by Calculated Risk on 8/01/2011 09:00:00 PM

Over the last couple of weeks, we saw extreme caution by businesses and consumers. CEOs were warning about a sharp slowdown. Lawyers were telling their clients to wait before signing contracts. Corporations were stockpiling cash ... and there was even a "run to the banks"!

From Francesco Guerrera at the WSJ: Washington's Haggling Left Wall Street Dangling

U.S. companies large and small also chose an extraordinary playbook, stashing cash in the corporate equivalent of mattresses—bank accounts that yield no interest ... Banks, for their part, looked at the influx of deposits with mixed feelings.

On one hand, the unexpected bounty provides them with cheap funding that can be put to work in the form of loans. At the same time, the new deposits swelled their liabilities ... One executive even suggested that if this "run to the bank" continues, lenders might consider introducing negative interest rates on deposits (savers would have to pay a fee to park the money in the bank) to keep money out.

Some of this move to cash is due to the European financial crisis (the Italy to Germany 10 year spread hit another record high today). But most of the move was probably due to the political uncertainty. A key question is how quickly consumer and business confidence returns to the already low pre-debt ceiling debate levels.

by Calculated Risk on 8/01/2011 05:27:00 PM

• From J.P. Morgan (this includes debt ceiling deal, expiring EUB, payroll tax cut. etc.):

Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

• From the WSJ: House Closes In on Vote as Deadline Approaches

The U.S. House began debate Monday afternoon, and voted 249-178 on a procedural measure to allow final debate on the bill, expected Monday evening. The procedural vote is a test of support for the underlying bill. As the House moved forward, the Senate scheduled its vote on the debt ceiling for Tuesday ...

• From David Altig at Macroblog: Is the economy hitting stall speed?

[R]esearch shows that things could become considerably less comfortable if the 2 percent threshold persists, or the yield curve flattens, or the housing market tanks again. At that point, history is on the side of the recessionists. While Lockhart and our Reserve Bank don't believe we're there yet, it's fair to say we'd feel more comfortable if the incoming third quarter data were a little more positive. And on that count, this morning's Institute for Supply Management report for manufacturing isn't a very promising first step.

Many people (myself included) keep looking for a little pickup in activity that never seems to materialize. Of course the slowdown in July can be blamed on a self inflicted wound to an already fragile economy. I wonder what the excuse will be in August?

by Calculated Risk on 8/01/2011 03:25:00 PM

It looks like the spending cuts in the deal through the end of 2012 will be $22 billion, although there could be more after the special committee fails makes their recommendations later this year.

These spending cuts will only have a small negative impact on the economy, but we have to remember that the original stimulus is almost over - and that the payroll tax cut expires at the end of the year - as do the emergency unemployment benefits. Plus state and local governments are continuing to cut spending.

Brad Delong estimates:

A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline.

That seems high based on the above spending cuts, but that is only part of the drag. I'll try to find some other estimate of the economic drag.

Floyd Norris writes in the NY Times that this could lead to a larger deficit Could This Deal Raise Budget Deficits

[T]his deal could manage to do the exact opposite of what it promises — raise the deficit.

... This could damage the economy enough to send tax receipts down again. Although you never would have guessed it from the rhetoric, tax receipts are at the lowest level in years, as a percentage of gross domestic product. Get a healthy economy and tax revenues rise while a lot of spending, on such things as unemployment benefits, goes away.

It is not just this deal, but the winding down of all the programs that will be a drag on the economy.

As far as confidence, I do think there will be some boost from the deal. Not because it reduces the deficit - that does nothing for confidence - but because the deal takes not paying the bills off the table.

by Calculated Risk on 8/01/2011 11:50:00 AM

Catching up ... this morning from the Census Bureau reported that overall construction spending increased slightly in June:

[C]onstruction spending during June 2011 was estimated at a seasonally adjusted annual rate of $772.3 billion, 0.2 percent (±1.8%)* above the revised May estimate of $770.5 billion.

Private construction spending increased in June:

Spending on private construction was at a seasonally adjusted annual rate of $493.4 billion, 0.8 percent (±1.3%)* above the revised May estimate of $489.6 billion. Residential construction was at a seasonally adjusted annual rate of $235.8 billion in June, 0.3 percent (±1.3%)* below the revised May estimate of $236.5 billion. Nonresidential construction was at a seasonally adjusted annual rate of $257.7 billion in June, 1.8 percent (±1.3%) above the revised May estimate of $253.1 billion.

Click on graph for larger image in graph gallery.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending is 65% below the peak in early 2006, and non-residential spending is 38% below the peak in January 2008.

Private construction spending is mostly moving sideways, and it is public construction spending that is now declining.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending will probably turn positive in August, but public spending is now falling sharply as the stimulus spending ends.

by Calculated Risk on 8/01/2011 10:00:00 AM

PMI was at 50.9% in July, down from 55.3% in June. The employment index was at 53.5%, down from 59.9% and new orders decreased to 49.2%, down from 51.6%.

From the Institute for Supply Management: July 2011 Manufacturing ISM Report On Business®

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term, while export orders continue to remain strong."

Click on graph for larger image in new window.

Here is a long term graph of the ISM manufacturing index.

This was below expectations of 54.3%, but in line with the weak regional surveys.