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Friday, October 29, 2010

Table 10 and Table 3 For Halloween GDP Release

Here's all you need to know about the first take on Q3 US GDP. Full release is here in pdf.

Headline is 2.0%, which is just fine. It gets a bit ugly when we look at the numbers, but first a caveat - Q3 was greatly assisted by the extension of unemployment benefits. Numbers below are seasonally adjusted billions.

Table 3 - Level and Change.
GDP in total: +65.8 up from Q2's 56.1.

Personal Consumption (note that consumption is driving growth):
Total: +58.9, up from Q2's 50.2
Goods: 22.4 down from Q2's 27.2
Notable here is the food/gas reverse from Q2. Gas spending rose then while food spending fell; food spending rose this quarter while gas consumption fell. In general, the economy is growing healthily when both categories rise. If not, almost without exception a substantial percentage of consumers are pressured for money and trying to conserve cash, which does not bode well for more discretionary spending.
Services: 36.7 way up from Q2's 23.8
There was a healthy increase in recreation but a big drop off in financial services and insurance.

Gross Private Domestic Investment:
Over the long term, this category drives the economy.
Total: +54.6 down from Q2's 101.3.
Fixed: +3.5 down from Q2's 72.0. Oops. All categories were weak, but the major variation was in fixed residential, -28.8 compared to Q2's 19.4. However nonresidential, while positive, came in at 31.9 vs Q2's respectable 52.7.
Virtually all GPDI growth this quarter came from growth in nonfarm inventories which grew 48.9.

Right there one's eyebrow would raise. I think we will not see much of an inventory blowback in Q4 (see Chicago PMI) and I also think the dropoff in residential building has troughed this cycle. Yet one cannot ignore this. This is suggesting that consumption is all that's moving the economy right now.

And, since consumption is what moved the economy forward in Q3, naturally we skip right to Table 10, Personal Income and Its Disposition:
The very first thing I want to look at is the relationship between PCE growth and growth in wages and salaries. In Q2, wages and salaries disbursements increased by a bit over 50 billion, which was very close to the PCE increase. In Q3, wages and salaries disbursements increased by a bit more than 38 billion, which is unfortunately significantly below PCE growth at 58.9. That big a miss is not sustainable over the long term.

Over the short term, it can be done if government transfer payments support consumption.

In Q2, government transfer payments increased more than 41 billion. In Q3, they increased less than 24 billion. So the squeeze is on.

But there is also investment income and so forth. At the bottom of Table 10 you will see a 2005 chained dollar (real) line that gives the trend in personal income ex government transfer payments. Between Q1 and Q2, the increase was over 76 billion. That easily accounts for PCE growth and left us some. Between Q2 and Q3 the increase was a measly 15 billion.

Of course, if people earn more they pay more in taxes. This is good for the government, but one should correct for that. The last line in Table 10 gives disposable current income (income less taxes) in chained 2005 dollars. From Q1 to Q2, disposable current income grew 110 billion dollars! Unfortunately, from Q2 to Q3 disposable current income grew less than 14 billion dollars.

Now, this means that we have tightness ahead. Inducing rapid inflation in "needs" categories is not the way to fix that curve. It could in fact shift disposable current income in real dollars to the negative.

That's the Fed suicide curve, and I am hoping that they will say "hah - hah, just kidding" next week, and claim that it was just some spooky Halloween Haunted House-type fiscal trick. The only thing the Fed can currently accomplish this way is to squeeze company margins more (see the Prices Paid table in Chicago PMI on page 2) which will tend to constrict employment growth, and then you will have a double negative on real personal income. It is real personal income that matters.

Nor will raising taxes on most individuals or businesses help. That's the WTF suicide curve. Currently it is also the Dem plan, which has a great deal to do with how this election cycle is playing out.

Only time is going to help this.

In response to Sporkfed's comment in the previous post:
1) Your point is well-taken. I think this post sets out very clearly your contention.
2) However, the glorious thing known as "bankruptcy" is the factor to consider. Either consumers will continue going bankrupt in droves or CC companies are going to have to get serious about segmenting their portfolios, cutting rates for customers who are likely to pay the debt down, and junking the rest. CC companies are already taking a bit of a beating as relatively high CC rates cause better credit prospects to try to consolidate off their CC debt, which leaves CC portfolios in an adverse sort scenario.

It's not just income - it's also income less debt repayments. Disposable current income cannot increase very quickly, but debt repayments can be adjusted down and free more income for consumption. There is already a bunch of mythical mortgage debt being written off. Now it is time to clear the bad consumer debt. I hear radio ads for consolidation loans already.

Bernanke's not just pushing on a rope, he's pushing more and more people off a cliff.

Bernanke doesn't even know what inflation is so his compass will always be off. No worries, his handlers and Wall St. will be there to tell him what to do.

In Bernanke's mind, the solution for too much debt is more debt. And the solution to financial fraud is more fraud.

The damage has been done.
I'm ready to just start agreeing that we are in a full-blown recovery. If enough people believe it, maybe the Fed will believe it and stop making things worse.
I think the increased payroll deductions are still going to get us next year.

Ironically, I think the chances of extending the Bush tax cuts decrease if the Republicans take the House. Everybody knows the tax rate increase is going to be a disaster, and the Democrats were looking for a face-saving way to extend at least some of the lower rates. With a Republican House, it'll be easier to just blame the Republicans rather than put anything together. The only way those tax rates are getting extended is if the Republicans win veto-proof super-majorities in both houses, and that ain't happening.
Angry Saver - some damage has already been done. But if I pound one nail through my foot, that doesn't mean it's not very self destructive to pound eight more through in a fit of rage.
Neil - the new Congress won't be seated until next year. Regardless of the election's outcome, the current crop have to decide on the tax scheme. They can't blame it on the Republicans.

Of course, maybe they won't care, but I would think Obama will. He will still be sitting on the hot seat, and Reid probably will be also.

The problem for Obama and Reid is the same problem they have already. Their core constituencies have spend the last 6 years obsessing on the idea that the Bush tax rate cuts are the greatest economic evil perpetrated since Andrew Mellon. If the election demonstrates conclusively that the Democrat party has lost the independents and is down to core constituencies, it will be more difficult to compromise.

If a bunch of left-leaning politicians couldn't agree to a tax rate cut before an election, I don't see why they would afterward!
Charles - you have to consider trend growth. A full recovery is a return to trend growth. And believe it or not, this is about trend.

There are multiple factors producing the low trend, and the Fed appears to be in denial about it. God knows the WH and CBO are. I read their growth predictions and flinch.

The thing about trend growth is that hen you goose the economy to push longer-term growth past trend, you build up a backlash. (It is normal for an economy to briefly rebound far past trend when it emerges from a recession.) And it is not an avoidable backlash. In one way or another, you are inducing a price distortion to push the old donkey along. Eventually the donkey just quits on you, and then you give back all the extra growth and some.

Among the factors inducing low trend growth for the US are demographics, unavoidable income shifts, energy constraints, regulatory/legal constraints on expansion of production, and bad public policies. One bad public policy is our tax scheme - we have not kept pace on our corporate taxes with other developed nations who have been cutting for years to achieve growth.

Some of those could be fixed, but not under current management. The regulatory/legal framework is shifting for the worse, and so is energy policy, and it appears certain that taxes will be raised on a lot of businesses next year.

Therefore the Fed is very foolish to try to goose this sucker. The Fed did not create the trend and only a shift in public policy can change the trend. The Fed can create another downturn, and due to the last attempt to avoid reality, this time the Fed has no slack at all.

Right now, the situation is such that the economy is still in a growth cycle, although I think our wrathful ant is correct and that the Fed has already whacked the sick man on the head a bit to see if it would make him stagger.
I figure it will take 3 electoral cycles before it seeps into the brains of the surviving Congresscritters that repeatedly whacking the voters in indelicate places is counterproductive.
QE2 may not be about goosing the economy, but
rather shoring up the banking sector and allowing
the Treasury to raise funds at cheaper rates. I think we
may be 6 months from having to raise interest rates.
It is getting harder to fund deficit spending at these rates but higher rates will implode government obligations. That's why I see a lower standard of living
for all. Every action taken by the Fed leads to an opposite but equal reaction.
Spork - while the Fed has been talking up QE2, Mr. Market has been running up longer yields. That is hardly going to bail out the banks, and it is the reverse of what should theoretically happen.

And yes, since it seemed like a done deal most of it should have been priced in. Mr. Market was all like "AIIIIEEEEAAAEEEE" and running for the exit. This is why I think the Fed may emit a weak sort of laugh and giggle and then say it turned out really not to be necessary and they're just going to make a few token purchases and do more later if necessary. It really looks like that announcing a major buying program would raise long rates rather than dropping them. Discussing it certainly has.

I think the Fed is worried as you say, but I think the Fed does not control the situation.
Cahrles said, "I'm ready to just start agreeing that we are in a full-blown recovery. If enough people believe it, maybe the Fed will believe it and stop making things worse."

That's the thing. If the psychology changed (Obama quit beating up on business and the profit motive), the economy would turn. There's two trillion $ sitting on the sidelines wanting to see some signs of a friendly administration.

The FED can push on the string, but the psychology won't change until the admininstration gives up on redistribution. Since Obama is incapable of that sort of thinking, we've got two more years of pain and suffering to endure. Unless...........I'm wrong about Obama and he triangulates ala Bill Clintion.

Interesting times..
"If I pound one nail through my foot, that doesn't mean it's not very self destructive to pound eight more through in a fit of rage"
At what point have we put enough nails in our feet that it does not matter if we put more in or not? Be it with the Debt or economic regulations, at some point we have killed the economy and one more does not matter. Do you think there is a debt number that is unrecoverable? At what point is the game just plain over?
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