Category Archives: GDP

June DGOs/July 20 Claims-Weaker CapEx; Jumpy Claims

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Karim writes:

June DGOs/July 20 Claims-Weaker CapEx; Jumpy Claims

  • Durables data was unequivocally weak. Core orders (ex-defense and aircraft) were down 1.4%. The 3mth annualized rate is now -5.1%, a steady decline from the double digit growth pace of 2011. This feeds into Bernanke’s view that some of the gains in employment and capex in the past year were corrections for overly deep cuts in 2008-09 rather than the start of a new uptrend.
  • Core shipments were up 1.2%. That has greater implications for Q2 GDP (out tomorrow), whereas the orders data has greater implications for Q3 and Q4. Expect a slightly above consensus GDP number tomorrow (1.8% vs 1.4% consensus).
  • Claims dropped by 35k to 353k. Even though the labor department stated there were no quirks, +/- 35k weekly swings in the data as we’ve had for 3 straight weeks does seem quirky.
  • The 4-week average of claims did drop to 367k, the lowest since March.
  • At the very least, the report suggests the labor market is holding up at worst, and suggests another 100k-type gain in payrolls for July.

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Don’t forget, Obamacare’s ‘tax and spend’ is good for GDP and stocks

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At the macro level:

Govt spending equal to taxing is positive for nominal gdp, top line growth, etc.

Taxing removes spending power, but usually not as much as the total tax, as not all of that would have been spent. Govt spending is all spent by definition. So there is usually a ‘positive multiplier’.

Obamacare not only taxes and spends, but it deficit spends (at least according to the pundits), adding a bit more to nominal GDP.

I suggest you trade accordingly!
;)

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Housing on a sustainable uptrend?

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Looks to me like housing is finally in a very sustainable uptrend, supported by adequate federal deficit spending, modestly improving personal income, relatively high affordability, low consumer debt ratios, very low levels of actual inventory, tightening rental markets, etc. etc.

And looks to me that housing starts could double and still be at relatively low levels, so there’s years of upside with modest growth rates.

It also means GDP could gravitate up to the 3-4% range by year end, and stay above 0% even should we go over the fiscal cliff.

Housing Starts Rise at Fastest Pace in Three Years

July 18 (CNBC) — Groundbreaking on new U.S. homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling.

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U.K. Unemployment Rate Hits 9-Month Low, Defying Recession

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More hints from europe that deficits may be high enough to support a bit of GDP growth?

Euro-Region Construction Output Advanced in May, Led by Germany

By Simone Meier

July 18 (Bloomberg) — Euro-area construction output rose in May, as gains in Germany and Portugal offset declining production in Italy, Spain and the Netherlands.

Construction in the 17-nation euro area advanced 0.1 percent from April, when it dropped 3.7 percent, the European Union’s statistics office in Luxembourg said today. From a year earlier, construction output declined 8.4 percent.

In Germany, Europe’s biggest economy, construction output increased 3.1 percent from April, when it fell 5.5 percent, today’s report showed. Portugal and France reported increases of 3.6 percent and 0.4 percent, respectively. In Italy, output fell 1.4 percent from the previous month, when it dropped 4.3 percent. Spanish output slumped 3.3 percent after a 3 percent drop in April, and the Netherlands had a decline of 0.7 percent.

In the 27-nation EU, output rose 1.6 percent from April, when it fell 6.9 percent. Ireland and Greece are not required to provide monthly data on construction output.

U.K. Unemployment Rate Hits 9-Month Low, Defying Recession

By Scott Hamilton

July 18 (Bloomberg) — U.K. unemployment fell to a nine- month low in the quarter through May. Unemployment based on International Labour Organization methods fell to 8.1 percent of the workforce from 8.2 percent in the period through April. Jobless-benefit claims rose 6,100 in June. The number of people in work climbed 181,000 to 29.4 million with full- time work accounting for most of the increase. London gained 61,000, partly reflecting hiring for the Olympic Games that open on July 27. The claimant-count rate was 4.9 percent. Claims rose 6,900 in May instead of the 8,100 rise initially reported. June was affected by a rule change that forced more lone parents to claim Jobseeker’s Allowance.

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EU update

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More possible hints that deficits may be large enough to support stability

A little better than expected:

Euro-Area Manufacturing Contracted for 11th Month in June

By Mark Deen

July 2 (Bloomberg) — Euro-area manufacturing output contracted for an 11th straight month in June as Europe’s debt crisis sapped demand across the continent.

A gauge of euro-region manufacturing held at 45.1 in May, London-based Markit Economics said today in a final estimate. That compares with an initial estimate of 44.8 on June 21. A reading below 50 indicates contraction.

A little better than expected:

Italian May Unemployment Rate Declines for First Time in a Year

By Chiara Vasarri

July 2 (Bloomberg) — Italy’s jobless rate unexpectedly fell from a 12-year high in May, the first decline in more than a year.

The unemployment rate decreased to a seasonally-adjusted 10.1 percent, from 10.2 percent in April, Rome-based national statistics office Istat said in a preliminary report today. It was the first decline in the jobless rate since February of last year. Economists forecast an increase to 10.3 percent, the median of eight estimates in a Bloomberg News survey showed.

Joblessness among people aged 15 to 24 rose to 36.2 percent, from 35.3 percent, Istat said.

Better than expected improvement here:

U.K. CIPS Manufacturing Shrank for Second Month in June

By Jennifer Ryan

July 2 (Bloomberg) — U.K. manufacturing shrank for a second month in June as demand “remained weak,” Markit Economics said.

A gauge of factory output was at 48.6 from 45.9 in May, Markit said on its website today. The median estimate in a Bloomberg News survey of 25 economists was 46.5. A reading below 50 indicates contraction.

Some ok Swiss news as well.

Also, sufficient progress at the EU level to give the ECB cover to write checks as needed to get from here to any of the prospective EU measures.

This includes taking forever to get from here to there.

They all seem to understand that the ECB is at least one answer to the solvency issue, and seem to be willing to allow the ECB to provide bank liquidity while they try to finalize an alternative solution. Indirectly that means, at least for now, the member governments will be able to make their payments for the immediate future.

So as previously discussed, they solved the solvency issue, and markets have responded, which leaves them with a bad economy to focus on.

With deficits now perhaps large enough for stability, and maybe a bit of modest GDP growth, I’d at best expect a ‘wait and see’ attitude from an EU that has found it highly problematic to act even in an emergency.

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Demand leakages- the 800lb economist in the room

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I can’t say I’ve seen anyone in the deficit debates talking about the demand leakages? Not a mention in the mainstream press, financial news media, or any of the thousands of economic reports?

That’s like discussing the right horsepower for a truck or an airplane without any consideration of the weight of the vehicle.

Demand leakages are unspent income. And if any agent doesn’t spend his income, some other agent has to spend more than his income or that much output doesn’t get sold.

And if the non govt sectors collectively don’t spend all of their income, it’s up to the govt to make sure its income is less than its spending, or that much output does’t get sold, which translates into what’s commonly called the ‘output gap’. Which is largely a sanitized way of saying unemployment.

And with the private sector necessarily pro cyclical, the (whopping) private sector spending gap in this economy can only be filled with by govt via either a (whopping) tax cut and/or spending increase, depending on your politics.

So why the ‘demand leakages’? The lion’s share is due to tax advantages for not spending your income, including pension contributions, IRA’s, and all kinds of corporate reserves. Then there’s foreign hoards accumulated to support foreign exporters. And it all should be a very good thing- net unspent income like that means that for a given size govt our taxes can be that much lower. Personally, I’d rather have a tax cut than a policy to get other people to spend their unspent income. But that’s just me…

And then there’s the fear mongering about the likes of the $200 trillion present value of US govt unfunded liabilities. But 0 mention of the present value of all demand leakages- that future income that will be unspent as it’s squirreled away in the likes of retirement plans, corporate reserves, and foreign central banks.

If history is any guide, the demand leakages will probably continue to outstrip even the so called ‘runaway spending of our irresponsible government,’ like they’ve always done in the past, as evidenced by nearly continuous output gaps/excess unemployment.

Worse, every mainstream economist learned that it’s the demand leakages that create the ‘need’ for govt deficits. But somehow fail to even mention it, even casually.

If anything, they voice no objections to the popular misconception that we need more savings to have funds for investment, thereby tacitly supporting the call for higher levels of demand leaks and the need for even higher levels of govt deficit spending.

And all you hear are calls for deficit reduction, both public and private, all in the face of geometrically expanding demand leakages.

Am I missing something?

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Greece after math

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Looking like it was another ‘buy the rumor sell the news’ near term.

After you do the maths it still doesn’t add up.

It can’t add up.

Ever.

Given today’s institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels. And with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.

In other words, as previously discussed, the maths can’t add up without the ECB, directly or indirectly, writing the check.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.

The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that,(and even though some think it’s not acting within legal limits) but it won’t just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’, no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.

So while the ECB can and has ‘written the check’ as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.

This means any manager of ‘other people’s money’ with any fiduciary responsibility will continue to remain on the sidelines.

And even as markets fluctuate, and then some, underneath it all payments are met on a timely basis and the banking system continues to function to service deposits and loans.

And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the ‘savings desires’/demand leakages) ensuring the maths don’t ever add up without the assumption of the ECB writing the check.

One last thing.

Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.

A good economy with rising debt and ECB support to keep it all going isn’t even a consideration.

They’ve painted themselves into an ideological corner.

And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.

This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.

The founders of the euro believed a single currency would work to prevent a third great war. So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.

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