the Fed on consumer finances, May retail sales, inflation reports, industrial production, et al

the crisis in europe, and it’s possible spillover effects worldwide, has dominated the news cycle again this week; for the most part, the focus was on two stories; the aftermath of the bailout of the spanish banking system, and the upcoming greek election (june 17th) which will be over with by the time you read this (the whole play by play, nearly 100 links, covers the last quarter of this week’s global glass onion); in spain, after several failed attempts over the last couple of weeks to prop up their banks with financial sleight of hand, the spanish government finally went hat in hand to the eurogroup finance ministers for a bailout, the 4th such eurozone country to do so; & by that time the amount needed had risen from €29bn to €100bn (about $125 B)…instead of a direct bailout of spain’s banks, however, funds came as a loan from the EFSF (or the successor ESM bailout fund) directly to the spanish government, who set up a TARP like structure to bailout their banks, leaving spanish taxpayers on the hook for eventual payback, as spain is now expected to lower salaries, raise the VAT, & end their housing deduction…but the post bailout market euphoria lasted less than a day, however, and after a 3 notch downgrade by moody’s, spain’s benchmark bonds rose to near 7% by the end of the week & Italy’s financial markets panicked in sympathy (Italy is responsible for almost 20% of the spanish bailout, and they’re borrowing at almost 5% to loan to spain at 3%)…meanwhile, greeks have been pulling over €800m daily from their banks, or 1/2% of their deposit base per day, in uncertainly over their election results & its repercussions, as much of the country has become dysfunctional, with widespread shortages of necessities & slowdowns of services….meanwhile, the prospect that a euro slave state might actually elect an unapproved leader has the financial markets shaking in their boots; the thinking seems to be that should the left wing syriza party emerge the winner, greece might tell the troika to stuff it & leave the eurozone, precipitating some kind of catastrophe, so the banks have their crisis teams in place, running fire drills on possible Greek outcomes, and the central banks are preparing for worldwide chaos after this weekend’s election…but from here it’s hard to see it all blowing up tomorrow; watching europe stumble from crisis to crisis for over two years has been more like watching paint dry than anything explosive; the eurozone will certainly break up, but it will more likely be with a long whimper than anything like a bang…


on the home front, the major economic news story this past week in the blogosphere and in the media wasnt really news at all; it was about a Fed study of family finances and how they changed between 2007 and 2010; this 80 page study, the Survey of Consumer Finances (pdf), is one the Fed does every three years and has a census like quality to it; where categories of income & wealth are broken down in tables by demographic characteristics of the head of household, such as age, region, race, & by quintile…what attracted all the attention, however, was that the median family net worth fell almost 40% in the three year period; everyone knew the recession has been bad, but this was one hell of a hole; this depression wiped out nearly two decades of our family wealth…in fact, the bar graph above from felix salmon’s blog at reuters shows median family net worth is now lower than it was in 1983, with the caveat that those earlier surveys used a different methodology so they’re not directly comparable… the median family net worth fell from $126,400 in 2007 to $77,300 in 2010; however, the average net worth from the survey was still $498,800 in 2010, which is illustrative of how a handful of very wealthy people at the top can pull up the whole national average…of course; much of the drop in household net worth was driven by the housing market’s collapse, which was magnified by leveraged property; recall that net worth is assets less liabilities, so many families went from positive home equity to negative equity over the period; among families that owned homes, their median home equity declined to $75,000 in 2010, down from $110,000 three years earlier; but even if primary residences and the associated mortgage debt are excluded, the median of families’ net worth fell from $42,300 in 2007 to $29,800 in 2010…median family income took a big hit, too; it was at $49,600 in 2007, but by 2010 it was down to $45,800 – a drop of 7.7% in inflation adjusted 2010 dollarsreal average income fell even more; it went down 11.1%…furthermore, if you check figure 1 on page 2, you’ll see median income had also fallen slightly in the preceding three-year period, so by 2010 the typical family had been backsliding for 6 years..while the decline in median income was widespread across demographic groups, median incomes moved slightly higher for retirees, while the decline in median income was most pronounced among more highly educated families, families headed by persons aged less than 55, and families living in the South and West regions.

while median net worth fell for most groups in the period, the decline for the median family was almost always larger than the decline in the average, because those at the top held onto a larger percentage of their wealth, because in most cases their wealth was in assets that didnt take as big a hit as houses…generally, the poorer quintiles lost a greater percentage of their wealth than the top 10%, as the wealth of the top 10% was more heavily concentrated in financial assets, which had regained much of their value by year end 2010 (the surveys were conducted in the second half)…those in the top 10% of the wealth distribution had a median wealth of $1,864,000, and an average wealth of $3,716,000 in 2010; the top 10% also had the smallest percentage decline in both the median and the mean from 2007 to 2010, which you can see in the table to the left taken from the report…the numbers also make it clear that families below the 75th percentile of the net worth distribution saw the largest decreases in proportional terms; in fact “the median for the lowest quartile of net worth fell from $1,300 to zero—a 100 percent decline; at the same time, the mean for the group fell from negative $2,300 to negative $12,800” on the other hand, the median wealth for the 75th to 90th percentile group fell 19.7% and the mean fell 14.4%, while for the top 10%, the 11% decline in the mean was actually greater than the 6.4% decline in that group’s average…the table also shows the effect of the housing price collapse, as those in the south experienced a 55.3% decline in their median wealth as compared to the national median decline of 38.9%…you can also see that the median of those households led by someone over 75 years of age actually saw a modest gain in net wealth, while families led by those in the 35-to-44 age group saw a 54.4% decline in median net worth over the 3 years compared in this survey, while their average wealth fell 36.4%…
Click to View

probably the most important of the economic release of the past week was the May retail sales report from the census bureau, if only because 70% of our economy is still driven by consumer spending…the headline seasonally adjusted sales decline of 0.2% (±0.5%)* from april to may was the worst in 2 years, but that was mitigated by the impact of falling gasoline prices on overall sales; sans the 2.2% plunge in gas-station receipts, reported sales still fell, but by only 0.1%; the real weakness in this release showed up in the revision of the April report, originally reported as a weak gain of 0.1%, to a loss of 0.2%, again the first back to back sales decline since mid 2010…citing this report, both JP Morgan & BofA Merrill Lynch lowered their forecasts for 2nd quarter GDP growth by a half a percent, with RBS, Barclays & credit suisse also marking down their growth forecasts by lesser fractions…without car sales, the numbers were even worse, down 0.4%; but total May sales of $404.6 billion were still 5.3 percent above May’s of 2011; other than cars & car parts, sales of clothing & electronics increased, & sales of building materials & general merchandise showed the biggest decreases… although nominal retail sales are up 22.1% from the low water mark and are now 6.8% higher than the pre-recession peak, when adjusted for inflation and population growth they’re still 6.8% below the peak, at a level first reached in november of 1999, as shown on the adjacent chart from doug short...

also released this week were several price indexes for May; led by the 20 cent drop in the price of gas, consumer prices in May fell 0.3%, the most since December of 2008; the gasoline index declined 6.8%, which led to a sharp decrease in the energy index and subsequent decline in the all items index; since last year, prices overall are up 1.7%…core CPI, which is all items less food and energy rose 0.2% in May; for the year, core CPI inflation is at 2.26%; both of the alternate measures of computing inflation from the cleveland Fed designed to strip out volatility, median & trimmed, both showed a 0.1% increase for the month; also for May, the producer price index for finished goods fell 1.0% for the month (seasonally adjusted) and is now only 0.8% above last years level..  led by the cost of oil & food, prices of May imported goods were also down 1.0%, their largest decline in nearly two years; and we’re also seeing a virtual collaspe in commodity prices, too, with corn, cocoa, oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel all selling for 20% or less than they were a year ago…

the other May report released this week was Industrial production and Capacity Utilization from the Fed; and again the numbers were negative; the overall production index was down 0.1% month over month, after being up a revised downward 1.0% a month ago; the drag on the index was in factory production, which was off 0.4%, as automakers cut back for the first time in six months; the output of durables fell 1.3% with none of the major categories increasing;  automotive products production was down 1.9%; the output of home electronics was unchanged, while the output of appliances, furniture, and carpeting decreased 0.5%; production of consumer non-durables, on the other hand, were up 0.1%…in the other major production categories, utilities gained 0.8% & mining, including crude oil extraction, gained 0.9%…even with this May slowdown, the industrial production index remains 4.7% above its level of a year ago…capacity utilization, which was also expected to remain flat, fell 0.2%, from 79.2% to 79.0%; again, the weakness was in utilization of factories, which were only 77.6% in use, while “mining” was at 89.2% of capacity and utilities ran at 76.5% of capacity…year over year growth in capacity utilization has been 1.1%

(the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)

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