by Calculated Risk on 3/28/2011 12:50:00 PM

Before the February Personal Income and Outlays report, most analysts were expecting real GDP growth of over 3% in Q1. As an example, Paul Kasriel at Northern Trust was forecasting 3.1% real GDP growth with 2.2% real Personal Consumption Expenditure (PCE) growth, and Goldman Sachs was forecasting 3.5% real GDP growth with 3.0% real PCE growth.

Both of those forecast now look too high.

Note: The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next. Instead, you have to average all three months of a quarter, and then take the change from the average of the three months of the preceding quarter.

So, for Q1, you would average PCE for January, February, and March, then divide by the average for October, November and December. Of course you need to take this to the fourth power (for the annual rate) and subtract one. Also the March data isn't released until after the advance Q1 GDP report.

There are a few commonly used methods to forecast quarterly PCE growth after the release of the second month of the quarter report (February for Q1). Some analysts use the "two month" method (averaging the growth from October-to-January with the growth from November-to-February). Others use the mid-month method and just use the growth from November-to-February.

Either way, the first two months of Q1 2011 suggest PCE growth of around 1.4% for the quarter as shown in the following table.

	PCE, Billions (2005 dollars), SAAR	3 Month Change (annualized)	Quarter (Annualized)
Jan-10	$9,189.30
Feb-10	$9,228.20
Mar-10	$9,258.60
Apr-10	$9,257.20	2.99%
May-10	$9,280.50	2.29%
Jun-10	$9,289.30	1.33%	2.2%
Jul-10	$9,302.60	1.98%
Aug-10	$9,333.90	2.32%
Sep-10	$9,355.40	2.88%	2.4%
Oct-10	$9,402.80	4.38%
Nov-10	$9,426.60	4.03%
Dec-10	$9,439.30	3.64%	4.0%
Jan-11	$9,435.10	1.38%
Feb-11	$9,459.00	1.38%
Mar-11

Although there are other components of GDP (investment, trade, government spending and inventory changes), it appears Q1 GDP growth will be lower than expected.

I still expect stronger GDP growth in 2011 than in 2010, but it appears 2011 is off to a sluggish start - and I'm concerned about world events and high oil prices.

by Calculated Risk on 3/28/2011 10:30:00 AM

• From the Dallas Fed: Texas Manufacturing Activity Strengthens Further

Texas factory activity increased in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose sharply to 24, its highest level in nearly a year.
...
Labor market indicators continued to reflect expansion. The employment index came in at a reading of 12, similar to February. Twenty percent of manufacturers reported hiring new workers compared with eight percent reporting layoffs. The hours worked index jumped to 13, with the share of firms reporting decreases in employee workweeks falling to its lowest level since 2006. The wages and benefits index rose from 9 to 12, although the great majority of respondents noted no change in labor costs.

Another strong report. The last of the regional reports will be released on Thursday, and the ISM manufacturing index will be released on Friday (should be very strong again).

• From the NAR: February Pending Home Sales Rise

The Pending Home Sales Index,* a forward-looking indicator, rose 2.1 percent to 90.8, based on contracts signed in February, from 88.9 in January. The index is 8.2 percent below 98.9 recorded in February 2010. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

This suggests a slight increase in existing home sales in March and April.

by Calculated Risk on 3/28/2011 08:30:00 AM

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

Personal income increased $38.1 billion, or 0.3 percent ... Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, in contrast to a decrease of less than 0.1 percent in January.

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

Click on graph for larger image in graph gallery.

PCE increased 0.7% in February, but real PCE only increased 0.3% as the price index for PCE increased 0.4 percent in February.

Personal income growth was slightly below expectations. Note: Core PCE - PCE excluding food and energy - increased 0.2 percent in February.

Even though PCE growth was at expectations, real PCE was low - and this suggests analysts will downgrade their forecasts for Q1 GDP. Using the two month estimate for PCE growth (averaging the growth of January and February over the first two months of the previous quarter) suggests PCE growth of around 1.4% in Q1 (down sharply from 4.0% in Q4).

Weekend on U.S. economy:
• Here is the Summary for Week ending March 25th.
• Lawler: Census 2010 and Excess Vacant Housing Units
• Schedule for Week of March 27th

by Calculated Risk on 3/27/2011 07:29:00 PM

The next round of Irish bank stress test results are due on March 31st. Meanwhile the ECB is seeking a new liquidity facility and Ireland is talking haircuts for senior bondholders ...

• From Bloomberg: Ireland Seeks to Share Bank-Loss Burdens With Bond Holders, Noonan Says

Ireland wants to share bank losses with senior bondholders as part of a “final solution” for the country’s debt-laden financial system, Agriculture Minister Simon Coveney said.

Finance Minister Michael Noonan will seek agreement from European authorities to share losses with bond holders after stress-test results on March 31 determine how much extra capital the banks need, Coveney said.

• From the Financial Times: Ireland seeks ECB deal to secure banks
• From the WSJ: ECB Seeks New Liquidity Plan for Irish Banks

the Sunday Business Post newspaper reported over the weekend that the tests will expose a capital shortfall of €18 billion to €23 billion. That is more than the €10 billion earmarked by the European Union, International Monetary Fund and European Central Bank in Ireland's November bailout deal, but less than the €35 billion many analysts had estimated the banks would require.

Yesterday and Today:
• Here is the Summary for Week ending March 25th.
• Lawler: Census 2010 and Excess Vacant Housing Units
• Schedule for Week of March 27th

by Calculated Risk on 3/27/2011 02:46:00 PM

• From Kyodo News: Woes deepen over radioactive water at nuke plant, sea contamination

Japan on Sunday faced an increasing challenge of removing highly radioactive water found inside buildings near some troubled nuclear reactors at the Fukushima Daiichi plant, with the radiation level of the surface of the pool in the basement of the No. 2 reactor's turbine building found to be more than 1,000 millisieverts per hour.

... efforts to restore power and enhance cooling efficiency at the crisis-hit nuclear power plant is showing slow progress partly due to the radioactive pools of water found at the Nos. 1, 2, 3 and 4 units.

Workers there are planning to turn on the lights in the control room of the No. 4 reactor, while also trying to inject freshwater into tanks storing spent nuclear fuel at the plant's Nos. 1, 2, 3 and 4 reactors to prevent crystallized salt from seawater already injected from hampering the smooth circulation of water and thus diminishing the cooling effect.

• From the LA Times: Officials retract reports of extremely high radiation at Fukushima plant
• From the NY Times: Higher Levels of Radiation Found at Japan Reactor Plant

Yesterday and Today:
• Here is the Summary for Week ending March 25th.
• Lawler: Census 2010 and Excess Vacant Housing Units
• Schedule for Week of March 27th