Category Archives: GDP

MMT to Obama- Use This Speech!

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This is the speech I would make if I were President Obama:

My fellow Americans, let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.
In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.
Jobs are lost when business sales go down.
Economists give that fancy words- they call it a lack of aggregate demand.

But it’s very simple.
A restaurant doesn’t lay anyone off when it’s full of paying customers,
no matter how much the owner might hate the government,
the paper work, and the health regulations.

A department store doesn’t lay off workers when it’s full of paying customers,
And an engineering firm doesn’t lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden all those people decided they’d rather collect unemployment than work.
The reason all those jobs were lost was because sales collapsed.
Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.
That’s a serious collapse that cost millions of jobs.

Let me repeat, and it’s very simple, when sales go down, jobs are lost,
and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone willing and able to work.

That’s good for businesses and all the people who work for them.

And these proposals are bipartisan.
They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.
That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive should ever support.
And, of course, the Tea Party is against any tax.
So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living. This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.
Allowing them to take home more of their pay supports their good efforts.
Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over. When government stops taking FICA taxes out of their pockets, they’ll be able to get back to more normal levels of spending.

And many will be able to better make their mortgage payments and their car payments,
which, by the way, is what the banks really want- people who can make their payments.
That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.

And the payroll tax holiday is also for business, which reduces costs for business, which, through competition, helps keep prices down for all of us. Which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,
and lower costs for business to help keep prices and inflation down,
so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments with no strings attached.
This will help the states to fill the financial hole created by the recession,
and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday
restores their lost revenues.

Again, I expect bipartisan support.
The progressives will support this as it helps the states sustain essential services,
and the Tea Party believes money is better spent at the state level than the federal level.

My third proposal does not involve a lot of money, but it’s critical for the kind of recovery that fits our common vision of America.
My third proposal is for a federally funded $8/hr transition job for anyone willing and able to work, to help the transition from unemployment to private sector employment.

The problem is employers don’t like to hire the unemployed, and especially the long term unemployed. While at the same time, with the payroll tax holiday and the revenue distribution to the states,business is going to need to hire all the people it can get. The federally funded transition job allows the unemployed to get a transition job, and show that they are willing and able to go to work every day, which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.
Progressives have always known the value of full employment,
while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.
The payroll tax holiday is a cut of a regressive, punishing tax,
that takes the government’s hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.
The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector, to private sector jobs.

There is no question that these three proposals will drive the increase in sales we need to
usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA, a very important lesson was learned.

Interest rates actually came down. And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe
made a very important point.

The markets are telling us something we should have known all along.
The US is not Greece for a very important reason that has been overlooked.
That reason is, the US federal government is the issuer of its own currency, the US dollar.
While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states. Like the US states, Greece and other euro nations are not the issuer of the currency that they spend. So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK,
can always pay their bills.
There is no such thing as the US running out of dollars.
The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.
The US federal government can not go broke like Greece.

That was the important lesson of the S&P downgrade,
and everyone has seen it up close and personal and they all now agree.
And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?
Absolutely not!
Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now,
with unemployment sky high and an economy on the verge of another recession,
we can immediately enact my 3 proposals to bring us back to
a strong economy with good jobs for people who want them.

And some day, if somehow there are too many jobs and it’s causing an inflation problem,
we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,
and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals
for a speedy recovery:

A full payroll tax holiday for employees and employers
A one time revenue distribution to the states
And an $8/hr transition job for anyone willing and able to work to facilitate
the transition from unemployment to private sector employment as the economy recovers.

Thank you.

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UK Daily

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Negative headlines and hard evidence Fisher doesn’t understand the role of bank capital:

HIGHLIGHTS:

U.K. Manufacturing Contracts Most in More Than Two Years
Fisher Says Bank Capital Levels Should Reflect Tail Risks
U.K. House Prices Decline the Most in 10 Months, Nationwide Says
Quantitative Easing Prospects Rise as UK Growth Forecast Cut
BCC Lowers U.K. Outlook, Pushes Back BOE Rate-Increase Forecast
Continued Stimulus Is Not Called for, Sentance Writes in the WSJ

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EU Daily | Eurozone PMI at two-year low as new orders fall in all countries

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Weakness and continued austerity. My guess is it will take serious blood in the streets before policy changes

IMF and eurozone clash over estimates

(FT) International Monetary Fund work, contained in a draft version of its Global Financial Stability Report, uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bail-outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium. Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity by about €200bn ($287bn), a drop of 10-12 per cent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks. The ECB and eurozone governments have rejected such estimates.

ECB Lends Euro-Area Banks 49.4 Billion Euros for Three Months

(Bloomberg) The European Central Bank said it will lend euro-area banks 49.4 billion euros ($71.3 billion) in three-month cash. The ECB said 128 banks bid for the funds, which will be lent at the average of the benchmark rate over the period of the loan. The key rate is currently at 1.5 percent. Banks must repay 48.1 billion euros in previous three-month loans tomorrow. The ECB re-introduced an unlimited six-month loan this month and extended full allotment in its shorter-term operations through the end of the year as tensions on European money markets grew. ECB President Jean-Claude Trichet on Aug. 27 rejected the suggestion that there could be a liquidity crisis in Europe, citing the central bank’s non-standard measures.

Eurozone PMI at two-year low as new orders fall in all countries

(Markit) Manufacturing PMI fell from 50.4 in July to 49.0 in August, its lowest level since August 2009 and below the earlier flash estimate of 49.7. National PMIs held just above the 50.0 no-change mark in Germany, the Netherlands and Austria, but signalled contractions in Ireland, France, Italy, Spain and Greece. Only the Irish PMI rose compared to July, but still remained in contraction territory. The weakness highlighted by the headline PMI reflected falling volumes of both output and new business in August. The Eurozone new orders-to-finished goods inventory ratio, which tends to lead the trend in production, fell to its lowest for almost two-and-a-half years.

European Central Bank Said To Purchase Italian Government Bonds

Sept. 1 (Bloomberg) — The European Central Bank is buying Italian securities, according to two people with knowledge of the transactions. They declined to be identified because the transactions are confidential.

A spokesman for the ECB declined to comment.

Germans, Dutch, Finns to Meet on Crisis Amid Collateral Spat

Sept. 1 (Bloomberg) — The German, Dutch and Finnish finance ministers will meet on Sept. 6 in Berlin to discuss the euro-area debt crisis as a Finnish demand for collateral threatens to delay a second Greek bailout.

“We will discuss how to go forward with this crisis and the future,” Dutch Finance Minister Jan Kees de Jager told reporters in The Hague today. “It’s about fighting this fire, but more importantly, how do we prevent such a fire.”

Finland’s demand for collateral from Greece as a condition for contributing to a second rescue package has triggered calls for similar treatment from countries including Austria and the Netherlands. De Jager said an agreement on collateral shouldn’t take long to reach.

“I see room for a solution; there are proposals on the table to discuss,” De Jager said. “I think it will be possible to provide equal treatment for creditors without the disadvantage of the proposed deal between Finland and Greece, which is unthinkable because it uses extra money from the EFSF to provide collateral to Finland.”

The 440 billion-euro ($628 billion) European Financial Stability Facility is the euro region’s rescue fund.

Weidmann Says ECB Must Scale Back Crisis Measures to Reduce Risk

Sept. 1 (Bloomberg) — European Central Bank council member Jens Weidmann said the bank must scale back the additional risks it has shouldered to help counter the region’s debt crisis.

Measures taken by the ECB have “strained the existing framework of the currency union and blurred the boundaries between the responsibilities of monetary policy on one side and fiscal policy on the other,” Weidmann, who heads Germany’s Bundesbank, said at an event in Hanover today. Over time this can damage confidence in the central bank, he said. “It is therefore valid to scale back the extra risks monetary policy has taken on.”

The ECB is lending euro-area banks as much money as they need at its benchmark rate and has also re-started its bond purchase program — a step Weidmann opposed — in an attempt to stem the spreading debt crisis. While European leaders on July 21 re-tooled their 440-billion-euro ($629 billion) rescue fund, allowing it to buy government debt on the secondary market, national parliaments still need to ratify the changes.

“Decisions on taking further risks should be made by governments and parliaments, as only they are democratically legitimized,” Weidmann said.

He said one option for a long-term solution to Europe’s debt crisis could be “a real fiscal union.”

“Should one be unwilling or unable to take this path, then the existing no-bailout clause in the treaties, and the accompanying disciplining of fiscal policy, should be strengthened instead of being completely gutted,” he said.

Weidmann said his comments don’t relate to current economic developments or ECB policy, citing the one-week blackout prior to a rate decision. ECB officials will convene on Sept. 8 in Frankfurt.

German manufacturing PMI lowest since September 2009

(Markit) At 50.9, down from 52.0 in July, the final seasonally adjusted Markit/BME Germany PMI was around one index point lower than the ‘flash’ figure of 52.0. Growth of German manufacturing output eased fractionally since the previous month and was the slowest since July 2009. Latest data pointed to a fall in intakes of new work for the second month running and the rate of contraction was the fastest since June 2009. The downturn in sales to export markets was highlighted by a further reduction in new business from abroad in August, with the rate of contraction also the sharpest for over two years. Meanwhile, stocks of finished goods at manufacturing firms accumulated at the steepest pace since the survey began in April 1996.


German Trade, Consumption Damped Second-Quarter GDP Growth

(Bloomberg) Private consumption contracted 0.7 percent in the second quarter. GDP increased 0.1 percent from the first quarter, when it gained 1.3 percent, the office said, confirming its initial Aug. 16 estimate. Exports rose 2.3 percent from the first quarter, when they gained 2.1 percent. Imports surged 3.2 percent in the second quarter after rising 1.7 percent in the first. That resulted in net trade reducing GDP growth by 0.3 percentage point. Companies stocked up inventories, which contributed 0.7 percentage point to GDP growth. Gross investment also added 0.7 percentage point to growth. Private consumption subtracted 0.4 percentage point and a 0.9 percent decline in construction spending cut 0.1 percentage point off GDP.

Carrefour posts net loss in 1st half

(AP) Europe’s largest retailer Carrefour SA posted an unexpected net loss in the first half and abandoned its growth target for the year amid the economic slowdown. The French retailer reported a net loss of euro249 million ($359 million) in the first six months of the year, compared with a profit of euro97 million a year earlier. Carrefour said it expects its operating profit to decline this year, reversing a target the retailer set in March when it said an ongoing and expensive “transformation plan” would raise profits this year. As it did last year, Carrefour booked what it calls “significant one-off charges” again in the first half. They amounted to euro884 million in the first half, over half of which went to writing down the value of Carrefour’s Italian assets.

Greece set to miss deficit target

(AP) Greece is likely to miss its budget targets in 2011 even if it fully implements painful reforms a parliamentary panel of financial experts said. “The increase in the primary deficit in combination with a further drop in economic activity strengthens significantly the dynamics of debt, offsetting the benefits from the decisions of the summit of July 21, and distancing the possibility of stabilization of the debt to GDP in 2012,” the panel, known as the State Budget Office, wrote in a report. Citing government figures, it said the 2011 January-July deficit stands at euro15.59 billion ($22.53 billion) with a primary deficit of 2.4 percent of gross domestic product, as opposed to a euro12.45 billion ($17.99 billion) shortfall and 1.5 percent primary deficit in that period last year.

Italy Drops Pension Changes, Will Announce Budget Amendments

(Bloomberg) The Italian government has dropped proposed changes to pension rules agreed to this week from a 45.5 billion-euro ($65.5 billion) austerity plan being discussed in parliament that aims to balance the budget by 2013. Giorgia Meloni, minister for youth and sport policy, told reporters that the government decided to withdraw the proposal agreed to by Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti two days ago. On Aug. 29, Berlusconi’s office announced that the government had dropped a planned bonus tax on Italians earning more than 90,000 euros a year and reduced cuts in transfers to regional and local authorities. It did not provide details of how the lost deficit reduction of 4.5 billion euros from those changes would be compensated.

Crisis exposes weakness of Italian coalition

(FT) Giulio Tremonti, finance minister, was said to be in “damage limitation” mode on Wednesday, seeking to assure Italy’s partners that a budget could still get through parliament’s twin chambers by the end of next week, despite prime minister Silvio Berlusconi’s decision to jettison some key proposals, including a wealth tax. Three weeks after the centre-right cabinet agreed an austerity package – with €45.5bn ($65.4bn) of savings intended to balance the budget by 2013 – the government on Wednesday missed its self-imposed deadline to present legislation to the senate, the first step towards parliamentary approval. Insiders admit, however, that the budget could amount to a stopgap measure, the second since July, and might need to be reinforced at a later date.

Spanish PM: deficit cap amendment essential

(AP) “It is true that it is a reform done in a very short time span, because we need it,” Prime minister Jose Luis Rodriguez Zapatero said. The amendment of the 1978 constitution enshrines the principle of budgetary discipline into Spain’s constitution, but does not specify numbers. These will come in a separate law that is to be passed by June 2012. The Socialists and conservatives have agreed the law will stipulate that Spain’s deficit cannot exceed 0.4 percent of GDP, but that threshold will not take effect until 2020. Their support is enough for the bill to pass when it is voted on Friday in the lower house of Parliament and presumably next week in the Senate. Time is pressing because the legislature dissolves Sept. 27 in order to get ready for general elections Nov. 20.

Spain Expects ‘Chain’ of Market Turbulence, Valenciano Says

(Bloomberg) “We’re probably going to get back into a chain of financial turbulence in September and October,” Elena Valenciano, Socialist party campaign chief, said in an interview. Valenciano said the constitutional amendment is necessary as Spain must avoid following Greece, Ireland and Portugal into seeking a European bailout. “We have to say this because sometimes talking of a rescue seems almost something positive: any kind of intervention in Spain would be a great misfortune for the country,” she said. Valenciano said authorities “didn’t expect August to be as bad as it was” and that the gap may widen again in the next two months, “not so much because of our own debt, but because of Italy’s debt.”

Portugal Raises Taxes to Meet Deficit Targets in Rescue Plan

(Bloomberg) Portugal will raise capital gains tax and increase levies on corporate profit and high earners to reach the deficit-reduction goals in its 78 billion-euro ($112 billion) bailout. The government will impose a tax surcharge of 3 percent on companies with income above 1.5 million euros, add a bonus tax of 2.5 percent on the highest earners and raise the levy on capital gains by 1 percentage point to 21 percent, Finance Minister Vitor Gaspar said. The moves will help trim the budget deficit from 5.9 percent of gross domestic product this year to the European Union ceiling of 3 percent in 2013, he said. The shortfall will narrow to 0.5 percent in 2015. The government will reduce its deficit even as the economy contracts 2.2 percent this year and 1.8 percent next year, before expanding 1.2 percent in 2013, he said.

Ireland’s unemployment rate rises to 14.4 percent

(AP) Ireland’s unemployment rate has risen to 14.4 percent. Ireland has been trying to escape its 3-year recession through export growth led by its multinational companies. But the domestic economy remains dormant because of weak consumer demand, high household debts and a collapsed real-estate market. The Central Statistics Agency said Wednesday that unemployment rose from July’s rate of 14.3 percent, the fourth straight monthly increase. A record-high 470,000 people in Ireland, a country of 4.5 million, are claiming welfare payments for joblessness. About 17 percent are foreigners, chiefly Eastern Europeans who immigrated during the final years of Ireland’s 1994-2007 Celtic Tiger boom.

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DGO

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Right, and still looks to me that with an 8%+ US federal budget there won’t be a major collapse in aggregate demand.


Karim writes:

Main story is in the revisons

  • July durables -1.5% ex-aircraft and defense (up 4% headline)
  • But the core measure was revised from -.4% to +.6% for June and from 1.7% to 1.9% for May
  • Shipments (matters more for current quarter GDP) up 0.2% ex-aircraft and defense (2.5% headline)
  • Core shipments for June revised from 1% to 1.9%
  • 3mth annualized rate for core shipments up from 11.1% to 13.6%
  • Big caveat is this is July data

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FED Dudley comments

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*DJ Fed’s Dudley: Drop In Market Rates A Plus For Economy

He forgets about the interest income channels

*DJ Dudley: US Economic Growth Slower Than Expected

Yes, but still higher than the first half, as recently revised

*DJ Dudley: Has Revised Down Expectations Of Growth

Yes, but still higher than the first half when corporate earnings were relatively strong

*DJ Dudley: NY Region Growing Faster Than Nation
*DJ Dudley: NY Region Has Grown At ‘Slow Pace’

Yes, and better than the first half, helped by auto production resuming after earthquake delays

Retail sales were ‘normal’

The 9% federal budget deficit continues to provide reasonably support for modest GDP growth

The Fed’s ‘forecast’ for unchanged rates for two years is just that. It’s their expectation for rates based
on their outlook.

And while the Fed’s outlook will change as conditions change, markets are not taking it that way.

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Jobless Claims Dip, Still in Range; Trade Deficit Jumps

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As previously discussed, the real economy seems to be muddling through, and at firmer levels than the first half of the year.

The trade report will probably result in Q2 GDP being revised down to just below 1%, but up from the .4% reported for Q1

So Q3 still looks like it will be at least as strong as q2 and likely higher with lower gasoline prices and Japan coming back some.

With corporate profits still looking reasonably strong, corporations continue to demonstrate they can do reasonably well even with low GDP growth and high unemployment.

And with a federal deficit of around 9% of GDP continually adding income, sales, and savings I don’t see a lot of downside to GDP, sales, and profits, though a small negative print is certainly possible.

Jobless Claims Dip, Still in Range; Trade Deficit Jumps

August 11 (Reuters) — New U.S. claims for unemployment benefits dropped to a four-month low last week, government data showed on Thursday, a rare dose of good news for an economy that has been battered by a credit rating downgrade and falling share prices.

Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since the week ended April 2.

Economists polled by Reuters had forecast claims steady at 400,000. The prior week’s figure was revised up to 402,000 from the previously reported 400,000.

The Federal Reserve said on Tuesday economic growth was considerably weaker than expected and unemployment would fall only gradually. The U.S. central bank promised to keep interest rates near zero until at least mid-2013.

Hiring accelerated in July after abruptly slowing in the past two months. However, there are worries that a sharp sell-off in stocks and a nasty fight between Democrats and Republicans over raising the government’s debt ceiling could dampen employers’ enthusiasm to hire new workers.

The continued improvement in the labor market could help to allay fears of a new recession, which have been stoked by the economy’s anemic growth pace in the first half of the year.

A Labor Department official said there was nothing unusual in the state-level claims data, adding that only one state had been estimated.

The four-week moving average of claims, considered a better measure of labor market trends, slipped 3,250 to 405,000. Economists say both initial claims and the four-week average need to drop close to 350,000 to signal a sustainable improvement in the labor market.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 60,000 to 3.69 million in the week ended July 30.

The number of Americans on emergency unemployment benefits fell 26,309 to 3.16 million in the week ended July 23, the latest week for which data is available.

A total of 7.48 million people were claiming unemployment benefits during that period under all programs, down 89,945 from the prior week.

Trade Gap Grows

The US. trade gap widened in June to its largest since October 2008, as both U.S. imports and exports declined in a sign of slowing global demand, a government report showed on Thursday.

The June trade deficit leapt to $53.1 billion, surprising analysts who expected it to narrow to $48 billion from an upwardly revised estimate of $50.8 billion in May.

Overall U.S. imports fell by close to 1 percent, despite a rise in value of crude oil imports to the highest since August 2008. Higher volume pushed the oil import bill higher, as the average price for imported oil fell to $106 per barrel after rising in each of the eight prior months.

U.S. exports fell for a second consecutive month to $170.9 billion, as shipments to Canada, Mexico, Brazil, Central America, France, China and Japan all declined.

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FOMC Statement(3 dissents)

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Karim writes:

Pretty tepid response in light of the changed assessment of current conditions and outlook. No hike thru early 2013 was already priced, so stating that they are unlikely to hike thru at-least mid 2013 doesn’t buy them that much more in terms of taking out tightening. Also, didn’t apply ‘extended period’ to balance sheet nor say anything about balance sheet composition other than they will review (which they said last time as well). Made indirect reference to QE3 in last paragraph-saying ‘range of tools’ was discussed and they may be employed as appropriate.

Right, careful not to offend China.

New
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.

Yes, the first half was revised down which they didn’t expect.
But they did not indicate it has been improving quarter to quarter though Q1 and Q2 GDP and their forecast shows that.

Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting

Yes, seems their forecasts are a bit lower, but still higher than the actual Q1 and Q2 results.

and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

That implies the possibility of core moderating some, which Goldman has also forecast.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

In line with their understanding with China and something closer to a strong dollar policy.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
2011 Monetary Policy Releases

Old
Release Date: June 22, 2011
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

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Equity storm over for a bit

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From Goldman:

Published August 8, 2011

* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

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Consumer credit up, Friday update

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It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

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