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Thursday, August 19, 2010

Well, That's Ripped The Recovery Summer A New One

I have been wanting to chalk some of the sharp rise in initial claims up to special factors (re-apps after Census, mfrg schedules, etc). But I give up.

Despite the generally positive, although clearly slowing, readings on various manufacturing type indices, initial claims of 500,000 with a four week moving average of 482,500 cannot be ignored. We are also seeing the consistent pattern of upward revisions (which has been in effect much longer than the sharp rise) which generally augers trouble. Also, the pattern is discontinuous with the other factors which should already have peaked.

At the beginning of this year I targeted these claims as a way to distinguish a slow recovery from a double-dip type pattern. So I can't dodge it now, can I? I guess I better update the claims graph and take my medicine like a middle-aged twit. Who Struck John is clearly winning this argument! (No doubt much to his displeasure.)

We'll see what the next few employment reports look like. My guess is that we are seeing the state and local financing problems feed through into employment.

Okay, so now it's time to figure the base and extrapolate from there. The retail slowdown is clear, although not dire. Industrial indices are still okay. However price increases have cut further at the lower and broader levels of the population/consumption pyramid. It will be interesting to see Philly Fed. And then on to tax data for personal incomes to figure the base.

From there I can adjust my expectations. Lending surveys show that lending is loosening a bit at the bigger banks, so that is less drag. However the bigger banks have mostly cut their loan reserves too much as far as I can tell, so one can't be too optimistic.

In the spring I figured two dip scenarios. One was for a fallback in consumer with a slow industrial uptick on a lower dollar that basically hauled us through a series of oscillations between mild contraction and mild expansions (a skimming recession over 8-9 more quarters). The second was for a deeper and more protracted contraction which emerged into stronger growth in 2012.

Oh, lalalala, why does it feel like Friday the Thirteenth? Philly Fed goes negative!


Following a crummy Empire survey, this packs more wallop. Here's the whole thing, and it's salted with little nuggets like:
Indexes for new orders and shipments also suggest a slowing this month; the new orders index fell slightly, to -7.1, while the shipments index turned negative, declining to -4.5. Indicating weakness, indexes for both delivery times and unfilled orders remained negative this month.

The percentage of firms reporting a decline in employment (23 percent) was higher than the percentage (20 percent) reporting an increase. More concerning was the significant drop in the average employee workweek index from 1.7 in July to -17.1 in August.
Yeah, that would rouse a bit of concern! So far Chicago PMI has been hanging in with real strength. We'll have to see how the next few months go. The Empire State survey was much better than Philly, although shipments and new orders did turn negative.

Comments:
MOM,

"Oh, lalalala, why does it feel like Friday the Thirteenth? Philly Fed goes negative!"

For what it's worth, I was thinking of a different holiday.

Philly Fed says, six more years of Kondratiev winter! Woohoo!
 
You guessed correctly, MOM; I was hoping I was wrong, but just not seeing the turn in sentiment among customers and vendors to justify it.

I do wonder if some of this is coming from preemptive "hunkering down" by small businesses in preparation for the change in tax rates and regulatory environment next year. I mean, if you're a business with 51 employees, you have a heck of an incentive to figure out how to get down to 49 employees, don't you?

Ironically, this comes just as my own personal situation improves (going back to 40-hour weeks, woohoo!).
 
It would be interesting to compare the velocity of money
to the employment rate to gauge the time lag.

Sporkfed
 
In lovely Sonoma County the Grape harvest looks to be a month late if we get some warm weather. if not,the rains will come and the Grapes will rot. A lot of seasonal employment revolves around this crop. Coopers,bottlers,truckers and the men,mostly from mexico who actually do the harvesting. These are skilled crews who are paid commensurately and they show up every year at the same time. They showed up this year and there is no work for them,many will have to supplement their income some how or leave. And they can not be easily replaced if they leave. In other news,home prices continue to drop ( $239k for a decent 3/2 in sebastopol,more than 50% off peak) while some sellers price as though home appreciation kept going after 2007. I got my first tomato on 8/15!
 
Tom - now that's COLD. I knew the West Coast was still chilly, but that drives it home.

I think we are in for years more of dropping home prices in many areas. The higher-end stuff will drop now, but that will further depress the mid-range.
 
Spork - velocity as measured isn't quite as direct a relationship.

For one thing, there is a big economic difference between shifting money in small circles versus the production type of spending. Production requires a lot of crude materials, transport and labor inputs, as well as capital machinery. So money spent in production diffuses through the economy in a much broader way than money spent in say, flipping houses or trading and arbitraging financial assets.

But production is up (except for homes and commercial buildings, of which we have a big oversupply in many areas) so unless we decide to shoot ourselves in the head with nail guns, it does put a limit on how far and quickly the economy can drop.

I hate to put it like this, but every penny that isn't spent on shoes imported from Asia, or clothing imported from Asia, or imported jewelry, etc, but rather spent in local production probably will support our economy in the long run.

We just keep trying to take the cheap way out like a bunch of fad economic dieters who just can't understand why they keep gaining weight.
 
WSJ - Yes, I think there is some protective impulse going on.

The extra costs for small businesses just involved in the idiotic 1099 requirements alone probably have some businesses freaked. I was reading a thread on DU which just lambasted Congress over it; apparently Congress hasn't been able to understand the POV of businessmen at all even though the change in the Independent polling is clearly linked to small businesses.

And medical cost changes are hurting other businesses. And then there is the worry over other tax increases. Without knowing your net margin, how does a business in a tight environment even figure payoffs on investments? I sure don't know how to do it.

There appear to be sharp pricing limitations in effect due to lower incomes, so you can't theorize that you can raise your prices to compensate. If tax rates are raised sharply on successful businesses, this surely means that some capital investments may not pay off.
 
Mark - I am glad you can keep your sense of humor.

I was also laughing about the T-bill warnings. The silly season on Wall Street is upon us.
 
MoM,the high end dropped first then the low end,for the most part.some movement in the middle.There is stickyness in asking prices at all levels,made worse by agents "buying" listings by listing at an unrealistic price. And they do pay for them, in ill will and in cash.Marketing a property costs in time and money. I do see signs of capitulation and it will come with a rush when enough appraisals come in low and enough listings expire.
 
MOM,

Mark - I am glad you can keep your sense of humor.

Bill Murray Quote

Bank Guard: What the Hell kind of clown are you?
Grimm: The crying on the inside kind, I guess.


I laugh at my computer most days, sometimes with our economy and sometimes at it. It's not always easy though, especially since my girlfriend has been unemployed for over a year.

I didn't find much humor in Siegel's words though. He may or may not go down with the Titanic, but he always downplays the risks.

October 8, 2008
Another Optimist Capitulates

It seems our economic system is teetering on the brink of collapse. Jeremy Siegel, finance professor at the University of Pennsylvania´s Wharton School of Finance commented, “Two weeks ago was the first time in my life that I was worried about the very stability of the United States financial system.”

Everything is all biscuits and gravy now though apparently. He feels the need to guilt people back into the stock market even after its impressive rally. Go figure.

Take TIP. It's an inflation adjusted bond fund. There is risk there. It's about 4% higher than its average price since 2003. Since it pays out all interest and inflationary gains, it tends to hover at about $103. It is now $107 thanks to falling interest rates.

Siegel is telling me that it is a bubble now. All $4 of it apparently. Good grief.

To be fair, there is more risk than that. If the stock market completely implodes and deflation sets in a major way I will experience some pain. That said, I'm not exactly thinking that was the basis of his bubble argument, lol.
 
So MoM is moving in favor of tariffs
for finished goods ? What I'm trying
to figure out is what is the needed
Velocity of money to sustain growth.

Sporkfed
 
M_O_M,

Even on DU they don't like the new 1099 reporting? Perhaps there's hope!

Sporkfed,

Although you've got some good tax efficiency arguments on your side, I think that a tariff would cause foreign policy problems that would outweigh any possible gains. I don't particularly want to be on the receiving end of China's anger in about 20 to 30 years over a move like that.

Besides, I suspect it's not necessary. How about these steps: Revamp the personal tax code to stop penalizing saving and investment (maybe with lower or zero taxes on interest and dividends). Change the business tax code to stop penalizing fixed capital investment (reduce the corporate income tax, allow expensing of capital investment, get rid of payroll taxes). Compensate with income tax rate increases across the board (no more bashing of the wealthy).

If we do those things while cutting some of the regulatory silliness, we'll start generating jobs and exports again, and increase tax revenue to boot.
 
Neil,

Revamp the personal tax code to stop penalizing saving and investment (maybe with lower or zero taxes on interest and dividends).

Compensate with income tax rate increases across the board (no more bashing of the wealthy).

I'm retired. How could transferring most or all of my income tax burden to the poor possibly help this country?

High income inequality in America is one reason I'm bearish.

The Gini Index was 45 in 1929. It fell to an estimated 37.6 in 1947. In 2006 it stood at 47. That was the highest level ever recorded. That's even higher than it was heading into The Great Depression.

15 Mind Blowing Facts

I have a vested interest to just keep my mouth shut. I can't do that though.

Here's how Bush's capital gains tax cut affected me in 2004.

I sold all of my stocks for a profit. I paid far less capital gains tax than I would have previously paid. That money saved went straight into inflation protected treasury bonds.

The net effect is that the instant the capital gains tax was lowered I became wealthier relative to the poor. Another way to look at it is that the government basically gave me free treasury bonds for selling the stocks I was planning to sell anyway.

My savings were certainly stimulated. I didn't need or ask for any help though. I obviously can't speak for others, but the help that I received definitely hurt this economy. The country is now more in debt because of it with absolutely nothing to show for it.

And once again, I'm only speaking for how the cuts affected me personally. I doubt I was alone though.

As much as I hate to say this, if the government singled me out for tax increases, and only me, it could only help this economy. That taxed money could be spent elsewhere. I'm pretty much already in maximum frugality mode. It isn't like I can become much more frugal. Further, I have no debt. There's no risk of hurting the banking system by increasing the taxes on me.

Somebody will have to pay more taxes and from where I sit, I'm one of the best choices. Sigh.
 
Mark,

[snark] As surprising as this may be, it's not all about you. [/snark] ;)

OK, got that out of my system.

The idea is to incentivize savings and investment relative to consumption. That's how we create jobs, and how poor people hang onto some wealth. If the tax system penalizes savings and investment relative, maybe snarky Mark will just blow his T-bills on billiards and liquor. We want him to keep his stash in the system, unless he pulls it out to start a business. That's how we grow the economy, and how we increase the government skim to cover our obligations.

I'm pretty sure Sporkfed and I agree on this point, though we differ on the required measures.
 
Neil,

I know it isn't all about me. If it was all about me then I would just keep my mouth shut as you seek to reduce my income taxes to zero.

If you think a growing inequality gap is good for America, then by all means reduce the taxes on the rich while simultaneously raising taxes on the poor.

We can always just bail out the banks once the poor stop making payments on their mortgages, again.
 
Mark,

The tax system has incentivized consumption over investment for 50 years. Has that decreased the income gap?

Is there any evidence at all, that increasing taxes investment and savings decreases the income gap? Perhaps it seems intuitive, but does that make it true?
 
One more thought.

"If the tax system penalizes savings and investment relative, maybe snarky Mark will just blow his T-bills on billiards and liquor."

Sounds good. All that extra demand could see American billiard and liquor businesses begin to hire.

They might even buy sailboats manufactured right here in the USA. Who knows?

One thing they probably wouldn't do is make trips through Wal-Mart though. That stuff's all Made in China as you know.

Just sayin'. ;)
 
Mark,

One thing they probably wouldn't do is make trips through Wal-Mart though. That stuff's all Made in China as you know.

That won't change, as long as we punish capital investment and reward consumption.

I'll point out again that we've been using our current punitive policies for 50 years. Continuing them won't change the income gap.
 
Neil,

The tax system has incentivized consumption over investment for 50 years. Has that decreased the income gap?

Is there any evidence at all, that increasing taxes investment and savings decreases the income gap? Perhaps it seems intuitive, but does that make it true?


The tax system has also reduced top marginal tax rates for 50 years. During that period the Gini Index rose.

Can you supply any evidence that lowering the top marginal tax rates have not contributed to the rise in the income gap?

Because from where I sit, if large incomes are taxed at high rates, large incomes tend to be smaller incomes.

I know this is very unpopular to all parties here. I just cannot understand how it helps the country for me to be paying no taxes. That's all.

I'd be in favor of some sort of VAT that actually taxed consumption, but I'd want to make sure that the poor weren't burned by it.

At least then I'd be paying some tax.
 
Mark,

I agree with you partly. No offense intended, but it makes no sense that you don't pay any tax on your risk-averse strategy, while risk-takers have to pay tax on capital gains, dividends, and business loan interest income. That's one of the problems I propose to fix. Taxes on investment income (risk-taking) should be lower while taxes on T-bills and munis should be higher. I'm ambivalent on savings accounts and CD's--it depends on whether the restructured banking system actually issues business loans or not. I'll also note that T-bills and munis are preferred investment vehicles for the wealthy in this country.

As to lowering the top marginal rates, what the heck are you talking about? I said we should raise income tax rates on everybody! I didn't even say we should flatten the rates. I just said we need to stop penalizing the activities we want to see more of. I'm open to arguments about the relative merits of a flatter vs. steeper tax progression, but I also think it wouldn't matter nearly so much if we'd stop penalizing investment.
 
Oops, forgot to point out that my original suggestion here included elimination of the payroll tax, which would make the tax rates more progressive.
 
Neil,

"No offense intended, but it makes no sense that you don't pay any tax on your risk-averse strategy, while risk-takers have to pay tax on capital gains, dividends, and business loan interest income."

I agree with you. However, I DO pay tax. My TIPS are not tax free. I pay tax on them every year, even on the inflationary gains that they accumulate but are not actually paid until they mature. I don't even get the favorable capital gains tax rate on those inflationary gains either.

You said...

"Revamp the personal tax code to stop penalizing saving and investment (maybe with lower or zero taxes on interest and dividends)"

I am saving. I am paid interest. I pay tax on that interest. That's about the only way I'm taxed these days. If there were zero taxes on interest as you proposed then I would NOT pay any income tax. That was my whole point. Your original proposal did not seem fair to me.

Your new plan might really stick it to me though as investors stopped buying the lower risk assets that I own. Maybe you are trying to grant me my wish, lol.

I'm already earning less interest on treasuries than I could get in bank CDs. Do you not want Americans to be the ones buying American treasury debt?

Would the CDs still be backed by FDIC?

My I-Bonds have been severely penalized too. I-Bonds purchased in November will more than likely have a 0.0% rate (over inflation, locked in for the life of the bond). That means that after taxes it will be extremely unlikely for them to even keep up with inflation, much less turn a profit.

As for...

"As to lowering the top marginal rates, what the heck are you talking about? I said we should raise income tax rates on everybody!"

I definitely got sidetracked there. Right you are. Sorry about that.

"Oops, forgot to point out that my original suggestion here included elimination of the payroll tax, which would make the tax rates more progressive."

It would.
 
Interesting discussion.

Mark, income inequality mostly stems from unchecked immigration (which is essentially class warfare) and lower production. High production generates higher wages.

At any time in any country, unchecked immigration drives down the cost of labor and produces income inequality. It becomes persistent income inequality when you have a good social welfare system and low production. Service economies are low-wage economies.

I'd write a lot more about this, but I have bursitis of the shoulder and typing is very hard.
 
Neil - you can't eliminate payroll taxes, because if you do, the voters will inevitably demand more and more benefits. Without the adverse signal of increasing payroll taxes, you will see income taxes jacked so high that investment will be sharply limited.

On average, social benefits to persons should be paid by the persons - not by corporations. Note that I said "on average", meaning that of course higher-income earners will throw a lot more into the pot.

Having the voting population as a whole pay for the benefits that the population as a whole receives keeps benefits correlated to incomes. Without that feedback system, economies self-destruct.

However we have gone too far, because we used the higher payroll taxes to offset income taxes. Therefore, we will have to raise income taxes, but I am suggesting that we do so on tax-sheltered income.

The capital gains tax is the most economically destructive tax. It should be set very low. The capital gains tax shelter for residences, for example, is really quite necessary. Otherwise it would not pay most persons to buy a house and live in it for decades, because they would essentially come out negative in the end. But if that is true for a house, it is even more true for industrial assets. A high long-term capital gains tax is mostly a tax on inflation.

Taxing interest makes more sense, but it should be taxed progressively. Tax-sheltered interest has become a huge tax shelter for the relatively well-off. That has very destructive economic implications. It shifts, for example, investment money from the private sector to the public sector in the form of muni bonds.
 
One more thought before I head off.

I think we're closer now than I thought we'd be.

I would not consider myself rich. I'm just fairly well off if I don't do anything stupid with my nest egg or we don't hyperinflate or default on our debt.

I would doubt that any of your proposed changes would do anything but help me. I'm just looking to see that the poor don't get shafted in all of this. That's all.

It started off looking like another Romney plan and that bothered me. I can see now that is not what you intended though.

Romney Plan Would Eliminate Some Taxes
 
MOM,

Tax-sheltered interest has become a huge tax shelter for the relatively well-off.

Speaking of that.

Suze Orman vs. Warren Buffett Revisited

What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound."

If the "city goes under", and the insurance company insuring those bonds go under, I'll be posting about injustices if the taxpayers end up bailing her out. Let's just put it that way.
 
M_O_M,

Good point about payroll taxes. I guess it would make sense to increase payroll taxes rather than increase the income tax, as long as the psychological link to social benefits can be maintained.

The corporate portion of payroll taxes should be done away with, though. If we're to have them at all, they should come out of the top-line number on the W-2, and not act as a hidden tax on employment.
 
MOM's spot on about going after the tax-exempt income. AMT-exempt income, foundations and trusts used primarily to evade gift and estate taxes -- these are the kinds of things we should target.

For capital gains, I would index the basis amount, but tax the net proceeds at a higher rate than we currently do. This way, you are taxing REAL gains, not inflationary gains. I dislike the positions of both the Party of Envy (tax capital gains unbearably, whether the gains are real or inflationary) and the Party of Greed (don't tax capital gains at all).

Unfortunately, I can be completely confident that these approaches will not be enacted anytime soon.
 
MOM,

"At any time in any country, unchecked immigration drives down the cost of labor and produces income inequality. It becomes persistent income inequality when you have a good social welfare system and low production. Service economies are low-wage economies."

I can't argue with that. However, China's income inequality has also risen dramatically as well. Any thoughts?

This is a major concern of mine long-term.

Automation and Inequality

It would appear that we are spending roughly the same amount of inflation adjusted dollars on farm labor over the years but on a fewer and fewer number of workers.

We have non-farm payrolls now. Is non-manufacturing payrolls next?

In my opinion, we're running out of long-term job creation ideas. In order to be competitive globally, we need to be more productive. If farming is any indicator, that means jobs disappear.

Capitalist/Socialist Utopia!

Worse, we've been counting on a 61 year exponential job creation trend that's virtually impossible to continue.

36 Million Missing Jobs
 
Who Struck John,

"Those who would banish the sin of greed
embrace the sin of envy as their creed.
Those who seek to banish envy as well,
only draw elaborate new maps of hell." - Dean Koontz

Prepare for the Balanced Greed and Envy Recovery Act. It will require several thousand pages of new regulations. There will be unforeseen unintended consequences of course, but it will be a good start.

The key here is that it will help our country "change". By taxing all envious and greedy behavior, the CBO predicts an actual budget surplus by 2025.

Sigh.
 
WSJ-- But then which party gets to decide what constitutes "inflation"? Simpler is better.

Also, capital gains should be advantaged, because all of society benefits from the investment, on average. Unlike wage income, which primarily benefits the earner. Capital gains are required to maintain and improve our society.
 
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