

That kind of supply response is not going to happen in the near future. I expect the Saudis to keep hiking and inflation to keep getting worse no matter what the Fed does. It is payback time for them from being humiliated in the 1980s, and they are also at ideological war with us whether we know it or not.

Markets might have a false start or two with the interest rate response and flattening curve, just to not make it too easy.

Also, as before, there could be an equity pullback when it is sensed the Fed is going to seriously fight inflation with hikes designed to keep a sufficient output gap to bring inflation increases down.

And along the way everything goes up, including housing prices, during a major cost push inflation. Even with low demand. Just look at all the weak emerging market nations that have had major inflations with weak demand, high rates, etc. etc.

• Initial Jobless Claims
• Continuing Claims
• Leading Indicators
• Philadelphia Fed.

---

Initial Jobless Claims (Apr 12)

Survey	375K
Actual	372K
Prior	357K
Revised	355K

Not impossible that this spike to over 400,000 might be ending, much like in 2005, this time with help from a fiscal package and and government spending moved forward from 2007 to 2008.

---

Continuing Claims (Apr 5)

Survey	2950K
Actual	2984K
Prior	2940K
Revised	2958K

This lags the claims a bit, and could go further, but still not looking like recession type levels

---

Leading Indicators (Mar)

Survey	0.1%
Actual	0.1%
Prior	-0.3%
Revised	n/a

The future is starting to look a touch better, and the Fed uses ‘forward looking’ models.

---

Philadelphia Fed. (Apr)

Survey	-15.0
Actual	-24.9
Prior	-17.4
Revised	n/a

Philadelphia Fed. TABLE

The Phili area is still in a ‘soft spot’ with only prices paid showing real strength.

Twin themes remain from Q2 06: weakness and higher prices.

“Inflation is a problem,” she said. Yet the problem isn’t excessive demand, rising wages, or a tight labor market, but “negative supply shocks.” Once the shocks wear off, the inflation rate can’t be sustained in the long run without a pick-up in wage growth, she said.

“There’s no textbook answer to what monetary policy should be doing at this time,” Yellen added.

Yes, there is – the mainstream says quite clearly ‘don’t add to demand during a negative supply shock. Or a triple negative supply shock. That will monetize the price increases and turn a relative value story into an inflation story.’

The FF rate is now below the year over year headline and core CPI; so, it’s easy for the Fed to now make the case the ‘real rate’ is negative and cutting it any could adversely alter long term employment and growth given the balance of risks between market functioning, inflation, and the output gap.

They also think they know that if markets are expecting a 25 basis point cut they need to do less than that to get a positive inflation response.

And, as before, they need to set a rate for the TAF and accept any bank legal collateral to be able to more effectively target LIBOR as desired.

• MBA Mortgage Applications
• Bloomberg Global Confidence
• Consumer Price Index
• Housing Starts
• Building Permits
• Industrial Production
• Capacity Utilization

---

MBAVPRCH Index (Apr 11)

Survey	n/a
Actual	381.6
Prior	384.7
Revised	n/a

Holding in its new, lower range.

---

MBAVREFI Index (Apr 11)

Survey	n/a
Actual	2866.0
Prior	2724.7
Revised	n/a

Doing ok in this prime time for resets, which are peaking and then falling off.

---

Bloomberg Global Confidence (Apr)

Survey	n/a
Actual	14.54
Prior	13.08
Revised	n/a

Still down, but signs of a bottom.

---

In my humble opinion, inflation is ripping, and the Fed’s in a very bad place. April’s food and energy price hikes, along with hosts of others, and the weaker USD all are pointing to an upward surge for prices on a forward looking basis.The Fed’s forecasting models should be showing higher inflation as well.And futures markets continue to be an unreliable forecasting tool for the Fed.

Consumer Price Index MoM (Mar)

Survey	0.3%
Actual	0.3%
Prior	0.0%
Revised	n/a

CPI Ex Food & Energy MoM (Mar)

Survey	0.2%
Actual	0.2%
Prior	0.0%
Revised	n/a

Consumer Price Index YoY (Mar)

Survey	4.0%
Actual	4.0%
Prior	4.0%
Revised	n/a

CPI Ex Food & Energy YoY (Mar)

Survey	2.4%
Actual	2.4%
Prior	2.3%
Revised	n/a

From Karim:

Headline/Core divergence->limited passthrough

• Headline 0.343% and stays at 4% y/y

• Core rises 0.152% (after 0.04% last month), showing limited pass-through from headline and even more limited pass-through from wholesale level (PPI from yday).

• Core rises from 2.3% to 2.4%, equates to about 1.9-2.0% on core PCE basis due to measurement differences

• Food up 0.2% and gas up 1.3%

• OER up 0.2%, apparel down 1.3%, vehicles down 0.1%

• Lodging away from home down 0.6% and medical up only 0.1%, a bit below trend

---

Housing starts not looking good. The glimmer of hope is that prior months have been revised up for the last two reports, so there’s a chance this number could be revised substantially as well.

Housing Starts (Mar)

Survey	1010K
Actual	947K
Prior	1065K
Revised	1075K

Building Permits (Mar)

Survey	970K
Actual	927K
Prior	978K
Revised	984K

From Karim:

Housing data shows drag continuing with at least the same intensity

• Starts down 11.9%, boding poorly for current GDP

• Permits down 5.8%, boding poorly for future GDP

• Best news is not adding to inventories

---

Industrial Production (Mar)

Survey	-0.1%
Actual	0.3%
Prior	-0.5%
Revised	-0.7%

May be due to exports, which are keeping GDP and employment muddling through

---

Capacity Utilization (Mar)

Survey	80.3%
Actual	80.5%
Prior	80.9%
Revised	80.3%

Staying too high for the typical recession.

Says it all about politics:

Fuel Choices, Food Crises and Finger-Pointing

by Andrew Martin

Senator Charles E. Grassley, Republican of Iowa, called the recent criticism of ethanol by foreign officials “a big joke.” He questioned why they were not also blaming a drought in Australia that reduced the wheat crop and the growing demand for meat in China and India.

“You make ethanol out of corn,” he said. “I bet if I set a bushel of corn in front of any of those delegates, not one of them would eat it.”

• Producer Price Index
• Empire Manufacturing
• NAHB Housing Market Index
• ABC Consumer Confidence

---

Producer Price Index MoM (Mar)

Survey	0.6%
Actual	1.1%
Prior	0.3%
Revised	n/a

PPI Ex Food & Energy MoM (Mar)

Survey	0.2%
Actual	0.2%
Prior	0.5%
Revised	n/a

Producer Price Index YoY (Mar)

Survey	6.2%
Actual	6.9%
Prior	6.4%
Revised	n/a

PPI Ex Food & Energy YoY (Mar)

Survey	2.8%
Actual	2.7%
Prior	2.4%
Revised	n/a

Producer Price Index TABLE

Inflation ripping.

From Karim:

Headline/Core divergence continues

• Headline up 1.1% m/m and 6.9% y/y

• Core up 0.2% m/m and 2.7% y/y

• Food (+1.2%) and gas (+1.3%) lead the way up, computers (-3.2%) and passenger cars (-0.2%) lead the way down.

• Intermediate and crude pressures remain intense, rising 2.3% and 8.0% respectively for the month

• Further margin squeeze likely to put further downward pressure on capex, especially in light of weak economy and credit conditions (see below)

Empire jumps from -22.2 to 0.6. Index quite volatile and 10-20 point moves per month the norm as of late.

6mth expectations deteriorate from 25.8 to 19.6.

• Shipments show largest jump from -5 to +17 (for current conditions)

• Employment and average workweek both extremely weak

• Capex intentions fall from 18 to 11.5

---

Empire Manufacturing (Apr)

Survey	-17.0
Actual	0.6
Prior	-22.2
Revised	n/a

Survey is colored by subjective recessions fears bouncing back some.

---

NAHB Housing Market Index (Apr)

Survey	20
Actual	20
Prior	20
Revised	n/a

Still looks to me like a bottom.

---

ABC Consumer Confidence (Apr 13)

Survey	n/a
Actual	-39
Prior	-34
Revised	n/a

Still looking weak. Much like an export economy

As a point of logic seems their best move is to try to pressure the Fed to stop cutting.

Highlights:

ECB’s Stark, Ordonez Say 4% Key Rate May Not Contain Inflation

French Government Will Lift Minimum Wage by 2.3% on May 1

French annual inflation jumps to 17-year high

Italian inflation jumps to highest level since 1996

German Investor Confidence Unexpectedly Fell in April

Ed says:

Warren,

Isn’t it also true that the US export boom is less a result of the weaker dollar, so much as it is the cause? Foreigners using the trade surplus dollars they were previously content to save, are now spending them, and the shopping list is sizable. In this sense, all the dollars we have been exporting for years are coming home to roost, and that explains a good chunk of the inflation we are seeing.

Ed

I agree the cause is foreigners switching as a sector from wanting to accumulate USD to not wanting to accumulate them, and therefore spending them.

However, I see the market forces working as follows:

The first desire is ‘not to save’ which drives the USD down either until the $ is somehow low enough where they want to save it again, which doesn’t make sense to me, or until the USD is low enough for them to spend them here, which makes a bit more sense to me.

And the other force is the decreased desire to export to us which is evidenced by higher import prices.

Last, this is all inflationary, and inflation is the other channel for getting rid of a trade gap.

For an extreme example, if there is sufficient inflation for the minimum wage to go to $60 billion per hour, the real trade gap is suddenly down to only an hour of labor, though still nominally at 60 billion.

The combination of rising net exports, falling imports, and inflation are all working together right now to digest the sudden shift from CBs and monetary authorities away from buying USD financial assets.

Fiscal adjustment checks start going out in a couple of weeks.

Rest of govt. spending going up as well.

GDP should muddle through and inflation continue to accelerate.

It may dawn on the Fed that the weak dollar is hurting the financial sector as the consumer is being squeezed by food/energy prices and therefore having trouble making loan payments. That’s the price of sticky wages, at least this time around.

Foreign CBs have no option regarding world currency stability but to try to put pressure on the Fed to stop cutting.

Seems no end to the stupidity that continues to spew out from all kinds of places.

You’d think the ratings agencies would have learned their lesson with Japan – downgraded below Botswana and still funded JGB’s at under 1% for years until the BOJ raised rates.

And last I saw ten year US credit default was around ten basis points?

I had a discussion with S&P years ago. Seem to remember a name ‘David’?

He seemed to sort of grasp that operationally governments with their own (non convertible) currencies and floating fx policies aren’t revenue constrained, but obviously didn’t quite get it when they downgraded Japan.

The eurozone is another issue, where they have downgraded national governments and that does mean something regarding risk, just like the US States, but with no legal safety net by the Federal authorities like the US. Fortunately the eurozone banking system hasn’t been tested, yet.

Simple trade: sell US credit default, buy Germany, for example.

US credit rating under threat

by Aline van Duyn

The US government’s need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country’s triple-A credit rating, Standard & Poor’s, the credit rating agency, said on Monday.

In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3 per cent of GDP, S&P said.

“The size of GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating,” the S&P report said.

The S&P comments come amid increased pressure for better regulation of the mortgage financiers, especially as their role in the US housing market is likely to increase as they are used to provide support for struggling homeowners.

Policymakers are pushing for Fannie Mae, Freddie Mac and the lesser-known Federal Home Loan Banks to pump liquidity into the US mortgage market and this has prompted regulators to call for stronger oversight of such institutions.

Fannie Mae, Freddie Mac and the Federal Home Loan Banks have become the backbone of the troubled US mortgage market as purely private sources of finance have all but dried up or are offered only at punitive terms.

In the second half of 2007, about 90 per cent of new mortgage funding was provided by GSEs. They have about $6,300bn of public debt and mortgage securities outstanding, more than the $5,100bn of outstanding US government debt.

Fannie Mae and Freddie Mac have no formal state guarantees but investors believe the US government would step in if the system got into trouble. This allows the agencies to raise funds at very low rates against a triple-A credit rating, in spite of high levels of leverage.

The capital surplus ratio for GSEs was recently reduced to 20 per cent from 30 per cent, allowing them to operate on a more leveraged basis.

In January, Moody’s Investors Service, another credit rating agency, said the US could risk its triple-A rating within a decade unless soaring healthcare costs and social security spending was curbed.

Advance Retail Sales (Mar)

Survey	0.0%
Actual	0.2%
Prior	-0.6%
Revised	-0.4%

Retail Sales Less Autos (Mar)

Survey	0.1%
Actual	0.1%
Prior	-0.2%
Revised	-0.1%

Retail Sales YoY

Survey	n/a
Actual	2.0%
Prior	2.9%
Revised	n/a

Down, but not yet at ‘traditional’ recession levels, particularly with exports as strong as they are.

Retail Sales TABLE

From Karim:

Recent trend intact and in line with confidence surveys:

Nominal gwth zero for Q1 consumer spending

• March retail sales +0.2%, +0.1% ex-autos, 0.0% ex-gas, and +0.2% for control group (autos, gas, and building materials)

• Building materials down 1.6% shows housing decline continues to exert impact

• Following items also negative: electronics -0.4%, furniture -0.3%, clothing -0.5%. Food +0.4% and gas +1.1%, lead the way.

• Despite minor upward revision to February, 3mth annualized rate of change 0.0% for overall retail sales and -2.2% for retail sales ex-gas.

---

Business Inventories (Feb)

Survey	0.6%
Actual	0.6%
Prior	0.8%
Revised	0.9%

Business Inventories YoY

Survey	n/a
Actual	5.2
Prior	4.9
Revised	n/a

Inventories still very low for a recession, if we are in one.

(an email)

>
>   On Sun, Apr 13, 2008 at 11:41 PM, Craig wrote:
>
>   Ok. So then it seems to me that it’d be a big change
>   for foreigners to panic on USD assets. Not saying it
>   couldn’t happen, but it’d need a big catalyst. In the
>   mean time, I suppose foreigners will peck away,
>   the dollar will do what it does and purchasing power
>   parity will provide some elastic limits on downside.
>
>   True?
>
>   Craig
>
>

Ironically, the ‘fundamentals’ of the $ are pretty good – purchasing power parity is good, the govt deficit is relatively small, and the relatively difficulty of getting $US credit helps as well.

But the technicals remain extremely negative (we’ve cut off the traditional buyers) CBs, monetary authorities, and chunks of our own pension funds.

So it’s not so much as concern about ‘foreigners’ in general, but specifically CBs and monetary authorities no longer accumulating perhaps $50 billion a month, and no one else stepping in to replace them, so instead the $ goes to a level where the trade gap goes away.

And that level of the $ can be anywhere, as while the correction process is ‘using’ the level of the $ to get the trade gap to 0, the trade gap is not that strong/precise a function of the level of the dollar.

It’s an example of a ‘cold turkey’ adjustment (the sudden cut off of all the $ accumulators at once) with no prior thought to the subsequent adjustment process, apart from the limited understanding that it would somehow drive exports, and the mistaken notion that exports are a ‘good thing.’

I do think the rest of the G7 thinks the ‘answer’ for the G7 is to convince the Fed to stop cutting rates.

As I mentioned a while back, the Fed has become an international ‘outlaw’ seemingly prodding the world to follow it in an international race to the bottom regarding inflation. It started the game ‘who inflates the most wins’ with their ‘beggar they neighbor’/mercantilist weak/$ policy to ‘steal’ (or maybe in the way the Fed sees it ‘reclaim’) world agg demand and support US gdp with US exports at the expense of foreign gdp.

Now it seems this policy is backfiring. The weak $ has seemingly raised food/energy prices for the US consumer, weakening the financial sector as less income is available for debt service as well as other consumption, and while exports have helped it’s only been enough to muddle through. And US inflation is sprinting ahead as well.

So the Fed rate cuts have not been seen to have helped the financial sector, the consumer, nor the US economy in general.

The Fed is being seen as destabilizing the world’s economy, weakening the US financial sector, depressing US consumer demand, depressing foreign domestic demand, and driving US to dangerous levels.

Once again it seems it’s being demonstrated that weakening your currency and inflating your way out of debt is not a road to prosperity.

And world markets are pricing in further US rate cuts.

Good morning!

Warren

My take on the USD:

It was at a level based on foreigners wanting to accumulate $70 billion per month which also = the US trade gap (accounting identity).

Most of that desire to accumulate came from foreign CBs trying to support their exporters, oil producers accumulating USD financial assets, and foreign portfolios allocating some percentage of assets to USD assets.

Paulson cut off the CBs calling the currency manipulators and outlaws.

Bush cut off the oil producers by being perceived to be conducting a holy war.

Bernanke scared off the portfolio managers with what looks to them like an ‘inflate your way out of debt’ policy.

And US pension funds are diversifying out of USD into passive commodities and foreign securities.  Looks to me like the desire to accumulate USD overseas is falling towards zero rapidly.

This means they sell us less and buy more of our goods, services, and our real assets.

Volumes’ of non oil imports are falling and of oil imports are flat.

The dollar has gotten low enough for the trade gap to fall from over $70 billion to under $60 billion per month (February was an aberration IMHO).

The dollar will ‘adjust’ until it corresponds with a trade gap that = desired foreign accumulation of USD financial assets.

I see no reason to think the trade gap should not go to zero.

The USD probably has not traded down enough to reflect the zero desire to accumulate USD abroad.

The ECB has serious ideological issues regarding buying of USD.  Not the least of which they don’t want to give the impression that the USD is ‘backing’ the euro, which would be the appearance if they collected USD reserves.

The ECB has an inflation problem, and they believe the strong euro has kept it from being much worse.

The policy ‘shift’ might be the process of ending of US rate cuts at the next meeting by cutting less than expected.

This might first mean only a 25 basis point cut when the market prices in 50 basis points, followed by no cut when markets price in 25 basis points, for example.

This would firm the USD and soften the commodities near term, as after the last 75 basis point cut when markets were pricing 100 basis points.

But this does not change the foreign desires to accumulate USD as direct intervention by the ECB would, for example.

So the adjustment process that gets us to a zero trade gap will continue.

And it will continue to drive up headline CPI with core not far behind.

And US GDP will muddle through in the 0% to +2% range with weak private sector consumption being supported by exports, US government consumption, and moderate investment.

On the current food shortages and protests created by biofuels (as feared):

The mainstream ‘Malthusian’ world is one where the population grows to the size of the food supply.

Now we have a new twist on that theme.

The monetary system burns up the food supply as fuel to the point where the marginal agent facing starvation has sufficient political influence to stop this process.

The first phase is happening as politicians around the world are allocating more funds to people who can’t afford to eat.

This only drives up the price further as markets continue to allocate by price, with no sign of a sufficient supply response to keep many from starvation.

In fact, newly emerging nations are producing income distributions that allow their higher income groups to reduce the aggregate food supply by both consuming more fuel and also by increasing meat consumption.

I expect a lot worse before it gets better.

Import Prices from China

This came out earlier today. To me it’s the current day version of ‘unit labor costs’ as much of what used to be US labor content is now sourced in China.

‘Globalization’ has turned from a deflationary to an inflationary influence for the US.

Import Price Index MoM (Mar)

Survey	2.0%
Actual	2.8%
Prior	0.2%
Revised	n/a

Import Price Index YoY (Mar)

Survey	13.7%
Actual	14.8%
Prior	13.6%
Revised	13.4%

This is a very strong inflation channel.

---

U. of Michigan Confidence (Apr P)

Survey	69.0
Actual	63.2
Prior	69.5
Revised	n/a

From Karim:

• Michigan survey takes out low from 1990-91 recession; prior lowest point was March 1982. Decline was from 69.5 to 63.2

U. of Michigan Survey since 1980

Interesting how low ‘confidence’ is in light of how much better GDP and employment is doing now vs then.

Part of it is the rising influence of the media, and part are the factors behind the export boom that are causing us to consume less and instead export more of our own output.

The channel this time around is rising costs for food and energy take away the purchasing power power needed to buy the rest of our output, and foreigners get to consume it instead via US exports.

• 5-10yr inflation expectations move to higher end of recent range

5yr Ahead Inflation Expectations

Yes, it’s part of the equation, as above, and the FOMC ‘knows’ it can’t allow inflation expectations to elevate.

While the Fed gives the 5 year more weight, it also watches the one year, particularly when it spikes.

1 yr Inflation Expectations

In today’s report the one year survey hit 4.8%, they highest since one 4.8% reading in 1990. The only time it’s been higher was during the ‘great inflation’ of the 70′s- early 80′s.

• Worsening confidence also visible in job leavers component of employment report-% of workers who voluntarily leave their jobs (chart 3). Tends to rise when times are good and vice-versa. When declining, tends to be associated with lower wage growth and core CPI (an important piece of the output gap argument).

Other comments from Michigan survey make from grim reading:

• There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than fifty-year history of the survey.

• Consumers expected gains in their nominal incomes of just 1.0% in April, the smallest gain expected in three decades.

• Three-in-four consumers expected bad times financially in the overall economy during the year ahead, the largest proportion recorded since 1980, and the fourth highest proportion in more than fifty years.

• A record 41% of all home owners reported that their home had lost value during the past year
• Just 5% of all consumers expected the unemployment rate to decrease in the year ahead, the smallest proportion ever recorded.

• Uncertainty about future income and job prospects has had a devastating impact on buying plans, with consumers citing these uncertainties three times as frequently as they did a year ago. Purchase plans for furniture, appliances, home electronics, and similar goods fell to their lowest level since the 1990 recession, with one-third of all consumers specifically mentioning their uncertainty about jobs and incomes as their primary reason. Vehicle buying plans also fell to their lowest level since the 1990 recession, with one-third of all consumers citing uncertainty about jobs and incomes as well as the future price of gasoline.

That’s the Bernanke vision as per his latest congressional testimony- less consumption and more exports and investment. Looks good, feels bad.

While revenue growth is slowing, it is still positive.

Might be the suspected 2007 spending that was moved forward to 2008 that is helping spending increase so much and support GDP into the election. And the new fiscal package kicks in soon as well.

Government spending, this year, should top $3 trillion – still a modest percent of GDP by world standards.

Federal budget deficit at all-time high for first half

by Martin Crutsinger

The federal deficit through the first half of this budget year is at an all-time high, underscoring the pressure the budget is coming under as the overall economy slumps.

The Treasury Department reported Thursday that the deficit through the first six months of the budget year totaled $311.4 billion (euro196.2 billion), up 20.5 percent from the same period a year ago. That was the largest deficit for the first half of a budget year on record, surpassing the old six-month mark of $302 billion set in 2006.

The Bush administration, when it sent its budget proposal to Congress in February, estimated that the deficit for the whole year will total $410 billion (euro258.3 billion), putting it very close to the all-time high in dollar terms of $413 billion (euro260.2 billion).

However, private economists are forecasting a much bigger deficit, reflecting the U.S.’s current economic problems and a $168 billion (euro105.83 billion) stimulus package that Congress has passed in an effort to jump-start growth. Rebate checks will be mailed to 130 million households starting next month in an effort to boost consumer spending and make sure that any downturn is short-lived and mild.

The Treasury’s monthly budget report showed that revenues for the first six months of the budget year, which began on Oct. 1, totaled $1.146 trillion (euro720 billion), up 2.2 percent from last year. However, government spending was up by a much faster 5.7 percent, rising to $1.457 trillion (euro920 billion). Both the spending and the revenues were records for the first six months of a budget year.

The difference between revenues and spending left a deficit of $311.4 billion (euro196 billion), compared to a deficit for the same period in the 2007 budget year of $258.4 billion.

Inflation ripping:
Oil up, grains and commodities up, and dollar down, as continued US demand at higher prices for energy transfers more $US to foreigners who don’t want to accumulate them.

Weakness continues:
Stocks down and credit spreads looking wider, and claims lower but have nonetheless worked their way higher since year end and only rising exports keep GDP at ‘muddling through’ levels.

Interest rates down:
As markets continue to believe Fed won’t even begin to act vs inflation, and will do ‘whatever it takes’ to narrow the output gap to zero, in total contrast to mainstream economic theory.

US Trade Deficit SA

It is sending USD overseas that have lost appeal and are driving the USD down to levels where they get spent here, hence the falling trade deficit.

(an interoffice email)

>
>   On Wed, Apr 9, 2008 at 4:05 PM, Pat wrote:
>
>   What about the continued allocation increases from non-end
>   users of commodities? From what I’ve read allocations by
>   pensions have gone higher even with the rising prices as well
>   as a whole host of new entrants (ETFs, HF’s, etc…) Are these
>   compounding the problem or are they the root of the
>   commodity price inflation?
>
>

passive commodities are part of the landscape for sure:

1. put upward pressure on competitive commodity spot prices
2. put downward pressure on the $
3. add to gdp
4. in general, help ‘monetize’ saudi crude price hikes
5. put upward pressure on crude futures
6. serves no public purpose