fiscal follies, November’s income & outlays, 3rd qtr GDP revision, week’s manufacturing & housing reports, & unemployment by state

with the so-called fiscal cliff fast approaching, the various proposals floated during the negotiations again were the center of interest in the economic blogosphere and the financial media over the past week, with related news and opinion probably encompassing a quarter of the linked paragraphs in this week’s global glass onion… but it was all for naught, as Obama and Boehner both went home for christmas with negotiations collapsing in disarray by the end of the week…however, since some of the proposals floated this week may yet rise from the ashes to be part of a final deal, a bit of a play-by-play is in order..

ssi cola cpi-w chained cpi

the negotiations began with Boehner breaking from his party’s no tax pledge to offer an increase in tax rates on those earning over $1 million a year, a switch from the medicare eligibility age increase to social security benefits cuts, with a one year extension of the debt ceiling, which was initially rejected by Obama; then Ezra Klein at the WaPo picked up on a deal that seemed to be underway, the notable features of which included undoing the Bush tax cuts over the $400,000 range, a cap on itemized deductions at 28 percent; spending cuts in lieu of the sequestered cuts that were to be later worked out by congress, and cutting Social Security benefits by changing the cost of living adjustment to follow a chained CPI, all of which was supposed to cut spending by $1.22 trillion over 10 years…the inclusion of the social security cuts brought on a firestorm in the progressive blogosphere; as social security is an independent program paying stipends from its own trust fund which is replenished from its own revenue stream, by law it is not allowed to add to the deficit, and its issues are two decades away anyway….but while that deal was being debated in the blogosphere, Boehner switched tactics and introduced what was widely called “Plan B” in the House, essentially just preserving the Bush tax rates on the first $1 million of income and not much else, pitched as a alternative to the “cliff” expiration, claiming that obama’s rejection of it would make him “responsible for the largest tax increase in American history”…but amazingly, despite the tough talk and ultimatum, Boehner apparently couldn’t even get his own Republican caucus to support it, and he had to cancel the vote on his plan; conservative republicans did not want to be on record as voting for a tax increase on the wealthy, even if taxes would go up on everyone if they did nothing at all…so Boehner called off further negotiations, shut down the House for the holidays & went home…at this point, the hope for any deal would seem to rest on the House Dems, but what they’re pushing still includes switching to a chained CPI for Social Security and other government programs cost of living adjustments, as well as for indexing of tax brackets, which would allow taxes to rise faster with a lower inflation measure…so its a lump of coal in your stocking no matter which way it’s resolved…since it’s impossible to project what future inflation and hence cost of living increases might be, robert oak at the economic populist has provided the above chart to illustrate the effects of using chained CPI to compute COLAs for social security would have been on a $1000 monthly stipend had chained CPI been used since the beginning of last decade… as you can see, the differences in cost of living increases are minimal at first, but over time they accumulate; using real data, if chained CPI had been used instead of CPI-W (CPI for wage earners), the cost of living increase over 12 years would have been $286.90, instead of the $336.60 per thousand that was actually added to benefits over the period..

FRED Graph likely the most important economic release of the week was the report on Personal Income and Outlays for November from the Bureau of Economic Analysis;  the BEA reported that personal income increased $85.8 billion, which was at a seasonally adjusted annual rate of 0.6%, and that disposable personal income (DPI), which is income after taxes, rose by $74.7 billion, also at a 0.6% annual rate, for the month; this constituted a rebound from the personal income data of October, originally reported as virtual unchanged due to Hurricane Sandy but revised with this report to show an increase of $7.5 billion in personal income and $6.4 billion in DPI, both of which were at an annual rate of 0.1% over September’s figures…moreover, adjusted for inflation, real disposable personal income increased at a 0.8 percent rate in November vs the decrease at 0.1% in October, which was the first gain in real disposable income since augustwages and salaries increased $41.1 billion in November, in contrast to the decrease of $16.3 billion in October, which BEA reports was caused by wages and salaries being reduced at an annual rate of $18.2 billion due to work interruptions caused by Sandyproprietors’ income increased at a $8.1 billion rate in November, compared with an increase of $0.5 billion in October, while transfer receipts increased $7.3 billion in November, in contrast to a decrease of $5.0 billion in October…meanwhile, personal consumption expenditures (PCE) increased $41.3 billion in November, or 0.4% at a seasonally adjusted annual rate, in contrast to the $6.6 billion, or 0.1%, revised decrease in PCE in October; real (inflation adjusted) PCE increased 0.6%, vs the decrease of 0.2% in octoberpersonal savings, which is DPI less personal outlays, was at $436.7 billion in November, compared with $404.6 billion of savings in October…the personal savings rate, which is personal savings as a percentage of disposable personal income, was at 3.6% in November, up from 3.4% in October…to calculate real DPI and real PCE for this report, BEA also produces a PCE price index, which is the inflation measure now cited by the Fed in monetary policy consideration…the BEA reports that the PCE price index decreased 0.2% in November, in contrast to an increase of 0.1% in October, due to a 7.3% decrease in the price of gasoline; meanwhile, the core PCE price index, which excludes food and energy, increased less than 0.1%, compared with an increase of 0.1% in October…using BEA data, the Dallas Fed “trims” the most extreme price changes and produces a trimmed mean PCE inflation rate for November at an annualized 1.3% rate; doug short has the annual change to the PCE price index computed to two decimals; Novermber’s headline PCE inflation fell to 1.42% from October’s 1.72%, while the Core PCE index fell to 1.47 from 1.57…the FRED chart that we have included above shows the nominal growth of disposable personal income per capita since Jan 2000 in red, and the real, inflation adjusted change in DPI per capita since the same date in current dollars (the spike in 2008 was the tax rebate)…while DPI per capita has grown 50.8% over the period, the real purchasing power of those after tax dollars is up only 15.2%, and real DPI per capita has just returned to a level first reached in November 2007

on Thursday, the BEA released the 3rd & final estimate for 3rd quarter GDP; which showed that the economy grew at a 3.1% annual rate, more than expected and more than previous estimates of a 2.7% rate in november and 2.0% rate when it was initially reported in October; the second estimate had personal consumption expenditures up at a 1.4% annual rate for the quarter; this was revised to a QoQ gain at an annual rate of 1.6%, led by an increase in durable good expenditures at an 8.9% annual rate; gross private investment decreased in this revision, from a gain at an annual rate of 6.7% to a gain at a rate of 6.6%; the largest gain in this component was an increase in residential fixed investment at a 13.5% rate; government consumption and investment was revised from a quarterly increase at an annual rate of 3.5% to an increase at a 3.9% rate, as defense spending increased at a 12.9% annual rate between the 2nd and 3rd quarters…meanwhile, the 2nd to 3rd quarter change in exports was revised from a gain at an annual rate of 1.1% to a gain of 1.9%, while imports, originally reported to have increased at a 0.1% annual rate, were found to have actually decreased at an annual rate of 0.6% (pdf source)…you might note how cumbersome this description of these elements of GDP is, but since the quarterly change in GDP and its components is expressed by BEA as a seasonally adjusted annual rate, describing it without suggesting that qualifier, as the media often does, is misleading to anyone not versed in these statistics; the actually quarterly change in these components can be approximated by dividing the data from the BEA by four…the bar graph from zero hedge that we have included here illustrates the quarterly changes at annual rate in each of the major components of GDP over the last two years, with the 1st, 2nd and final estimated for 3rd quarter GDP shown in the pink background box to the right…if you click on the graph to open it in a new window, you will see almost half of the final read on 3rd quarter GDP is from components not likely to carry into the current quarter…government expenditures in orange accounted for .75% of the 3rd quarter increase, and most of that was defense department spending, thought to be a tactical move by the pentagon to frontrun the fiscal cliff cuts to the military budget, while private inventory increases in green accounted for .73% of the 3rd quarter gain, such that if shelves and warehouses are filling up, they’re unlikely to be added to without a corresponding increase in sales…

while last week’s November industrial production data was still skewed by the rebound from Sandy, this week saw a number of reports that give us a glimpse of current manufacturing conditions forward looking, including three regional Fed surveys; the first was the December Empire State Manufacturing Survey from the NY Fed; their general business conditions index was showing modest contraction for a fifth consecutive month, falling 2.9 points to -8.1, while the new orders index dropped 6.8 point to -3.7 and the shipments index declined six points to 8.8.; both employment indexes were negative, the number of employees registered -9.68 while the average workweek slipped to-10.75…the prices paid index rose 1.5 points to +16.1 but its counterpart the prices received index fell 4.5 points to 1.1….the next report was the Philadelphia Fed’s Business Outlook Survey for December, which covers most of Pennsylvania, southern New Jersey, and Delaware; area activity rebounded from six months of contraction as its index of factory sector general business activity increased to 8.1 in December from -10.7 in November; the new orders index increased over 15 points, from -4.6 in November to 10.7 in December, and the current shipments index also improved significantly, rising by 25 points…meanwhile, their current employment index, at 3.6, registered its first positive reading in six months…then on Friday, the Kansas City Fed released the December Manufacturing Survey (pdf), which saw factory activity in the middle of the country decline for the third straight month; the month-over-month composite index was -2 in December, up slightly from -6 in November and -4 in October, but the the production, shipments, and new orders indexes all posted three-year lows, at -5, -8, & -8 respectively, all seasonally adjusted from much lower diffusion indexes…meanwhile, the employment index decreased to 13 after jumping to 22 in November…also on Friday, the Chicago Fed released it National Activity Index for November economic activity (pdf), which is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories…it registered 0.10, where negative values indicate below the historical average growth; and positive values indicate above-average growth; however this index has been negative for seven of the past nine months, and the 3-month moving average has been negative for all nine of those months and 22 of the last 28 months…a historical graph of this index from doug short is included here; the red dots indicate the individual monthly index, which you can see is quite volatile; the blue line tracks the 3 month moving average…the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for November (pdf) was also released by the commerce department on Friday; new orders for manufactured durable goods in November increased $1.6 billion or 0.7%  to $220.9 billion, following a 1.1% increase in October; the $1.0 billion increase to $32.0 billion in new orders for machinery was by far the largest percentage increase at 3.3%not including transportation, new orders increased 1.6%, and not including defense, new orders increased 0.8%Click to View

we also wanted to take a quick look at the Regional and State Employment and Unemployment Summary for November from the BLS, in light of the statement in the national report that “analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November”; recall this state and regional report is really no more than a breakdown of the two BLS employment surveys; based on household survey data, no state showed a higher unemployment rate, and 45 states plus the District of Columbia registered unemployment rate declines; Louisiana, who’s U3 rate fell from 6.6% to 5.8%, Nevada, who’s jobless rate fell from 11.5% to 10.8%, and Alabama and Tennessee, which both saw 0.6% declines, had the biggest drops in unemployment…the results from the establishment survey, as is typical, were somewhat different; the states showing the largest payroll job gains were N.Carolina, where 30,600 jobs were added, and Florida, which showed an increase of 24,500 jobs; meanwhile, the largest over-the-month decreases in employment occurred in New York, where 33,500 jobs were lost, followed by Indiana (-9,100) and New Jersey (-8,100)…that New York and New Jersey lost payroll jobs while most of the country was gaining them certainly suggests the hurricane did have an impact, even during the week of the 12th when that survey was taken…the BLS map included here shows state unemployment rates in broad groupings of 2% increments… state unemployment map 11/12

two of the widely watched reports on housing were also released this week; the first well look is from the Census Bureau, on New Residential Construction in November(pdf), and provides data on housing starts, completions, and building permits issued, and like all census reports has a wide margin of error; as reported, private housing starts in November were at a seasonally adjusted annual rate of 861,000, which was 3% (±14.3%)* below the revised October estimate of 888,000, but was 21.6% (±12.5%) above the 708,000 rate of November last year…the asterisk after 3.0% (±14.3%)* cautions us that since the 90-percent confidence interval between an 11.3% increase in starts and a 17.3% decrease contains zero, the change is not statistically significant, and no one can determine whether starts increased or decreased in November in spite of the widespread reporting of the headline numbers as gospel…the year over year change {21.6% (±12.5%)}, on the other hand, has a margin of error well within the range considered statistically significant; ie, we can be reasonably sure that housing starts in november were higher than last years…but when we contrast november’s year over year data with what was reported in october, we find that it’s now only half that; the year over year gain reported for October was 41.9%, with a ±15.9% confidence interval…obviously, anyone reading this report for housing starts with less than a jaundiced eye is likely to come away with a misimpression…however, the data on newly issued building permits has a much smaller margin of error and should be useful in at least tracking that activity; housing units authorized by building permits in November were at a seasonally adjusted annual rate of 899,000, which was 3.6 percent (±1.1%) above the revised October rate of 868,000; november permits were also a decent 26.8% (±1.7%) above the permits issued last November…but again, the data for housing completions exhibits the same wide 90% confidence interval that new starts does; in November, completions were at a seasonally adjusted annual rate of 677,000, which was 9.7% (±13.7%)* below the revised October estimate of 750,000 and 16.1% (±9.5%) above the completion rate of a year ago…the chart included here from bill mcbride show total housing starts in red and single family starts in blue; while the monthly figures may have too large a margin of error to be dependable, the trend over several years is obvious in the graph…

the other housing market report of the past week was on November sales of previously occupied homes, referred to as “existing home sales”…according to the National Association of Realtors, total existing-home sales rose 5.9% to a seasonally adjusted annual rate of 5.04 million in November from a revised 4.76 million in October; this November’s sales were 14.5% higher that the 4.40 million annual sales pace of a year ago, and are at the highest level since November 2009 when the rate jumped to 5.44 million annually on the back of the first time homebuyer creditat the end of november, 2.03 million homes were listed for sale, down 3.8% from October, which was a 4.8 month supply at the November sales pace; this is 22.5% below a year ago when there was a 7.1-month supply…the NAR continues to say that a low supply of available homes is pressuring home prices, and that as a result the national median price for all existing-home types was $180,600 in November, which was up 10.1% from a year ago…this was aided by record low 3.35% interest rates on 30-year conventional fixed-rate mortgages, which were down from 3.99% from November 2011…NAR also reports that sales of foreclosed homes accounted for 12% of November sales and they sold at 20% discount to the market, and short sales accounted for another 10% of sales, and those sold at an average of 16% less than homes that were not distressed…NAR President Gary Thomas said there’s been speculation of a rise in short sales before year end due to the pending expiration of the Mortgage Forgiveness Debt Relief Act; if congress fails to renew this legislation, mortgage debt forgiven in short sales will be treated as income and be taxable in 2013…  

(the above is my weekly commentary that accompanied my sunday morning links emailing, 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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