by Calculated Risk on 5/31/2013 12:35:00 PM

Here is the summary of the 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.  And a brief excerpt:

What is the Outlook for Future Social Security and Medicare Costs in Relation to GDP? One instructive way to view the projected costs of Social Security and Medicare is to compare the costs of scheduled benefits for the two programs with the gross domestic product (GDP), the most frequently used measure of the total output of the U.S. economy (Chart A). Under the intermediate assumptions employed in the reports and throughout this Summary, costs for both programs increase substantially through 2035 when measured this way because: (1) the number of beneficiaries rises rapidly as the baby-boom generation retires; and (2) the lower birth rates that have persisted since the baby boom cause slower growth of the labor force and GDP. Social Security’s projected annual cost increases to about 6.2 percent of GDP by 2035, declines to 6.0 percent by 2050, and remains between 6.0 and 6.2 percent of GDP through 2087. Under current law, projected Medicare cost rises to 5.6 percent of GDP by 2035, largely due to the rapid growth in the number of beneficiaries, and then to 6.5 percent in 2087, with growth in health care cost per beneficiary becoming the larger factor later in the valuation period.


In 2012, the combined cost of the Social Security and Medicare programs equaled 8.7 percent of GDP. The Trustees project an increase to 11.8 percent of GDP in 2035 and 12.7 percent of GDP in 2087. Although Medicare cost (3.6 percent of GDP) is smaller than Social Security cost (5.0 percent of GDP) in 2012, the gap closes gradually until 2056, when Medicare is projected to be the more costly program. During the final decade of the long-range projection period, Medicare cost is modestly larger than Social Security cost.

The increase in Social Security as a percent of GDP has always been expected.  The larger concern is the increase in Medicare.  According to the report, the OASI trust fund will be depleted in 2035 (then the program will either run a deficit or a pay the portion received in payroll taxes).  The current large trust fund was a result of payroll tax increases under President Reagan to have the baby boomers prepay their social security on the recommendation of the Greenspan commission.   The eventual depletion of the trust fund was expected. 

As the Columbia Journalism Review noted, any publication that says the fund is "bankrupt" or "on track for insolvency" gets an "F" for reporting (I've already seen a few).

by Calculated Risk on 5/31/2013 10:00:00 AM

Click on graph for larger image.

• The final Reuters / University of Michigan consumer sentiment index for May increased to 84.5 from the April reading of 76.4, and up from the preliminary reading of 83.7. This is the highest level since July 2007.

This was above the consensus forecast of 83.7. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011.

• From the Chicago ISM:

May 2013:

The Chicago Purchasing Managers reported April's Chicago Business Barometer sprung 9.7 to 58.7, the highest since March 2012 and in sharp contrast to April's 3-1/2 year low. All Business Activity measures surged in May, reversing weakness seen in most categories in March and April.

PMI: Increased to 58.7 from 49.0. (Above 50 is expansion).

Employment increased to 56.9, up from 48.7.

New orders increased to 58.1 from 53.2.

This was well above the consensus estimate of 50.0.

by Calculated Risk on 5/31/2013 08:46:00 AM

The BEA released the Personal Income and Outlays report for April:

Personal income decreased $5.6 billion, or less than 0.1 percent ... in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.5 billion, or 0.2 percent. In March, personal income increased $36.2 billion, or 0.3 percent ... and PCE increased $14.2 billion, or 0.1 percent, based on revised estimates.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in April, compared with an increase of 0.2 percent in March. ... The price index for PCE decreased 0.3 percent in April, compared with a decrease of 0.1 percent in March. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared with an increase of 0.1 percent.
...
Personal saving -- DPI less personal outlays -- was $306.9 billion in April, compared with $301.4 billion in March. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.5 percent in April, the same as in March.

The following graph shows real Personal Consumption Expenditures (PCE) through April (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.  

Some of the decline in spending is probably related to lower gasoline prices in April - and that is actually a positive (gasoline prices rebounded in May though).    Also PCE was revised up for January (slightly), February and March.

A key point is that the PCE price index was only up 0.7% year-over-year (1.1% for core PCE).   Core PCE increased at a 0.1% annualized rate in April keeping the pressure off the Fed to taper asset purchases.

by Calculated Risk on 5/30/2013 09:16:00 PM

The 2013 Social Security Trustees Report is expected tomorrow. If it is released, expect some terrible media coverage. Last year, the Columbia Journalism Review issued a Report Card on Social Security Trust Fund Coverage. They gave the media an "F" on headlines, and a "C-" on coverage.

With a few exceptions like USNews.com, the ABCNews blog, and Mark Miller, who noted on his Reuters blog “[Security Commissioner Michael] Astrue went out of his way to emphasize that the program is far from broke,” Astrue’s warning went unheeded.. Most press coverage ignored Astrue’s cautions and left the impression with the public that Social Security will not be there for them. “There won’t be much money left for you” after 2033, declared a reporter on WBEZ in Chicago.

Obviously any site that says "broke" or "bankrupt", is well, wrong. Unfortunately the coverage is typically more political than data driven. Be prepared to ridicule the coverage (The Columbia article has some great examples from last year).

Friday economic releases:
• At 8:30 AM ET, the BEA will release the Personal Income and Outlays for April. The consensus is for a 0.1% increase in personal income in April, and for no change in personal spending. Also for the Core PCE price index to increase 0.1%. Based on the second estimate of GDP, there will be an upward revision to outlays for Q1.

• At 9:45 AM, the Chicago Purchasing Managers Index for May will be released. The consensus is for an increase to 50.0, up from 49.0 in April.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (final for May). The consensus is for a reading of 83.7.

• Expected: The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds

by Calculated Risk on 5/30/2013 05:50:00 PM

Oh my ... from the Irish Times: Recession out of the picture as Fermanagh puts on a brave face for G8 leaders

Just a few weeks ago, Flanagan’s – a former butcher’s and vegetable shop in the neat village – was cleaned and repainted with bespoke images of a thriving business placed in the windows. Any G8 delegate passing on the way to discuss global capitalism would easily be fooled into thinking that all is well with the free-market system in Fermanagh. But, the facts are different. ...

The butcher’s business has been replaced by a picture of a butcher’s business. Across the road is a similar tale. A small business premises has been made to look like an office supplies store. It used to be a pharmacy, now relocated on the village main street.

Elsewhere in Fermanagh, billboard-sized pictures of the gorgeous scenery have been located to mask the occasional stark and abandoned building site or other eyesore.

The picture in the Irish Times is amazing. Ahhh, a Potemkin village that might fool some "leaders" into thinking Ireland is actually recovering.

by Calculated Risk on 5/30/2013 03:29:00 PM

Earlier the BEA reported the second estimate of Q1 GDP. The revisions were fairly small, as the BEA reported that real GDP increased at a 2.4% annual rate in Q1, revised down from the advanced estimate of 2.5%.  The underlying details were slightly positive.

Personal consumption expenditure (PCE) grew at a 3.4% annualized real rate in Q1, revised up from 3.2%.

The change in private inventories was revised down to a 0.63 percentage point contribution from a 1.03 percentage point contribution in the advance report (a 0.40 percentage point decline between estimates). This smaller buildup in inventories for Q1 is probably a positive for Q2.

A key negative was the contribution from state and local government from -0.14 percentage points to -0.29 percentage points - the largest drag since Q2 2011.

This graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

Click on graph for larger image.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years - and is now adding to the economy.

However the drag from state and local governments has continued.  Just ending this drag will be a positive for the economy.  Note: In real terms, state and local government spending is at the lowest level since Q1 2001.

With consumer spending holding up, residential investment increasing - and state and local governments near the bottom - this suggests decent growth going forward. Of course there will be a substantial drag from Federal fiscal policy over the next couple of quarters ...

by Calculated Risk on 5/30/2013 12:31:00 PM

From Freddie Mac today: Fixed Mortgage Rates Highest in a Year

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates following long-term government bond yields higher. The average 30-year fixed moved up nearly half a percentage point since the beginning of May when it averaged 3.35 percent. ...

30-year fixed-rate mortgage (FRM) averaged 3.81 percent with an average 0.8 point for the week ending May 30, 2013, up from last week when it averaged 3.59 percent. Last year at this time, the 30-year FRM averaged 3.75 percent.

15-year FRM this week averaged 2.98 percent with an average 0.7 point, up from last week when it averaged 2.77 percent. A year ago at this time, the 15-year FRM averaged 2.97 percent.

Click on graph for larger image.

This graph shows the the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®.   Not much of an increase recently, but this is the highest level in a year.

This is a weekly average for the week ending May 30th.  Rates moved higher over the last couple of days, and 30 year rates will probably be close to 4% in the next survey if Treasury yields remain at the current level.

Note: The Freddie Mac survey started in 1971 and rates were below 5% in earlier periods.

The second graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index.

The refinance index has dropped sharply recently (down almost 30% over the last 3 weeks) and will probably decline significantly if rates stay at this level.

by Calculated Risk on 5/30/2013 10:03:00 AM

From the NAR: Pending Home Sales Edge Up in April

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.3 percent to 106.0 in April from 105.7 in March, and is 10.3 percent above April 2012 when it was 96.1; the data reflect contracts but not closings.

Home contract activity is at the highest level since the index hit 110.9 in April 2010, immediately before the deadline for the home buyer tax credit. Pending sales have been above year-ago levels for the past 24 months.
...
The PHSI in the Northeast jumped 11.5 percent to 92.3 in April and is 17.7 percent above a year ago. In the Midwest the index rose 3.2 percent to 107.1 in April and is 15.1 percent higher than April 2012. Pending home sales in the South slipped 1.1 percent to an index of 119.2 in April but are 12.3 percent above a year ago. With pronounced inventory constraints, the index in the West fell 7.6 percent in April to 94.6 and is 2.6 percent below April 2012.

Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in May and June.

With limited inventory at the low end and fewer foreclosures, we might see flat or even declining existing home sales. The key is that the number of conventional sales is increasing while foreclosures and short sales decline - and that is a sign of an improving market (although with significant investor buying), even if total sales decline.

by Calculated Risk on 5/30/2013 08:30:00 AM

Note: The BEA reported GDP for Q1 was revised down to a 2.4% annualized real growth rate from 2.5% in the advance report:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "second" estimate released by the Bureau of Economic Analysis. ... The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP increased 2.5 percent. With the second estimate for the first quarter, increases in private inventory investment, in exports, and in imports were less than previously estimated, but the general picture of overall economic activity is not greatly changed.

I'll have more on GDP later.

The DOL reports:

In the week ending May 25, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 10,000 from the previous week's revised figure of 344,000. The 4-week moving average was 347,250, an increase of 6,750 from the previous week's revised average of 340,500.

The previous week was revised up from 340,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 347,250.

Claims were above the 340,000 consensus forecast.

by Calculated Risk on 5/29/2013 09:00:00 PM

Tim Duy thinks the Fed might start to taper asset purchases in September: September Looking Good

A "few more months" I interpret as June, July, and August, which puts the beginning of tapering at the September FOMC meeting. I think that Fed speakers are sending pretty clear signals to prepare for a September policy change.

Some big names on Wall Street don't agree. Vincent Reinhart at Morgan Stanley believes the data will push the Fed back to December. The view at Goldman Sachs is reportedly similar. To be sure, the data might cut in that direction, but I think that the bar to tapering might be lower than believed by those looking for a shift in December. We may believe the Federal Reserve's dual mandate argues for a longer period of QE at its current pace, but I am thinking that for the Federal Reserve, the dual mandate has more to do with the lift-off date from ZIRP than the end of QE. They have tended to argue for more or less QE on the basis of "stronger and sustainable" improvement in labor markets, and, given the obvious shift in tone among Fed speakers, I think we have reached that benchmark. At this point, they are just looking for a little more confirmation, in their minds erring on the side of being "too easy."

A lot of data will be coming in the door over the next week and a half, culminating in the all-important employment report on Friday, June 5. I think even a moderately positive run of data will further cement a September shift.

Most analysts expect some economic slowdown in Q2 and Q3 due to the significant fiscal drag over the next couple of quarters. I expect the Fed will wait and see how much fiscal policy impacts growth and employment, so - unless the data is very strong - I think the Fed will wait until at least September before they start tapering.

Of course "tapering" is still very accommodative.

Thursday economic releases:
• At 7:00 AM ET, the BEA will release the second estimate of Q1 GDP. The consensus is that real GDP increased 2.5% annualized in Q1, unchanged from the advance report.

• Also at 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims at 340 thousand, unchanged from last week.

• At 10:00 AM, the NAR will release Pending Home Sales Index for April. The consensus is for a 1.4% increase in the index