Category Archives: Government Spending

Spending and tax bill, Chicago Fed, CRE lending

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800 billion over 10 years is something, but not enough to turn things around as it’s maybe .25% of GDP per year or so.

Historically it’s taken a good 5% of GDP deficit to reverse a decline, which today means close to a 1T deficit annually.

And interesting how they just jumped all over Trump for his tax plan that they claimed would add 1T to the debt over 10 years…

Massive Spending and Tax Package Leaves Deficit Fears Behind

Congress passed far-reaching legislation Friday to fund the government through September and to extend tax breaks for business and low-income families. They passed a $1.15 trillion government spending bill and approved a multiyear highway funding package. They also ended a Medicare funding cliff and agreed to make permanent tax credits, steps that add more than $800 billion to deficits over the coming decade. The spending bill, which also lifted a 40-year ban on oil exports, won the support of 166 House Democrats and 150 Republicans, a majority of the House GOP.

Another bad one:

Chicago Fed National Activity Index
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Highlights
Subdued inflation pressure over the coming year is the conclusion of the monthly national activity report where the index came in at minus 0.30 in November, below a downward revised minus 0.17 in October and below the low-end Econoday forecast. The negative reading is consistent with below average economic growth, in a reminder that the Fed is raising rates at a time when the economy is far from booming. The 3-month average is at minus 0.20, only marginally improved from October’s revised minus 0.25.

Weakness in exports is a key negative right now for the economy, underscored in a very sharp decrease for the production component to minus 0.27 from minus 0.11. Much of this decline, however, likely reflects the weather-related slowdown in utility output. The consumption & housing component pulled down the index by minus 0.06 points, which however is improved from October’s minus 0.11, while sales/orders/inventories came in little changed at minus 0.02. The only one in the positive zone is employment though this component did slow to plus 0.05 from 0.08.

This doesn’t help GDP growth:

U.S. Banking Regulators Step Up Rhetoric on Commercial Real-Estate Loans

“The agencies have observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards,” said the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. They vowed to “continue to pay special attention to potential risks” in 2016, and said supervisors may ask for banks to raise more capital or take other actions to remedy risks that haven’t been addressed.

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Producer Prices, Retail sales, Business inventories, Atlanta Fed, Debt Ceiling Comment

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Gives the Fed another dovish data point:

PPI-FD
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Highlights
Producer prices show wide weakness and may raise talk that deflationary pressures are building, not easing. The PPI-FD fell 0.5 percent in September which is just below Econoday’s low estimate for minus 0.4. Year-on-year, producer prices are falling deeper into the negative column at minus 1.1 percent. And it’s not all due to energy excluding which and also excluding food, prices fell 0.3 percent though the year-on-year rate is still in the plus column, at plus 0.8 percent but down 1 tenth from August. Excluding food, energy and services, where the latter had been showing price traction, prices still fell 0.3 percent with the year-on-year rate at only plus 0.5 percent.

The services weakness, down 0.4 percent in the month, follows two prior gains of 0.4 percent that had been cited as evidence of resilience in domestic demand. Exports remain very weak at minus 0.8 percent in the month following August’s 0.4 percent decline. September energy prices fell 5.9 percent and are down 23.7 percent year-on-year. Gasoline fell a monthly 16.6 percent for a 42.8 percent year-on-year decline.

Other readings include a 1.3 percent decline for finished goods where the year-on-year rate, following a long string of monthly declines, is down 4.1 percent. This is an important reading that points to pass through of low raw material prices.

Hawks at the Fed are saying that the negative price effects from oil and low import prices will prove temporary. That may be, but the depth of ongoing price weakness continues to sink. Watch for the consumer price report on tomorrow’s calendar.
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This continues to disappoint, no matter how they try to spin it. And total sales do count, as they are also the total income for the sellers, so that’s been slowing as well:

Retail Sales
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Highlights
Weakness at gasoline stations, where low prices are depressing sales totals, continues to exaggerate weakness in retail sales where the headline inched only 0.1 percent higher in September. Gasoline sales fell 3.2 percent in the month, excluding which the headline looks far more respectable at plus 0.4 percent.

And there are plenty of tangible positives in the data including a third straight solid gain for motor vehicles, at plus 1.7 percent in September, and a second straight outsized gain of 0.9 percent for restaurants. Both of these are discretionary categories and point to underlying consumer strength. Clothing stores are also posting strong gains, up 0.9 percent despite negative price effects from lower import prices.

Price weakness is not only pulling down gasoline sales but also sales at food & beverage stores which fell 0.3 percent. But there are signs of consumer retracement in the September report with the general merchandise category, which is very large, down 0.1 percent, and with health & personal care stores unchanged. Building materials fell 0.3 percent with electronics & appliance stores down 0.2 percent.

Looking at adjusted year-on-year rates helps clarify the trends. Excluding gasoline stations, retail sales are up a very respectable 4.9 percent which is well above the less impressive 2.4 percent gain for total sales. Sales at gasoline stations are down a year-on-year 19.7 percent. Leading the positive side are motor vehicles, up 8.8 percent, and restaurants, up 7.9 percent — both robust gains. Core sales, that is ex-auto ex-gas, the year-on-year rate is a moderate plus 3.8 percent for a 1 tenth decline from August.

One of the very biggest positives for the consumer right now, aside from strength in labor demand, is the weakness in pump prices, which however in this report, where dollar totals are tracked and not sales volumes, turns into a negative. Still, the headline is weak and will likely lower third-quarter GDP estimates — but for Fed policy, because the weakness is skewed due to gas prices, the results are harder to assess and may prove neutral.

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Imports have a much lesser effect on the economy:
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This is where the domestic growth has been, which has been about the same growth rate for the last few years:
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And even this is low vs prior cycles:
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Yet another big negative here. Again, it’s the same unspent income story. If agents spent less than their incomes others must have spent more than their incomes or inventory went unsold, which is exactly what’s been happening. And unsold inventory = cuts in output and employment = less income = less spending etc. until some agent starts spending that much more than his income. Most often that’s govt, spending more than its income (deficit spending) on rising unemployment benefits, and experiencing reduced tax revenues in the slow down:

Business Inventories
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Highlights
There’s evidence of economic weakness coming from inventory data where inventories are being kept down but are still building relative to sales. Business inventories were unchanged for a second month in August while sales fell a sizable 0.6 percent, driving up the inventory-to-sales ratio to 1.37 from 1.36.

Inventory downscaling is underway in manufacturing which is being hurt by weak exports. Manufacturing inventories fell 0.3 percent in both August and July against a major sales decline of 0.7 percent in August and a 0.2 percent dip in July. There’s less inventory downscaling, at least right now, among wholesalers where inventories rose 0.1 percent but sales at wholesalers are even weaker, down 1.0 percent in the month. Retail, the third component, is not immune with sales down 0.1 percent but inventories up 0.3 percent.

Inventories are looking heavy which could limit production and employment growth and could emerge as a new concern for the doves at the Fed.

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Revised down again:
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Applying leverage here is, functionally, subversive:

McConnell’s Last Stand: He Wants Medicare, Social Security Cuts to Raise Debt Limit

By Rob Garver

Oct 13 (Fiscal Times) — In case anyone thought things couldn’t get more chaotic on Capitol Hill, Senate Majority Mitch McConnell appears ready to set them straight. McConnell, according to a report first published by CNN, plans to make several major demands of the White House, including changes to Medicare, Social Security, and EPA regulations as his price for raising the nation’s debt limit.

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The Fed’s Sort of Right Move for the Wrong Reasons

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The Fed did not raise rates because the FOMC concluded this was not the time to remove accommodation.

I agree this is not the time to remove accommodation. But I do not agree lower rates and QE are accommodative.

Changing rates shifts income between borrowers and savers, and with the federal debt just over 100% of GDP, the state is a large net payer of interest to the economy. So lowering rates reduces interest income paid by the state to the economy. Therefore that aspect of lowering rates imparts a contractionary bias and, yes, raising rates would impart an expansionary bias. In other words, the Fed has the ‘easing’ and ‘tightening’ thing backwards, and if it wants to impart an expansionary and inflationary bias a rate increase would be in order.

Paying more interest, however, does have distributional consequences, as the additional income paid to the economy goes to those holding government securities. Alternatively, a fiscal adjustment (tax cut and spending increase) directs additional spending power to other constituencies. So the remedies for a weak, deflationary outlook come down to some combination of rate hikes, tax cuts, or spending increases.

And given those choices, I think most of us would vote to leave rates at 0 and either cut taxes or increase public spending.

Additionally, the rate selected by the Fed translates into the term structure of prices presented to the economy, as forward pricing is necessarily a function of Fed rate policy. So in that sense, the term structure of rates put in place by Fed policy *is* the rate of inflation presented to the economy at any point in time.

Let me also add that setting a range for fed funds rather than a single interest rate gives the appearance of ignorance. A combination of paying interest on reserves and a few (reverse) repurchase agreements to pay interest on any residual funds not subject to interest on reserves would both do the trick and improve the optics.

And as for QE, the Fed buying secs is functionally identical to the tsy never having issued them, and instead letting tsy payments remain as reserve balances. That is, QE shifts duration but not quantity, and there is little to no evidence that shifting duration has a material effect on aggregate demand, inflation, or employment.

So while QE is just a placebo, like any placebo, it does impact the decisions of portfolio managers, corporations, central bankers, etc. who believe otherwise.

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Mtg purchase applications, UK industrial production, Saudi visit, US budget deficit

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Purchase apps came in 41% higher than a year ago, but have been going nowhere for several months and now look to be drifting lower, as in any case they remain at seriously depressed levels:

MBA Mortgage Applications
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Highlights
After jumping 17.0 percent in the prior week on a rate-related surge in refinancing applications, the refinance index fell back 10 percent in the September 4 week. The purchase index continues to show much less volatility, down 1.0 percent in the week. Rates were little changed in the week with the average 30-year mortgage for conforming loans ($417,000 or less) up 2 basis points to 4.10 percent.
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Blow up of the last few years. Note the recent decline:
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Great Britain : Industrial Production
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Highlights
The UK goods producing sector significantly underperformed expectations in July. Overall industrial production fell 0.4 percent on the month, matching its June decline, while the key manufacturing sector contracted a hefty 0.8 percent, easily eclipsing a 0.2 percent rise last time.

The monthly fall in manufacturing output reflected decreases in seven of the thirteen reporting subsectors. Within this, the steepest drop was posted by basic metals and metals products (5.7 percent), mainly due to weakness in weapons production which can be very volatile and this alone accounted for half of the overall decline. The second largest negative impact came from transportation equipment which subtracted 0.3 percentage points from monthly growth. However, outside of these categories performances were rather better and in particular there was a solid 5.8 percent gain in pharmaceuticals, in part courtesy of surprisingly buoyant export demand.

Total industrial production found some support from a 0.4 percent monthly increase in the volatile mining and quarrying subsector together with rises in electricity, gas, steam and air conditioning (1.3 percent) as well as in water and waste management (0.5 percent).

The latest data leave overall goods production in July 0.6 percent below its second quarter average and, on the same basis, manufacturing output down some 0.9 percent. The August manufacturing PMI (51.5) was less than bullish and while last month probably saw kind of a rebound, it looks as if industrial production will not provide much of a boost to real GDP growth this quarter. Whether the Fed tightens or not this month, there is still little pressure on the BoE MPC to hike any time soon.

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What little growth we do get only tightens the noose further as govt’s net contribution to aggregate demand is further reduced. For 2014 the US economy was supported by oil related capital expenditures that ended when prices collapsed late last year, and so far year I’ve seen nothing stepping up to replace it, apart from increases in unsold inventories and accounting for the new health care premiums as an increase in personal consumption. With the federal deficit now below that of the euro area the rest of the US economy is likely heading in that direction as well:

CBO: Fiscal 2015 Federal Deficit through August more than 10% below Last Year

More good news … the budget deficit in fiscal 2015 will probably decline more than 10% compared to fiscal 2014.

From the Congressional Budget Office (CBO) today: Monthly Budget Review for August 2015

The federal government’s budget deficit amounted to $528 billion for the first 11 months of fiscal year 2015, the Congressional Budget Office estimates. That deficit was $61 billion smaller than the one recorded during the same period last year. Revenues and outlays were both higher than last year’s amounts, by 8 percent and 5 percent, respectively. Adjusted for shifts in the timing of certain payments (which otherwise would have fallen on a weekend), the deficit for the 11-month period decreased by $42 billion.

In its most recent budget projections, CBO estimated that the deficit for fiscal year 2015 (which will end on September 30, 2015) would total $426 billion, about $59 billion less than the shortfall in fiscal year 2014. …
The Treasury will run a surplus in September, and it appears the deficit for fiscal 2015 (ends in September) will be below 2.4% of GDP.

The Treasury will run a surplus in September, and it appears the deficit for fiscal 2015 (ends in September) will be below 2.4% of GDP.

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macro update

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Saudis remain price setter:

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Main theme: deflationary biases

Greece is a deflationary event, as EU aggregate demand is further restricted, with no sign of any possibility of fiscal relaxation.

Oil fell as Saudis increased discounts, further reducing global capex and related asset prices.

US oil production that gets sold counts as GDP, and for Q3 both production and prices look to be lower. Yes, the lower price also reduces the deflator, but the fall in the price of oil relative to other prices reduces GDP.

The decline in oil prices has also directly lowered income earned from oil sales, royalties, etc. plus ‘multipliers’ as that lost income would have been ‘respent’ etc. This loss has been at least 1% of GDP and completely ignored by analysts who have been over forecasting growth by several % since oil prices declined.

And the more than 50% decline in drilling due to the lower prices = declining production as oil (and gas) output from existing wells declines over time. This means both less GDP and higher imports, a negative bias for the dollar.

Trade flows remain euro friendly and are taking over the price action, and trade will continue to put upward pressure on the euro until the trade surplus is reversed.

The stronger euro vs the dollar initially helps US stock psychology via earnings translations, etc. but hurts euro zone stocks, exports, GDP, etc. reversing this year’s growth forecasts. And a weaker euro zone economy is also a negative for the US.

Oil capex is down and not coming back until prices rise, and the US budget deficit is down further as well, and I see nothing else stepping up to replace the reduced private and public deficit spending that was offsetting the demand leakages (unspent income) inherent in the institutional structure that grows continuously. So unlike last year, when oil capex did the heaving lifting, I expect any bounce in Q2 gdp from Q1 to be modest and transitory.

The Fed may raise rates some not because of the state of the economy, but due to fears that current policy somehow risks some kind of financial instability. No discussion, of course, that Japan has had a 0 rate policy for over 20 years with perhaps the highest level of financial stability in the history of the world, perhaps indicating that a 0 rate policy promotes financial stability…

Employment seems to have begun to decelerate as well, with fewer new jobs each month and claims beginning to rise.

Unlike the last recovery that ended suddenly with a financial crisis that cut off credit, this one is ending with a fall off in aggregate demand from oil capex due to the Saudis cutting oil prices, so the sequence of events has not been the same. But, as always, it’s just a simple unspent income story.

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Sanders endorsement, Greece, Passenger transportation services index

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A bit of press for my endorsement of Bernie Sanders for President after a chat with Stephanie Kelton which included how they’ve been working together on his economic agenda.

Warren Mosler – An International Leader in Modern Monetary Theory Endorses Bernie Sanders

Varoufakis completely misses the point.

First, the only way public debt, for all practical purposes, need be ‘paid back’ is via refinance.

Second, with the implied guarantee of the ECB’s ‘do what it takes’ policy, rates are down and market forces not applicable for those members ‘in good standing’ and not at risk of losing that ECB support.

Third, Greece, and the entire euro zone, is in desperate need of larger deficits/more public debt, either through tax reductions or spending increases (that choice is political). So even if Greece ‘wins’ on all points currently being negotiated the economy still deteriorates, just at a slower pace.

Fourth, if Greece attempts to go to drachma or any kind of ‘parallel currency’, based on discussion I’ve heard and read, it will most likely be a case of out of the frying pan and into the fire. The expertise required to do it right is not evident at any level.

Varoufakis demands slash to Greek debt

June 15 — Greek finance minister Yanis Varoufakis said that his country desperately needed some of its debts written off if it is ever to pay anything back.

“Only [with debt cuts] can we guarantee the repayment of as much of our debt as possible and actually deliver,” Varoufakis told Bild on Monday.

He claimed that he would immediately agree to further financial aid from the country’s creditors – which he and Prime Minister Alexis Tsipras have until now resisted due to the harsh conditions attached to it – if some of Greece’s debts could be cancelled

Another index in decline:
passenger-trans-services

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Federal Deficit below last year

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The budget deficit is now looking too small to sustain growth, as evidenced by the incoming data over the last 6 months. The problem is, as always, unspent income- aka demand leakages- must be offset by agents spending more than their incomes or the output goes unsold. And collapsing GDP growth and rising inventory ratios are telling me that’s it’s been happening ever since the price of oil collapsed, ending the shale related capex, with nothing yet stepping up to fill that spending gap.

At the same time, the Federal govt is going the other way as, reducing the amount that it’s spending in excess of taxation. Additionally, with the current tax structure, if there is any pick up in growth from private sector credit expansion it will cause the federal deficit to further decline, which will require that much more private sector deficit spending to support growth. That’s why the tax structure and transfer payment structure are called ‘automatic fiscal stabilizers’. And, of course, if the economy does stall, the Fed will get the blame for ending QE and more recently allowing longer term rates to rise…

CBO: Fiscal 2015 Federal Deficit through May about 10% below Last Year

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macro update

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At the beginning of 2013 the US let the FICA tax reduction and some of the Bush tax cuts expire and then in April the sequesters kicked totally some $250 billion of proactive deficit reduction. This cut 2013 growth from what might have been 4% to just over half that, peaking in Q3 and then declining to negative growth in Q1, due to the extremely cold winter. Forecasts were for higher growth in 2014 as the ‘fiscal headwinds’ subsided. GDP did resume after the weather improved, though not enough for 2014 to look much different from 2013. And with the fall in the price of oil in Q4 2014, forecasts for Q1 2015 were raised to about 4% based on the ‘boost to consumers’ from the lower oil prices. Instead, Q1 GDP was -.7%. The winter was on the cold side and the consumer had been saving instead of spending the savings from lower gas prices. And the forecasts for Q2 were for about 4% growth based on a bounce back and consumers now spending their gas savings. Most recently Q2 forecasts have been reduced with the release of Q2 data.

My narrative is that we learned the extent of capex chasing $90 in Q4 after the price fell in half. It seemed to me then that it had been that capex that kept 2013 growth as high as it was and was responsible for the bounce from Q1 2014 as well as the continued positive growth during 2014 up to the time the price of oil dropped and the high priced oil related capex came to a sudden end.

By identity if any agent spend less than his income another must have spent more than his income or the output would not have been sold. So for 2012 the output was sold with govt deficit spending where it had been, and when it was cut by some $250 billion in 2013 some other agent had to increase it’s ‘deficit spending’ (which can be via new debt or via depleting savings) or the output would have been reduced by that amount. Turns out the increase in oil capex was maybe $150 billion for 2013 and again in 2014, best I can tell, and this was sufficient to keep the modest growth going while it lasted. And when it ended in Q4 that spending (plus multipliers) ended as well, as evidenced by the sudden decline in GDP growth. And so far the Q2 numbers don’t look like they’ve increased much, if any, since Q1. And to do so will take an increase in ‘borrowing to spend’ that I can’t detect. Of course, I missed the surge in oil capex last year, so there could be something this year I’m missing as well.

When oil prices dropped I pointed out three things-

1. Income saved by buyers of oil equaled income lost by sellers, so the benefit to total spending was likely to be small and could be negative, depending on propensities to save and to spend on imports. And yes, some of the sellers of oil were ‘non residents’, but that was likely to reduce US exports, and cuts in global capex could reduce US exports as well.

2. Lost capex was a direct loss of GDP, plus multipliers, both domestically and globally.

3. Deflation in general is highly problematic for lenders, and tends to reduce private sector credit expansion in general.

To me this meant the drop in oil prices was an unambiguous negative. And in the face of universal expectations (including the Fed) that it was a positive, which can be further problematic.

Euro Zone

Forecasts are for modestly improving growth largely due to the weak euro driving exports. However, the euro is down from massive foreign CB selling, probably due to fears of ECB policy and the Greek saga. This technical selling drove the euro down and the euro area 19 member current account surplus up, absorbing the euro the portfolios were selling. Once the portfolio selling subsides- which it will as euro reserves are depleted and short positions reach maximums- the trade flows continue, which then drives the euro up until those trade flows reverse. In other words, the euro appreciates until net exports decline and the anticipated GDP growth fades. And there is nothing the ECB can do to stop it, as rate cuts and QE works only to the extent it frightens portfolio managers into selling, etc.

Also, ironically, a Greek default would fundamentally strengthen the euro as Greek bonds are nothing more than euro balances in the ECB system, and a default is a de facto ‘tax’ that reduces the holdings of euro net financial assets in the economy, making euro that much ‘harder to get’ etc.

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claims, producer prices, euro comments, public sector jobs

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Just a reminder, claims measure those losing jobs who file for benefits, not new hires:

Jobless Claims
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The euro has been moving higher vs the dollar, as CB selling winds down as they reach the lower limits of their reserve targets along with fundamental support from a large and growing EU current account surplus that’s drained those euro sold by those CB’s and other sellers from global markets. This may have left the short sellers and others needing to recover euro allocations subject to a dramatic short squeeze for as long as the current account surplus continues. And this poses an extreme risk to the EU. Growth forecasts have been largely based on ‘weak euro’ and as it moves higher that growth never materializes, and instead the economy deteriorates/unemployment goes higher, etc. etc. and, making matters worse, the ECB is left ideologically bankrupt, having seen negative rates and QE do nothing more than exacerbate the deflation they were trying to reverse. All they can do is try more of the same, which will be a very depressing environment for those who have been suffering under the failed policies. All of which has the potential to accelerate the already growing support for the various anti euro forces.
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Yes, President Obama wins the Tea Party trophy for downsizing government:
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