This was up 7.2% for Q3 from Q2 and should revert:
Exports of goods were up 7.5% and should revert:
(this chart hasn’t been updated today but it’s very close)
Near stall speed through Q3:
The monthly number just reported a blip up but the growth rate remains low and slowing, and it looks a lot worse when you take out the top 1% of course:
This is from the Dec 5 release:
This is the release from earlier today.
(These are not inflation adjusted):
Personal Income growth remains anemic, particularly when the distribution of income gains is factored in. The gain in consumer spending was all durable goods, which has already reversed as per today’s earlier release.
Personal Income and Outlays
Highlights
The consumer sector continues to improve with gains in income and spending but inflation remains weak. Personal income advanced 0.4 percent in November after growing 0.3 percent in October. The wages & salaries component increased 0.5 percent, following a gain of 0.3 percent the month before.
Personal spending grew 0.6 percent, following 0.3 percent in October.
Strength was in durables which jumped 1.6 percent, following a rise of 0.3 percent in October. Nondurables were unchanged in November after decreasing 0.3 percent the prior month. Services improved 0.6 percent after rising 0.4 percent in October.
PCE inflation continues to be weak-largely due to lower energy costs. Headline inflation posted at a minus 0.2 percent on a monthly basis, following no change in October. Core PCE inflation was flat in November, following a 0.2 percent rise in October.
On a year-ago basis, headline PCE inflation eased to 1.2 percent in November from 1.4 percent the prior month. Year-ago core inflation came in at 1.4 percent in November compared to 1.5 percent in October. Both series remain below the Fed goal of 2 percent year-ago inflation.
Overall, the consumer sector is slowly improving even though inflation is below the Fed’s goal. In fact, lower gasoline prices are improving discretionary income and boosting spending elsewhere.
FHFA prices for home sales were up as the number of cheaper distressed sales declined.
Still looking like the cycle has peaked.
Yet another reversal from a blip up in Q3, and new home sales are a contributor to GDP, so this should cause more downward revisions to Q4 GDP
New Home Sales
Highlights
Like yesterday’s existing home sales report, today’s report on new home sales came in below low-end expectations, down 1.6 percent in November to an annual sales rate of 438,000 vs expectations for 460,000 and Econoday’s low-end estimate for 440,000.
Also like yesterday’s existing home sales report, price data show weakness with the median price down 3.2 percent in the month to $280,000. Year-on-year, the median price is up only 1.4 percent which, in what at least doesn’t point to an imbalance, is largely in line with year-on-year sales which are down 1.6 percent.
Supply data are stable with 213,000 new homes on the market vs 210,000 in October. Supply relative to sales is up slightly, to 5.8 months from 5.7 and 5.5 months in the prior two months. Regional sales data show declines in 3 of 4 regions including the South, which is larger than all other regions combined in this report, and a gain in the West.
Housing had been showing some life going into the fourth quarter but the readings on November have been a surprising disappointment and won’t be good reading for the nation’s builders.
Richmond Fed Manufacturing Index
Highlights
Activity has picked up this month in the Richmond’s Fed manufacturing district, to 7 from 4 in November. New orders show relative strength, at 4 vs November’s 1, but are still on the soft side. Order backlogs, however, show outright contraction for a second month, at minus 5 vs minus 2 in November.
Shipments show relative strength to November, at 5 vs 1, but, like new orders, are still on the soft side. A definitive sign of strength, however, comes from employment which is up 3 points to a very solid 13 in a reading that points to underlying confidence among the region’s manufacturers. Price data are soft in line with declining fuel costs.
Early readings on December’s manufacturing activity are mixed with today’s report and last week’s report from Kansas City pointing to slight acceleration for December but the reports from the New York and Philly Feds, along with the PMI national flash report, pointing to softness. Reports on November have also proven mixed with last week’s industrial production report showing outstanding strength in contrast to this.
At her press conference Janet Yellen stated that the net effect of the drop in oil prices is that of a tax cut, and therefore supportive of US output and employment.
My take is that the cuts in spending due to both the equal income lost by oil producers as well as the reduced ‘borrowing to spend’/credit expansion results in a net reduction of aggregate demand of hundreds of $ billions.
The Fed spends over $100 million on research, which is more than double what I spend, so take that into consideration as well.
So it makes sense for the markets to go with the Fed, which would mean stocks go back through the highs, and rates rise in anticipation of Fed rate hikes as the ‘oil tax cut’ does its thing to accelerate sales/output/employment.
;)
Brent crude held steady above $61 a barrel on Thursday, bringing a sharp drop in prices to a temporary halt as companies are forced to cut upstream investments around the world.
Chevron has put a plan to drill for oil in the Beaufort Sea in Canada’s Arctic on hold indefinitely, while Marathon Oil cut its capital expenditure for next year by about 20 percent.
Canadian oil producers also deepened 2015 spending cuts, as Husky Energy, MEG Energy and Penn West Petroleum joined those hacking back capital budgets in response to tumbling crude prices.
My RT interview starts at the 4 min mark.
The cut it into segments that will appear at a later date.
Crude pricing
The Saudis are the ‘supplier of last resort’/swing producer. Every day the world buys all the crude the other producers sell to the highest bidder and then go to the Saudis for the last 9-10 million barrels that are getting consumed. They either pay the Saudis price or shut the lights off, rendering the Saudis price setter/swing producer.
Specifically, the Saudis don’t sell at spot price in the market place, but instead simply post prices for their customers/refiners and let them buy all they want at those prices.
And most recently the prices they have posted have been fixed spreads from various benchmarks, like Brent.
Saudi spread pricing works like this:
Assume, for purposes of illustration, Saudi crude would sell at a discount of $1 vs Brent (due to higher refining costs etc.) if they let ‘the market’ decide the spread by selling a specific quantity at ‘market prices’/to the highest bidder. Instead, however, they announce they will sell at a $2 discount to Brent and let the refiners buy all they want.
So what happens?
The answer first- this sets a downward price spiral in motion. Refiners see the lower price available from the Saudis and lower the price they are willing to pay everyone else. And everyone else is a ‘price taker’ selling to the highest bidder, which is now $1 lower than ‘indifference levels’. When the other suppliers sell $1 lower than before the Saudi price cut/larger discount of $1, the Brent price drops by $1. Saudi crude is then available for $1 less than before, as the $2 discount remains in place. Etc. etc. with no end until either:
1) The Saudis change the discount/raise their price
2) Physical demand goes up beyond the Saudis capacity to increase production
And setting the spread north of ‘neutral’ causes prices to rise, etc.
Bottom line is the Saudis set price, and have engineered the latest decline. There was no shift in net global supply/demand as evidenced by Saudi output remaining relatively stable throughout.
The Global Economy
If all the crude had simply been sold to the highest bidder/market prices, in a non monetary relative value world the amount consumed would have been ‘supply limited’ based on the real marginal cost, etc. And if prices were falling do to an increased supply offered for sale, the relative price of crude would be falling as the supply purchased and consumed rose. This would represent an increase in real output and real consumption/real GDP(yes, real emissions, etc.)
However, that’s not the case with the Saudis as price setter. The world was not operating on a ‘quantity constrained’ basis as the Saudis were continuously willing to sell more than the world wanted to purchase from them at their price. If there was any increase in non Saudi supply, total crude sales/consumption remained as before, but with the Saudis selling that much less.
Therefore, with the drop in prices, at least in the near term, output/consumption/GDP doesn’t per se go up.
Nor, in theory, in a market economy/flexible prices, does the relative value of crude change. Instead, all other prices simply adjust downward in line with the drop in crude prices.
Let me elaborate.
In a market economy (not to say that we actually have one) only one price need be set and with all others gravitating towards ‘indifference levels’. In fact, one price must be set or it’s all a ‘non starter’. So which price is set today? Mainstream economists ponder over this, and, as they’ve overlooked the fact that the currency is a public monopoly, have concluded that the price level exists today for whatever ‘historic’ reasons, and the important question is not how it got here, but what might make it change from today’s level. That is, what might cause ‘inflation’. That’s where inflation expectations theory comes in. For lack of a better reason, the ‘residual’ is that it’s inflation expectations that cause changes in the price level. And not anything else, which are relative value stories. And they operate through two channels- workers demanding higher wages and people accelerating purchases. Hence the fixation on wages as the cause of inflation, and using ‘monetary policy’ to accelerate purchases, etc.
Regardless of the ‘internal merits’ of this conclusion, it’s all obviated by the fact that the currency itself is a simple public monopoly, rendering govt price setter. Note the introduction of monetary taxation, the basis of the currency, is coercive, and obviously not a ‘market expense’ for the taxpayer, and therefore the idea of ‘neutrality’ of the currency in entirely inapplicable. In fact, since the $ to pay taxes and buy govt secs, assuming no counterfeiting, ultimately come only from the govt of issue, (as they say in the Fed, you can’t have a reserve drain without a prior reserve add), the price level is entirely a function of prices paid by the govt when it spends and/or collateral demanded when it lends. Said another way, since we need the govt’s $ to pay taxes, the govt is, whether it knows it or not, setting ‘terms of exchange’ when it buys our goods and service.
Note too that monopolists set two prices, the value of their product/price level as just described above, and what’s called the ‘own rate’/how it exchanges for itself, which for the currency is the interest rate, which is set by a vote at the CB.
The govt/mainstream, of course, has no concept of all this, as inflation expectations theory remains ‘well anchored.’ ;)
In fact, when confronted, argues aggressively that I’m wrong (story of my life- remember, they laughed at the Yugo…)
What they have done is set up a reasonably deflationary purchasing program, of buying from the lowest bidder in competition, and managed to keep federal wages/compensation a bit ‘behind the curve’ as well, partially indexed to their consumer price index, etc.
And consequently, govt has defacto advocated pricing power to the active monopolist, the Saudis, which explains why changes in crude prices and ‘inflation’ track as closely as they do.
Therefore, the way I see it is the latest Saudi price cuts are revaluing the dollar (along with other currencies with similar policies, which is most all of them) higher. A dollar now buys more oil and, to the extend we have a market economy that reflects relative value, more of most everything else. That is, it’s a powerful ‘deflationary bias’ (consequently rewarding ‘savers’ at the expense of ‘borrowers’) without necessarily increasing real output.
In fact, real output could go lower due to an induced credit contraction, next up.
Banking
Deflation is highly problematic for banks. Here’s what happened at my bank to illustrate the principle:
We had a $6.5 million loan on the books with $11 million of collateral backing it. Then, in 2009 the properties were appraised at only $8 million. This caused the regulators to ‘classify’ the loan and give it only $4 million in value for purposes of calculating our assets and capital. So our stated capital was reduced by $2.5 million, even though the borrower was still paying and there was more than enough market value left to cover us.
So the point is, even with conservative loan to value ratios of the collateral, a drop in collateral values nonetheless reduces a banks reported capital. In theory, that means if the banking system needs an 8% capital ratio, and is comfortably ahead at 10%, with conservative loan to value ratios, a 10% across the board drop in assets prices introduces the next ‘financial crisis’. It’s only a crisis because the regulators make it one, of course, but that’s today’s reality.
Additionally, making new loans in a deflationary environment is highly problematic in general for similar reasons. And the reduction in ‘borrowing to spend’ on energy and related capital goods and services is also a strong contractionary bias.
UPDATE: Saudi Arabia cuts all oil prices to U.S., Asia – Bloomberg (OIL)
Dec 4 — Saudi Arabia cuts all oil prices to U.S. and Asia, according to Bloomberg headlines.
UPDATE: Reports have the message issued by Saudi Aramco — the state-owned oil and gas giant — now recalled.
The stock market is happy on the false assumption that bad news means lower rates from the Fed which is good for profits, but that’s another story…
Income and spending weak, and prices soft as the Fed continues to fail on at least that part of its mandate:
Personal Income and Outlays
Highlights
Personal income continues a modest uptrend but spending slipped on volatile auto sales and lower gasoline prices. Personal income advanced 0.2 percent in September, following a 0.3 percent gain in August. Analysts projected a 0.3 percent gain for September. The wages & salaries component increased 0.2 percent, following a 0.5 percent boost the prior month. Averaging the wage gains leaves consumer basic income moderately healthy.Analysts botched their forecast for spending for September-and for no apparent reason. Personal spending declined 0.2 percent after jumping 0.5 percent in August. The latest figure came in below market expectations for a 0.1 percent rise. Weakness was in the durables component which fell 2.0 percent after a 2.1 percent jump in August, reflecting swings in auto sales. Lower gasoline prices pulled down on nondurables. Nondurables spending declined 0.3 percent after falling 0.4 percent in August. Services firmed 0.2 percent, following a 0.5 percent spike in August.
PCE inflation remains soft. The September figure matched expectations for a 0.1 percent increase and followed a dip of 0.1 percent in August. Core PCE inflation rose 0.1 percent in September, following a gain of 0.1 percent in August and equaling expectations.
On a year-ago basis, headline PCE inflation held steady at 1.4 percent in September. Year-ago core inflation was 1.5 percent in both September and August. The Fed doves will not be in a rush to boost policy rates early next year.
Note how after tax cpi adjusted income- purchasing power- keeps ratcheting down:
And wonder why you don’t hear much about this?
Employment Cost Index
Working its way higher, but still very low, particularly in light of productivity increases. And with profit margins at a new record high of 13%, almost double the norm, there’s
plenty of room for wages to increase before pressuring prices.
Manufacturing chugging along:
First look, which tends to get revised substantially as more info is released.
Consumption looks discouraging, especially longer term, and it appears to be at ‘stall speed’:
You can see how after tax income keeps ratcheting down:
Wages used to go up faster with growth, but seems not this time:
Prices getting further from Fed’s 2% target, not closer: 
I got this email supporting the idea that bank credit expansion has been at the expense of non bank lenders, with low total credit growth.
As previously discussed, I don’t see the credit growth necessary to sustain the 3%+ GDP growth being forecast. Instead, I see the q1 negative growth and H1 total growth of only 1.2% as indicative of the underlying trend.
Warren: With respect to the recent “surge” in bank credit, please see below info that I prepared from Z.1. I recall you once suggesting that the expansion in bank credit may be attributed to banks taking share from non-bank lenders. Based on below table and graphs, that appears to be the case. When you combine bank and non-bank lenders (what I refer to as “Bank & Non-Bank Finance”), growth in credit market assets is essentially zero/nominal over recent periods, and you can see the recent increase in bank credit appears to be largely offset by a decrease in non-bank credit. Most non-banks are essentially “agents” of banks in my opinion so should view together for macro perspective. Note below that my definition of “Adjusted Credit Market Assets” is the FRB’s definition plus money market, rev repo and security credit. Not sure if this is the “correct” way to view things and I could be way off base but figured may be worth passing along. Also, for the “Insurance & Inv Mgmt” Sectors, I think the growth there may support your demand leakage narrative (but excludes equities). Thx
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There is no right time for the Fed to raise rates!
Introduction
I reject the belief that economy is strong and operating anywhere near full employment. I also reject the belief that a zero-rate policy is inflationary, supports aggregate demand, or weakens the currency, or that higher rates slow the economy and reduce inflation. Additionally, I reject the mainstream view that employment is materially improving, the output gap is closing, and inflation is rising and returning to the Fed’s targets.
What I am asserting is that the Fed and the mainstream have it backwards with regard to how interest rates interact with the economy. They have it backwards with regard to both the current health of the economy and inflation, and, therefore, their discussion of appropriate monetary policy is entirely confused and inapplicable.
Furthermore, while I recognize that raising rates supports both aggregate demand and inflation, I am categorically against raising rates for that purpose. Instead, I propose making the zero-rate policy permanent and supporting demand with a full FICA tax suspension. And for a stronger price anchor than today’s unemployment policy, I propose a federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment. Together these proposals support far higher levels of employment and price stability.
So when is the appropriate time to raise rates? I say never. Instead, leave the fed funds rate at zero, permanently, by law, and use fiscal adjustments to sustain full employment.
Analysis
My first point of contention with the mainstream is their presumption that low rates are supportive of aggregate demand and inflation through a variety of channels, including credit, expectations, and foreign exchange channels.
The problem with the mainstream credit channel is that it relies on the assumption that lower rates encourage borrowing to spend. At a micro level this seems plausible- people will borrow more to buy houses and cars, and business will borrow more to invest. But it breaks down at the macro level. For every dollar borrowed there is a dollar saved, so any reduction in interest costs for borrowers corresponds to an identical reduction for savers. The only way a rate cut would result in increased borrowing to spend would be if the propensity to spend of borrowers exceeded that of savers. The economy, however, is a large net saver, as government is an equally large net payer of interest on its outstanding debt. Therefore, rate cuts directly reduce government spending and the economy’s private sector’s net interest income. And looking at over two decades of zero-rates and QE in Japan, 6 years in the US, and 5 years of zero and now negative rates in the EU, the data is also telling me that lowering rates does not support demand, output, employment, or inflation. In fact, the only arguments that they do are counter factual- the economy would have been worse without it- or that it just needs more time. By logical extension, zero-rates and QE have also kept us from being overrun by elephants (not withstanding that they lurk in every room).
The second channel is the inflation expectations channel. This presumes that inflation is caused by inflation expectations, with those expecting higher prices to both accelerate purchases and demanding higher wages, and that lower rates will increase inflation expectations.
I don’t agree. First, with the currency itself a simple public monopoly, as a point of logic the price level is necessarily a function of prices paid by government when it spends (and/or collateral demanded when it lends), and not inflation expectations. And the income lost to the economy from reduced government interest payments works to reduce spending, regardless of expectations. Nor is there evidence of the collective effort required for higher expected prices to translate into higher wages. At best, organized demands for higher wages develop only well after the wage share of GDP falls.
Lower rates are further presumed to be supportive through the foreign exchange channel, causing currency depreciation that enhances ‘competitiveness’ via lower real wage costs for exporters along with an increase in inflation expectations from consumers facing higher prices for imports.
In addition to rejecting the inflation expectations channel, I also reject the presumption that lower rates cause currency depreciation and inflation, as does most empirical research. For example, after two decades of 0 rate policies the yen remained problematically strong and inflation problematically low. And the same holds for the euro and $US after many years of near zero-rate policies. In fact, theory and evidence points to the reverse- higher rates tend to weaken a currency and support higher levels of inflation.
There is another aspect to the foreign exchange channel, interest rates, and inflation. The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.
Finally, I see the output gap as being a lot higher than the mainstream does. While the total number of people reported to be working has increased, so has the population. To adjust for that look at the percentage of the population that’s employed, and it’s pretty much gone sideways since 2009, while in every prior recovery it went up at a pretty good clip once things got going:
The mainstream says this drop is all largely structural, meaning people got older or otherwise decided they didn’t want to work and dropped out of the labor force. The data clearly shows that in a good economy this doesn’t happen, and certainly not to this extreme degree. Instead what we are facing is a massive shortage of aggregate demand.
Conclusion
There is no right time for the Fed to raise rates. The economy continues to fail us, and monetary policy is not capable of fixing it. Instead the fed funds rate should be permanently set at zero (further implying the Treasury sell only 3 month t bills), leaving it to Congress to employ fiscal adjustments to meet their employment and price stability mandates.
First this, supporting what I’ve been writing about all along:
Here’s Proof That Congress Has Been Dragging Down The Economy For Years
By Shane Ferro
Oct 8 (Business Insider) — In honor of the new fiscal year, the Brookings Institution released the Fiscal Impact Measure, an interactive chart by senior fellow Louise Sheiner that shows how the balance of government spending and tax revenues have affected US GDP growth.
The takeaway? Fiscal policies have been a drag on economic growth since 2011.
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And earlier today it was announced that August wholesale sales were down .7%, while inventories were up .7%. This means they produced the same but sold less and the unsold inventory is still there. Not good!
Unfortunately the Fed has the interest rate thing backwards, as in fact rate cuts slow the economy and depress inflation. So with the Fed thinking the economy is too weak to hike rates, they leave rates at 0 which ironically keeps the economy where it is. Not that I would raise rates to help the economy. Instead I’ve proposed fiscal measures, as previously discussed.
Fed Minutes Show Concern About Weak Overseas Growth, Strong Dollar (WSJ) “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,” according to the minutes. “Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk.” “Several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions,” the minutes said.
The case for patience strengthens yet further by a consideration of the risks around the outlook. Across GS economics and markets research, we have recently cut our 2015 growth forecasts for China, Germany, and Italy, noted the continued weakness in Japan, and made a further upgrade to our already-bullish dollar views. So far, our analysis suggests that the spillovers from foreign demand weakness and currency appreciation only pose modest risks to US growth and inflation. But at the margin they amplify the asymmetric risks facing monetary policy at the zero bound emphasized by Chicago Fed President Charles Evans. If the FOMC raises the funds rate too late and inflation moves modestly above the 2% target, little is lost. But if the committee hikes too early and has to reverse course, the consequences are potentially more serious given the limited tools available at the zero bound for short-term rates.
Germany not looking good:
German exports plunge by largest amount in five-and-a-half years (Reuters) German exports slumped by 5.8 percent in August, their biggest fall since the height of the global financial crisis in January 2009. The Federal Statistics Office said late-falling summer vacations in some German states had contributed to the fall in both exports and imports. Seasonally adjusted imports falling 1.3 percent on the month, after rising 4.8 percent in July. The trade surplus stood at 17.5 billion euros, down from 22.2 billion euros in July and less than a forecast 18.5 billion euros. Later on Thursday a group of leading economic institutes is poised to sharply cut its forecasts for German growth. The top economic priority of Merkel’s government is to deliver on its promise of a federal budget that is in the black in 2015.
UK peaking?
London house prices fall in Sept. for first time since 2011: RICS (Reuters) The Royal Institution of Chartered Surveyors said prices in London fell for the first time since January 2011. The RICS national balance slid to +30 for September from a downwardly revised +39 in August. The RICS data is based on its members’ views on whether house prices in particular regions have risen or fallen in the past three months. British house prices are around 10 percent higher than a year ago, and house prices in London have risen by more than twice that. Over the next 12 months, they predict prices will rise 1 percent in London and 2 percent in Britain as a whole. Over the next five years, it expects average annual price growth of just under 5 percent.
British Chambers of Commerce warns of ‘alarm bell’ for UK recovery (Reuters) “The strong upsurge in manufacturing at the start of the year appears to have run its course. We may be hearing the first alarm bell for the UK,” said British Chambers of Commerce director-general John Longworth. The BCC said growth in goods exports as well as export orders for goods and services was its lowest since the fourth quarter of 2012. Services exports grew at the slowest rate since the third quarter of 2012. Manufacturers’ growth in domestic sales and orders slowed sharply from a record high in the second quarter to its lowest since the second quarter of 2013. However, sales remained strong in the services sector and confidence stayed high across the board.
Not to forget the stock market is a pretty fair leading indicator.
Some even say it causes what comes next:
