Category Archives: Government Spending

Shutdown- this time it’s very different

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The negatives:

Profit growth already low and slowing
Car sales rolled over in September
New home sales already rolled over
Housing starts flattened
Personal income anemic, and distribution issues further softening demand
800,000 federal workers not getting paid
0 rate policy/QE is a deflationary bias
Pro active austerity already initiated
Federal deficit looking too low for financial conditions
Markets/analysts have ignored/ridiculed the paradox of thrift so are ‘long and wrong’
Japan’s currency depreciation works against US and euro domestic demand

Not only no chance of fiscal relaxation if things go bad, but more likely further fiscal tightening.

So it’s thereby worse than flying without a net.

The positives:

Just rhetoric-
Americans are resilient and all that…

feel free to distribute.

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Debt ceiling

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Remember, unlike just a tax hike or spending cut, hitting the debt ceiling means going cold turkey to a balanced budget, which is catastrophic as it eliminates the automatic stabilizers and triggers a downward spiral that, if left to continue, could take maybe 25% off of GDP in 90 days, and still be accelerating downward.

Boehner: We’ll win the fight to defund Obamacare

September 19 (Reuters) — U.S. House of Representatives Speaker John Boehner said he was confident that majority Republicans in the chamber would pass a stop-gap U.S. funding measure on Friday that denies money for “Obamacare” health insurance reforms.

At a news conference on Thursday, Boehner also said Republicans had “no interest” in defaulting on U.S. debt in the looming debate over raising the U.S. debt limit.

“We will deliver a big victory in the House tomorrow, and then this fight will move over to the Senate where it belongs. I expect my Senate colleagues to be up for the battle,” Boehner said.

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Notes from latest Merrill report

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FYI, from Merrill:

Cliff notes Forgotten, but not over The sequester may be forgotten, but it’s not over. Contrary to popular belief, it appears that most of the impact on growth comes in 3Q, not 2Q. This is one reason our tracking model is pegging growth this quarter at just 1.6%. The Federal workforce is shrinking Federal payrolls have been shrinking since the first half of 2011, but the pace has picked up since the beginning of this year. This reflects some layoffs, but mainly hiring freezes, natural attrition and presumably some workers balking at accepting the shift to part-time employment. Thus, the sequester simply is accelerating a drop that was already in progress. Government wages are falling Aggregate income of government workers has been falling since the end of last year. This reflects not just the drop in employment, but recently reduced hours from the furloughs. In particular, the Department of Defense began furloughing 640k employees on July 8. Doing the math, cutting work by two days a month would cause income to drop by $6.5 bn at an annual rate. That alone could explain the 0.5% drop in government wages and salaries July, which was the biggest mom decline since February 1993. Sequester’s impact is not evenly spread Surveys suggest that most Americans feel unaffected by the sequester. However, regions with heavy concentrations of federal workers or government contractors are feeling the pain. Even as the national unemployment rate continues to drop, there has been a notable pick-up in unemployment in Maryland and Virginia since hitting cyclical lows in April. Anecdotal evidence suggests more pain is on the way The latest Fed Beige Book suggests more pain in the pipeline. In the September 4 edition, there were nine references to sequester or sequestration versus only one reference in the July release. Defense firms in the Kansas City and San Francisco districts reported “that the effects of the sequestration have already been passed through to actual reductions in production.” Meanwhile, defense firms in the Boston region were concerned “about the prospect of larger effects in the fourth quarter.”

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NFP/Fed Chair Nomination Timing

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Karim writes:

NFP Key Takeaways

  • Several sub-texts, mainly that the softer news was in prior months and that the better news was in the most recent month (August).

Yes, though August is subject to revision, and the underlying ‘private payroll’ growth, which lags fiscal adjustments, is now looking like it’s been hurt by the year end tax hikes and subsequent sequesters.

  • Net payroll revisions of -74k definitely the soft side of this report; with a 169k gain for August close to expectations.


Yes

  • The Income proxy at +0.7% for August (jobs x hours x wages) definitely the strong side of this report.


Yes, though Friday’s +.1 for personal income is more ‘macro’

  • The rise in the diffusion index from 55 to 59 also good news as job gains are more broad based.

Ok, fewer jobs but more spread out.

  • The U6 measure fell from 14% to 13.7%, and most other measures of underemployment also fell.
  • The Unemployment rate fell from 7.4% to 7.3% as the 312k drop in the labor force offset the 115k drop in the household survey
  • The Part rate is now at its lowest since 1978-which will most certainly fuel the structural vs cyclical debate

Yes, as it looks like un and under employed are transitioning to ‘out of the labor force’, and participation rates are falling for younger people as well and if you say half the drop in participation is cyclical you can add about 4% to the un and under employment rates.

  • This outcome shouldn’t effect tapering at the September FOMC meeting and if anything, may accelerate the pace of tapering given how close we are to the 7% unemployment rate level that Bernanke identified in June as being consistent with the end of QE.

Agreed. The Fed is heck bent on tapering. They don’t like QE as a tool. And Jackson Hole had presentations showing it doesn’t work with regards to output, employment, CPI, etc.

  • Its highly doubtful the part rate will influence the tapering decision as Bernanke knew full well in June that the part rate was on a long-term decline when he set the 7% level (the same as when the Fed set the 6.5% threshold last December). I expect a more nuanced discussion of the part rate in speeches and the minutes.
  • Recall, payrolls were averaging 90k/mth when the Fed set out on QE3.

And the term structure of rates was lower, questioning what QE actually accomplishes in that regard, as it’s still going full force at the moment.

  • Any decision not to taper or to draw out the taper next year would be more due to the signaling qualities of QE (they wont be hiking as long as they are buying).

A few observers have also pointed out that August payrolls have had upward revisions in 11 of the past 13 years. This is possibly due to the earlier start of the school year over time, which may also have had an impact on the labor force dynamics. Chart below from SMR.


Full size image


New Fed Chair

  • Its increasingly expected that the nomination of the new Fed Chair will take place between the Sep 18 FOMC meeting and the Annual IMF/WB Meeting in DC on October 11-12.
  • I’d put the odds on Summers around 75%.


Confirmation is another story, of course. But seems his odds of confirmation should be better than, say, Jamie Dimon… ;)

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Comments on research report

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From DB,
Comments below:

Commentary for friday: the second print on Q2 GDP growth showed a significant upward revision to +2.5% from +1.7% as previously reported. Recall that growth was only +1.1% in Q1.

After the 3rd downward revision

Given that the deflator was revised a tenth higher (0.8% vs. 0.7% as previously reported), the magnitude of the overall revision is even more impressive. Personal consumption was unrevised at +1.8% in Q2,

Down from 2.3% in Q1 if I recall correctly

While business fixed investment was only modestly softer (+4.4% vs. +4.6%). Residential investment was also reduced slightly (+12.9% vs. +13.4%). The big changes to Q2 growth were in inventories and international trade. Inventory accumulation was lifted to $62.6b from $56.7b as first reported, thereby adding 0.6 ppt to growth compared to 0.4 ppt previously.

The question is voluntary to restock from a Q1 dip or sales growth forecast, or involuntary due to lower than expected sales.

In terms of trade, firmer exports and softer imports drove net exports to improve; as a result, the original -0.8 ppt drag from trade was revised up to zero.

Question is whether exports can be sustained through Q3 as the dollar spike vs Japan and then the EM’s hurts ‘competitiveness’

The government drag on Q2 was revised to become slightly larger (-0.2 ppt vs. -0.1 ppt as first reported). Nonetheless, the federal government drag on economic activity has diminished significantly compared to the impact in Q1 (-0.7 ppt) and Q4 2012 (-1.2 ppt). A diminished drag from the public sector should enable overall GDP growth, which was +1.6% year-on-year in Q2, to close the gap with private sector growth, which was +2.5% over the same period.

I see it this way- the govt deficit spending is a net add of spending/income. So with the deficit dropping from 7% of GDP last year to maybe 3% currently, with maybe 2% of the drop from proactive fiscal initiatives, some other agent has to be spending more than his income to sustain sales/incomes etc. If not, output goes unsold/rising inventories and then unproduced. The needed spending to ‘fill the spending gap’ left by govt cutbacks can come from either domestic credit expansion or increased net exports (no resident credit expansion/savings reductions. I don’t detect the domestic credit expansion and net export growth/trade deficit reduction seems likely given the dollar spike and oil price spike?

If we achieve +3.0% growth in the current quarter and +3.5% in Q4, this will push the year-on-year rate to +1.7% in Q3 and +2.5% by yearend. (this is in line with the Fed’s central tendency forecasts, which are due to be updated at the september FOMC meeting.)

In order for our growth forecast to come to fruition, we will need to see a pickup in consumer spending,

Hard to fathom, as personal consumption has been slipping from 2.3 in Q1 to 1.8 in Q2, and walmart and the like sure aren’t seeing any material uptick in sales? Car sales are ok, but further gains from the June high rate seems doubtful as July has already posted a slower annual rate.

homebuilding and business investment relative to first half performance. The first two series are likely to be boosted by sturdier employment gains, and hence faster household income growth.

Seems early Q3 reports show falling mtg purchase applications, home sales falling month to month, and lots of anecdotals showing the spike in mtg rates has slowed things down. So growth from Q2 seems unlikely at this point?

We are confident that the pace of hiring will pick up in the relatively near term, because jobless claims continue to hold near cyclical lows.

New jobs dropped to 160,000 in july, and claims measure people losing their jobs, not new hires. Also, top line growth, the ultimate driver of employment, remains low, so assuming actual productivity hasn’t gone negative a spike in jobs is unlikely?

Given the usefulness of jobless claims as a payroll forecasting tool, it should come as little surprise that they are also significantly correlated with wage and salary growth. In fact, over the past 25 years, the current level of jobless claims has typically coincided with private wage and salary growth above 6% compared to 3.8% in Q2.

As above, claims may have correlated with all that in the past, but the causation isn’t there. Looks to me like claims are more associated with ‘time from the bottom’ as with time after the economy bottoms firings tend to slow, regardless of hiring?

Meanwhile, the third growth driver noted above—business investment—will largely depend on the corporate profit trend. Yesterday’s second print on GDP provided the first look at economy-wide corporate profits, which rose +3.9% in Q2 vs. -1.3% in Q1. Many analysts fretted the decline in profits in Q1, because they tend to drive business investment and hiring plans. We dismissed the Q1 weakness as a temporary development which occurred in lagged response to the growth slowdown in Q4 2012 and Q1 2013. The fact that profits are reaccelerating (+5.0% year-on-year versus +2.1% in Q1) is an encouraging development in this regard.

Profits also are a function of sales, which are a function of ‘deficit spending’ from either govt or other sectors, as previously discussed. And, again, i see no signs of ‘leaping ahead’ in any of those sectors.

Faster GDP growth through yearend should result in even stronger corporate profit growth.

Agreed! But didn’t he just say that the GDP growth would come from business investment that’s a function of profits (and in turn a function of sales/GDP)?

To be sure, the additional growth momentum now evident in the Q2 GDP results makes our 3% target for current quarter growth more easily attainable. –CR

I don’t see how inventory growth is ‘momentum’ and seems there are severe headwinds to Q3 net exports as drivers of growth?

And govt is there with a deficit of only 3% of GDP to help offset the relentless ‘unspent income’/demand leakages inherent in the global institutional structure.

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comments on GDP

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Q2 revised up to 2.5 with higher exports and higher inventories.

Higher inventories can be either voluntary or involuntary, but in any case either unlikely to repeat and can reverse subsequently. And sustaining higher net exports is also problematic with the dollar spiking vs yen and now most other emerging market currencies. And at the same time spiking oil prices increase US import expenditures.

And consumption growth at only 1.8 looks to be decelerating as well.

So with the narrative of govt reductions of net spending needing to be offset by either some other agent spending more than his income, or output goes unsold, we have the foreign sector reducing net exports and unsold inventories in reaction to reduced govt.

And so far it looks to me like Q3, again in line with the narrative, is facing some serious downside risk.

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Mobilization and Money

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The way I say it is the funds to pay taxes and buy tsy secs come from govt spending/lending.
That is, govt is best thought of as spending first, then ‘collecting’ taxes and ‘borrowing.’

And, as a minor correction, govt doesn’t ‘issue money, then spending it’ but in general just instructs the Fed to credit a member bank account.

Mobilization and Money

By J.D. Alt

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Economists: Future deficits top US fiscal problem

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Can’t seem to find their long term inflation problem that has to be behind this conclusion?

The Fed’s long term inflation forecast is 2%, so no long term deficit problem implied there…

Economists: Future Deficits Top US Fiscal Problem

August 26 (AP) — The biggest fiscal challenge facing the U.S. is the size of projected deficits in the 2020s and 2030s, according to a survey of business economists.

The National Association for Business Economics surveyed 220 of its members in July and August. The survey found that members were more concerned about the size of deficits in the next two decades than current deficits or deficits over the next 10 years: 43 percent of the economists named budget gaps in the 2020s and 2030s as the top fiscal challenge, compared with 37 percent who chose projected deficits over the next 10 years.

The policy survey found that no consensus on the best way to address those deficits.

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