GDP and corporate earnings

As previously discussed, stocks don’t need a lot of GDP growth to do moderately well.
Even with weak GDP numbers, high unemployment, a week consumer, weak housing, higher crude prices, moderating export markets, near 0 rates, QE, and a major earthquake in Japan, earnings for the first half of 2011, corporate earnings on average were pretty good.

So if govt. isn’t forced to go cold turkey to a balanced budget which could cause stocks to fall out of control, stocks could do well.

Risks remain, however, including the very real possibilities of trouble in the euro zone and China.


Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan

Agents already anticipating lost income from looming spending cuts

MBA Mortgage applications decreased last week: The Market Composite Index decreased 5.0%, The Refinance Index decreased 5.5%, and the Purchase Index decreased 3.8%. The refinance share decreased to 69.6% from 70.1, and the ARM share increased to 6.1% from 5.8%. The average 30-year rate increased to 4.57% from 4.54% and the average 15-year rate increased to 3.67% from 3.66%.

Durable Good Orders decreased 2.1% in June to a seasonally adjusted $191.98 billion, led by a 8.5% decrease in transportation equipment. Orders excluding volatile transportation equipment increased 0.1% after a 0.7% gain.
Federal Reserve Bank of Chicago Manufacturing Index was down 0.1% in June to 84.0 from May as higher steel and machinery production partially countered a decline among auto makers.

Profits and wages

Couple of things.

First, corporations currently have low propensities to spend their income, so this means we need a deficit that much larger than otherwise.

Second, this goes back to the ‘labor market’ not being what’s called a ‘fair game’.
That’s because people have to work to eat, while business only hires if it can make a desired rate of profit. So game theory tells us that real wages will stagnate without some form of external support:

Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

 
In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.
The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007- 2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.

http://economix.blogs.nytimes.com/2011/06/30/the-wageless-profitable-recovery/

ECB debt buying plan suffers fresh setback

ECB debt buying plan suffers fresh setback

Another silly headline that completely misses the point of monetary operations.

The ‘debt buying plan’ is a purely technical move to do what is called ‘offset operating factors’ as a means to hitting the ECB’s interest rate targets.

The quantity of securities offered to do this is entirely inconsequential. As always, for a central bank, the monopoly supplier of net reserves for its currency of issue, it’s about price (interest rates) and not quantities. And the only possible ‘inflationary impact’ is via the interest rate channels:

(FT) — The European Central Bank faced embarrassment on Tuesday after failing for a second consecutive week to neutralise fully the inflationary impact of funds it had spent buying government bonds to combat the region’s debt crisis. On Tuesday, the ECB was due to reabsorb €76bn – the total amount spent under the bond-buying programme so far. But banks only offered €62bn. Last week, the ECB had also failed to reabsorb the required amount. In total, such operations have failed five times in the past year.

The latest setback was the result of higher market interest rates, which deterred banks from parking funds at the ECB. It could fuel ECB nervousness about its bond buying.

Europe Services, Manufacturing Growth Accelerated in April

(Bloomberg) — European services and manufacturing growth accelerated in April. A composite index based on a survey of euro-area purchasing managers in both industries rose to 57.8 from 57.6 in March, Markit Economics said. That’s in line with an initial estimate on April 19.

They call the above an acceleration, I suppose because it fell in March:

The euro-area services indicator fell to 56.7 from 57.2 in March, Markit said, below a preliminary reading of 56.9 released last month. The manufacturing gauge increased to 58 from 57.5. In Germany, which has fueled the region’s recovery, a manufacturing indicator rose to 62 from 60.9 in March, while a services gauge slipped to 56.8 from 60.1.

Europe Retail Sales Decline Most in Almost a Year on Oil

Note the ‘and government austerity measures’ didn’t make the headline:

(Bloomberg) — European retail sales declined the most in almost a year in March as higher oil prices and government austerity measures curbed consumer spending. Sales in the 17-nation euro region fell 1 percent from the previous month after a revised 0.3 percent increase in February. March sales dropped 1.7 percent from a year earlier. Among services companies, “expectations for their activity levels in 12 months’ time slipped for the second successive month to reach a six-month low,” Markit said in a report. German retail sales declined 2.1 percent in March from February, when they fell 0.4 percent, today’s Eurostat report showed. In France, sales dropped 1 percent. Spanish sales fell 1.4 percent, while Ireland saw a 0.6 percent increase.

GS Skinny: The Administration’s New Fiscal Proposals

The President’s proposal is now looking anemic at best.

Like I think Woody Allen once said, the food was bad and the portions were small.

This will cost the Dems even more seats in November.

Fortunately the federal deficit is already large enough to support a bit of modest growth.

All looking very L shaped to me, with a hint of growth.

Gasoline consumption has recovered and showing signs of growth year over year, but very modest.

Modest recoveries from the lows and leveling off.

Continued modest improvement from the lows

Manufacturing, the smaller component of GDP, led from very low levels

Looking very L shaped.

These are March numbers, June should be out soon and show further balance sheet repair as deficit spending continues are relatively high levels, adding income and net financial assets to the non govt. sectors.

Lots of signs of leveling off at modest levels of top line growth.

Waiting for the handoff to private sector credit expansion as balance sheets repair, or another fiscal adjustment.

GS Skinny: The Administration’s New Fiscal Proposals
(CLEARED FOR EXTERNAL USE)

September 7, 2010

The White House has announced three new measures to stimulate growth: 100% up-front depreciation of capital investments; a permanent and slightly expanded R&D tax credit; and $50 bn in infrastructure spending. They could be helpful but are unlikely to have a large effect on growth for four reasons: (1) some of them cover multiple years, spreading out the fiscal impulse; (2) the incremental effect is smaller than the headline numbers imply, as some are modifications of existing proposals or policies and one is essentially an interest free loan; (3) the president proposes offsetting the cost of some of the proposals with targeted corporate tax increases of an equal amount; and (4) the likelihood of enactment of some of these proposals is low.

Key points:

1. Bonus depreciation. The president proposes to allow companies to deduct 100% of the cost of capital investments (not including real estate) made in 2010 and 2011. Press reports cite White House estimates that the proposal would lower corporate tax receipts by $200bn. However, almost all of this revenue loss would be temporary, since the additional deductions taken now would lower deductions in future years, effectively making this an interest free loan. Given current low levels of capacity utilization, the benefit of additional investment is low to begin with. Our previous analysis indicated that the 50% bonus depreciation provision effective for 2008 and 2009 had a relatively small effect on investment. To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near term effect should be even more modest (and indeed the effect in early 2012 would be negative). Whatever effect the provision would have would also be weakened somewhat by the proposal to raise corporate tax revenues (through closing of “loopholes”) to offset the proposal’s cost.

2. R&D Tax credit. The president is expected to propose to increase and make permanent the research and development tax credit, at a cost of $100bn over ten years. This proposal is somewhat less than meets the eye, since the president has already proposed to make the credit permanent at a cost of $80bn. This leaves an incremental proposal worth around $20bn, or $2bn per year. Nevertheless, enactment of this proposal would be helpful on the margin, since the existing R&D credit lapsed at the end of last year and has yet to be renewed by Congress.

3. Infrastructure. The president proposes to spend $50bn on transportation infrastructure projects, as part of a six-year plan. We take this to mean a front-loading or incremental investment on top of the six-year reauthorization of surface transportation spending programs that has been pending in Congress for most of the year. For context, a $50bn addition to infrastructure spending is roughly on par with the investments made in that sector in the 2009 Recovery Act. If enacted, this could provide an important boost to growth, particularly in 2011. However, the likelihood of enactment in the near term appears low. Also, offsetting the otherwise positive effect is the proposal to offset the entire cost with the repeal of tax incentives for oil and gas companies.

4. Process from here. There are two likely scenarios for consideration of the tax-based measures. First, the Senate will vote on small business legislation next week, which already includes a 50% depreciation bonus for 2010. This provision could simply be modified, to bring it into line with the president’s depreciation proposal, in which case it could be enacted in the next few weeks. The second scenario is that the tax measures could be added to upcoming legislation to extend the expiring 2001/2003 tax cuts, which will be debated in late September. Adding corporate tax cuts to that legislation might allow Democratic leaders to attract enough votes for passage without extending the upper-income tax rates that most Republicans support. However, given that legislation’s uncertain prospects, adding these measures to it could also risk delaying enactment until after the November election. Infrastructure spending would be dealt with separately from the tax measures; the most likely scenario is that it could be considered after the election as part of the next stop-gap extension of the highway program, which expires December 31.

PCE/Personal Income

Very good, looks like continuing muddling through with moderate growth unemployment drifting lower in a few months when there are no more hours to add to the existing labor force.

Welcome to Japan, Mr. US bond market?

Ok market for stocks, especially with Euro zone risk fading. Just China h2 risk left, seems.


Karim writes:

PCE data today was encouraging and showed the positive impact of hours on labor income.

Personal income up 0.4% with wage and salary income up 0.5%.

Personal spending up 0.3% and headline deflator unchanged, so strong advance in real consumption spending.

For all the slowdown fears, real private sector demand will be stronger in Q2 than Q1.

Core deflator up .162%, largest advance in 7mths. Recent divergence from core CPI (PCE data has been firmer) reflective of lower weight of housing in PCE data.

Not saying inflation is picking up, just that deflation fears seem overblown.

the President’s speech and markets


[Skip to the end]

The speech made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road. The spending freeze will pay half of it over time, and the rest from less specified sources that included tax increases for people making over 250,000, banks, etc. The health care plan is also supposed to reduce the deficit and paygo may be back.

And no additional fiscal relaxation of consequence apart from the current jobs bill working its way through congress.

The jobs initiatives mentioned were minor.

And rather than come up with a way for congressman inherently uncooperative due to the current institutional structure, there was simply a call for them to somehow act in the public interest.

So it looks like the economy is on its own for the most part, with an agonizingly slow and irregular recovery, and neither side coming up with substantially better ideas.

This isn’t a bad environment for stocks, as there’s nothing to suggest negative earnings shocks, and productivity gains can keep supporting at least modest earnings growth, and high unemployment helps keep down costs, and helps keep interest rates low which helps valuations.

The announced export push would be a negative for our standard of living and real terms of trade, but pretty good for stocks as well.

And clearly there’s nothing more the Fed can do, as it’s becoming increasingly clear the moves they have already made have had no positive impact on aggregate demand. They have only restored ‘market functioning.’

Removing some of their liquidity measures does mean there’s again a chance the pressures will appear in libor settings if something starts shaking the tree.

Like Greece, or Iran, or something like that.

Each time the President speaks I’m hoping for some meaningful new ideas but have yet to hear any.

But, again, not a bad environment for stocks, and interest rate forwards continue to look reasonably cheap as well, particularly as concerns about QE and 0 rates as causes of inflation subside.


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