Category Archives: Government Spending

new home sales

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Note that with the downward revisions it looks like things went flattish for housing through at least May, presumably due to the fiscal adjustments. And June is subject to revision the same way the prior months were, all with the backdrop of Q2 estimates now revised down towards 0.

Most are now looking for the fiscal pressure to let up in Q3, and therefore are expecting stronger numbers, while others see it lingering through Q3.

I see further risk that the fiscal damage has sufficiently slowed the growth of the consumer’s income to the point the growth in consumer spending continues to decelerate below the approx. 2.5% estimates I’m seeing for Q2.

In any case I don’t see jobs staying at 200,000/mo with GDP near flat for long.

The question is how the gap closes- higher GDP or fewer jobs.


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Bank earnings as a demand leakage

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All unspent income is called a ‘demand leakage’ as it means the output can’t get sold unless another agent spends more than his income. (by identity, not ‘theory’) And unsold output leads to cuts in output, cuts in employment, etc. etc. and down you go until some agent spends enough more than his income to offset the demand leakages. Invariably that agent is govt, as the automatic fiscal stabilizers increase the deficit. Of course they also work in reverse, providing an increasing headwind to the economy as it grows, via higher revenues and lower transfer payments. Like what’s happening now, which has brought the deficit down dramatically over the last few of years..

Anyway, when a bank has income and pays it out as shareholder income, that’s not a demand leakage. And if the shareholders don’t spend their income, that is a demand leakage. etc.

But if a bank earns income and doesn’t pay it out or spend it, but instead lets its equity capital increase, that is a demand leakage.

So what’s happening in general is top line growth is pretty much flat, with earnings not being spent, but instead adding to net worth and therefore the earnings are demand leakages. This includes the housing agencies/banks who are now turning over their incomes to govt.

Remember this from the Fed?

The Automatic Stabilizers: Quietly Doing their Thing

By Darrel S. Cohen and Glenn R. Follette

Abstract: This paper presents theoretical and empirical analysis of automatic fiscal stabilizers, such as the income tax and unemployment insurance benefits. Using the modern theory of consumption behavior, we identify several channels–insurance effects, wealth effects and liquidity constraints- -through which the optimal reaction of household consumption plans to aggregate income shocks is tempered by the automatic fiscal stabilizers. In addition we identify a cash flow channel for investment. The empirical importance of automatic stabilizers is addressed in several ways. We estimate elasticities of the various federal taxes with respect to their tax bases and responses of certain components of federal spending to changes in the unemployment rate. Such estimates are useful for analysts who forecast federal revenues and spending; the estimates also allow high- employment or cyclically-adjusted federal tax receipts and expenditures to be estimated. Using frequency domain techniques, we confirm that the relationships found in the time domain are strong at the business cycle frequencies. Using the FRB/US macro-econometric model of the United States economy, the automatic fiscal stabilizers are found to play a modest role at damping the short-run effect of aggregate demand shocks on real GDP, reducing the “multiplier” by about 10 percent. Very little stabilization is provided in the case of an aggregate supply shock.

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CBO monthly budget review for June 2013

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Looks like the fiscal year deficit will drop from 7% of GDP in 2012 to 3.2% of GDP in 2013.

That means it’s probably going to be running at pace much lower than that on a month to month basis. Again, we are at risk of the deficit not being large enough to support GDP growth at current levels as demand leakages continue unabated.

Could private credit or exports expand sufficiently to ‘make up’ for the reduced govt deficit spending?
Yes, in theory, but so far I see no signs of that happening.

Monthly Budget Review for June 2013

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Consumer Credit Year Over Year

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I keep looking for domestic credit expansion, to fill the ‘spending gap’ left by the tax hikes and sequesters.

The headline uptick in consumer credit looked promising, but seems there’s some kind of ‘seasonal’ factor at work, as it’s done this every year for the last three years, so the year over year change isn’t showing any signs of life.

Nor is mortgage debt outstanding or any other measure of lending that I’ve seen showing any material growth.

I’m now hearing Q2 GDP growth estimates are down to +1 to + 1.5% or so. This is to be expected when the federal deficit reduction measures aren’t being ‘offset’ by domestic credit expansion and/or increased net exports. In fact, the higher than expected trade deficit was the latest thing to pushing down GDP estimates.

Worse, with a bit of a lag, lower GDP growth = lower sales growth= lower job growth (presuming ‘productivity’ doesn’t collapse) and then the lower job growth feeds back into lower sales, etc.

So yes, more jobs mean more income for those working, but without sales and earnings growth their paychecks reduce corporate incomes which then drives ‘negative adjustments’ in hiring policy, etc.

The answer, as always, is quite simple- cut taxes and/or increase govt spending, depending on one’s politics.

Unfortunately govt- and not just our govt, but all govt that I know of- is still going the other way and continuing to make things worse.


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Jobless About to Take a Big Hit From the Sequester

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Jobless About to Take a Big Hit From the Sequester

By Jeff Cox

July 6 (CNBC) — The 11.7 million Americans still unemployed are finding their wallets getting even lighter as the sequester federal spending cuts kick in.

While the mandated decreases have been slow to trickle into the real economy, the unemployed are feeling perhaps the first big jolt.

As of July 1, the average weekly benefit of $289 will fall by $43 a week, adding pressure at a time when the labor market is trying to find its bearings but has yet to generate the kind of employment that would indicate a strong recovery.

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Construction and PMI yoy graphs

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Construction spending and PMI still look to me to be relatively low and, if anything, modestly decelerating? And details and revisions looking worse as well.

Also, the talk remains, once the drag from the tax hikes and spending cuts is out of the way, growth will accelerate.

Except the govt deficit was contributing maybe 7% of GDP last year before the fiscal adjustments, and when the proactive fiscal adjustments stop reducing the deficit the support will probably be below 4% of GDP as the modest growth we’ve been having is also reducing the deficit via the automatic fiscal stabilizers.

And if that reduction of fiscal support isn’t offset by some other agent spending that much more than his income than before, the output doesn’t get sold and GDP/output/employment doesn’t happen.

Yes, corporations and individuals have the ability to increase their deficit spending to fill the gap, but so far they have not shown any sign of being willing to further extend themselves.

Construction Spending Y/Y:


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PMI:


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Another tax hike: Loan Rates Increase as Calendar Turns to July

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Student loan rates double after Congress fails on fix

July 1 (Fox News) — Interest rates on federally subsidized Stafford student loans doubled overnight, soaring from 3.4 percent to 6.8 percent after Congress failed to reach a deal.

Though lawmakers potentially could still pass a bill to undo the damage, Congress’ Joint Economic Committee has estimated the increase — unless and until it is reversed — will cost the average college student an additional $2,600.

Democrats have sought to keep interest on Stafford loans low, saying poor and middle class students need the help to get a college education. Republicans have proposed linking student loans to the financial markets instead of letting Congress set federal lending rates. President Obama included a variation of that market-based approach in the budget he sent to Congress earlier this year, leaving his fellow Democrats trying to block his efforts.

“Why Senate Democrats continue to attack the president’s plan is a mystery to me, but I hope he’s able to persuade them to join our bipartisan effort to assist students,” Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, said last week

Senate Majority Leader Harry Reid said that a proposal to tie loan rates to the 10-year treasury note yield could never pass the Senate and that he couldn’t back something that doesn’t include stronger protections for students and parents.

“There is no deal on student loans that can pass the Senate because Republicans continue to insist that we reduce the deficit on the backs of students and middle-class families, instead of closing tax loopholes for the wealthiest Americans and big corporations,” Adam Jentleson, a spokesman for Reid, told Fox News last week. “Senate Democrats continue to work in good faith to reach a compromise but Republicans refuse to give on this critical point.”

Democrats said the Senate would consider voting on a one-year extension of the current interest rates July 10, after a recess for the 4th of July holiday. But Massachusetts Senator Elizabeth Warren said that the party preferred to include a comprehensive student loan measure in a long-range law governing colleges and universities.

“We need a one-year patch to keep interest rates from doubling on student loans,” Warren told the Associated Press last week. “That buys us the time.”

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