Thursday, October 29, 2009
Everything's Dandy, Sugar and Candy, Lala LA
But the underlying details aren't very encouraging. It looks like we have about four more months left on the inventory adjustments before those fade out.
Because of the overhanging debt problem, this is one of the few times in my life I've paid more attention to current-dollar measures than real measures. And that's what just kicked me in the face about this GDP release.
Table 1 gives you the change from prior periods in "real" terms. That plus 3.5 looks awfully nice, and I weakly wanted to stop there. Sadly moving down the table, we see that personal consumption expenditures (PCE) increased 3.4%, whereas disposable personal income dropped 3.4%. This might puzzle a person until one realizes that this far into a down period, people really, really start needing things. Everything from cars to lamps to clothing. So they are not as conservative as they would like to be. However one cannot assume that falling disposable personal income will correlate indefinitely to rising PCE; this is not how the world works in real terms.
I was steeled to the falling incomes bit, so I proceeded bravely onward to Table 2, which gives us the percentage contribution to the change from prior period. PCE accounted for +2.38%. Gross private domestic investment accounted for +1.22, but the vast bulk of that was inventory adjustment at +0.94%. The rest is basically gubmint spending at +0.48%, but state and local is declining, so the federal gubmint had to increase spending by 0.62% to create that positive.
So at this point we heave a sigh and acknowledge quietly to ourselves that people are spending money from savings (some of which is coming from written-off debt!) and government is spending mythical tax dollars (borrowing) in order to push this through. It is the personal spending which concerns us really. Disposable personal income is defined as personal income less taxes. This is why increasing taxes to spend more government money does not get you out of a recession but gets you further in. You can only increase taxes on the population in small wedge segments, or disposable personal income falls more than GDP increases from the government spending. Of course, one of our current problems is that state and local taxes are going up and have gone up for years disproportionately to personal incomes of many people living on stable incomes, which is tending to erode their spending power.
Brooding about PCE and declining disposable personal incomes I proceeded onward to Table 3, which gives us GDP level and change from preceding period in current and real dollars. Here is where one wants to stop and sing the Marine Hymn before proceeding; one suspects that this could be painful. The reason we are so interested in current dollar measures is that debt is paid out of current dollars.
So, metaphorically guarded by Marines, this one proceeded to look at current dollar measures in Table 3. Noting that GDP increased by about 150 billion, and noting that PCE increased by about 150 billion, the Marines and I scrutinized PCE with some care. Spending on motor vehicles and parts increased by about 39 billion. In the work-up for this release, I had figured that 5-7 billion was the real increase ex-stimulus, so we are going to subtract 32 billion as being evanescent and not a carrying force.
Gasoline costs were a concern. Gas prices increased, but real consumption only increased a couple of percentage points. Current dollar gasoline spending increased 48 billion, of which about 46 billion is definitely due to price changes. This goes into the category of "forced", which is really net retraction from other spending capacity; forced spending for consumers tends to shift their discretionary spending patterns down by more than the forced spending increase until the pattern stops changing. In other words, most consumers are likely to be extremely cautious about overall spending for some time to come.
In the services forced categories, health increased by about 19 billion; financial services and insurance increased by about 11.5. That takes us to 30 billion. So now we have PCE of 150 billion going to 128 billion without CARS. 128 billion - 46 billion - 30 billion = 52 billion. That's a kick in the teeth, that is. We did not emerge from Q3 with much of a carrying force at all.
If you think this is an irrelevant exercise, think again. Private inventories are still falling; the net contribution to gross private domestic investment in Q3 derived mostly from the fact that non-farm private inventories fell only about 147 billion in Q3 vs Q2's 177 billion drop. Non-forced spending has a lot to do with both jobs and moving goods out of inventory.
Even the Marines cannot save us from the sad reflection that PCE is going to be curbed later in this cycle by the fact that several millions of households are now living effectively rent-free through the simple recourse of not paying their mortgages. Eventually, this economic stimulus is doomed to end and it is hefty. Figuring that the average household manages to clear an extra 7K after compensating for moving expense, higher credit, etc, and figuring 2 million households a year, that gives us 2,000,000 * 7,000 = 14,000,000,000 or a 14 billion dollar stimulus, no small factor when you consider that that is 9.3% of the annualized increase in PCE seen in this GDP release. With initial claims hanging in there above the 500,000 weekly level, the picture is a bit intimidating.
There has also been a substantial net boost to spendable incomes and thus PCE from the lower mortgage rates. Those rates will hang in there in the future (who the heck is going to refi a 4.9% mortgage?) but the additive effect is about gone and it is real stimulus to the consumption side of the economy. Seven million housholds paying $2,400 less a year on their mortgage than otherwise is a net 7,000,000 * $2,400 = $16,800,000,000 (16.8 billion) added to spendable income. And we've hit the trough on mortgage rates.
So we are locked into increasing government stimulus to try to compensate for the net drags we believe to be coming in the first half of 2010. Oooh, that smarts. Boy, does that smart.
The combination of forced PCE increases with decliniing real disposable income suggests that the only real cure for this economy is consumer debt write-offs, which makes the wacky idea of giving households with 225K annual incomes 8K to buy a house look even stupider, doesn't it? It's kind of as if a person with declining income were running up debt on his credit card to buy gold toilet fixtures on his house just because he has a six-month very low APR on his credit card.
Update: No, it's not me with a bad case of the blues. I have a flat tire, but not the blues. Forbes article:
Don't worry and don't go short. Thats for losers and vegans. Bannana Ben got our back!
But if they don't, it looks like this will peak somewhere around Nov-Dec, and we'll be contracting again by March.
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