US budget updates, 2nd quarter GDP, june’s durable goods, new home sales, et al

with time running out before congress heads out for their august recess and the pre-election campaign season, there has been some movement that suggests they’ll avoid the fiasco of an unresolved budget that repeatedly threatened to shut down the government last year…house republicans, who are seen as the most likely roadblock to an agreement, were close to a deal to fund the government at the same level as it’s been funded under the 2012 budget for the first 6 months of the new fiscal year (starts Oct 1st), which would effectively kick the budget can past the elections through march, when republicans figure they’ll be in control of the oval office & both houses…although the House has made no progress on dealing with the fiscal cliff, those end of the year tax cut expirations & budget constraints now written into law which could knock 5% off GDP  (which we discussed here), the Senate Democrats, the party of the rich, has made some progress on resolving issues on the expiring 2001 & 2003 packages collectively known as the Bush tax cuts…with the republicans agreeing to drop their filibuster, a bill to reinstate clinton era tax rates of 36% and 39.6% for upper income brackets above $250,000 passed the senate 51 to 48…although the bill taxes earned income at these slightly higher rates, it exempts dividends & capital gains from those rates, and also reverts the estate tax to 35%, the lowest level ever reached under the regressive bush cuts, with a $3.5 million exemption, which will virtually assure that almost no one will pay an estate tax…and in other matters fiscal, the CBO rescored the Affordable Care Act based on changes imposed by the Recent Supreme Court Decision and found that it will now have a net cost of $1,168 billion over the next 11 years, compared to the $1,252 billion when it was last scored in March of this year for that same 11-year period, which amounts to a net budget reduction of $84 billion, and the White House released its mid-year budget estimate, wherein they estimated the deficit for the fiscal year ending Sept. 30th would be $1.21 trillion, which is $116 billion lower than the $1.32 trillion they estimated for this year in February; the ten year defict projection is now also $240 billion lower, mostly due to lower interest rates, & smaller medicare, medicaid & social securty expenditures; the Treasury further relates that the debt ceiling will not be reached until late this year, when they’lll be able to shuffle funds & suspend some payments to avoid dealing with it until after the new year…

Click to View on Friday, the BEA (Bureau of Economic Analysis) released the advance estimate for 2nd quarter GDP, which showed the “output of goods and services produced by labor and property in the US” increased at a seasonally adjusted annual rate of 1.5%, or more specifically, at a rate of 1.54%, a higher growth rate than most estimates, with the caveat that the data is “incomplete and subject to further revision” …the real (inflation-adjusted) annual growth rate for the 1st quarter was also revised from it’s last reported 1.9% to 2.0% (it had originally been reported as 2.2%, then revised to 1.8%, so it’s obvious these reports arent cast in concrete)…the increase of an annualized 1.5% in the 2nd quarter over the 1st was from gains in personal consumption expenditures (PCE), exports, residential & non-residential construction & investment, and business inventories, which were partially offset by imports (which are subtracted from GDP) and decreases in state & local government spending…PCE increases contributed less to the change in the second quarter than they did in the first (which we saw in the retail sales reports), as did residential & non residential investment, while increases in inventories and a slower decrease in federal spending contributed more, while both imports & exports increased…doug short produces a bar graph (above) that shows how the change of each of the 4 major components of GDP contributed to the change in GDP since the 1st quarter of 2007, with PCE in blue, net private investment in red, exports minus imports in green, and total government spending in violet…bars above the line contributed to a quarter over quarter increase (at an annual rate), & bars below the line subtracted from the reported quarterly change…the specific areas showing the greatest change in this report were real nonresidential fixed investment, which increased at a rate of 5.3%in the 2nd quarter, compared with an increase of 7.5% in the 1st, non residential structures, which only increased 0.9% in the 2nd quarter after a 7.5% increase in the first quarter, residential investment, which fell from a 20.5% annual rate of increase to a 9.7% rate of increase, and equipment & software, which increased 7.2%, up from the 5.4% increase in the 1st quarter…the largest category, personal consumption expenditures (which account for over 70% of GDP), increased at an annual rate of 1.5%, after increasing at a rate of 2.4% in the 1st quarter...real exports increased at a 5.3% rate in the 2nd quarter, vs a 4.4% rate of growth in the 1st quarter, while the QoQ change in the growth rate of imports was from 3.1% to 6.0%…meanwhile, federal govt consumption decreased at a 0.4% rate in the 2nd quarter, vs a decrease rate of 4.2% in the 1st, while state & local expenditures were off at a 2.1% rate, nearly the same as the 2.2% decrease in the 1st quarter…this release also reflected the regular annual revision of the national income and product accounts beginning with the estimates for the first quarter of 2009, so GDP figures back to that date were revised further…the only sizable changes were for the first 2 quarters of 2010, where GDP growth was overstated by more than 1%, and the 2nd and 4th quarters of 2011, where GDP growth was understated by over a half a percent…doug short also has a quarterly chart which illustrates these revisions…and former administration economist & now blogger jared bernstein does a good job of explaining why GDP is important for employment, graphing “Okun’s law” to show that in recent years a growth rate of 2.5% has been the baseline, with each percent of GDP growth above that generallt lowering unemployment by a half percent…

Click to View

while GDP tells us where we’ve been, there were also few reports this week that might give us some insight into where our economy is heading…first we’ll look at the Advance Report on June Durable Goods from the Dept of Commerce (pdf), which is mostly watched for new orders; they report that new orders for manufactured durable goods in June increased $3.4 billion or 1.6% to $221.6 billion, which was a greater increase than the 0.3% gain expected; however, excluding transportation goods, which had the largest increase of $5.1 billion or 8.0%, as Boeing received an order for 24 jets, new orders actually decreased 1.1%, and excluding defense, new orders decreased 0.7%, so orders for what are considered “core durables” actually decreased 4.6%, the sharpest drop since January…the greatest decrease was in orders for capital goods such as machinery & computers, which slumped 4.9%, likely reflecting slowing orders from Europe, where even german manufacturing is contractingDoug Short graphs durable goods and core durables in a series of reports; included above is his chart for core durable orders on a per capita basis adjusted for inflation; by this reasonable metric, real durable goods orders per capita are 40.6% lower than their April 2000 peak…another forward looking report out this week was the Markit Flash Manufacturing PMI for July (pdf); their preliminary survey of purchasing managers showed manufacturing barely expanded so far this month, with a reading of 51.8, down from 52.5 in June, being the lowest since December of 2010, on the typical PMI scale where readings below 50 signal contraction; their new orders index dropped to 51.9 from 53.7, while the new export orders index was at 48.3, the employment index was at 52.8, and work backlog was at 49.5…regional Fed reports this week included a dismal report from the Richmond Fed, which showed manufacturing in the Mid Atlantic region shrank, as its overall index fell in July to -17 from -3 in June, its lowest since April 2009, and the Kansas City Fed, which showed modest growth, with its month-over-month composite index up 5 in July from 3 in June but down from 9 in May; however, in the same vein as other reports, they reported their new orders for export index dropped from -7 to -13, almost matching their all-time low of -14 in early 2009…last week the New York Fed’s Empire State manufacturing index for July rose five points to 7.4, while its index for new orders went negative for the first time since November 2011, falling five points to -2.7, while the Philly Fed’s July index failed to improve much, as it only inched up to -12.9 from -16.6 in June… Homeownership Rate

this week also brought an unexpectedly weak report on June new home sales from the Census Bureau (pdf), which showed that new home sales had declined 8.4% (±12.4%) to a seasonally adjusted annual rate of 350,000, from May’s annual sales rate of 382,000 new homes, which was also revised down, from a gain of +7.6% over april’s rate to a +6.7% gain, however, April’s sales were revised up to a rate of 358,000 from 343,000, as were March sales, to a 352,000 annual rate…nonetheless, reported June sales were still 15.1% (±16.7%) over the rate of June last yearhome sales in the Northeast reportedly fell 60.0%, which some attributed to the heatwave; meanwhile, sales in the midwest were up 14.6%, sales in the south were down 8.6%, while new home sales in the west were reportedly up 2.1%the median sales price of new houses sold in June was $232,600; while the average sales price was $273,900…according to census, 144,000 completed new homes remained on the market at the end of June; this would be a 4.9 month supply of unsold homes at June’s sales rate… 

the census was also out with another report this week, on Residential Housing Vacancies and Homeownership for the second quarter of 2012 (pdf), a quite detailed report with charts and tables…it reports that the homeownership rate is up to 65.5% in the second quarter, up from the record low of 65.4% in first quarter but still 0.4% below the rate of the same quarter last year…they also report a rental vacancy rate of 8.6% and a homeowner housing vacancy rate of 2.1%; with the median asking rent at $716 and the median asking price for sales units at $134,600bill mcbride covers this report in more detail, often disagreeing with their findings…he posts the above chart which graphs the homeownership rate as taken from this report, with red dots representing homeownership rates as reported by the decennial Census from the same agency; it’s quite obvious that the reported numbers are considerably different in the two reports…

in another housing report, LPS released their First Look at mortgage delinquencies & foreclosures for June this week; reporting an increase in delinquencies for the 3rd straight month, they show 3,602,000 mortgages past due but not in foreclosure, or 7.14% of all mortgages outstanding, which is a 3.4% increase over the 6.91% of mortgages so qualified in May…they also report another 2,061,000 homeowners in the foreclosure process, representing 4.09% of the total, which is down from the 4.17% reported in foreclosure in May…despite the recent increases, the delinquency rate is now 7.3% below where it was a year ago, while the year-over-year decline in foreclosure presale inventory is only 1.0%…the complete Mortgage Monitor pdf will be available on LPS’ website on Aug. 6, after which we’ll cover it in more detail…

also released this week was the Midyear Metro Foreclosure Report from RealtyTrac, on foreclosure activity in 212 of the largest US metro areas; they show increasing activity in 125 of them, or 59%, although 129 are still reporting year over year decreases…of the 10 metros with the highest foreclosure rates, 7 are located in California, and also included Phoenix, Las Vegas & Atlanta outside of that state, while Florida had four cities among the top 20RealtyTrac sees the foreclosure rate increasing in the second half, & apparently thinks this is a good thing; as RealtyTrac CEO Brandon Moore saysforeclosure starts are welcome news for prospective buyers and real estate brokers in many local markets where a shortage of aggressively priced inventory has been holding up sales activity; {such areas} will likely see more distressed inventory for sale in the form of short sales and bank-owned properties in the second half of the year.”

(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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