by Calculated Risk on 12/14/2012 03:07:00 PM

Once again we are nearing a political event horizon that could significantly impact the economy - and we can't see beyond the horizon. My baseline assumption is an agreement will be reached, probably during the first few weeks of January, and the agreement will mean Federal fiscal drag next year at about the level of the CBO's alternative fiscal scenario. This would suggest modest GDP and employment growth next year, although probably better than in 2012.

Note: There is no clear drop dead date for the "fiscal cliff". Nothing horrible happens on January 1st, but the longer it takes to reach an agreement next year, the larger the negative impact on the economy.

With that assumption, there are two key drivers for additional growth next year. The first is residential investment (construction employment lags investment with a lag, so construction employment should pick up in 2013), and the second is the end of the state and local drag. I've discussed both of these before - see: Two Reasons to expect Economic Growth to Increase - but I think this is worth repeating.

Over the last 3+ years, state and local governments have lost over 700 thousand payroll jobs (including the preliminary estimate of the benchmark revision) and it appears these layoffs are coming to an end. I don't expect state and local government to add much to economic and employment growth next year, but just stopping the drag will help.

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. Now RI has added to GDP growth for the last 6 quarters (through Q3 2012).

However the drag from state and local governments is ongoing, although the drag in Q3 was small. State and local governments have been a drag on GDP for twelve 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. The good news is the drag appears to be ending.

Yesterday, the Rockefeller Institute put out an update on state government revenues: State Tax Revenues Showed Continued Yet Slow Growth in the Third Quarter of 2012

The Rockefeller Institute's compilation of preliminary data from 47 states shows that collections from major tax sources increased by 2.1 in nominal terms in the third quarter of 2012 compared to the same quarter of 2011. Tax collections have now risen for 11 straight quarters, beginning with the first quarter of 2010. This growth followed five quarters of declines brought on by the Great Recession.
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Among 47 early reporting states, 38 states reported gains while nine states reported declines in total tax revenue collections during the third quarter of 2012.
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Overall, state tax revenues are showing continued improvement, though the pace of growth has been much slower in the recent quarters compared to historic averages. While state tax revenues have now grown for 11 consecutive quarters, they are still far below where they would have been in the absence of the Great Recession. Nationwide, state tax revenues in fiscal 2012 were less than 1 percent higher than fiscal 2008 in nominal terms. After adjusting for inflation, state tax revenues declined 5 percent in fiscal 2012 compared to fiscal 2008.

Revenues are not increasing sharply, but they are increasing enough to probably stop most of the layoffs.

And from the NY Times: As State Budgets Rebound, Federal Cuts Could Pose Danger

A fiscal survey of states released Friday by the National Governors Association and the National Association of State Budget Officers found that states expect to collect $692.8 billion in general fund revenues this fiscal year, which is more than they collected in 2008, the last fiscal year before the recession.

That is good news, but perhaps not as good as it initially appears. Adjusted for inflation, this year’s revenues are still expected to be 7.9 percent below the 2008 levels.
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“What we’re really seeing here is there is not enough money to make up for any federal cuts,” said Scott D. Pattison, the executive director of the state budget officers’ association. “What I’ve heard from the state budget people is that they’ve told departments and agencies in state government: Do not expect us to have the money available, even if we wanted to, to make up for federal cuts.”

So there are some reasons for a little optimism, but it is difficult to make projections without knowing the budget agreement.

by Calculated Risk on 12/14/2012 12:23:00 PM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.3% (-3.7% annualized rate) in November. The CPI less food and energy increased 0.1% (1.4% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for November here.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.8%, and the CPI less food and energy rose 1.9%. Core PCE is for October and increased 1.7% year-over-year.

On a monthly basis, median CPI was above the Fed's target at 2.3% annualized. However trimmed-mean CPI was at 1.6% annualized, and core CPI increased 1.4% annualized. Also core PCE for October increased 1.6% annualized. These measures suggest inflation is mostly below the Fed's target of 2% on a year-over-year basis.

The Fed's focus will probably be on core PCE and core CPI, and both are at or below the Fed's target on year-over-year basis. Also, the FOMC statement this week indicated the Fed will tolerate an inflation outlook "between one and two years ahead" of 2 1/2 percent.

So, with this low level of inflation and the current high level of unemployment, the Fed will keep the "pedal to the metal".

by Calculated Risk on 12/14/2012 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October. In November, manufacturing output increased 1.1 percent after having decreased 1.0 percent in October; in addition to the storm-related rebound, a sizable rise in the production of motor vehicles and parts boosted factory output in November. The output of utilities advanced 1.0 percent, and production at mines rose 0.8 percent. At 97.5 percent of its 2007 average, total industrial production in November was 2.5 percent above its year-earlier level. Capacity utilization for total industry increased 0.7 percentage point to 78.4 percent, a rate 1.9 percentage points below its long-run (1972--2011) average.
emphasis added

Click on graph for larger image.

This graph shows Capacity Utilization. This series is up 11.6 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 78.4% is still 1.9 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production increased in November to 97.5. This is 17% above the recession low, but still 3.2% below the pre-recession peak.

IP was above expectations due to the bounce back following Hurricane Sandy. Overall IP has only up 2.5% year-over-year.

All current manufacturing graphs

by Calculated Risk on 12/14/2012 08:40:00 AM

From the BLS: Consumer Price Index - November 2012

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 percent in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment. The gasoline index fell 7.4 percent in November; this decrease more than offset increases in other indexes, resulting in the decline in the seasonally adjusted all items index.
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The index for all items less food and energy increased 0.1 percent in November after a 0.2 percent increase in October. ... The index for all items less food and energy rose 1.9 percent over the last 12 months, slightly lower than the October figure of 2.0 percent. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.3 percent.

I'll post a graph later today after the Cleveland Fed releases the median and trimmed-mean CPI. This was below the consensus forecast of a 0.2% decrease for CPI, and below the consensus for a 0.2% increase in core CPI.

The decrease in CPI was mostly due to the recent decline in gasoline prices.  On a year-over-year basis, CPI is up 1.8 percent, and core CPI is up 1.9 percent.  Both below the Fed's target.

by Calculated Risk on 12/13/2012 08:27:00 PM

A couple of articles for light evening reading:

From Derek Thompson at the Atlantic: The Best Idea for the Debt Ceiling? Abolish It Forever. It really should be called the "default ceiling". I've been arguing for years - since Reagan demanded a clean bill from Congress in the '80s - that the default ceiling is just for political grandstanding.

From Suzy Khimm at the Wonkblog: New language, same findings: Tax hikes on the rich won’t cripple the economy. Here is the updated Congressional Research Service report. The data speaks.

Note: I still expect some sort of compromise to be reached on the "fiscal cliff", probably in early January.

Thursday economic releases:
• At 8:30 AM ET, the Consumer Price Index for November will be released. The consensus is for CPI to decrease 0.2% in November and for core CPI to increase 0.2%.

• At 9:15 AM, the Fed will release Industrial Production and Capacity Utilization for November. The consensus is for a 0.3% increase in Industrial Production in November, and for Capacity Utilization to increase to 78.0%.



Another question for the December economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).