MaxedOutMama
Thursday, June 30, 2011
Ho-Hum Thursday
NACM Update. This sounds a cautionary note. The strong drop in favorable indicators on manufacturing is not that good a sign. Both the combined index and the manufacturing index are negative this month, although the decline is much, much less than last month's reading. Indications of financial stress remain, but at least one can say that this month's survey does not show a cartwheel into disaster. We will have to see how this shapes up over the summer. Since April, the index of favorable factors for mfrg: 62.7 > 59.5 > 56.9. This should be strongly associated with production pace.
K.C. Update: This one rebounds as well, hardly surprising since it is strongly correlated to Chicago PMI. Inventory build, but production, etc, go back to April levels. Below March, but a recovery from May's unhappiness.
Update: I KNEW THERE WOULD BE A PONY IN HERE SOMEWHERE. Chicago PMI. Inventory cleared, and it probably is mostly on autos. There is a large rebound in headline, employment is growing but at a slower pace, and order backlogs fell to SA negative territory at 49.3. Still, as long as inventory is cycling through there is no need to panic and run screaming. This report is quite consistent with slowing growth trends in manufacturing, but not collapsing growth trends. A huge distinction. End update.
Well, at least it's no worse.
Initial claims advance was 428,000 from last week's unrevised 429,000. The four week moving average for initial claims moved up slightly to 426,750. The four week trajectory is 430,000 > 420,000 > 429,000 > 428,000. For a series so volatile, this is oddly consistent. There don't seem to be any distorting effects in here - it just is at this pace.
The pace suggests weakness in the job market this summer, mostly in services. Services tend to be more stable employment so that is probably why the series is so oddly even at this point. Nothing ever happens quickly in services, but jobs lost tend to take a long while before they are replaced, so that is not necessarily a good thing.
Later today Chicago PMI comes out, followed by K. C. Manufacturing survey.
Since we have indications of service weakness (concentrated in service directly to somewhat strapped consumers, with some residual weakness in services to state and local governments), I am watching the inventory portions of the manufacturing surveys with great attention. The natural response to building inventories is to scale back production, and if we see enough of a scale back conjoined to enough weakness in services, that will put us into a contraction cycle. The actual mechanisms causing a contraction cycle don't develop quickly - by the time it is overt you usually are six to eight months into the contraction cycle. Specifically, what I am looking for in these surveys is this progression (from May Chicago PMI):
Many analysts are predicting a better economy, but in reality it will all depend on inventories.
Ford made cheerful comments about car sales later this year, which is encouraging, although Ford also said it did not expect June sales to be all that great. Weakness in car sales is one of the factors that tends to push the economy into a contraction cycle, so I am waiting for June car sales in great anxiety. Ford did pretty well last month compared to GM. Ford's production lines are running all out.
My view can best be summed up by the observation that I am seeing a spate of absurdly optimistic economic projections. For example, Germany's economy is, by most standards, doing just great, with unemployment continuing to drop to a multi-decade low. But in May German retail sales fell 2.8%. German inflation is around 2.4% currently - households are just tight on energy costs, which now include electricity costs from Germany's foray into wind and solar power, which are jacking up German household's utility bills.
This is a regressive trend - most wealthier German households can install solar panels, which carry such a huge feed-in subsidy that they can essentially exempt themselves from this portion of inflation. So household that can do this have done it in great numbers - the revenue stream is guaranteed for over a decade. But the poorer households end up paying for it because the tab for extremely costly electricity generation is distributed on all their bills.
Expectations of some sort of surge in consumer spending on gas prices in the US are idiotic. It's not going to happen; in fact gas prices hugely rebounded yesterday on currency trends. Inflation is also raising auto prices in the US along with everything else, and I think affordability is one of the factors in what seems to be a somewhat weaker sales trend there.
Australia will probably raise rates next. ECB may not do it in June, but probably will by the fall. China is fighting its inflation war with little success to date, so it is letting its currency rise to help with import costs. This is not going to work out all that well for China, because most Chinese inflation is internally sourced at this point. The Fed ought to start raising US rates, paradoxically it would improve our economy in the short term. But it is too dangerous - the Fed does not have the guts to try it.
Given the global situation, commodities cannot adjust downwards significantly in pricing, but must continue to press on real incomes. So economic growth varies pretty much in proportion to each economy's individual consumption/production balance. The only short-term fix for the US is to raise interest rates, which will both suppress commodity pricing by making it more expensive to play in the market and adjust away some of the currency effect now very obvious in dollar-priced commodities.
K.C. Update: This one rebounds as well, hardly surprising since it is strongly correlated to Chicago PMI. Inventory build, but production, etc, go back to April levels. Below March, but a recovery from May's unhappiness.
Update: I KNEW THERE WOULD BE A PONY IN HERE SOMEWHERE. Chicago PMI. Inventory cleared, and it probably is mostly on autos. There is a large rebound in headline, employment is growing but at a slower pace, and order backlogs fell to SA negative territory at 49.3. Still, as long as inventory is cycling through there is no need to panic and run screaming. This report is quite consistent with slowing growth trends in manufacturing, but not collapsing growth trends. A huge distinction. End update.
Well, at least it's no worse.
Initial claims advance was 428,000 from last week's unrevised 429,000. The four week moving average for initial claims moved up slightly to 426,750. The four week trajectory is 430,000 > 420,000 > 429,000 > 428,000. For a series so volatile, this is oddly consistent. There don't seem to be any distorting effects in here - it just is at this pace.
The pace suggests weakness in the job market this summer, mostly in services. Services tend to be more stable employment so that is probably why the series is so oddly even at this point. Nothing ever happens quickly in services, but jobs lost tend to take a long while before they are replaced, so that is not necessarily a good thing.
Later today Chicago PMI comes out, followed by K. C. Manufacturing survey.
Since we have indications of service weakness (concentrated in service directly to somewhat strapped consumers, with some residual weakness in services to state and local governments), I am watching the inventory portions of the manufacturing surveys with great attention. The natural response to building inventories is to scale back production, and if we see enough of a scale back conjoined to enough weakness in services, that will put us into a contraction cycle. The actual mechanisms causing a contraction cycle don't develop quickly - by the time it is overt you usually are six to eight months into the contraction cycle. Specifically, what I am looking for in these surveys is this progression (from May Chicago PMI):
Many analysts are predicting a better economy, but in reality it will all depend on inventories.
Ford made cheerful comments about car sales later this year, which is encouraging, although Ford also said it did not expect June sales to be all that great. Weakness in car sales is one of the factors that tends to push the economy into a contraction cycle, so I am waiting for June car sales in great anxiety. Ford did pretty well last month compared to GM. Ford's production lines are running all out.
My view can best be summed up by the observation that I am seeing a spate of absurdly optimistic economic projections. For example, Germany's economy is, by most standards, doing just great, with unemployment continuing to drop to a multi-decade low. But in May German retail sales fell 2.8%. German inflation is around 2.4% currently - households are just tight on energy costs, which now include electricity costs from Germany's foray into wind and solar power, which are jacking up German household's utility bills.
This is a regressive trend - most wealthier German households can install solar panels, which carry such a huge feed-in subsidy that they can essentially exempt themselves from this portion of inflation. So household that can do this have done it in great numbers - the revenue stream is guaranteed for over a decade. But the poorer households end up paying for it because the tab for extremely costly electricity generation is distributed on all their bills.
Expectations of some sort of surge in consumer spending on gas prices in the US are idiotic. It's not going to happen; in fact gas prices hugely rebounded yesterday on currency trends. Inflation is also raising auto prices in the US along with everything else, and I think affordability is one of the factors in what seems to be a somewhat weaker sales trend there.
Australia will probably raise rates next. ECB may not do it in June, but probably will by the fall. China is fighting its inflation war with little success to date, so it is letting its currency rise to help with import costs. This is not going to work out all that well for China, because most Chinese inflation is internally sourced at this point. The Fed ought to start raising US rates, paradoxically it would improve our economy in the short term. But it is too dangerous - the Fed does not have the guts to try it.
Given the global situation, commodities cannot adjust downwards significantly in pricing, but must continue to press on real incomes. So economic growth varies pretty much in proportion to each economy's individual consumption/production balance. The only short-term fix for the US is to raise interest rates, which will both suppress commodity pricing by making it more expensive to play in the market and adjust away some of the currency effect now very obvious in dollar-priced commodities.
Wednesday, June 29, 2011
And We Don't Have Two Election Cycles
Seriously, we don't.
We can't implement the provisions of the health care reform act - we don't have the money to do it, and if we were to try to cut Medicare reimbursements as scheduled, most non-wealthy Medicare recipients would have increasing difficulties getting access to health care. No one at the CBO is willing to use the official plan as a basis for economic forecasts, because it is nonsense. Holtz-Eakin isn't alone in this.
The states don't have the money to spend on their portion of Medicaid, which is the chief mechanism for covering more people under the act. The private sector doesn't have the money to spend on insurance, so the public subsidy is scheduled to be much higher than theorized.
And even if it weren't for health care reform, the pressure of the retirement crunch is just beginning to build and is going to place so much stress on state and local governments that massive changes are necessary there. The only way to balance the budget is through mechanisms like President Obama's reform commission came up with, and there a large part of the contribution comes from a rise in middle-class taxation.
One of our worst problems is the green energy drive. For the most part, the strategy is not just a failure but a remarkable failure that will undercut the global trends which would tend to support a slow resurgence of US manufacturing.
Much of our federal deficit problem over the long term derives from a vast expansion of federal spending on health care. CBO blog post on the issue:
1) ...if the government’s programs and activities are maintained in their current form, spending for everything other than interest will rise to between 23 percent and 25 percent of GDP in 2035, compared with an average of 18.6 percent of GDP experienced over the past 40 years.
2) ... if current laws remained in place, spending on the major mandatory health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and the health insurance subsidies that will be provided through insurance exchanges) alone would grow from less than 6 percent of GDP today to about 9 percent in 2035 and would continue to increase thereafter.
3) Social Security and the major mandatory health care programs already account for about 46 percent of federal noninterest spending. Under current laws, that percentage will grow to nearly 60 percent by 2021 and to 67 percent by 2035, CBO projects.
You can't fool much with Social Security payments, because most Social Security recipients get very modest Social Security checks already, and reforms to CPI calculations have tended rather to diminish the real benefit over time. So the reform has to be to health benefits.
In another post, CBO addresses the long-term forecast by substituting their own more realistic assumptions on health care payments rather than the faked-up Pelosi deal:
The unthinkable has happened in NJ, because NJ had to reform. The unthinkable had better happen at the federal level very quickly.
We can't implement the provisions of the health care reform act - we don't have the money to do it, and if we were to try to cut Medicare reimbursements as scheduled, most non-wealthy Medicare recipients would have increasing difficulties getting access to health care. No one at the CBO is willing to use the official plan as a basis for economic forecasts, because it is nonsense. Holtz-Eakin isn't alone in this.
The states don't have the money to spend on their portion of Medicaid, which is the chief mechanism for covering more people under the act. The private sector doesn't have the money to spend on insurance, so the public subsidy is scheduled to be much higher than theorized.
And even if it weren't for health care reform, the pressure of the retirement crunch is just beginning to build and is going to place so much stress on state and local governments that massive changes are necessary there. The only way to balance the budget is through mechanisms like President Obama's reform commission came up with, and there a large part of the contribution comes from a rise in middle-class taxation.
One of our worst problems is the green energy drive. For the most part, the strategy is not just a failure but a remarkable failure that will undercut the global trends which would tend to support a slow resurgence of US manufacturing.
Much of our federal deficit problem over the long term derives from a vast expansion of federal spending on health care. CBO blog post on the issue:
1) ...if the government’s programs and activities are maintained in their current form, spending for everything other than interest will rise to between 23 percent and 25 percent of GDP in 2035, compared with an average of 18.6 percent of GDP experienced over the past 40 years.
2) ... if current laws remained in place, spending on the major mandatory health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and the health insurance subsidies that will be provided through insurance exchanges) alone would grow from less than 6 percent of GDP today to about 9 percent in 2035 and would continue to increase thereafter.
3) Social Security and the major mandatory health care programs already account for about 46 percent of federal noninterest spending. Under current laws, that percentage will grow to nearly 60 percent by 2021 and to 67 percent by 2035, CBO projects.
You can't fool much with Social Security payments, because most Social Security recipients get very modest Social Security checks already, and reforms to CPI calculations have tended rather to diminish the real benefit over time. So the reform has to be to health benefits.
In another post, CBO addresses the long-term forecast by substituting their own more realistic assumptions on health care payments rather than the faked-up Pelosi deal:
The unthinkable has happened in NJ, because NJ had to reform. The unthinkable had better happen at the federal level very quickly.
Briefly
Crude inventories isn't moving much. Under the circs that can be regarded as a good thing, I suppose, except these levels seem to show real economic trouble. I can't see persistent drops in YoY diesel without thinking it is a sign of recession. After a point the temporary becomes the average - but at least the average isn't moving that much.
Pending home sales really isn't moving much either. May was about at the Jan/Feb levels. March was high, followed by a crash in April, but that sequence was almost certainly due to a rise in FHA insurance premiums in mid April, causing people to rush it a bit and then a decline. I think we are bouncing along the bottom of the housing market in terms of activity this year. That doesn't mean in terms of prices - in many areas, prices will tend to drift down for years to come.
Mostly I'm watching Treasuries. Indications vary. Some of this is currency flux, as the commodities seem to be. Some of it is just plain nerves about what the result of QE2's end will be.
Trichet spoke a few days ago, using ECB-code for an interest rate rise. This is very definitely moving the currencies. This weekend the various European finance groupies get together and try to orchestrate a Greek sovereign voluntary rollover deal. To be lined up and have your pocket picked while being forced to shout "Please sir, may I have another!" so the ratings firms don't clean you out is not going to improve your appetite for bad debt.
I would think that investors are contemplating US obligations with a mind to the result of not contemplating Greek obligations. Admittedly there is more time for the US, but that doesn't mean 20 years. A lot depends on the debt figures Congress comes up with. So in a way the Greek tragedy and the US farce are conjoined. The end of the Greek tragedy is uncertain. The US farce is just the first act.
Major Action in Treasuries continues. Look at the 7 year auction:
'
Look at today's trading.
Pending home sales really isn't moving much either. May was about at the Jan/Feb levels. March was high, followed by a crash in April, but that sequence was almost certainly due to a rise in FHA insurance premiums in mid April, causing people to rush it a bit and then a decline. I think we are bouncing along the bottom of the housing market in terms of activity this year. That doesn't mean in terms of prices - in many areas, prices will tend to drift down for years to come.
Mostly I'm watching Treasuries. Indications vary. Some of this is currency flux, as the commodities seem to be. Some of it is just plain nerves about what the result of QE2's end will be.
Trichet spoke a few days ago, using ECB-code for an interest rate rise. This is very definitely moving the currencies. This weekend the various European finance groupies get together and try to orchestrate a Greek sovereign voluntary rollover deal. To be lined up and have your pocket picked while being forced to shout "Please sir, may I have another!" so the ratings firms don't clean you out is not going to improve your appetite for bad debt.
I would think that investors are contemplating US obligations with a mind to the result of not contemplating Greek obligations. Admittedly there is more time for the US, but that doesn't mean 20 years. A lot depends on the debt figures Congress comes up with. So in a way the Greek tragedy and the US farce are conjoined. The end of the Greek tragedy is uncertain. The US farce is just the first act.
Major Action in Treasuries continues. Look at the 7 year auction:
Treasury supply may finally be getting ahead of demand. That's a conclusion that can reasonably be drawn from this week's poorly received string of coupon auctions including today's $29 billion offering of 7-year notes. Coverage of 2.62 is light for this issue while the high yield of 2.43 percent is three basis points over expectations. In a sign of weak retail demand, dealers ended up taking down an outsized 56 percent share of the offering. Demand for Treasuries is sinking following today's results.It's been weakening. The longer terms are suffering; bid/covers on the shorts this week were just fine. The four week on the 28th had a bid/cover of 4.57 and a yield of 1/2 a basis point. (0.005). The 52 week at the same time and same day had a bid/cover of 4.15% and a yield of 20 basis points (0.20). An hour and a half later, the 5 year had a bid/cover of 2.59 and a yield of 1.5%. Compared to earlier auctions this year, this is a definite move down in demand.
'
Look at today's trading.
Tuesday, June 28, 2011
Just Reading Along
Richmond Fed - The good thing about this is that the overall rose to 3 from -6 in May, which was a dizzying drop from 10 in April. The bad thing is that inventories of finished goods took a wild hop up to 23 (from 10 > 12 in recent months). Inventory builds aren't necessarily bad if shipments are rising, but in May shipments moved to -13, and in June shipments were still marginally negative at -1. So this may be a report I don't want to read next month. Also the backlog of orders was still quite negative at -16. Prices paid current and expectations are in the 4s - better than last month, but still in compress territory. Prices received are in the lower 2s, and expectations are similar.
The average workweek fell to -5, but that is not too paid because number of employees was still healthily positive at 12. Wages are still rising; in April that index was 22, it fell to 6 in May and rose to 9 in June. So probably manufacturers are trying to control costs by limiting overtime, and are staffing more to ensure that happens.
Note: I am not certain, but I suspect that part of the Texas slump shown yesterday is related to Japanese supply problems. Autos we pretty much know about, and because May Southeastern PMI was better than national, I think autos had a limited, although negative, influence to date. Electronics component shortages should be showing up about now.
Given the power problems in Japan, I am expecting some continuing influence. The long and the short of it is that out of 54 reactors Japan has 17 now running, no new restarts have been approved (on those that were shut down for normal maintenance), and this summer at least four more have to shut down for maintenance. At least three utilities have asked for the 15% power conservation; the problem is compounded because some of the larger companies had shifted movable work out of the Tokyo area only to find themselves facing new restrictions.
The average workweek fell to -5, but that is not too paid because number of employees was still healthily positive at 12. Wages are still rising; in April that index was 22, it fell to 6 in May and rose to 9 in June. So probably manufacturers are trying to control costs by limiting overtime, and are staffing more to ensure that happens.
Note: I am not certain, but I suspect that part of the Texas slump shown yesterday is related to Japanese supply problems. Autos we pretty much know about, and because May Southeastern PMI was better than national, I think autos had a limited, although negative, influence to date. Electronics component shortages should be showing up about now.
Given the power problems in Japan, I am expecting some continuing influence. The long and the short of it is that out of 54 reactors Japan has 17 now running, no new restarts have been approved (on those that were shut down for normal maintenance), and this summer at least four more have to shut down for maintenance. At least three utilities have asked for the 15% power conservation; the problem is compounded because some of the larger companies had shifted movable work out of the Tokyo area only to find themselves facing new restrictions.
Monday, June 27, 2011
Eek, Squeak, Yelp
Texas, Dallas Fed.
The overall report was less depressing. The hours worked index was still positive, if only marginally, capacity utilization was -0.8, falling 11.9 from April, and new orders and employment were still increasing. Future expectations are still marginally positive (the red dotted line above). I'm really surprised, though - I thought Texas would be pretty decent. This is not pretty decent. I can't really claim that it is more worry than anything else because of the large drop in capacity utilization.
ATA Truck Tonnage for May was bad also. In just a few months the direction has changed a lot. We kind of knew that because of diesel; so far diesel supplied has not rebounded. Last week the four week supplied average was down 5.7% YoY, which does not forecast well for ATA Truck Tonnage in June. Rail is holding, and may be doing slightly better in June, but it is probably doing that from displaced truck freight. Much more freight rolls on trucks than trains.
Tomorrow we get Richmond Fed. If it's not good I don't want to look at it; last month it was surprisingly bad. The Richmond Fed also puts out the survey of agricultural conditions, which was neutral with price concerns dropping demand for pricey stuff, and lenders worried about credit. Kansas City is due to weigh in also, I think on Thursday. K.C.'s May survey was not that much fun; the headline was neutral at 1, but production, shipments, new orders and the average workweek indices dropped, so I probably don't want to see June K.C. either:
I'm thinking that the odds that I will really like the next bar on that graph aren't that hot, but it should update automatically so I can just scroll down here, and if it doesn't look too bad, I'll deign to read the report.
I have been saving the following for an opportune moment full of cheer and hilarity when everyone would enjoy good laugh. Unfortunately, after looking at the Dallas Fed survey I realized that such a moment may not come. However, if you are personally in a good mood, you might enjoy St. Louis' scholarly review of the burning issue - could it be, that by any unforeseen and indeed unforeseeable chance, that an easy money policy might drive up asset and commodity prices? Could it be and who'd a thunk?
I do have to look at June car sales when those figures are released. Also inventory. I use Ward's figures. I have been sadly staring at MV shipments on the rail reports, but sales can be different so perhaps it won't be too bad. In May car sales dropped YoY and, cough, inventories rose for Chrysler and GM, although not for Ford and not for most of the foreigns. However looking at April beginning YTD MV rail shipments (still up 12.8% YoY) versus the most recent week's YTD YoY of 7.2%, I don't think I'm going to like the Ward's data that much. Of course I have to read Chicago PMI, NACM, and I'll look at the ISM indices. Somewhere in there something will look better.
Anyway, when I sum up my reading plans for the near future, I realize that I am only looking for good news to rebut the highly probable reality that Q3 is going to mark the slide into outright contraction. The reason is timing; end user inflation for most primary goods is still escalating, and oil prices won't have time to fall far enough to offset it. Most older people are facing higher drug costs and the doughnut hole this summer; they'll pull back hard on spending. Their spending would be sparse anyway, because food costs are too high and no SS COLAs for several years have impacted their finances most unfavorably.
The hit on the service businesses is proceeding along, and actually the economic infusion at the top end (FICA cuts for high earners) falls off hard by August (they start reaching cap then)/September. So relatively that contribution fades out but the effect of inflation is still there.
Then to cap it all, due to Congress' failure to extend unemployment benefits for the 99rs, by late summer the bulk of those who haven't found employment will find themselves with no unemployment benefits. This spring the drop off has been pretty hard, and it is undoubtedly affecting some spending patterns.
Economic stimulus in 2011 was very front-loaded. Initial claims are up. What can I say? When oil prices are this high and the Dallas Fed produces a survey that ugly-looking, it is hard to be optimistic. I began this year with the thesis that everything depended on auto sales - that this was the sole remaining real growth edge for the economy. It appears that we have lost that growth edge. If this is true, it is going to be hard to pull out and see much in the way of growth in the third quarter.
There are pockets of real growth out there remaining, but you have to understand that we were in a bad position at the beginning of the year. The net Gross Private Domestic Investment over Q4/Q1 was negative. We do have suppressed demand rebounds still on things like cars, but an unemployment rate over 8% sharply limits the scope, and the negative trajectory for many service businesses is going to limit their equipment spending.
Housing and CRE is bad this year and will not have any significant impact on growth. The only possible growth avenue this year was from trickle-up from the bottom 40%, and the Fed;'s failure to realize that boosting asset prices had to come at the cost of real incomes for the bottom 40% pretty much destroyed that, then Congress and our dear, dear Community Organizer made sure to organize the bottom 40% out of the growth picture. It was a one-two blow that our economy was too weak to withstand.
So this is the Fed downturn - an economic horror movie probably coming to a theater near you. If Andrew Jackson were running for president in 2012, he'd win in a landslide.
Right now I am struggling with this reality. People will die because of this. Right now I truly despise all the talking heads.
The overall report was less depressing. The hours worked index was still positive, if only marginally, capacity utilization was -0.8, falling 11.9 from April, and new orders and employment were still increasing. Future expectations are still marginally positive (the red dotted line above). I'm really surprised, though - I thought Texas would be pretty decent. This is not pretty decent. I can't really claim that it is more worry than anything else because of the large drop in capacity utilization.
ATA Truck Tonnage for May was bad also. In just a few months the direction has changed a lot. We kind of knew that because of diesel; so far diesel supplied has not rebounded. Last week the four week supplied average was down 5.7% YoY, which does not forecast well for ATA Truck Tonnage in June. Rail is holding, and may be doing slightly better in June, but it is probably doing that from displaced truck freight. Much more freight rolls on trucks than trains.
Tomorrow we get Richmond Fed. If it's not good I don't want to look at it; last month it was surprisingly bad. The Richmond Fed also puts out the survey of agricultural conditions, which was neutral with price concerns dropping demand for pricey stuff, and lenders worried about credit. Kansas City is due to weigh in also, I think on Thursday. K.C.'s May survey was not that much fun; the headline was neutral at 1, but production, shipments, new orders and the average workweek indices dropped, so I probably don't want to see June K.C. either:
I'm thinking that the odds that I will really like the next bar on that graph aren't that hot, but it should update automatically so I can just scroll down here, and if it doesn't look too bad, I'll deign to read the report.
I have been saving the following for an opportune moment full of cheer and hilarity when everyone would enjoy good laugh. Unfortunately, after looking at the Dallas Fed survey I realized that such a moment may not come. However, if you are personally in a good mood, you might enjoy St. Louis' scholarly review of the burning issue - could it be, that by any unforeseen and indeed unforeseeable chance, that an easy money policy might drive up asset and commodity prices? Could it be and who'd a thunk?
I do have to look at June car sales when those figures are released. Also inventory. I use Ward's figures. I have been sadly staring at MV shipments on the rail reports, but sales can be different so perhaps it won't be too bad. In May car sales dropped YoY and, cough, inventories rose for Chrysler and GM, although not for Ford and not for most of the foreigns. However looking at April beginning YTD MV rail shipments (still up 12.8% YoY) versus the most recent week's YTD YoY of 7.2%, I don't think I'm going to like the Ward's data that much. Of course I have to read Chicago PMI, NACM, and I'll look at the ISM indices. Somewhere in there something will look better.
Anyway, when I sum up my reading plans for the near future, I realize that I am only looking for good news to rebut the highly probable reality that Q3 is going to mark the slide into outright contraction. The reason is timing; end user inflation for most primary goods is still escalating, and oil prices won't have time to fall far enough to offset it. Most older people are facing higher drug costs and the doughnut hole this summer; they'll pull back hard on spending. Their spending would be sparse anyway, because food costs are too high and no SS COLAs for several years have impacted their finances most unfavorably.
The hit on the service businesses is proceeding along, and actually the economic infusion at the top end (FICA cuts for high earners) falls off hard by August (they start reaching cap then)/September. So relatively that contribution fades out but the effect of inflation is still there.
Then to cap it all, due to Congress' failure to extend unemployment benefits for the 99rs, by late summer the bulk of those who haven't found employment will find themselves with no unemployment benefits. This spring the drop off has been pretty hard, and it is undoubtedly affecting some spending patterns.
Economic stimulus in 2011 was very front-loaded. Initial claims are up. What can I say? When oil prices are this high and the Dallas Fed produces a survey that ugly-looking, it is hard to be optimistic. I began this year with the thesis that everything depended on auto sales - that this was the sole remaining real growth edge for the economy. It appears that we have lost that growth edge. If this is true, it is going to be hard to pull out and see much in the way of growth in the third quarter.
There are pockets of real growth out there remaining, but you have to understand that we were in a bad position at the beginning of the year. The net Gross Private Domestic Investment over Q4/Q1 was negative. We do have suppressed demand rebounds still on things like cars, but an unemployment rate over 8% sharply limits the scope, and the negative trajectory for many service businesses is going to limit their equipment spending.
Housing and CRE is bad this year and will not have any significant impact on growth. The only possible growth avenue this year was from trickle-up from the bottom 40%, and the Fed;'s failure to realize that boosting asset prices had to come at the cost of real incomes for the bottom 40% pretty much destroyed that, then Congress and our dear, dear Community Organizer made sure to organize the bottom 40% out of the growth picture. It was a one-two blow that our economy was too weak to withstand.
So this is the Fed downturn - an economic horror movie probably coming to a theater near you. If Andrew Jackson were running for president in 2012, he'd win in a landslide.
Right now I am struggling with this reality. People will die because of this. Right now I truly despise all the talking heads.
BIS Annual Report
The 81st Bank of International Settlements (BIS) Annual report was published yesterday. I have not finished it, but there is some particularly juicy stuff in here that can be read as oppositional to the Fed.
If you read nothing else, read the chapter on low interest rates. I think every adult citizen of the US with a normal to above IQ should read this, and think about it. It's not difficult.
The fiscal sustainability chapter is of most relevance to current US political debate. The BIS takes a position somewhat more adverse to debt than Paul Krugman's, to put it delicately. On page 66 you will find graphs for some of the more significant industrialized countries:
The green line is what would happen if primary balance (gov revenues - gov expenditures less interest) were improved by 10% over 10 years at a rate of 1% a year. In the US, this would only help until about 2025.
The blue line is what would happen in the green scenario AND by holding age-related expenditures constant as a percent of GDP.
As BIS notes:
Jill, this chapter contains the answer to your questions. We have to make policy decisions by 2017 that will change the social contract in the US for the worse. If we don't make them, the social contract in the US will change hugely for the worse.
From the point of view of the average family, the economy of the US in the 2020's will seem far more like the economy in the later 50s and 60s if we correct earlier. If we correct later, it will be worse.
This need not lead to dire disaster for most people and for most families if we address the situation realistically. Unfortunately, most of our current catalog of public authorities on the issue are unwilling to be realistic. Electoral time is running out. One key in the US is to abandon our current energy policies - they are too destructive of economic growth. Eventually the correction in the US will lead to more production of items for consumer needs, and you can't run an industrialized economy on wind and solar. You can do coal, NG and/or nuclear, but you cannot do current "green". Germany is about to find this out; Japan is probably going to NG to provide power.
The other thing one can clearly derive from this report is that China is facing a huge economic transition which will be difficult.
If you read nothing else, read the chapter on low interest rates. I think every adult citizen of the US with a normal to above IQ should read this, and think about it. It's not difficult.
The fiscal sustainability chapter is of most relevance to current US political debate. The BIS takes a position somewhat more adverse to debt than Paul Krugman's, to put it delicately. On page 66 you will find graphs for some of the more significant industrialized countries:
The green line is what would happen if primary balance (gov revenues - gov expenditures less interest) were improved by 10% over 10 years at a rate of 1% a year. In the US, this would only help until about 2025.
The blue line is what would happen in the green scenario AND by holding age-related expenditures constant as a percent of GDP.
As BIS notes:
Coming on top of the improvement in the primary balance, the freeze of the GDP share of age-related expenditures leads to a faster decline in the debt/GDP ratio or a slower rate of increase. Preventing age-related spending from growing faster than GDP for the entire projection horizon may be somewhat unrealistic. Nonetheless, the results suggest that early efforts to reduce future age-related spending or finance the spending through additional taxes and other measures (discussed below) could significantly improve fiscal sustainability in several countries over the medium term.In fact, BIS takes an extremely anti-Krugman position:
Although the evidence on the growth implications of high levels of public debt is slim, it suggests that the effects could be significant. Among countries with a debt/GDP ratio of more than 90%, the median growth rate of real GDP is 1 percentage point lower (and the average is 4 percentage points lower) than in countries with a lower ratio. Recent evidence also suggests that the expected increase in the debt/GDP ratio in the advanced economies for the 2007–15 period may permanently reduce future growth of potential output by more than half a percentage point annually.6Please note that the BIS' inflection point for the US is about 2015. When you are playing around with the debt levels we already have plus the demographics we have plus the deficits we are running, delaying action for just a few years can have a huge effect on future outcomes.
Jill, this chapter contains the answer to your questions. We have to make policy decisions by 2017 that will change the social contract in the US for the worse. If we don't make them, the social contract in the US will change hugely for the worse.
From the point of view of the average family, the economy of the US in the 2020's will seem far more like the economy in the later 50s and 60s if we correct earlier. If we correct later, it will be worse.
This need not lead to dire disaster for most people and for most families if we address the situation realistically. Unfortunately, most of our current catalog of public authorities on the issue are unwilling to be realistic. Electoral time is running out. One key in the US is to abandon our current energy policies - they are too destructive of economic growth. Eventually the correction in the US will lead to more production of items for consumer needs, and you can't run an industrialized economy on wind and solar. You can do coal, NG and/or nuclear, but you cannot do current "green". Germany is about to find this out; Japan is probably going to NG to provide power.
The other thing one can clearly derive from this report is that China is facing a huge economic transition which will be difficult.
GrumpWatch I.0
Reading financial reports is no fun these days.
First up: BEA's Personal Income and Outlays for May. There look to have been some downward revisions for April.
Look at real (chained 2005 dollars) PCE. That has a lot to do with the escalating rise of money in Other Deposits on H.8. Most households probably are experiencing falling real incomes and pretty sharp increases in the their bill for basics, so they respond by cutting more discretionary spending.
Smaller businesses aren't doing too well:
I don't understand how all the big outfits can be predicting Q2 GDP so high even after cutting their forecasts down a percent and a half. Real growth in Personal Consumption Expenditures is absent the picture, and just by looking at H.8 (do they???) you can tell that everyone didn't run out and blow the wad in June.
The main problem right now for the economy is food prices and the rise in service costs, but that isn't going to evaporate.
First up: BEA's Personal Income and Outlays for May. There look to have been some downward revisions for April.
Look at real (chained 2005 dollars) PCE. That has a lot to do with the escalating rise of money in Other Deposits on H.8. Most households probably are experiencing falling real incomes and pretty sharp increases in the their bill for basics, so they respond by cutting more discretionary spending.
Smaller businesses aren't doing too well:
Proprietors' income decreased $1.7 billion in May, in contrast to an increase of $3.2 billion in April.And our economy becomes ever more dependent on government payments!
Farm proprietors' income decreased $1.3 billion, the same decrease as in April. Nonfarm proprietors' income decreased $0.4 billion in May, in contrast to an increase of $4.5 billion in April.
Rental income of persons increased $3.3 billion in May, compared with an increase of $2.9 billion in April. Personal income receipts on assets (personal interest income plus personal dividend income) increased $10.0 billion, compared with an increase of $6.0 billion. Personal current transfer receipts increased $9.3 billion, in contrast to a decrease of $1.8 billion.
I don't understand how all the big outfits can be predicting Q2 GDP so high even after cutting their forecasts down a percent and a half. Real growth in Personal Consumption Expenditures is absent the picture, and just by looking at H.8 (do they???) you can tell that everyone didn't run out and blow the wad in June.
The main problem right now for the economy is food prices and the rise in service costs, but that isn't going to evaporate.
Sunday, June 26, 2011
Good Morning, Munchkins
The theme, I guess, is 2012.
I'm sorry this is German, but this article claims that the Greek rollover deal is supposed to be five years. On Friday the banking association was in talks; they apparently did not get what they were looking for - guarantees. Schauble is saying no. This weekend the large banks are supposed to show up and say how much they are willing to roll. But the banks still want an assurance that this will be treated as a voluntary deal by the credit ratings industry (this affects how it looks on their books). Five years? They should just write off 50% and be done with it. July 3rd is the drop-dead date for anteing up with the rollover amounts.
There is also this article about the claims of German firms that they can't get tax refunds from Greek authorities, because the Greek authorities don't have money to pay up! Let's just say that the real burden of debt on the Greek economy is probably higher than formally stated. The VAT refunds alone add up to a lot - as a result of the crisis, Greece raised its VAT from 21 to 23%. I did laugh a bit, because it is famously hard for foreigners to get refunds from German tax authorities.
Let's see - periodically I roam frantically through a bunch of company financial reports. The fun part is when you get to the Indian/Chinese ones, but I may never get there this round. I was struck by the Kellogg prediction of continued cost inflation in 2012:
Look at H.8 Assets and Liabilities of Commercial Banks. Deposits are liabilities to banks - they owe those funds to others. Over the last three months, the trend in annualized seasonally-adjusted growth trend in Other Deposits has been March: 4.8%, April: 7.7%, May 10.4%. Large time deposits are building too. A trend like this means that expectations for consumer spending should be adjusted downward.
One of the reasons (among many) I was so upset by the Bernank's presser was his nattering about mortgage underwriting terms. Virtually the entire board has climbed on that bandwagon, but it only makes them look like fools. SA residential delinquencies as of the first quarter were still at 10.23% - a slight increase from Q4 2010. This does not predict well. The charge-off rate on cards was still quite high at 7.22%.
Now, when you factor in the very real increase in consumer essential living costs (food, utilities, cars, fuel, medicines), you know that these trends were set to worsen this year, as a round of financially strapped but responsible consumers suddenly hit the point at which they can not pay any more. So granting mortgages to consumers with higher housing payments/income is not likely to work out well long term, and if the Fed really wants banks to do that, they should not have shoved inflation rates as high as the Fed has.
Now - U B Da Banker. One one hand, you are looking at some really crappy loan losses. On the other hand, you are looking at real income drops for many consumers. Further, with unemployment at 9.1% the "flex" for working borrowers, which has traditionally been odd jobs to catch back up, is gone. Not only that, but you are looking at a rise in initial unemployment claims, and such rises have been historically strongly associated with increased delinquencies. If you want to lend, you need to make sure that consumers have a pretty good chance of paying back the loan from their current income streams, because you have an increased chance of default just from job trends. You really need to watch their debt/income ratios.
Businesses are a little different. We have been through a winnowing process; if the business walks in and is currently in decent shape, you can review the last year and a half of financials and make a reasonably precise risk estimation. Credit quality of marginal businesses with high exposures to cost inflation risks is degenerating, but the point is that anyone reasonably competent should be able to estimate risk accurately! But not with consumers. Oh no. We have to also confront tax policy issues; under current law banks are facing the following issues in the next three years:
2012: A two-percent increase in FICA, which is going to shave some margin off those recent graduates who did get good tech jobs. A possible increase in taxes for most of the upper-middle class.
2013: Hey, ho, so, so, in the red the mortgage goes.... Few things shock and awe mortgage lenders quite like all those proposals to eliminate the mortgage tax deduction or property tax deduction. Also likely more tax increases from some local and state governments.
2014: Hey, ho, oh, no, CC repayments into medical insurance go.... Folks - the fact that so many waivers have been granted to various organizations kind of indicates that there will be a price shock in 2014. This is not the time to be cutting your borrower's margins, and you know what? That income loss is going to show up in some businesses as well.
Elizabeth Duke gave a rational-sounding speech recently. Perhaps that is because, cough, she actually knows something about commercial banking? Wiki bio. She is the only Fed member with any background in commercial banking. They don't seem to understand the impact of regulatory measures, which is pretty frightening. They don't seem to understand commercial banking, which makes me want to whimper and pee on myself like a beaten puppy. They don't seem to understand the impact of their own policies, which makes me want to grab them and shake them out of their coma. In fact, they don't even seem to know about regulation changes issued by the Fed.
So while I don't see what alternative we have to a central bank, I have to admit that Foo's claim that they have too much power is beginning to seem credible. All of life is trade-offs, and that's a truism. But when those who run the system don't even seem to understand what the trade-offs are, a rational person gets nervous. So to Foo, I would say that you would be likely to see a better-functioning Fed if you had commercial bankers as a larger percentage of governors. Commercial bankers must know a lot about Main Street. Most of the Fed doesn't, which is why they do seem like a convention of nutty professors. That's what they are.
I'm sorry this is German, but this article claims that the Greek rollover deal is supposed to be five years. On Friday the banking association was in talks; they apparently did not get what they were looking for - guarantees. Schauble is saying no. This weekend the large banks are supposed to show up and say how much they are willing to roll. But the banks still want an assurance that this will be treated as a voluntary deal by the credit ratings industry (this affects how it looks on their books). Five years? They should just write off 50% and be done with it. July 3rd is the drop-dead date for anteing up with the rollover amounts.
There is also this article about the claims of German firms that they can't get tax refunds from Greek authorities, because the Greek authorities don't have money to pay up! Let's just say that the real burden of debt on the Greek economy is probably higher than formally stated. The VAT refunds alone add up to a lot - as a result of the crisis, Greece raised its VAT from 21 to 23%. I did laugh a bit, because it is famously hard for foreigners to get refunds from German tax authorities.
Let's see - periodically I roam frantically through a bunch of company financial reports. The fun part is when you get to the Indian/Chinese ones, but I may never get there this round. I was struck by the Kellogg prediction of continued cost inflation in 2012:
David, the way we look at it is that we are in a long-term upward trend on cost of goods. The supply of grains has been relatively limited. The demand for grains is increasing, whether it be ethanol production or whether it be emerging market consumption or direct grains or meat-based products. And the result of that is you're going to see increased prices for grains over time. And so we would look at 2012 and say, yes, it's probably going to be inflationary. How inflationary? We have to wait to see where all the supply demand shakes out and where the prices shake out.That was on a response to a UBS question on page 12 of the transcript. Private brands are being beaten pretty solidly. The tremendous range of new products Kellogg is introducing is probably to achieve uniqueness so that they don't face store brand challengers, but it is a costly strategy! Gas prices are falling, but I doubt that consumers on average are getting ahead. Until they feel like they are, consumers are going to stockpile money.
Look at H.8 Assets and Liabilities of Commercial Banks. Deposits are liabilities to banks - they owe those funds to others. Over the last three months, the trend in annualized seasonally-adjusted growth trend in Other Deposits has been March: 4.8%, April: 7.7%, May 10.4%. Large time deposits are building too. A trend like this means that expectations for consumer spending should be adjusted downward.
One of the reasons (among many) I was so upset by the Bernank's presser was his nattering about mortgage underwriting terms. Virtually the entire board has climbed on that bandwagon, but it only makes them look like fools. SA residential delinquencies as of the first quarter were still at 10.23% - a slight increase from Q4 2010. This does not predict well. The charge-off rate on cards was still quite high at 7.22%.
Now, when you factor in the very real increase in consumer essential living costs (food, utilities, cars, fuel, medicines), you know that these trends were set to worsen this year, as a round of financially strapped but responsible consumers suddenly hit the point at which they can not pay any more. So granting mortgages to consumers with higher housing payments/income is not likely to work out well long term, and if the Fed really wants banks to do that, they should not have shoved inflation rates as high as the Fed has.
Now - U B Da Banker. One one hand, you are looking at some really crappy loan losses. On the other hand, you are looking at real income drops for many consumers. Further, with unemployment at 9.1% the "flex" for working borrowers, which has traditionally been odd jobs to catch back up, is gone. Not only that, but you are looking at a rise in initial unemployment claims, and such rises have been historically strongly associated with increased delinquencies. If you want to lend, you need to make sure that consumers have a pretty good chance of paying back the loan from their current income streams, because you have an increased chance of default just from job trends. You really need to watch their debt/income ratios.
Businesses are a little different. We have been through a winnowing process; if the business walks in and is currently in decent shape, you can review the last year and a half of financials and make a reasonably precise risk estimation. Credit quality of marginal businesses with high exposures to cost inflation risks is degenerating, but the point is that anyone reasonably competent should be able to estimate risk accurately! But not with consumers. Oh no. We have to also confront tax policy issues; under current law banks are facing the following issues in the next three years:
2012: A two-percent increase in FICA, which is going to shave some margin off those recent graduates who did get good tech jobs. A possible increase in taxes for most of the upper-middle class.
2013: Hey, ho, so, so, in the red the mortgage goes.... Few things shock and awe mortgage lenders quite like all those proposals to eliminate the mortgage tax deduction or property tax deduction. Also likely more tax increases from some local and state governments.
2014: Hey, ho, oh, no, CC repayments into medical insurance go.... Folks - the fact that so many waivers have been granted to various organizations kind of indicates that there will be a price shock in 2014. This is not the time to be cutting your borrower's margins, and you know what? That income loss is going to show up in some businesses as well.
Elizabeth Duke gave a rational-sounding speech recently. Perhaps that is because, cough, she actually knows something about commercial banking? Wiki bio. She is the only Fed member with any background in commercial banking. They don't seem to understand the impact of regulatory measures, which is pretty frightening. They don't seem to understand commercial banking, which makes me want to whimper and pee on myself like a beaten puppy. They don't seem to understand the impact of their own policies, which makes me want to grab them and shake them out of their coma. In fact, they don't even seem to know about regulation changes issued by the Fed.
So while I don't see what alternative we have to a central bank, I have to admit that Foo's claim that they have too much power is beginning to seem credible. All of life is trade-offs, and that's a truism. But when those who run the system don't even seem to understand what the trade-offs are, a rational person gets nervous. So to Foo, I would say that you would be likely to see a better-functioning Fed if you had commercial bankers as a larger percentage of governors. Commercial bankers must know a lot about Main Street. Most of the Fed doesn't, which is why they do seem like a convention of nutty professors. That's what they are.
Saturday, June 25, 2011
Fukushima Daiichi Reactor 2
The good news - I must start with that - is that TEPCO says it has got its decontamination rig working, and it is now planning to add the desalinization step. The water, according to TEPCO, has had its radioactivity levels reduced to 1/100,000th of original levels.
The bad news is pretty darned bad. TEPCO installed a new temperature gauge on Reactor 2, but says it isn't working because the temperature around the reactor is so high that all the water has evaporated from the pipes it is attempting to measure. Remember that TEPCO recently lowered water injection rates to all the reactors to try to prevent the flooding of the highly contaminated water. There may be just about no water in Reactor 2.
That may induce a thoughtful pause, and after that thoughtful pause, the news that the chopper drone TEPCO has been using to inspect areas over the reactors failed while flying over Reactor 2 may assume more significance to you. It was crashlanded on a portion of the Reactor 2 roof. The chopper was sent on a mission to test radioactivity above Reactor 2. This is a small device, and they are going to try to use one of the cranes to hook it off the roof.
In the link above, there is also information about modeling the ocean radioactivity dispersion from this incident.
In a way, it is a great relief that they came out and told us about the problems - the pause in the flow of news about the Reactor 2 project has been worrying me.
TEPCO is beyond bankrupt. It has no money to throw at the situation. It has asked the banks to roll over its loans for about 1% interest rate, and it needs more money from somewhere to try to deal with the Fukushima Daiichi incident. It should be a global priority to fund the recovery effort; Japan is going to have trouble finding the funds to rebuild the quake/tsunami damage; TEPCO theoretically has to pay compensation, and it has paid a little, but it doesn't have the money to do that either. So the Japanese government is going to have to assume the tab. I have been trying to glean facts about larger quake/rebuilding effort; it appears that the government quake fund is going to be exhausted by this event.
It's time to ante up. The workers at the site are in danger, and all the criticism (much warranted) about TEPCO's efforts kind of ignores the fact that they don't have the money to fund what is needed to do this.
PS: You can find more info on what they have done and are doing at each reactor at this link. After each reactor diagram page there is a summary of the major initiatives.
The bad news is pretty darned bad. TEPCO installed a new temperature gauge on Reactor 2, but says it isn't working because the temperature around the reactor is so high that all the water has evaporated from the pipes it is attempting to measure. Remember that TEPCO recently lowered water injection rates to all the reactors to try to prevent the flooding of the highly contaminated water. There may be just about no water in Reactor 2.
That may induce a thoughtful pause, and after that thoughtful pause, the news that the chopper drone TEPCO has been using to inspect areas over the reactors failed while flying over Reactor 2 may assume more significance to you. It was crashlanded on a portion of the Reactor 2 roof. The chopper was sent on a mission to test radioactivity above Reactor 2. This is a small device, and they are going to try to use one of the cranes to hook it off the roof.
In the link above, there is also information about modeling the ocean radioactivity dispersion from this incident.
In a way, it is a great relief that they came out and told us about the problems - the pause in the flow of news about the Reactor 2 project has been worrying me.
TEPCO is beyond bankrupt. It has no money to throw at the situation. It has asked the banks to roll over its loans for about 1% interest rate, and it needs more money from somewhere to try to deal with the Fukushima Daiichi incident. It should be a global priority to fund the recovery effort; Japan is going to have trouble finding the funds to rebuild the quake/tsunami damage; TEPCO theoretically has to pay compensation, and it has paid a little, but it doesn't have the money to do that either. So the Japanese government is going to have to assume the tab. I have been trying to glean facts about larger quake/rebuilding effort; it appears that the government quake fund is going to be exhausted by this event.
It's time to ante up. The workers at the site are in danger, and all the criticism (much warranted) about TEPCO's efforts kind of ignores the fact that they don't have the money to fund what is needed to do this.
PS: You can find more info on what they have done and are doing at each reactor at this link. After each reactor diagram page there is a summary of the major initiatives.
Friday, June 24, 2011
Absolute Devotion!
Or so Fisher of Dallas FRB claims:
Looking at durable goods, there are some signs of an inventory build that hint at weakness over the summer. See Table 2 in the release. This really is not surprising given the Empire State and Philly Fed surveys, but it tends to confirm that the patterns shown in those releases are general.
If you look at Table 10 in the GDP release, you'll see that annualized real personal income ex government transfers was 9.4 trillion versus 2008's 9.64 trillion. Therein lies the sensitivity of this economy to rapid price increases!
In the meantime, Moody's rudely and crudely made some comment or another about reviewing Italian banks' exposures to a decline in the Italian government's credit rating. The result was kind of a dramatic fall in the stock prices of various Italian banks, which is hardly going to help their position. Oil is trading down today with some reason!
The Draghi/Smaghi drama is about over. Draghi is in - this announcement probably forced from Sarkozy today in an attempt to shore up perceptions about continuity and stability at the ECB. They needed Draghi, because it always has been about Italy rather than the small fry that Greece and Portugal represent. We're clearly nearing the end of the European hand. Everyone's trying to drag out the hand by betting whatever they can afford, but sooner or later everyone's going to have to put their cards on the table. According to French newspapers, Smaghi is out at the end of the year. ECB:
There is a huge technical revision coming on GDP that will be published next month with the Q2 US advance GDP release. If it were not for that, Q2 GDP would be no higher than 1.4% annualized. As it is, we could get almost any number.
Developments in China are moving apace as well. I have the sensation that the 2008 crisis will reach its global culmination in 2012, but I don't know what it will be. The prior resolution was fake. This time it will have to be real.
“We are devoted absolutely to making sure that we don’t give rise to sustainable inflationary pressures that could be destructive,” Fisher said. “I very much look forward to an exit when it’s appropriate.”The major indicator in the GDP Q1 "final" release was higher inflation. The implicit price deflator for gross domestic purchases was 3.9%. Let's just say that if the Fed had an inflation goal in mind, they reached it with admirable speed. The YoY on GDP total (quarter from quarter a year ago) was 1.7% already at the end of March. Despite Fisher's laudable devotion, he claims that the Fed will not stomp on this tender little sprig of increasing prices it has so carefully nurtured. He claims they are of one mind on this.
Looking at durable goods, there are some signs of an inventory build that hint at weakness over the summer. See Table 2 in the release. This really is not surprising given the Empire State and Philly Fed surveys, but it tends to confirm that the patterns shown in those releases are general.
If you look at Table 10 in the GDP release, you'll see that annualized real personal income ex government transfers was 9.4 trillion versus 2008's 9.64 trillion. Therein lies the sensitivity of this economy to rapid price increases!
In the meantime, Moody's rudely and crudely made some comment or another about reviewing Italian banks' exposures to a decline in the Italian government's credit rating. The result was kind of a dramatic fall in the stock prices of various Italian banks, which is hardly going to help their position. Oil is trading down today with some reason!
The Draghi/Smaghi drama is about over. Draghi is in - this announcement probably forced from Sarkozy today in an attempt to shore up perceptions about continuity and stability at the ECB. They needed Draghi, because it always has been about Italy rather than the small fry that Greece and Portugal represent. We're clearly nearing the end of the European hand. Everyone's trying to drag out the hand by betting whatever they can afford, but sooner or later everyone's going to have to put their cards on the table. According to French newspapers, Smaghi is out at the end of the year. ECB:
The European Central Bank reiterated Friday that all members of its executive board, including Italy's Lorenzo Bini Smaghi, are appointed for eight-year terms and decide on their futures independently of outside pressure.The river looks to be running deep and fast, with forecasts of more water coming down. Italian two year yields at 3.28? The US two-year is rolling between 0.35 and 0.40%. Yikes!
There is a huge technical revision coming on GDP that will be published next month with the Q2 US advance GDP release. If it were not for that, Q2 GDP would be no higher than 1.4% annualized. As it is, we could get almost any number.
Developments in China are moving apace as well. I have the sensation that the 2008 crisis will reach its global culmination in 2012, but I don't know what it will be. The prior resolution was fake. This time it will have to be real.
Thursday, June 23, 2011
Oh, THURSDAY
Initial claims 429,000; last week's initial claims revised up to 420,000 from 414,000. Four week moving average on initial claims is 426,250. But there was a higher-than-expected lack of reporting, so there could be big revisions next week either way.
CFNAI MA3 weakening still. June would have to be quite positive to stop the slide in this number.
Tomorrow Q1 GDP final. It looks like Q2 is going to be worse than Q1. New Home Sales later today, but why bother? It's the same old, same old bouncing on the bottom. It ain't gonna get no worse because it can't, and it doesn't seem to be able to get much better due to competition from existing home sales. Next year in Jerusalem, folks. On condos, these supply figures can't be trusted either on existing or new, because there is a lot of inventory out there that shifts from rental to sale and back in some areas.
Asia greeted the downward revisions for projected US GDP with some dismay, and commodities trading turned quite negative. Chinese prelim PMI was reported about at "stall", so that is not helping the situation, money is moving into the risk currencies like the yen, the Swiss franc, and yes, the good 'ol USD. Perhaps the ECB should have laid less stress on "risk" yesterday. The Germans are rounding up investors and having a little meeting about "voluntary" rollovers. "Zo, Hans, Ve haf vays to obtain your cooperation ..." These meetings are completely confidential.
The brightest news out there is that TEPCO has perhaps found the problem with the water filtration system and may be able to fix it. One story. Another story. Who knows? Maybe today they'll get it working, maybe not, because this more detailed story doesn't sound quite right when read with the other two.
Let's see - the Sniffies (do you realize that we fund this stuff?) are crusading against potato chips and French fries. The Ivy Medical Sniffies appear to be chasing well-paid irrelevance - just think what a tremendous help this will be to all the doctors out there who up till now, were recommending a diet of potato chips and French fries for their patients who need to lose weight.
I had a good laugh over some of the oil articles. These are stocking levels:
Quite high, wouldn't you say? But even higher when one looks at consumption and capacity measures.
PS: On Meredith and munis:
Note: If it walks like a duck.....
European leading edge predictors don't look so hot. Germany is not in trouble, but there is growing wariness. Paradoxically, France is going to profit from the German decision to bag nuclear power so its economic growth trend should be adjusted upward. IEA's oil moves may not help Europe much.
CFNAI MA3 weakening still. June would have to be quite positive to stop the slide in this number.
Tomorrow Q1 GDP final. It looks like Q2 is going to be worse than Q1. New Home Sales later today, but why bother? It's the same old, same old bouncing on the bottom. It ain't gonna get no worse because it can't, and it doesn't seem to be able to get much better due to competition from existing home sales. Next year in Jerusalem, folks. On condos, these supply figures can't be trusted either on existing or new, because there is a lot of inventory out there that shifts from rental to sale and back in some areas.
Asia greeted the downward revisions for projected US GDP with some dismay, and commodities trading turned quite negative. Chinese prelim PMI was reported about at "stall", so that is not helping the situation, money is moving into the risk currencies like the yen, the Swiss franc, and yes, the good 'ol USD. Perhaps the ECB should have laid less stress on "risk" yesterday. The Germans are rounding up investors and having a little meeting about "voluntary" rollovers. "Zo, Hans, Ve haf vays to obtain your cooperation ..." These meetings are completely confidential.
The brightest news out there is that TEPCO has perhaps found the problem with the water filtration system and may be able to fix it. One story. Another story. Who knows? Maybe today they'll get it working, maybe not, because this more detailed story doesn't sound quite right when read with the other two.
Let's see - the Sniffies (do you realize that we fund this stuff?) are crusading against potato chips and French fries. The Ivy Medical Sniffies appear to be chasing well-paid irrelevance - just think what a tremendous help this will be to all the doctors out there who up till now, were recommending a diet of potato chips and French fries for their patients who need to lose weight.
I had a good laugh over some of the oil articles. These are stocking levels:
Quite high, wouldn't you say? But even higher when one looks at consumption and capacity measures.
PS: On Meredith and munis:
U.S. state and local governments will need to raise taxes by $1,398 per household every year for the next 30 years if they are to fully fund their pension systems, a study released on Wednesday said.The details vary hugely per plan. Obviously the above figures are an estimate. Some plans are in far worse shape and some are in far better shape. One rule of thumb is to look at demographics (growing or not?). The blue state government workers are about to see their worst nightmare take flesh and stalk the legislatures. This is why I posted all that stuff about the NJ plan, which cuts COLAs to eventually achieve a balance. There will be much more of these sorts of moves in many states, because many of these plans cannot be supported under any feasible scenario at all. This public pension bubble is very large indeed, but fortunately can be adjusted.
Note: If it walks like a duck.....
European leading edge predictors don't look so hot. Germany is not in trouble, but there is growing wariness. Paradoxically, France is going to profit from the German decision to bag nuclear power so its economic growth trend should be adjusted upward. IEA's oil moves may not help Europe much.
Wednesday, June 22, 2011
In Shock
I made the mistake of watching Gentle Ben's presser, and it will take days to recover. That was not a good experience.
I note that others seem unimpressed as well:
In the interests of Fed/public relations, I would like to offer some help to Ben about those confusing and frustrating slow recovery features. How about a fall in real earnings? The BLS puts out a series that the Fed might find very helpful known as "Real Earnings". The next release is scheduled for July 15th, and Ben might want to read it. As BLS notes in the narrative regarding all employees:
For production and non-supervisory employees on private nonfarm payrolls:
The moving parts here are nominal wages paid, CPI over the year, and most importantly, the average work week. Now let us turn to the ever-helpful St. Louis Fed Fred. Here I am going to just revolutionize modern economics nearly back to Adam Smith:
The economic moving parts we have been discussing pretty much are shown here.
The strong orange line is CPI-W. The strong blue line (most variable) is Real Retail Sales.
The week red and green lines wages and salaries (not benefits) paid to private workers and government workers, and the line over the other weak line is of course government workers.
One thing Ben might want to note is the sudden bend up in CPI-W, which, oddly enough, almost seems to have something to do with the fall in real retail sales.
Now - revolutionizing ECONOMICS AZ WE KNOWZ IT:
This hyah is real retail sales level and the compounded annual rate of change for the private worker series shown in the above graph, adjusted by CPI.
'
Note that the private worker series ends before the retail sales series.
When contemplating this graph:
A) For a self-sustaining recovery, the red line must be above the blue line as an average for a while. Otherwise, workers are withdrawing from savings or borrowing to sustain spending. Both trends have an end; the correction on the borrowing-to-spend is inevitably worse, because when you stop spending your savings, all you do is cut spending to income levels. When you have been borrowing to spend, when you stop you have to cut spending to income levels less debt repayment. The way we entered the 2007 recession was that households got behind the income/spending ball in 2005, and for the next two years, households borrowed very large sums of money to sustain spending. Of course the more they borrowed the more they fell behind each month, so when the correction came it was rather brutal.
B) We achieved that the magic red-line-above-blue-line. Toward the end of the last quarter of 2010 we were getting close to the margin, but remember that in the last quarter you always have holiday spending - the big recovery in real wages over the previous eighteen months basically funded that. So there wasn't going to naturally be a big dip, just a correction in rate of change of spending. Note the highly positive shift in annual compounded rate of change of real wages and salaries preceded emergence from the recession in 2009. Funny how that happens.... In an income recession, that must happen. It had very little to do with the governmental stimulus, in all sincerity.
C) You might think the Jan-April blue line trend (retail) looks odd. It is odd, but it occurred that way because of the FICA give back (mostly went to the top 30% of earners) plus the sudden rise in cost of basic goods. Now that the rate of cost changes is disseminating from basics through the economy, even higher income households are having trouble sustaining spending. Because the lower 30-40% spend so little relative to the top 30%, no one ever notices or worries when they're shoved to the wall. Their plight is only noticed when the incomes of the top 30% get affected. This is inevitable. Unfortunately, this relative invisibility means that most Wall Street forecasters are doomed to fail, because they always get surprised when the inevitable happens.
D) The red line stops short, but here we can refer to the "Real Earnings" release from BLS referred to above! Holy Moly, Ben, here's the missing clue! That red line is plummeting to negative! The blue line must follow! Oops. The changes are worse for the lower incomes. A quick check of CPI-U detail for May shows that the 3 month annualized inflation rate for food at home was 8.7%, with dairy and meat/protein up over 15%. All items less food and energy 3 month annualized rate of change was 2.5%, with the 6 month rate of change 2.1%, by which we see that we have just begun to fight.
Now, I kind of think that Ben might know all this and might somehow be hoping that the red line bends up again, like it did several times in the precursor to the recession. But it is not going to do so in the next few months, because as the CPI-W shown in the first graph makes clear, inflation is just really beginning to hit the economy. It can't peak in economic effect before the end of the summer and probably won't have peaked by then, and then it will either take a price bust to mitigate or it will take several years before real incomes can possibly recover, perhaps three years if we factor in the 2% increase in wage taxes. This is why you are seeing bank accounts suddenly jack up - people are moving back into survival mode.
E) For projecting forward the red line this summer, we need to look at wage indicators ex CPI.
1) Retail trade series CES4200000035 aggregate weekly payrolls. Table B. For some reason this is very sensitive to even minor economic changes. From December to May, this dropped a bit. There was a big spike up in April, but that was bleeping McDonald's with hour expansions. The trend is not our short-term friend on this one, and indeed I have a hard time understanding how this could happen:
When you stop and think about it, those stores should still be open and May should have shown at least at that level. There must be job/hour losses elsewhere.
Or this is a mistake. It isn't usually.
2) Temporary Help Services. A strong predictor of future economic strength.
A few months of a small decline - since March, this has fallen a bit.
3) That oldie but goodie, diesel (distillate). YoY supply is currently down over 5%. Given CPI trends and wage/employment indicators, the economy cannot thrive this summer. One only has to look at May retail sales to get a sense of the problem. On a nominal basis, retail sales fell and sales at grocery stores fell. There was almost no increase at pharmacies, which is another bad sign. Gas prices may be falling, but consumers on net are still losing ground on food and other items like clothing and household goods.
I note that others seem unimpressed as well:
Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”CR seems to be angsting a bit, and the markets reacted about as you would expect to this performance. Well, you go to economic crises with the Fed you have, not the Fed you wish you had....
In the interests of Fed/public relations, I would like to offer some help to Ben about those confusing and frustrating slow recovery features. How about a fall in real earnings? The BLS puts out a series that the Fed might find very helpful known as "Real Earnings". The next release is scheduled for July 15th, and Ben might want to read it. As BLS notes in the narrative regarding all employees:
Since reaching a recent peak in October 2010, real average weekly earnings have fallen by 1.4 percent.The highlighted bits are pieces that are important in forecasting the near term future, so Gentle Ben might want to focus on those.
Real average hourly earnings fell 1.6 percent, seasonally adjusted, from May 2010 to May 2011. A 0.6 percent increase in average weekly hours combined with the decrease in real average hourly earnings resulted in a 1.0 percent decrease in real average weekly earnings during this period.
For production and non-supervisory employees on private nonfarm payrolls:
Since reaching a recent peak in October 2010, real average weekly earnings have fallen by 1.6 percent. Real average hourly earnings fell 1.8 percent, seasonally adjusted, from May 2010 to May 2011. A 0.6 percent increase in the average workweek combined with the decrease in real average hourly earnings resulted in a 1.2 percent decrease in real average weekly earnings during this period.This information is further explicated in the detail tables A-1 & A-2. The YoY data is the most important for forecasting the future, because it tracks the changes over time. Looking at the deflators used to calculate real wages, we find that the YoY for CPI in Table 1 is 3.6%, and in Table 2 the same number is 4.0%.
The moving parts here are nominal wages paid, CPI over the year, and most importantly, the average work week. Now let us turn to the ever-helpful St. Louis Fed Fred. Here I am going to just revolutionize modern economics nearly back to Adam Smith:
The economic moving parts we have been discussing pretty much are shown here.The strong orange line is CPI-W. The strong blue line (most variable) is Real Retail Sales.
The week red and green lines wages and salaries (not benefits) paid to private workers and government workers, and the line over the other weak line is of course government workers.
One thing Ben might want to note is the sudden bend up in CPI-W, which, oddly enough, almost seems to have something to do with the fall in real retail sales.
Now - revolutionizing ECONOMICS AZ WE KNOWZ IT:
This hyah is real retail sales level and the compounded annual rate of change for the private worker series shown in the above graph, adjusted by CPI.
'
Note that the private worker series ends before the retail sales series.
When contemplating this graph:
A) For a self-sustaining recovery, the red line must be above the blue line as an average for a while. Otherwise, workers are withdrawing from savings or borrowing to sustain spending. Both trends have an end; the correction on the borrowing-to-spend is inevitably worse, because when you stop spending your savings, all you do is cut spending to income levels. When you have been borrowing to spend, when you stop you have to cut spending to income levels less debt repayment. The way we entered the 2007 recession was that households got behind the income/spending ball in 2005, and for the next two years, households borrowed very large sums of money to sustain spending. Of course the more they borrowed the more they fell behind each month, so when the correction came it was rather brutal.
B) We achieved that the magic red-line-above-blue-line. Toward the end of the last quarter of 2010 we were getting close to the margin, but remember that in the last quarter you always have holiday spending - the big recovery in real wages over the previous eighteen months basically funded that. So there wasn't going to naturally be a big dip, just a correction in rate of change of spending. Note the highly positive shift in annual compounded rate of change of real wages and salaries preceded emergence from the recession in 2009. Funny how that happens.... In an income recession, that must happen. It had very little to do with the governmental stimulus, in all sincerity.
C) You might think the Jan-April blue line trend (retail) looks odd. It is odd, but it occurred that way because of the FICA give back (mostly went to the top 30% of earners) plus the sudden rise in cost of basic goods. Now that the rate of cost changes is disseminating from basics through the economy, even higher income households are having trouble sustaining spending. Because the lower 30-40% spend so little relative to the top 30%, no one ever notices or worries when they're shoved to the wall. Their plight is only noticed when the incomes of the top 30% get affected. This is inevitable. Unfortunately, this relative invisibility means that most Wall Street forecasters are doomed to fail, because they always get surprised when the inevitable happens.
D) The red line stops short, but here we can refer to the "Real Earnings" release from BLS referred to above! Holy Moly, Ben, here's the missing clue! That red line is plummeting to negative! The blue line must follow! Oops. The changes are worse for the lower incomes. A quick check of CPI-U detail for May shows that the 3 month annualized inflation rate for food at home was 8.7%, with dairy and meat/protein up over 15%. All items less food and energy 3 month annualized rate of change was 2.5%, with the 6 month rate of change 2.1%, by which we see that we have just begun to fight.
Now, I kind of think that Ben might know all this and might somehow be hoping that the red line bends up again, like it did several times in the precursor to the recession. But it is not going to do so in the next few months, because as the CPI-W shown in the first graph makes clear, inflation is just really beginning to hit the economy. It can't peak in economic effect before the end of the summer and probably won't have peaked by then, and then it will either take a price bust to mitigate or it will take several years before real incomes can possibly recover, perhaps three years if we factor in the 2% increase in wage taxes. This is why you are seeing bank accounts suddenly jack up - people are moving back into survival mode.
E) For projecting forward the red line this summer, we need to look at wage indicators ex CPI.
1) Retail trade series CES4200000035 aggregate weekly payrolls. Table B. For some reason this is very sensitive to even minor economic changes. From December to May, this dropped a bit. There was a big spike up in April, but that was bleeping McDonald's with hour expansions. The trend is not our short-term friend on this one, and indeed I have a hard time understanding how this could happen:
When you stop and think about it, those stores should still be open and May should have shown at least at that level. There must be job/hour losses elsewhere.
Or this is a mistake. It isn't usually.
2) Temporary Help Services. A strong predictor of future economic strength.
A few months of a small decline - since March, this has fallen a bit.
3) That oldie but goodie, diesel (distillate). YoY supply is currently down over 5%. Given CPI trends and wage/employment indicators, the economy cannot thrive this summer. One only has to look at May retail sales to get a sense of the problem. On a nominal basis, retail sales fell and sales at grocery stores fell. There was almost no increase at pharmacies, which is another bad sign. Gas prices may be falling, but consumers on net are still losing ground on food and other items like clothing and household goods.
Meredith Whitney Is Smiling
She's taken a lot of heat for her call on muni bonds, but it's a good call!
Case in point, Cook County. The unique thing about Cook County is that they are trying to make the local governments 'fess up. The details are ugly, and quite a few of the municipalities haven't reported. If about 50% of all municipal pension obligations are unfunded, where does that leave the hapless homeowners? There is a point at which you just can't tax property owners any more without throwing them out of their homes, and many municipalities (phone Chris Christie) are there.
The unkindest cut of all by Pappas, the anti-union criminal in Cook County who spearheaded the confession drive:
Chris Christie has gotten a very strong pension reform bill through the NJ Senate. Now it will face the test of the NJ House. It ups government employee pension contributions, it increases proportion of medical benefits paid by the employee (lower paid employees pay less), and it cuts pension COLAs in order to get NJ's bankrupt pension systems back into balance eventually, AND it gives government employees a contractual right to court-enforced payment of the government side of their pension contributions! That is important in NJ! Here is the text of the bill.
This is the full text of the statement explaining the bill (for the use of legislators who ain't gonna look all that up, and it also could serve as an indication of intent in court):
The NJ bill would go a long way toward fixing a lot of damaged pension systems. The screaming over COLAs alone should create seismic shocks all the way to California.
Case in point, Cook County. The unique thing about Cook County is that they are trying to make the local governments 'fess up. The details are ugly, and quite a few of the municipalities haven't reported. If about 50% of all municipal pension obligations are unfunded, where does that leave the hapless homeowners? There is a point at which you just can't tax property owners any more without throwing them out of their homes, and many municipalities (phone Chris Christie) are there.
The unkindest cut of all by Pappas, the anti-union criminal in Cook County who spearheaded the confession drive:
“This is not just about federal and state governments. Homeowners need to understand when they vote for a local bond deal what the financial burden is for their children. This is about educating them,” said Pappas.Clearly, this lady is marked for electoral doom. I expect those waifs pounding on the drums in Madison, WI to show up in Cook County any moment. It will be interesting to find out what the unfunded liabilities on retirement medical benefits really are going to be. Maybe Cook County voters might be interested in what is happening in NJ?
The Treasurer’s Office analyzed the top 50 residential property tax amounts in each municipality from 1996 to 2009 and saw an increase on average of 121 percent. This means residential property owners are bearing enormous increases and wallets are stretched.
The Treasurer called for the state legislature to require all real estate brokers to disclose to prospective homeowners the “credit card debt” – how much local government owes – affecting any home before they purchase the property.
Pappas also said she would go to the Cook County Board again to refine the ordinance based on the figures she released today to deal with the following:
1. Requiring the 55 agencies that did not report their figures to upload their reports.
2. Requiring each agency to report the rate of return on which its figures were based – a five percent or eight percent rate of return.
3. Requiring agencies to report other post-employment benefits (OPEB), such as retiree health insurance.
Chris Christie has gotten a very strong pension reform bill through the NJ Senate. Now it will face the test of the NJ House. It ups government employee pension contributions, it increases proportion of medical benefits paid by the employee (lower paid employees pay less), and it cuts pension COLAs in order to get NJ's bankrupt pension systems back into balance eventually, AND it gives government employees a contractual right to court-enforced payment of the government side of their pension contributions! That is important in NJ! Here is the text of the bill.
This is the full text of the statement explaining the bill (for the use of legislators who ain't gonna look all that up, and it also could serve as an indication of intent in court):
STATEMENTImportant stuff not included: This bill establishes a special trust fund set up to take contributions for non-pension retirement medical benefits:
This bill makes various changes to the manner in which the Teachers’ Pension and Annuity Fund (TPAF), the Judicial Retirement System (JRS), the Public Employees’ Retirement System (PERS), the Police and Firemen’s Retirement System (PFRS), and the State Police Retirement System (SPRS) operate and to the benefit provisions of those systems.
The bill establishes new pension committees as follows:
one 8-member committee for the TPAF and one for the SPRS;
two 8-member committees in the PERS, one for the State part of the PERS and one for the local part of the PERS; and
two 10-member committees in the PFRS, one for the State part of the PFRS and one for the local part of the PFRS.
Half of the members of each committee will be appointed by the Governor to represent public employers and half appointed by certain unions whose members are in the retirement system. When a target funded ratio for the system or part of the system is achieved, each committee will have the discretionary authority to modify the: member contribution rate; formula for calculation of final compensation or final salary; fraction used to calculate a retirement allowance; age at which a member may be eligible and the benefits for service or early retirement; and benefits provided for disability retirement. A committee will not have authority to change the number of years required for vesting.
The term “target funded ratio” means a ratio of the actuarial value of assets against the actuarially determined accrued liabilities expressed as a percentage that will be 75 percent in State fiscal year 2012, and increased annually by equal increments in each of the subsequent seven fiscal years, until the ratio reaches 80 percent at which it is to remain for all subsequent fiscal years.
The committees of these systems will have the authority to reactivate the cost of living adjustment on pensions and modify the basis for the calculation of the cost of living adjustment and set the duration and extent of the activation. A committee must give priority consideration to the reactivation of the cost of living adjustment.
The State House Commission will have the same authority with regard to JRS.
Each committee may also hire actuaries and consultants.
The bill establishes a process using a super conciliator to resolve an impasse on a decision or matter regarding benefits before any of the newly established committees in the TPAF, PERS, PFRS, and SPRS.
With regard to employee benefits, the bill provides for increases in the employee contribution rates: from 5.5% to 6.5% plus an additional 1% phased-in over 7 years beginning in the first year, meaning after 12 months, after the bill’s effective date for TPAF and PERS (including legislators, Law Enforcement Officer (LEO) members, and workers compensation judges); from 3% to 12% for JRS phased-in over seven years; from 8.5% to 10% for PFRS members and members of PERS Prosecutors Part; and from 7.5% to 9% for SPRS members. New members of TPAF and PERS will need 30 years of creditable service and age 65 for receipt of the early retirement benefit without a reduction of 1/4 of 1% for each month that the member is under age 65. TPAF and PERS members enrolled before November 1, 2008 are eligible for a service retirement benefit at age 60 and members enrolled on or after that date are eligible at age 62. New members will be eligible for a service retirement benefit at age 65. A new PFRS member’s special retirement benefit will be 60% of final compensation, plus 1% of final compensation multiplied by the number of years of creditable service over 25 but not over 30, instead of the current benefit of 65% of final compensation plus 1% for each year of service over 25 but not over 30.
The bill repeals N.J.S.A.43:15A-47.2 and 43:16A-5.1 which provide that a member of PERS or PFRS may retire while holding an elective public office covered by PERS or PFRS and continue to receive the full salary for that office, if the member’s PERS or PFRS retirement allowance is not based solely on service in the elected public office. It also provides that the PFRS or PERS retirees who were granted a retirement allowance under those sections prior to the bill’s effective date and are currently in an elective office covered by either of those systems may continue to receive their pension benefit and salary for the elective office.
Under the bill, the automatic cost-of-living adjustment will no longer be provided to current and future retirees and beneficiaries, unless it is reactivated as permitted by the bill.
For the PERS, TPAF, SPRS, PFRS, and JRS, the bill changes the method for the amortization of the system’s unfunded liability.
One section of the bill provides that each member of the TPAF, JRS, Prison Officers' Pension Fund, PERS, Consolidated Police and Firemen's Pension Fund, PFRS, and SPRS will have a contractual right to the annual required contribution made by the employer or by any other public entity. The contractual right to the annual required contribution means that the employer or other public entity must make the annual required contribution on a timely basis to help ensure that the retirement system is securely funded and that the retirement benefits to which the members are entitled by statute and in consideration for their public service and in compensation for their work will be paid upon retirement. The failure of the State or any other public employer to make the annually required contribution will be deemed to be an impairment of the contractual right of each employee. The Superior Court, Law Division will have jurisdiction over any action brought by a member of any system or fund or any board of trustees to enforce the contractual right set forth in this bill. The State and other public employers will submit to the jurisdiction of the Superior Court, Law Division and will not assert sovereign immunity in such an action. If a member or board prevails in litigation to enforce the contractual right set forth in this bill, the court may award that party their reasonable attorney’s fees.
That section also provides that the rights reserved to the State in current law to alter, modify, or amend such retirement systems and funds, or to create in any member a right in the corpus or management of a retirement system or pension fund, cannot diminish the contractual right of employees established by this bill.
In addition, the bill increases the membership of the State Investment Council from 13 to 16 members. It eliminates one representative from the SPRS, but adds one member from the State Troopers Fraternal Association. Two additional members are appointed by the Governor with the advice and consent of the Senate, and one additional appointment is added to the current one by the Governor from persons nominated by Public Employee Committee of the New Jersey State AFL-CIO, specifying that one of the two will be a representative of a police officers’ or firefighters’ union. The bill also provides that an elected member, as opposed to any member, of the boards of trustees for TPAF, PERS and PFRS will be eligible for designation to serve on the State Investment Council.
This bill requires all public employees and certain public retirees to contribute toward the cost of health care benefits coverage based upon a percentage of the cost of coverage.
Under the bill, all active public employees will pay a percentage of the cost of health care benefits coverage for themselves and any dependents. However, lower compensated employees will pay a smaller percentage and more highly compensated employees will pay a higher percentage. In addition, the applicable percentage will vary based upon whether the employee has family, individual, or member with child or spouse coverage. The rates gradually increase based on an employee’s compensation, at intervals of $5,000. These rates will be phased in over several years for employees employed on the contribution’s effective date who will pay ¼, ½, and ¾ of the amount of the contribution rate during the first, second and third years, respectively, meaning during the three 12-month periods after the contribution rates become effective. The bill establishes a “floor” for employee contributions so that no employee will pay an amount that is less than 1.5% of the employee’s compensation. Employees who pay for health care benefits coverage based upon a percentage of the cost of coverage will not also be required to pay the minimum contribution of 1.5% of compensation, as provided by other laws. The contribution will commence on the bill’s effective date for certain public employees and upon the expiration of a collective negotiation agreement for others.
Similar provisions in the bill apply to retirees of the State, employers other than the State, and units of local government who accrue 25 years of service after the bill’s effective date, or on or after the expiration of an applicable collective bargaining agreement in effect on that date, and retire after that, who will be required to contribute a percentage of the cost of health care benefits coverage in retirement, but as based on their retirement benefit. These provisions will not apply to public employees who have 20 or more year of service in one or more State or locally-administered retirement systems. A 1.5% “floor”, for those retirees to whom the 1.5% contribution in current law applies, will also be applicable to these retirees.
The bill allows boards of education and units of local government, that do not participate in the SHBP or SEHBP, to enter into contracts for health care benefits coverage, as may be required to implement a collective negotiations agreement, and agree to different employee contribution rates if certain cost savings in the aggregate over the period of the agreement can be demonstrated. The savings must be certified to the Department of Education or the Department of Community Affairs, as appropriate. The departments are to approve or reject the certification, within 30 days of receipt. The certification is deemed approved if not rejected within that time. The agreement cannot be executed until that approval is received or the 30 day period has lapsed, whichever occurs first.
The provisions concerning contributions for health care benefits will expire four years after the effective date.
A public employer and employees who are in negotiations for the next collective negotiations agreement to be executed after the employees in that unit have reached full implementation of the premium share set forth in the bill must conduct negotiations concerning contributions for health care benefits as if the full premium share was included in the prior contract. The public employers and public employees will remain bound by the health care contribution provisions of the bill, notwithstanding the expiration of those sections, until the full amount of the contribution has been implemented in accordance with the schedule set forth in the bill.
Employees subject to any collective negotiations agreement in effect on the effective date of the bill, that has an expiration date on or after the expiration of the health care contribution provisions of the bill, will be subject to those provisions, upon expiration of that collective negotiations agreement, until the health care contribution schedule set forth in the bill is fully implemented.
After full implementation, those contribution levels will become part of the parties' collective negotiations and will then be subject to collective negotiations in a manner similar to other negotiable items between the parties.
A public employee whose amount of contribution in retirement was determined in accordance with the expired sections of law will be required to contribute the amount so determined in retirement, notwithstanding that the law has expired, with the retirement allowance, and any future cost of living adjustment thereto, used to identify the percentage of the cost of coverage.
The increased employee contributions under the bill for pension benefits and the contributions for health care benefits will begin upon the implementation of necessary administrative actions for collection and will not be applied retroactively to this bill’s effective date.
The bill also creates two new committees, one for the State Health Benefits Program and one for the School Employees’ Health Benefits Program and confers on the committees the responsibility for plan design. Half of the committee members will be appointed by the Governor to represent public employers and half by certain unions who represent public employees in the State.
The bill requires the committees for both programs to set the amounts for maximums, co-pays, deductibles, and other such participant costs; provide employees with the option to select one level of at least three levels of coverage each for family, individual, individual and spouse, and individual and dependent, or equivalent categories, for each plan offered by the program differentiated by out of pocket costs to employees including with regard to co-payments and deductibles; and provide for a high deductible health plan that conforms to the Internal Revenue Code Section 223.
The bill contains a section, to begin January 1, 2012, to limit coverage for certain medically necessary tertiary health care services performed by certain out of State health care providers.
The bill repeals a provision of law that provides that the State Health Benefits Commission must not enter into a contract for the benefits provided pursuant to the contract in effect on October 1, 1988, including, but not limited to, basic benefits, extended basic benefits, and major medical benefits unless the level of benefits provided under the contract entered into is equal to or exceeds the level of benefits provided for in the contract in effect on October 1, 1988, or unless the benefits in effect on October 1, 1988 are modified by an authorized collective bargaining agreement made on behalf of the State.
Various provisions of the bill contain a number of changes to the law that are necessary to maintain the qualified plan status of the retirement systems under the federal Internal Revenue Code; for compliance with Statements Nos. 43 and 45 of the Governmental Accounting Standards Board, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (GASB 43/45); and to bring the defined contribution plans into compliance with U.S. Department of Treasury regulations affecting administration of plans administered under section 403(b) of the Internal Revenue Code. Modifications pertaining to the Supplemental Annuity Collective Trust are also being made by the bill.
66. (New section) a. Post-employment benefits other than pensions under the State Health Benefits Program, P.L.1961, c.49 (C.52:14-17.25 et seq.), for retired employees, and their dependents, of employers other than the State that are participating in the State Health Benefits Program pursuant to section 3 of P.L.1964, c.125 (C.52:14-17.34), as non-State participating employers, shall be funded and paid by means of contributions to a separate trust fund.And these are the health insurance contribution amounts:
for family coverage or its equivalent -
an employee who earns less than $25,000 shall pay 3 percent of the cost of coverage;
an employee who earns $25,000 or more but less than $30,000 shall pay 4 percent of the cost of coverage;
an employee who earns $30,000 or more but less than $35,000 shall pay 5 percent of the cost of coverage;
an employee who earns $35,000 or more but less than $40,000 shall pay 6 percent of the cost of coverage;
an employee who earns $40,000 or more but less than $45,000 shall pay 7 percent of the cost of coverage;
an employee who earns $45,000 or more but less than $50,000 shall pay 9 percent of the cost of coverage;
an employee who earns $50,000 or more but less than $55,000 shall pay 12 percent of the cost of coverage;
an employee who earns $55,000 or more but less than $60,000 shall pay 14 percent of the cost of coverage;
an employee who earns $60,000 or more but less than $65,000 shall pay 17 percent of the cost of coverage;
an employee who earns $65,000 or more but less than $70,000 shall pay 19 percent of the cost of coverage;
an employee who earns $70,000 or more but less than $75,000 shall pay 22 percent of the cost of coverage;
an employee who earns $75,000 or more but less than $80,000 shall pay 23 percent of the cost of coverage;
an employee who earns $80,000 or more but less than $85,000 shall pay 24 percent of the cost of coverage;
an employee who earns $85,000 or more but less than $90,000 shall pay 26 percent of the cost of coverage;
an employee who earns $90,000 or more but less than $95,000 shall pay 28 percent of the cost of coverage;
an employee who earns $95,000 or more or but less than $100,000 shall pay 29 percent of the cost of coverage;
an employee who earns $100,000 or more or but less than $110,000 shall pay 32 percent of the cost of coverage;
an employee who earns $110,000 or more shall pay 35 percent of the cost of coverage
for individual coverage or its equivalent -
an employee who earns less than $20,000 shall pay 4.5 percent of the cost of coverage;
an employee who earns $20,000 or more but less than $25,000 shall pay 5.5 percent of the cost of coverage;
an employee who earns $25,000 or more but less than $30,000 shall pay 7.5 percent of the cost of coverage;
an employee who earns $30,000 or more but less than $35,000 shall pay 10 percent of the cost of coverage;
an employee who earns $35,000 or more but less than $40,000 shall pay 11 percent of the cost of coverage;
an employee who earns $40,000 or more but less than $45,000 shall pay 12 percent of the cost of coverage;
an employee who earns $45,000 or more but less than $50,000 shall pay 14 percent of the cost of coverage;
an employee who earns $50,000 or more but less than $55,000 shall pay 20 percent of the cost of coverage;
an employee who earns $55,000 or more but less than $60,000 shall pay 23 percent of the cost of coverage;
an employee who earns $60,000 or more but less than $65,000 shall pay 27 percent of the cost of coverage;
an employee who earns $65,000 or more but less than $70,000 shall pay 29 percent of the cost of coverage;
an employee who earns $70,000 or more but less than $75,000 shall pay 32 percent of the cost of coverage;
an employee who earns $75,000 or more but less than $80,000 shall pay 33 percent of the cost of coverage;
an employee who earns $80,000 or more but less than $95,000 shall pay 34 percent of the cost of coverage;
an employee who earns $95,000 or more shall pay 35 percent of the cost of coverage;
for member with child or spouse coverage or its equivalent -
an employee who earns less than $25,000 shall pay 3.5 percent of the cost of coverage;
an employee who earns $25,000 or more but less than $30,000 shall pay 4.5 percent of the cost of coverage;
an employee who earns $30,000 or more but less than $35,000 shall pay 6 percent of the cost of coverage;
an employee who earns $35,000 or more but less than $40,000 shall pay 7 percent of the cost of coverage;
an employee who earns $40,000 or more but less than $45,000 shall pay 8 percent of the cost of coverage;
an employee who earns $45,000 or more but less than $50,000 shall pay 10 percent of the cost of coverage;
an employee who earns $50,000 or more but less than $55,000 shall pay 15 percent of the cost of coverage;
an employee who earns $55,000 or more but less than $60,000 shall pay 17 percent of the cost of coverage;
an employee who earns $60,000 or more but less than $65,000 shall pay 21 percent of the cost of coverage;
an employee who earns $65,000 or more but less than $70,000 shall pay 23 percent of the cost of coverage;
an employee who earns $70,000 or more but less than $75,000 shall pay 26 percent of the cost of coverage;
an employee who earns $75,000 or more but less than $80,000 shall pay 27 percent of the cost of coverage;
an employee who earns $80,000 or more but less than $85,000 shall pay 28 percent of the cost of coverage;
an employee who earns $85,000 or more but less than $100,000 shall pay 30 percent of the cost of coverage.
an employee who earns $100,000 or more shall pay 35 percent of the cost of coverage.
The NJ bill would go a long way toward fixing a lot of damaged pension systems. The screaming over COLAs alone should create seismic shocks all the way to California.
Chinese Money
It makes me twitch:
Short summary of the rest today - Fed Heads talk. Plenty of oil, high prices. Housing and building continues to suck big time, but fortunately it can hardly get much worse. Same old, same old. Japanese situation could hardly be worse, but appears to be about to get considerably worse.
The leading edge of instability for the week is Japan/China and the downgrade in monsoon forecast for India.
Diesel supplied four week MA -5.7% YoY. Total -2.7%. For comparison purposes, in the comparable week of 2008 (June 18th), the distillate four-week MA was only down 0.4%, and total product was down 1.3%. This is pretty darned serious. Inventories of product and crude were much lower then. In April, (last report) the ATA truck tonnage index was only down 0.7%, but this must have degenerated. In June of 2008, the ATA truck tonnage index rose 1.3% after rising 0.5% in May of 2008.
The seven-day repo rate gained 47 basis points, or 0.47 percentage point, to 8.81 percent as of the 4:30 p.m. close in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It touched 8.93 percent, the highest level since October 2007.Banks trying to come up with their reserves.
The 14-day repo rate declined 125 basis points to 7.34 percent, the biggest drop since Feb. 1. The slump in longer-term rates shows the cash shortage will probably ease from the start of next month, said Liu.
Short summary of the rest today - Fed Heads talk. Plenty of oil, high prices. Housing and building continues to suck big time, but fortunately it can hardly get much worse. Same old, same old. Japanese situation could hardly be worse, but appears to be about to get considerably worse.
The leading edge of instability for the week is Japan/China and the downgrade in monsoon forecast for India.
Diesel supplied four week MA -5.7% YoY. Total -2.7%. For comparison purposes, in the comparable week of 2008 (June 18th), the distillate four-week MA was only down 0.4%, and total product was down 1.3%. This is pretty darned serious. Inventories of product and crude were much lower then. In April, (last report) the ATA truck tonnage index was only down 0.7%, but this must have degenerated. In June of 2008, the ATA truck tonnage index rose 1.3% after rising 0.5% in May of 2008.
