by Calculated Risk on 9/28/2012 09:58:00 AM

Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for September was 78.3, down from the preliminary reading of 79.2, and up from the August reading of 74.3.

This was below the consensus forecast of 79.0 and still fairly low. Sentiment remains weak due to the high unemployment rate, sluggish economy and higher gasoline prices.

From the Chicago ISM:

The Chicago Purchasing Managers reported the Chicago Business Barometer fell to 49.7, its lowest level in three years.

• EMPLOYMENT: 2 1/2 year low; [declined to 52.0 from 57.1 in August]
• NEW ORDERS, ORDER BACKLOGS, and SUPPLIER DELIVERIES: 3 month moving averages lowest since mid 2009; [new orders declined to 47.4 from 54.8]
• PRICES PAID: third consecutive monthly gain

The Chicago PMI was well below the consensus forecast of 53.1.

by Calculated Risk on 9/28/2012 08:45:00 AM

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

Personal income increased $15.0 billion, or 0.1 percent ... in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in August, compared with an increase of 0.4 percent in July. ... The price index for PCE increased 0.4 percent in August, compared with an increase of less than 0.1 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent in August, the same increase as in July.
...
Personal saving -- DPI less personal outlays -- was $444.8 billion in August, compared with $492.2 billion in July. Personal saving as a percentage of disposable personal income was 3.7 percent in August, compared with 4.1 percent in July

The following graph shows real Personal Consumption Expenditures (PCE) through August (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.

Using the two-month method, it appears real PCE will increase around 1.3% annualized in Q3 - another weak quarter for GDP growth (June PCE was weak, so maybe PCE will increase 1.6%).

A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up only 1.6%. In August, core PCE increase at a 1.3% annualized rate.

by Calculated Risk on 9/27/2012 08:50:00 PM

The beatings continue in Europe ...

From the NY Times: Despite Public Protests, Spain’s 2013 Budget Plan Includes More Austerity

The Spanish government on Thursday presented a draft budget for 2013 with a package of tax increases and spending cuts that it said would guarantee the country could meet deficit-cutting targets agreed to with the rest of the euro zone.
...
The 2013 budget plan released Thursday is meant to help carry out a sweeping long-term austerity package outlined by Mr. Rajoy in July, which is aimed at reducing the central government’s budget deficit by 65 billion euros, or $84 billion, over two and a half years.

The plan involves an average cut of almost 9 percent in the spending of each government ministry next year. The salaries of civil servants will be frozen for a third consecutive year.

And from the NY Times: Greece Agrees on New Package of Budget Cuts and Taxes

The government of Prime Minister Antonis Samaras must now present the proposed actions — $15 billion in cuts to pensions, salaries and state spending, and at least $2.6 billion in new taxes — for further discussion with the foreign lenders, who have demanded them in return for releasing the next portion of aid to the stricken country.
...
The government did not release specifics of the agreement, though it is said to call for a rise in the retirement age to 67 from 65.

On Friday:
• At 8:30 AM ET, the Personal Income and Outlays report for August will be released. The consensus is for a 0.2% increase in personal income in August, and for 0.5% increase in personal spending. And for the Core PCE price index to increase 0.1%.

This will give us two months of data (July and August) to estimate consumer spending in Q3.

• At 9:45 AM, the Chicago Purchasing Managers Index for September. The consensus is for an increase to 53.1, up from 53.0 in August.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (final for September). The consensus is for a reading of 79.0, down from the preliminary September reading of 79.2, and up from the August reading of 74.3.


A final question for the September economic prediction contest:

by Calculated Risk on 9/27/2012 05:57:00 PM

Another month, another record ...

From Freddie Mac today: All-Time Low: 30-Year Fixed-Rate Mortgage Averages 3.40 Percent

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates breaking their previous average record lows ... All mortgage products, except the 5-year ARM, averaged new all-time record lows.

30-year fixed-rate mortgage (FRM) averaged 3.40 percent with an average 0.6 point for the week ending September 27, 2012, down from last week when it averaged 3.49 percent. Last year at this time, the 30-year FRM averaged 4.01 percent.

"Fixed mortgage rates continued to decline this week, largely due to the Federal Reserve's purchases of mortgage securities, and should support an already improving housing market." [said Frank Nothaft, vice president and chief economist, Freddie Mac]

Click on graph for larger image.

This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). Both rates are at record lows for the Freddie Mac survey. Rates for 15 year fixed loans are now at 2.73%.

by Calculated Risk on 9/27/2012 02:52:00 PM

There is plenty of focus on the downside risks to the US economy - the European crisis and recession, the slowdown in China, the US fiscal cliff and more - but there are at least two reasons to expect an increase in US economic activity.

The first reason is a little addition by subtraction. Over the last 3+ years, state and local governments have lost over 700 thousand payroll jobs (including the preliminary estimate of the benchmark revision - assuming most of the additional government jobs lost were state and local).

The following graph is for state and local government employment. So far in 2012 - through August (and using the Benchmark estate) - state and local governments have lost about 78,000 jobs (61,000 not counting the revision). In 2011, state and local governments lost about 280,000 jobs (230,000 not counting revision). So the layoffs are ongoing, but have slowed.

Click on graph for larger image.

This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 280,000 in 2011.

It looks like the layoffs are mostly over, although I don't expect much hiring over the next year. Just ending the drag from state and local governments will give a boost to GDP and employment growth

The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005 (including the Q2 GDP revision today).

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 5 quarters (through Q2 2012).

However the drag from state and local governments is ongoing. State and local governments have been a drag on GDP for eleven consecutive quarters. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented.

In real terms, state and local government spending is now back to Q4 2001 levels, even with a larger population.

The second reason I expect growth to pickup is I think the recovery in residential investment will pick up next year. I'm not as optimistic as the NAR (the NAR is forecasting housing starts will increase about 50% next year), but I do think there will be a large increase in housing starts and new home sales in 2013.

Here is a graph of residential investment (RI) as a percent of GDP. Currently RI is 2.4% of GDP; just above the record low.

I expect RI will increase to 4%+ of GDP over the next few years, and that will give GDP and employment a strong boost.