balanced budget nonsense, February’s retail sales, CPI, & industrial production

sectoral balancesthere was quite a bit of unwarranted buzz around the blogosphere about a number of budget plans that were introduced early this week, all of which were likely an outgrowth of the requirements imposed on both houses of Congress by the debt-ceiling postponement, that budget resolutions be passed by mid April or the member’s pay would be suspended; two primary proposals were put on the table by Patty Murray, chair of the Senate Budget Committee, for the Democrats, and by Paul Ryan, republican chair of the similar committee in the House, as the template for the Republican plan; there was also a budget proposal by the progressive caucus entitled The Back to Work Budget (pdf), although it was the Ryan plan that garnered all the attention…but here’s the thing; there was really nothing new in this Ryan budget plan that wasnt in his first plan that was introduced two years ago, or the Ryan budget as it was proposed last year; sure, the baseline numbers changed, the sequester and some tax changes are already in effect, but the nuts and bolts of the proposed budget are still the same old same old; repeal Obamacare and Dodd-Frank, convert Medicare into a voucher program, restore the defense budget, cut Medicaid and other safety net programs, and cut top personal and corporate tax rates to 25%…and even Ryan himself didn’t seem to take it seriously …nonetheless, all the usual suspects weighed in as if this was a new serious plan that had to be rebutted…but having this plan, which suggests that we should balance the federal budget, around all week did bring to the fore what seems to be a widespread misunderstanding about our fiscal situation…as long as the US continues to run trade deficits, it is impossible for the federal government to balance its budget while the private sector is deleveraging…every dollar of private sector surplus is always offset by a government sector deficit, and vice versa; its an accounting identity…therefore reducing government deficits will of necessity reduce private sector surpluses accordingly…this can best be seen on the above chart from Goldman’s chief economist Jan Hatzius…what you see here is that the financial balance of three sectors (private, government, and foreign) always and must net out to zero; because one sector’s income is always another sector’s spending…thus the only time the Federal budget can come close to balance is when the private sector is going into debt in a substantial way, such as we saw during the boom years early last decade…most other times, government borrowing, issuing notes bills and bonds, is just the Treasury’s equivalent of monetary expansion, creating the money needed for the economy to grow…and any attempt to reduce government deficits risks inducing a worse recession…

February retail volume 2013

the reported 1.1% increase in retail sales in February was quite a surprise, considering the 4% drop in real disposable personal income in January and the incessant warnings about the economic damage that would be done by the sequester that persisted throughout the month; nonetheless the Advance Retail Sales Report for February from the Census Bureau estimated that seasonally adjusted retail and food services sales for February came in at $421.4 billion, which was an increase of 1.1% (±0.5%) from January and 4.6%(±0.7%) above February of last year; a major part of the story was the 5.0% increase in gasoline sales, from $45,356 million to $47,642 million, due entirely to higher prices (which this report does not adjust for) as gas prices were up 54c over the first two months of this year and vehicle miles driven has continued to fall; retail sales of everything but gas were only up 0.6%…other types of businesses showing sales strength in February were and cars and parts dealers, which saw seasonally adjusted sales increase 1.1% to $78,466 million from January’s $77,600 million, and building and garden supply stores, which also saw a 1.1% sales increase, from January’s $25,314 million of sales to $25,603 million in February…declining month over month sales were seen at furniture stores, where sales fell 1.6% from $8,146 to $8,019 , at department stores, where sales fell 1.0% to $14,888 million from $15,032 million; at restaurants where sales were down 0.7% to $45,065 million  from $45,367 million , at electronics stores where sales slipped 0.2% to $8,290 million from January’s $8,309 million, and at sporting, music and book stores, where sales fell 0.9% from $7,825 million  to $7,751 million…we’ve included above a bar graph from Robert Oak at the Economic Populist to give a visualization of the size of each retail category; note that general merchandise includes both big box department stores and discount chains…all these sales totals are the reported seasonally adjusted totals, and all reported February sales were increased from actual sales by the seasonal adjustment algorithm; if we check table 1 in the census report (pdf), we see that actual unadjusted sales for February fell to $381,015 million from $382,361 million in January; that adjustment has been called into question by both zero hedge, who points out that this was the first time since 2009 in which a drop in actual February sales resulted in an increase in adjusted sales, and by Lance Roberts writing at Advisor Perspectives who also questions  first sequential decline in the data in the last three years…it’s hard to say what might have happened here, since we dont have access to the seasonal adjustment algorithm nor the computing power to work through it…but there is a weighting of the most recent 5 years in making that adjustment, and therefore, the earlier year’s seasonal adjustment would have included conditions in years prior to the recession, and this years would have just included early 2008, when the economy was already heading south, and subsequent years, when economic conditions have been less than robust…so that might generate a bias in the adjustment process that understated earlier years and overstates seasonal adjustments in this year and beyond…

the rising price of gasoline also contributed the greatest jump in consumer prices since June of 2009; the Bureau of Labor Statistics reported that the Urban Consumers Price Index (CPI-U) increased  0.7% in February on a seasonally adjusted basis; this brought the year over year increase to 1.98%, which the BLS rounds to 2.0%…a 9.0% increase in the price of gasoline contributed to a 5.4% increase in the energy price index and accounted for nearly 3/4ths of the increase in the CPI by itself; other energy components were higher too; fuel oil was up 3.1%, electricity rose 0.3%, and the price of piped natural gas was 1.2% higher than in January…the food index also increased slightly; which was attributed in the release to a sharp increase in the fruits and vegetables index, which was up 1.4% on a seasonally adjusted basis, but virtually unchanged for the month according to the unadjusted index which rose from 293.714 to 293.742.….we might ask did the price of fresh produce really go up month over month if the only change was in the seasonal adjustment of the price, but not at the grocers? however we answer that, the Core CPI, which is the index for all items less food and energy increased 0.2% for the month, as seasonally adjusted price increases of 0.2% for shelter, 0.8% for used cars and trucks, 0.3% for recreation, and 0.3% for medical care more than offset declines in the prices indexes of 0.3% for new vehicles, 0.1% for apparel, and 0.3% for airline fares, and which resulted in a year over year increase of 2.0% for the Core CPI; contrast that with the 1.8% year over year increase in the chained CPI, which the president is advocating be used to compute cost of living increases for social security and other programs…the chart below that we’re including here comes from the BLS via a post this week at the Atlanta Fed’s macroblog, which explains how the cost of shelter, or “owners’ equivalent rent” enters into the CPI; although the chart is year to date before this week’s release, it does give an excellent picture of both the weighting of each component and how much the price changes for each has influenced the overall CPI; note the red dashed line was they year over year change in the CPI as of last month’s release, and that the price of energy, which contributes to price changes in every component, especially transportation, is not separated out…also note a table of price changes for CPI components by detailed expenditure category is here; note the relative importance column for each category, as it shows the actual weighting of each individual item..

Consumer Price Index Components

another report that surprised to the upside, albeit slightly, was on Industrial production and Capacity Utilization for February from the Fed; industrial production rose at a seasonally adjusted rate of 0.7% for the month whereas consensus expectations were for a 0.5% increase; the January reading was revised to unchanged from the previously reported 0.1% contraction, and the index is up 2.5% over a year ago and now reads 99.5, based on 2007=100manufacturing output led the increase, rising 0.8% to bring that index to 96.5, utility output rose 1.6% on near normal weather to bring that index to 101.4, while mining & drilling production declined 0.3%, the 3rd decrease in a row, while the index still stands well above prerecession levels at 114.7…the manufacturing increase was widespread through most industry and market groups; production of consumer goods increased 0.7 percent, with durables manufacturing up 1.7% led by increases of 2.1% of automotive products and 1.7% in electronic, while non-durable manufacturing was up 0.4%, with a 0.5% fall in chemical products production a drag on the average…other groups seeing production gains in February included business equipment, up 2.5%, led by a jump of 4.7% in transit equipment, construction supplies, up a seasonally adjusted 1.5%, and business supplies, up 0.8%; the only industry group to see a decline was defense and space equipment which saw production fall 0.6% for the month…capacity utilization, the measure of of how much of our industrial plant was in use during the month, also saw decent gains, rising from a revised 79.2% in January to 79.6% in February, the highest since March 2008 when it was at 80.1%….capacity utilization for manufacturing rose 0.5% to 78.3%, utilities were running at 75.4% of capacity, up 1.1% from January’s rate, while utilization of drilling rigs and mining equipment fell 0.6 percentage points to 90.2%…our graph shows the production index for all industry in black, the manufacturing production index in blue, the utility production index in green, and the mining production index in red from the beginning of the index year of 2007…you can see the overall index closely tracks the heavily weighted manufacturing production index, which makes up 75.65% the total; utilities accounts for just 9.64% of all production, while mining accounts for 14.71%..

FRED Graph

(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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