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Tuesday, August 02, 2011

Personal Income less Transfer Payments Revised Down Sharply

by Calculated Risk on 8/02/2011 10:41:00 AM

On Friday, the BEA released revisions for GDP that showed the recession was significantly worse than originally estimated. This morning the BEA released revisions for Personal Income and Outlays.

One of the key measures of the economy is personal income less transfer payments, in real terms. This is also one of the measures the National Bureau of Economic Research (NBER) uses in business cycle dating:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment.
The following graph shows personal income less transfer payments as a percent of the previous peak.

Personal Income less TransferClick on graph for larger image in graph gallery.

Prior to the revisions, the BEA reported this measure was off close to 7% from the previous peak at the trough of the recession.

With the revisions, this measure was off almost 11% at the trough - a significant downward revision and shows the recession was much worse than originally thought.

Real personal income less transfer payments is still 5.1% below the previous peak.

Personal Income increased 0.1% in June, PCE decreased 0.2%

by Calculated Risk on 8/02/2011 09:03:00 AM

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

Personal income increased $18.7 billion, or 0.1 percent ... Personal consumption expenditures (PCE) decreased $21.9 billion, or 0.2 percent.
Real PCE decreased less than 0.1 percent. ... The price index for PCE decreased 0.2 percent in June
The following graph shows real Personal Consumption Expenditures (PCE) through June (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image in graph gallery.

PCE decreased 0.2 in June, and real PCE decreased less than 0.1% as the price index for PCE decreased 0.2 percent in June. On a quarterly basis, PCE barely increased in Q2 from Q1 (this was in the GDP report Friday).

Note: The PCE price index, excluding food and energy, increased 0.1 percent.

The personal saving rate was at 5.4% in June.
Personal saving -- DPI less personal outlays -- was $620.6 billion in June, compared with $581.7 billion in May. Personal saving as a percentage of disposable personal income was 5.4 percent in June, compared with 5.0 percent in May.
Personal Saving rate This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the June Personal Income report.

Real PCE has declined for three straight months - this was expected based on the weak GDP report, but this is very weak.

Monday, August 01, 2011

A "Run to the Bank"

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.

Misc: Fiscal Drag, House Vote, Stall Speed?

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?

The Economic Drag

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.