sequestration, income and outlays, 4th quarter GDP revision, 4th quarter household debt, et al

since neither the administration nor congress could find a way to avoid the sequestered cuts that both say they dont want, Obama signed an order on Friday March 1st to all begin implementing $85 billion in across-the-board spending cuts specified as the default consequence of the 2011 Budget Control Act, which came about as the result of the debt ceiling standoff of last summer (covered here, here, and here)…cuts run from 5% to some non-exempt non-defense discretionary programs to 7.9% for non-exempt defense; exempt from the cuts are most direct transfer payments, such as social security, veterans benefits, medicare, and unemployment rations…in addition, there is a 2% cut in payments to medicare providers…an 83-page white house report to congress (pdf) details the reductions they’ll make, agency by agency and program by program; most employees on a federal government payroll will be forced to take a number of days of unpaid leave, which will vary by department; for instance, as many as 800,000 civilian employees of the defense department will be required to take 22 days of unpaid leave before Oct. 1st…since some of the cuts will result from reductions in contracts for long term construction or defense that would have not been billed until fiscal 2014 (starts Oct 1) or beyond, not all of the cuts will be reflected in this fiscal year’s total outlays; CBO expects the sequester to reduce fiscal 2013 outlays by just $42 billion, so if the impact of the sequester reduces revenues by more than that, as Bernanke suggests they might, the net effect of these spending cuts may be to make the deficit worse….most estimates on the economic impact are fairly similar; both MacroAdvisors and Goldman estimate that sequestration will reduce 2013 GDP by 0.6% and cost between 700,000 and 750,000 jobs, which would increase the unemployment rate by 1/2 percent…of course, none of this is cast in stone and all of part of it could be reversed during any of the upcoming crises which will be brought to you by a government determined to sabotage its own country; on March 27, the continuing resolution that was passed last September to fund government operations at last year’s level without a budget will expire, giving the vandals in congress another opportunity to bring the government to a standstill, and should that opportunity slip by without serious damage, they’ll have another chance to take hostages when the temporarily suspended debt ceiling law is reinstated in mid-May…

FRED Graph probably the most significant economic release of the week was on Personal Income and Outlays for January from the Bureau of Economic Analysis; the bad news headline was that personal income dropped 3.6% in January and disposable personal income (DPI), or what’s left after taxes, was down 4%, which was the largest one month drop in income in 20 years…that means there was $491.4 billion less to be spent in January than December, which doesnt bode well for an economy which is 70% consumer driven…some reduction in this income aggregate was expected due to the expiration of the payroll tax cut, which reduced take home pay by $126.7 billion, and because December’s income figure was inflated by 2.6% as corporations paid dividends and bonuses early to avoid the expected higher tax rates; however, expectations had just been for a decline in incomes of 2.5% or less…but even with that much less coming in, we still managed to spend more in January than December, as personal consumption expenditures (PCE) increased $18.2 billion, or 0.2% over december; total personal outlays, which includes interest and transfer payments, was up $22.0 billion in January, compared to an increase in of 13.3% in December, which reduced personal savings, which is DPI less personal outlays, to $283.9 billion in January, down from $797.4 billion in December; this left the personal savings rate (the percentage of DPI saved) at 2.4%, the lowest since November 2007…the BEA also computes a price index for personal consumption expenditures with this release, however, even in their full release with tables (pdf) they just give the increase as less than 0.1% for January and 1.2% over a year ago….given that this index used by the Fed in their inflation targeting, doug short uses BEA data to compute their index to two decimal places; he shows that the headline PCE price index has increased by exactly 1.20% since last year, a decrease from the 1.43% YoY inflation shown in December, and that the Core PCE price index, which excludes food and gas, has declined to an annual rate of 1.28% from the 1.39% level of December…the FRED chart we have included above shows the monthly change in disposable personal income over the past 5 years; the grey area is the recession…in case you’re curious, the outlier 5.7% spike in May 2008 reflects tax rebates resulting from the Bush economic stimulus act passed that year…you can see that except for the outliers resulting from changes in the tax code, monthly DPI changes generally tend to be increases of less than 1.0%…

the first estimate of fourth quarter GDP, which we led with 4 weeks ago as BEA had indicated -0.1% negative growth for the first time since 2009, was revised by the BEA on Thursday to show a tiny growth rate of 0.1%; this revision is much smaller than the +0.5% gain we expected when the December trade data came in unexpectedly strong, but although the change in net exports almost added that 0.5% to the revised figures, that was offset by a little weakness in each of the 3 other major components, led for the most part by a decline in private inventory building from $60.3 billion in the 3rd quarter to $12.0 billion in the 4th which took 1.55% off GDP by itself; other private investments were positive contributors; nonresidential fixed investment increased 9.7%, residential fixed investment increased 17.5%, and investment in equipment and software increased 11.3%…for the rest of the GDP equation, personal consumption expenditures increased 2.1% from the 3rd quarter and added 1.47% to 4th quarter GDP instead of the 1.52% originally reported, and federal government spending decreased 14.8% and subtracted 1.38% from GDP rather than the 1.33% first reported….much as was earlier reported, the lion’s share of that decline was due to a 22% decrease in defense spending…and the positive change to net exports was dubiously facilitated by a 3.9% decrease in exports offset by an even greater 4.5% decrease in importsthe Zero Hedge chart we have below shows the major components of GDP by quarter for two years, and the 4th quarter’s first estimate and this week’s revision offset in the box to the right; the change in GDP by quarter is tracked by the black line…above the dashed line adds to GDP, below it subtracts…the quarterly change in personal consumption expenditures is in blue; as noted now adding 1.52 to 4th quarter GDP; the change in government outlays is in orange; you can see that government cutbacks, mostly at the state and local level, have been a drag on GDP and worked against a robust expansion; in the 4th quarter revision, it’s federal cutbacks that subtract 1.38% from GDP; the investment component of GDP is divided into capital investment in red and inventories in green in this ZH chart; while fixed investment added 1.36% to the 4th quarter, the inventory pullback subtracted 1.55%..lastly, we have exports in violet and import in teal…understand that exports add to GDP, and imports subtract, but what we are looking at here is quarter to quarter change in each…so since the level of exports went down in the 4th quarter from the 3rd, that subtracts .55% from the 4th quarter GDP change…and since the amount of imports also went down from quarter to quarter, they’re less negative this quarter than the last and hence the change adds .79% to 4th quarter GDP growth….

another report we want to look at this week is the 4th quarter Household Debt and Credit Report from the New York Fed (pdf), notable in that households increased their debt in the last quarter of 2012 for the first time in 4 years; the NY Fed reported that outstanding consumer debt increased $31 billion in the fourth quarter to $11.34 trillion, which was 0.3% more than the total outstanding at the end of the 3rd quarter; the increase was primarily due to an increase in non-housing debt, although mortgage debt also inched up a bit…household non housing debt was up 1.3% now stands at  $2.75 trillion, with auto loans up $15 billion, student loans up $10 billion and credit card debt up $5 billion… as of year end, $978 billion, or 8.6% of the outstanding debt was delinquent, compared with 8.9% in at the end of the 3rd quarter; $712 billion or that was at least 90 days past due, or considered “severely derogatory”…the serious mortgage delinquency rate improved to 5.6% from 5.9% in the 3rd quarter, serious delinquency rates for home equity lines of credit, which stood at 4.9% in the third quarter, dropped to 3.5%, which the NY Fed attributed to an unusual high rate of charge-offs during the quarter, while auto loan debt that is 90 or more days delinquent fell slightly to 4.0%; however, the over 90 day delinquency rate on student loans continues to rise and stood at 11.7% at the end of the year…the difficultly of determining the delinquency rate of complex situations of student debt was the subject of a NY Fed blog post, because repayment can be deferred as long as the student stays in school, and can then be pushed back by another six-month grace period after he or she graduates…as a result, only 39% are paying down their loans currently…they find that 47% are in deferral or forbearance, 27% have past due balances, and 21% would be the adjusted percentage of serious delinquencies…24 pages of the 30 page 4th quarter pdf report is a set of national and state graphs on household debt; two are included below…the graph on the left shows the total household debt outstanding at the end of each quarter sicne Q1 2003; in the bar for each quarter, the type of debt is color coded; from the bottom of each we have mortgage debt in orange, home equity loans in violet, car loans in green, credit card debt in blue, and student loans, the one type of debt which has continued to expand while other debt was liquidated (much through default or foreclosure)…on the right we have a chart with the percentage of loans outstanding in 11 states that are seriously delinquent; the national average is shown by the black dashed line…obviously large percentages of households in both Florida and Nevada are seriously overdue on their payments; we saw the reason for this in Florida last week where the MBA”s delinquency survey showed 12.15% of the mortgaged property owners in that state in foreclosure…and although less than 6% of home mortgages are in foreclosure in Nevada, the most recent LPS Mortgage Monitor (pdf) showed that 14.7% in that state were non-current on their home loans…also note that both California and Arizona peaked at over 12% seriously delinquent debt in 2009 and those ratios in both states have now cured to below the national average…

Total Household DebtClick to enlarge 

it appears that Bill McBride, in his weekly summary, has covered several other reports that we havent mentioned, including the December Case-Shiller home price indexes, construction spending, new home sales, the February ISM manufacturing report, and February car sales, so we’ll just send you there for those…note that the Case-Shiller index continues to show home prices increasing nationally even in winter, something even McBride didnt expect, but as we’ve discussed, this is largely a function of banks holding their foreclosed real estate off the market to create a shortage and large scale purchases of mortgage bonds by the Fed which continue to hold interest rates down…also, we’d add our usual caveat to the new home sales data from the census, which most everyone, including McBride, continues to report without noting the large margin of error; let’s quote the January New Residential Sales report (pdf), just so you know: “Sales of new single-family houses in January 2013 were at a seasonally adjusted annual rate of 437,000″…”This is 15.6 percent (±18.9%)* above the revised December rate of 378,000 and is 28.9 percent (±21.7%) above the January 2012 estimate of 339,000”  clearly, the margin of error for the month (±18.9%) includes zero, so as the census notes, they cant even be 90% certain whether there was an increase or decrease in sales for the month…also, the seasonally adjusted annual rate is very deceptive and obscures what’s actually going on; scroll the Census pdf down to table 3 on page 4, where it shows the actual estimate of new homes sold in January by stage of construction…you’ll see just 31,000 homes indicated as sold in January, but only 12,000 were actually completed, with 10,000 still under construction and 10,000 not even started…and other data in the report is just meaningless; for instance, it indicates the Northeast region saw a 27.6% monthly increase in new single family home sales with an error margin on that figure of ±97.9%

also, there’s one other important release of this past week not covered by either of us; the Advance Estimate on Durable Goods Orders, Inventories and Shipments for January (pdf); new orders fell 5.2%, but that was largely a function of lower pentagon orders for aircraft in anticipation of the sequester; for more details, the best coverage of this report on the web is from Robert Oak at the Economic Populist, who combines 10 FRED charts with census data for more thorough coverage than the Census itself… 

(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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