by Calculated Risk on 9/03/2012 09:31:00 PM

Happy Labor Day!

On Tuesday:
• At 10:00 AM ET, the ISM Manufacturing Index for August is scheduled for release. The consensus is for an increase to 50.0, up from 49.8 in July. (below 50 is contraction).

• Also at 10:00 AM, Construction Spending for July will be released. The consensus is for a 0.4% increase in construction spending.

• All day: Light vehicle sales for August. The consensus is for light vehicle sales to increase to 14.3 million SAAR in August from 14.1 million in July. The SAAR estimate is usually available around 4 PM ET.

The Asian markets are mostly green tonight, with the Nikkei up slightly and the Shanghai Composite up 0.6%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P future are up 1, and the DOW futures up 16 points.

Oil prices are still moving up with WTI futures are at $97.22 and Brent is at $116.09 per barrel. Using the calculator at Econbrowser suggests national gasoline prices at about $3.74 per gallon.

Weekend:
• Summary for Week Ending Aug 31st
• Schedule for Week of Sept 2nd

Here are the first week questions for the September contest. You can now enter with Facebook, Twitter, or OpenID logins:

by Calculated Risk on 9/03/2012 06:08:00 PM

From the WSJ: ECB Chief Hints at Bond Purchases

The president of the European Central Bank dropped more hints about how the bank could support struggling countries, suggesting the bank was free to buy government bonds maturing in three years or less.

The comments by Mario Draghi in a closed hearing at the European Parliament on Monday came ahead of the ECB's monthly policy meeting Thursday.
...
Mr. Draghi indicated Monday that the ECB would be open to buying bonds with a maturity of two to three years, stressing that such purchases wouldn't break European Union treaties, according to several lawmakers present at the hearing.

Paul Murphy at Alphaville has the market reaction: A Draghi leak ...

It will an interesting week!

by Calculated Risk on 9/03/2012 11:55:00 AM

From CNBC: Europe Shares Close Higher on Asset Purchase Hopes

Traders are hoping the ECB will cut rates and detail a new bond-buying plan to ease the funding pressures on Spain and Italy. All eyes will be on the European Central Bank on Thursday as investors await news on its next policy move.

The ECB Governing Council meets on Thursday in Frankfurt with a press conference to follow. Analysts at Nomura are expecting a rate cut, but no bond buying yet for Spain and Italy. From Nomura:

• Having failed to cut in August, we now expect the ECB to cut the refi rate 25bp in September and leave the deposit rate at zero.

• We also expect the ECB to announce on 6 September that it is ready to intervene but only when help has been requested.

• We expect Spain and Italy to resist calling for help, prompting renewed market deterioration.

And from Jack Ewing at the NY Times: In Pivotal Week for Euro Zone, a Test for the Central Bank’s Leader

[T]his Thursday, when the central bank meets again, Mr. Draghi, the bank’s president, could have a far harder time reconciling the expectations of twitchy financial markets with the limitations of his power. Although investors are counting on bold action, analysts say the bank probably needs more time to resolve internal differences and deliver on a promise to use its financial clout to tame runaway borrowing costs for the most troubled euro zone countries.
...
Some analysts do expect the central bank to cut the benchmark interest rate to 0.5 percent on Thursday, from its already record low level of 0.75 percent.
...
In any case, actual bond buying by the central bank is probably at least several weeks away. Mr. Draghi said in August that the bank would intervene in bond markets only in concert with the new European Union rescue fund, the European Stability Mechanism, or E.S.M.

Countries would need to ask the rescue fund for help, Mr. Draghi said, and the fund would take the lead in bond buying, with the central bank providing backup financial support. But the fund, meant to replace a temporary bailout fund, is in legal limbo at least until the German constitutional court rules Sept. 12 on a challenge to the country’s participation.

by Calculated Risk on 9/03/2012 09:20:00 AM

For the economic question contest in August, the leaders were (Congratulations all!):

1st: Richard Plaster
2nd tie: Bill Dawers, Lance Leger, Jeffrey McNamee, Jeremy Strouse, Bill (CR)

Weekend:
• Summary for Week Ending Aug 31st
• Schedule for Week of Sept 2nd

Here are the first week questions for the September contest. You can now enter with Facebook, Twitter, or OpenID logins:

by Calculated Risk on 9/02/2012 05:55:00 PM

Two of the key U.S. economic trends I expected this year were 1) a recovery in residential investment, and 2) that most of the drag from state and local governments would be over by mid-year 2012. Just eliminating the drag from state and local governments would help GDP and employment growth.

I've written extensively about the housing recovery, and it is time to take another look at state and local government spending. In early August, the Rockefeller Institute of Government put out a report on state and local government revenue through Q1. From the press release:

Overall state tax revenues are now above pre-recession levels, as well as above peak levels that came several months into the Great Recession. In the first quarter of 2012, total state tax revenues were 4.8 percent higher than during the same quarter of 2008.

Starting at the end of 2008 and extending through 2009, states suffered five straight quarters of decline in tax revenues. They now have enjoyed nine consecutive periods of growth, and the second quarter of 2012 will likely extend the string to 10. Overall collections in 45 early-reporting states showed growth of 5.8 percent in the months of April and May of 2012 compared to the same months of 2011.

After adjusting for inflation, however, state tax revenues are still 1.6 percent lower compared to the same quarter four years ago, in 2008.

That is a little encouraging, but the news isn't as positive for local governments:

While state tax revenues have been recovering, many localities face significant fiscal challenges, according to the report’s author, Senior Policy Analyst Lucy Dadayan.

“The Great Recession led to a growing divergence between state and local government tax performance,” Dadayan said. “State tax revenues collapsed steeply from 2008 to 2010 while local tax revenues continued to grow. Such trends have reversed since 2010, and state tax revenues started trending upward while local tax revenues have been mostly heading downward. Fiscal pressures are continuously mounting for local governments, and depressed housing prices are now causing declines in local property taxes.”

The problem is local governments are mostly funded by property taxes, and property taxes react slowly to falling house prices - and property taxes are still declining. From the report:

Collections from local property taxes made up 81.6 percent of such receipts during the first quarter of 2012. Local property tax revenues showed a decline of 0.9 percent in nominal terms in the first quarter of 2012 compared to the same quarter of 2011. Moreover, local property taxes were 4.6 and 1.3 percent lower than during the same quarters of 2009 and 2010, respectively.

This suggests some further local cutbacks, although I still expect the drag to be less than the last few years.

Here is a graph showing 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 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 next graph is for state and local government employment. So far in 2012 - through July - state and local governments have lost 42,000 jobs (7,000 jobs were lost in July). In the first seven months of 2011, state and local governments lost 205,000 payroll jobs - and 230,000 for the year. So the layoffs have slowed.

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 230,000 in 2011.

Note: Some of the stimulus spending from the American Recovery and Reinvestment Act probably kept state and local employment from declining faster in 2009.

Note: Of course the Federal government is still losing workers (38,000 over the last 12 months and another 2,000 in July), but it looks like state and local government employment losses might be slowing - but the job losses haven't stopped yet - and with property tax revenue still falling, more local jobs will probably be lost.

Yesterday:
• Summary for Week Ending Aug 31st
• Schedule for Week of Sept 2nd