Thursday, May 16, 2013
About The IRS Bit
This is a big deal:
While the team of specialists reviewed applications from a variety of organizations, we determined during our reviews of statistical samples of I.R.C. § 501(c)(4) tax-exempt applications that all cases with Tea Party, Patriots, or 9/12 in their names were forwarded to the team of specialists.It actually gets worse from there:
We asked the Acting Commissioner, Tax Exempt and Government Entities Division; the Director, EO; and Determinations Unit personnel if the criteria were influenced by any individual or organization outside the IRS. All of these officials stated that the criteria were not influenced by any individual or organization outside the IRS. Instead, the Determinations Unit developed and implemented inappropriate criteria in part due to insufficient oversight provided by management. Specifically, only first-line management approved references to the Tea Party in the BOLO listing criteria before it was implemented. As a result, inappropriate criteria remained in place for more than 18 months. Determinations Unit employees also did not consider the public perception of using politically sensitive criteria when identifying these cases.Lastly, the criteria developed showed a lack of knowledge in the Determinations Unit of what activities are allowed by I.R.C. § 501(c)(3) and I.R.C. § 501(c)(4) organizations. (A screamer.)
Organizations that applied for tax-exempt status and had their applications forwarded to the team of specialists experienced substantial delays. As of December 17, 2012, many organizations had not received an approval or denial letter for more than two years after they submitted their applications. Some cases have been open during two election cycles (2010 and 2012).
The team of specialists stopped working on potential political cases from October 2010 through November 2011, resulting in a 13-month delay, while they waited for assistance from theTechnical Unit. Figure 5 illustrates significant events and delays concerning potential political cases.
The Story Is ...
Economically, it appears that the Fed has little ability to do anything with its QE extravaganza other than run up stocks and keep interest rates lower than they would have been. Okay, it also possesses the ability to drive commodity traders out of gold and into houses. But it doesn't seem able to actually stimulate the economy, because we now are moving into the second month of slack readings.
Initial unemployment claims are big news because of a sudden SA jump to 360K, but since the 4-week moving average isn't moving and continuing claims continue markedly benign, I wouldn't place undue weight on it. It probably has something to do with inventory/sales ratios, which have been correcting right along at these levels:
The US dollar is too strong for the comfort of some manufacturers given yen moves and China's apparent shift to a weakening yuan. You can't blame the industrial slowdown on foreigners, though, because retailer inventories were too high in March and that's why we have had two slack months of data from the production sector.
It is worth noting that last year's summer slump turned into a spring slump this year, which is not good. Bad weather and the FICA tax increase are responsible. Industrial production just went through its annual revision. A disappointing -0.5 in April was largely produced by weather shifts which shifted utility output. In March utility output was up 6.4 with an IP index change of +0.3. In April utility output was down 3.4, which shifted the headline. However look at the report! April gave us a string of negatives for all major market groups. Manufacturing was up only 1.3% on the year. Construction was up 1.8% on the year.
Of the regional surveys, Empire showed up in "May showers" mode, having declined to a negative. Update: Philly Fed came trotting up, wagging its tail enthusiastically and dropped a three-day old dead fish at our feet. -5.2.
The auto boom has worn out, so the major stimulation left at the ground level is composed of fracking and construction, with construction being less than brilliant. It's there and it will continue at higher levels than last year, but it is not soaring through the roof and there are troubling indicators that investors are creating market instability in some places. It looks as if builders have plenty of plans but are trying to roll through building at a measured pace so as not to get out ahead of the market or caught in a cash crunch. In many markets, the average first-time purchaser can't afford any new single-home purchase except for condos/coops. I think builders are carefully rolling their capital.
I have been watching consumer inflation in China very carefully for a better indication of real economic trends. Now the same gauge in the US is flagging a slowdown, to say the least:
The green line looks quite recessionary. This is not a surprise, but think about what the margin pressures do to the bottom lines of Main Street businesses! It's no surprise that NFIB just can't quite escape the recession zone. The interesting thing about the NFIB report is that there are clearly upward pressures on wages, and these pressures clearly are pushing in a different direction than end-user price pressures.
If you think about what is happening, the Fed's effective economic stimulus is actually lessening in real terms because real interest rates are less negative than they used to be. Yet by the time investor equity is chasing yet-to-be-built homes, the ability of the Fed to stimulate the economy by inserting money safely is about nil.
Note that increases in taxes on investment-type income at the beginning of this year, specifically capital gains, would be expected to hit business investment hard in some regions. If you are one of those people who will be left paying over 30% on capital gains, your best return may well be in tax-free bonds, but this removes stimulation from the economy. We will pay for this stupidity for a long time to come. I estimate that US capital gains tax policy shifted potential stable GDP growth down from 1.8-.19% to 1.5-1.6%. That, my friends, is not anything we can live with.
In sum, the US economy is weaker at this point in the year than it was last year. There is less potential uplift. The economy is struggling along trying to compensate with price cuts wherever it can afford them to boost real incomes. The Fed cannot do anything about this.
I presume the only possible policy response is for the federal government to subpoena all the press phone records from the Wall Street Journal and USA Today.
Tuesday, May 14, 2013
Never Trust A Libertarian Lawyer To Protect The Constitution
But I break my legitimate silence to point out that the Department of Justice apparently violated its own regs with the AP records subpoena, so this is anything but a "nonstory". Apparently the professional law bloggers (one example) are just too busy to bother with reading the law, so here it is, and I publish it below so that the DOJ can get its knickers in a twist and have another person to harass.
My comments in red. Please understand that the subpoena was not issued to AP directly. The subpoena would not have been issued by a court, but by the AG. No negotiations took place. Unless the subpoena was issued last year during the period for which records were requested, then notice and negotiations were required BEFORE the subpoena was issued. It looks as if this was not done because that would have allowed AP to take this to a court and a court would have been unlikely to allow it due to it being overbroad, to say the least. There's that pesky little bit about freedom of the press in the First Amendment, which libertarian lawyers don't worry about but the federal courts do worry about. Holder should have personally approved the subpoena. If the subpoena was issued last year during the period in question, the requirement to investigate all other avenues first was probably violated and the timely subsequent notice was also violated. These regulations have been in effect since 1980.
Write your representatives and demand a real investigation.
50.10 - Policy with regard to the issuance of subpoenas to members of the news media, subpoenas for telephone toll records of members of the news media, and the interrogation, indictment, or arrest of, members of the news media.
Because freedom of the press can be no broader than the freedom of reporters to investigate and report the news, the prosecutorial power of the government should not be used in such a way that it impairs a reporter's responsibility to cover as broadly as possible controversial public issues. This policy statement is thus intended to provide protection for the news media from forms of compulsory process, whether civil or criminal, which might impair the news gathering function.
In balancing the concern that the Department of Justice has for the work of the news media and the Department's obligation to the fair administration of justice, the following guidelines shall be adhered to by all members of the Department in all cases:
(a) In determining whether to request issuance of a subpoena to a member of the news media, or for telephone toll records of any member of the news media, the approach in every case must be to strike the proper balance between the public's interest in the free dissemination of ideas and information and the public's interest in effective law enforcement and the fair administration of justice.
(b) All reasonable attempts should be made to obtain information from alternative sources before considering issuing a subpoena to a member of the news media, and similarly all reasonable alternative investigative steps should be taken before considering issuing a subpoena for telephone toll records of any member of the news media.
(c) Negotiations with the media shall be pursued in all cases in which a subpoena to a member of the news media is contemplated. These negotiations should attempt to accommodate the interests of the trial or grand jury with the interests of the media. Where the nature of the investigation permits, the government should make clear what its needs are in a particular case as well as its willingness to respond to particular problems of the media.
(d) Negotiations with the affected member of the news media shall be pursued in all cases in which a subpoena for the telephone toll records of any member of the news media is contemplated where the responsible Assistant Attorney General determines that such negotiations would not pose a substantial threat to the integrity of the investigation in connection with which the records are sought. (Such determination shall be reviewed by the Attorney General when considering a subpoena authorized under paragraph (e) of this section. (Holder's in the bag regardless for this action.)
(e) No subpoena may be issued to any member of the news media or for the telephone toll records of any member of the news media without the express authorization of the Attorney General: (Holder should personally have signed off on this request) Provided, That, if a member of the news media with whom negotiations are conducted under paragraph (c) of this section expressly agrees to provide the material sought, and if that material has already been published or broadcast, the United States Attorney or the responsible Assistant Attorney General, after having been personally satisfied that the requirements of this section have been met, may authorize issuance of the subpoena and shall thereafter submit to the Office of Public Affairs a report detailing the circumstances surrounding the issuance of the subpoena.
(f) In requesting the Attorney General's authorization for a subpoena to a member of the news media, the following principles will apply:
(1) In criminal cases, there should be reasonable grounds to believe, based on information obtained from nonmedia sources, that a crime has occurred, and that the information sought is essential to a successful investigation?particularly with reference to directly establishing guilt or innocence. The subpoena should not be used to obtain peripheral, nonessential, or speculative information.
(2) In civil cases there should be reasonable grounds, based on nonmedia sources, to believe that the information sought is essential to the successful completion of the litigation in a case of substantial importance. The subpoena should not be used to obtain peripheral, nonessential, or speculative information.
(3) The government should have unsuccessfully attempted to obtain the information from alternative nonmedia sources.
(4) The use of subpoenas to members of the news media should, except under exigent circumstances, be limited to the verification of published information and to such surrounding circumstances as relate to the accuracy of the published information.
(5) Even subpoena authorization requests for publicly disclosed information should be treated with care to avoid claims of harassment.
(6) Subpoenas should, wherever possible, be directed at material information regarding a limited subject matter, should cover a reasonably limited period of time, and should avoid requiring production of a large volume of unpublished material. They should give reasonable and timely notice of the demand for documents.
(g) In requesting the Attorney General's authorization for a subpoena for the telephone toll records of members of the news media, the following principles will apply:
(1) There should be reasonable ground to believe that a crime has been committed and that the information sought is essential to the successful investigation of that crime. The subpoena should be as narrowly drawn as possible; it should be directed at relevant information regarding a limited subject matter and should cover a reasonably limited time period. In addition, prior to seeking the Attorney General's authorization, the government should have pursued all reasonable alternative investigation steps as required by paragraph (b) of this section.
(2) When there have been negotiations with a member of the news media whose telephone toll records are to be subpoenaed, the member shall be given reasonable and timely notice of the determination of the Attorney General to authorize the subpoena and that the government intends to issue it.
(3) When the telephone toll records of a member of the news media have been subpoenaed without the notice provided for in paragraph (e)(2) of this section, notification of the subpoena shall be given the member of the news media as soon thereafter as it is determined that such notification will no longer pose a clear and substantial threat to the integrity of the investigation. In any event, such notification shall occur within 45 days of any return made pursuant to the subpoena, except that the responsible Assistant Attorney General may authorize delay of notification for no more than an additional 45 days.
(4) Any information obtained as a result of a subpoena issued for telephone toll records shall be closely held so as to prevent disclosure of the information to unauthorized persons or for improper purposes. (
h) No member of the Department shall subject a member of the news media to questioning as to any offense which he is suspected of having committed in the course of, or arising out of, the coverage or investigation of a news story, or while engaged in the performance of his official duties as a member of the news media, without the express authority of the Attorney General: Provided, however, That where exigent circumstances preclude prior approval, the requirements of paragraph (l) of this section shall be observed.
(i) A member of the Department shall secure the express authority of the Attorney General before a warrant for an arrest is sought, and whenever possible before an arrest not requiring a warrant, of a member of the news media for any offense which he is suspected of having committed in the course of, or arising out of, the coverage or investigation of a news story, or while engaged in the performance of his official duties as a member of the news media.
(j) No member of the Department shall present information to a grand jury seeking a bill of indictment, or file an information, against a member of the news media for any offense which he is suspected of having committed in the course of, or arising out of, the coverage or investigation of a news story, or while engaged in the performance of his official duties as a member of the news media, without the express authority of the Attorney General. (k) In requesting the Attorney General's authorization to question, to arrest or to seek an arrest warrant for, or to present information to a grand jury seeking a bill of indictment or to file an information against, a member of the news media for an offense which he is suspected of having committed during the course of, or arising out of, the coverage or investigation of a news story, or committed while engaged in the performance of his official duties as a member of the news media, a member of the Department shall state all facts necessary for determination of the issues by the Attorney General. A copy of the request shall be sent to the Director of Public Affairs.
(l) When an arrest or questioning of a member of the news media is necessary before prior authorization of the Attorney General can be obtained, notification of the arrest or questioning, the circumstances demonstrating that an exception to the requirement of prior authorization existed, and a statement containing the information that would have been given in requesting prior authorization, shall be communicated immediately to the Attorney General and to the Director of Public Affairs.
(m) In light of the intent of this section to protect freedom of the press, news gathering functions, and news media sources, this policy statement does not apply to demands for purely commercial or financial information unrelated to the news gathering function.
(n) Failure to obtain the prior approval of the Attorney General may constitute grounds for an administrative reprimand or other appropriate disciplinary action. The principles set forth in this section are not intended to create or recognize any legally enforceable right in any person. [Order No. 916-80, 45 FR 76436, Nov. 19, 1980]
Friday, May 03, 2013
Some Relationship Graphs
This is a long-term series showing the relationship between YoY changes in employment as measured by the Household and Establishment series, plus the relationship between the two.
Short version of the same:
I've been agonizing over the seeming correlation of the green and the red/blue. Yikes! However recently this has looked a bit more favorable, esp. considering the low initial claims.
The above graph is really a proxy for real disposable income changes (which is where the M_O_M fudge factor comes in):
The orange is annual real disposable income change, and the purple is the quarterly. Both show YoY changes. Obviously the quarterly is more sensitive.
As you can see, last year was harrowingly close. The big rise at the end of the year was really due to incomes being brought forward, which will have a natural giveback this year, compounded by the FICA tax increase. Against that we have only two real growth factors - increased incomes from employment and increased incomes from retirements. The government retirement bonus per retiree is very BIG! So the M_O_M fudge factor implies that government retirees will have a net add (in the short term).
Also, the fact that we did have a contraction last year by some measures helps us now. But yet - throughout this entire recovery sequence, we have never returned to a non-recessionary real disposable income trend. We are solidly in recession territory and apparently will remain in recession territory, which is why I cannot see the Fed's actions as getting us into long-term stability. Despite the Fed's best pumping efforts, the only thing they seem to be able to achieve is prevention of collapse, and this year, it's very fragile.
The best possible future trajectory would be emergence into 70s type inflation. Not a very lovely prospect, but.... Otherwise, Japan.
Is the M_O_M fudge factor debunked? Manufacturing seems to say so. YoY drops in new orders plus unfilled orders have never been a good sign. This, btw, doesn't even have much of a relationship to sequesters yet. When YoY YTD shipments for ag-chem. paper, and pharmaceuticals are all down 3% or more, you have a completely different problem. YoY YTD unfilled orders for motor vehicles are down 4.7%.
I feel like a fool for insisting that the US economy doesn't fall out this year, but I still think it will see-saw. I won't give up until unfilled orders for fabricated metals totally collapses. This does mean that Canada's in trouble, though. We have gained MV production at their expense!
One Of The Strangest Employment Reports I've Ever Seen
Well, I will be going through this thing with a fine toothed comb this weekend, but here's a hint as to how weird it is:
In one month, using SA figures we have the following moves:
- A loss of 364,000 government wage and salary workers,
- A gain of 411,000 private industry workers,
- A gain of 244,000 non-incorporated self-employeds (contractors).
As a wild guess, Obamacare moves are shaping a lot of the stats we see. State governments are making changes rather industriously to deal with the requirements, and I'm guessing that includes a lot of contracting. Also government retirements must be in high gear with corresponding shifts to contracting fueled by the government medical benefit problem.
The self-employed shift is mirrored by the non-ag part-time for economic conditions number, which rose 249,000 from March to April, but just remains lower than in January or February. So this really is going to be mostly in construction! The February-April gain in non-ag employment is close to 180,000, which makes quite a bit of sense.
The establishment survey (Table B-1) shows a two month gain of 300,000 in non-ag, and the difference is mostly in government, which may be due to timing factors. However the establishment survey shows a net loss in construction jobs, which is not credible (but of course, the establishment survey tends not to pick up contractors). The establishment survey shows no manufacturing gains but large relative gains in services, of which a very large gain in department store employment???!!!, a very large gain in restaurants and a very large gain in temps.
There is often a timing problem for government employment, because many of them use a monthly payroll system, whereas the household survey uses the reference week. Because of the big gap between reported government employment in the two surveys, I think most of the difference between the Establishment and Household surveys fall into two categories - government retirements and casual construction employment. They move in different directions, so the two-month gain for Establishment of 300K and the two-month gain for Household of 177K are not really that different. Note - this is comparing non-ag from Table B-1 to non-ag from Table A-8.
Note: The broadest measure of employment we have is from Table A-1, and there YoY SA jobs increased by 1.65 million. YoY non-SA non-ag from Table A-8 jobs increased by nearly 1.9 million, which is very close indeed to YoY non-SA non-ag from Table B-1 at 2.09 million. On the same basis, private industry employment in Table A-8 increased 1.6 million, but private industry employment in Table B-1 increased 2.18 million.
Wednesday, May 01, 2013
A Whole Lotta US Stuff Wednesday
I'll update this as the drama rolls in and time allows today.
B) No surprise on Markit US Mfrg PMI. Significant slowing from March, but not contracting.New order growth fell from 55.4 to 51.5, but new export orders were unchanged at 51.8. Thus the weakness is domestic. Only a very minor rise in finished goods inventories, so the story is just slackness.
C) Watching Ward's on auto sales - they are currently projecting a slight SAAR drop. I don't think it matters whether it comes in at 15.4 or 15.1 - the point is that it does seem likely that maybe we reached the natural high point on US auto sales, so that stops pushing us along this year. This may be something to watch.
Update: Well, it had to happen sooner or later. Auto sales fell below the 15 million SAAR mark at 14.9. Lowest YoY DSR growth since August 2011:
D) ISM manufacturing okay. A headline of 50.7 doesn't say a whole lot, but customer inventories were reported down. Both new orders and backlog of orders is reported to have increased, which makes a continued slump in May unlikely. 50.7 matches August of last year, which was preceded by 50.2 and 50.5 in June/July 2012.
E) Construction spending dropped 1.7% in March from February? Total private construction dropped?
Not particularly brilliant, right? We were sort of shooting for the "better than 20010" range. This is not quite the green of spring.
F) This winter was notably colder than the prior two in the US (and spring colder yet), so it's been a bit hard to compare oil usage. Today's 12.4 million dollar total commercial petroleum build is rather hefty, and the four week total product supplied YoY is -2.7. This suggests that the trucking tonnage report for April won't be that great. So far in April rail figures have been disappointing. YTD compared to last year, total rail traffic is up only 0.7%. Last year intermodal was very strong, but this year it seems to be slowly weakening.
Light note: When one is contemplating a series of less-than-brilliant economic reports, it is somewhat unsettling to read this headline on Bloomberg: Amgen Drugs May Boost Survival During a Nuclear Attack.
Well, it depends: I've had this bookmarked, might as well throw it in here:
Net trailer orders for March were down 6% month-over-month and 12% year-over-year. This update on industry performance was reported in the latest State of the Industry: U.S. Trailers published by ACT Research Co.
Tuesday, April 30, 2013
Kinda Surprising To The Downside
Today, Chicago PMI just beats us up and tosses us over the cliff. While the headline index dropped into outright contraction (the worst since Q3 2009), backlogs of orders, SA, dropped to 40.6, substantially below last year's minimum. It is only April, and we haven't yet even seen the full impact of the FICA increase. One would expect the low of this index to hit this summer, not now.
There will be a dignified silence while I consider the implications. Had Kansas or Richmond been better, then one could have taken the "great expectations" element in Philly more seriously. Even the Empire State survey did not look too pure this month due to diminishing backlogs.
Taken together, there is a consistent pattern of February having been an interim high, followed by a sagging process that's more than a bit unsavory due to its consistency.
Unfortunately, this impression of consistent negativity is boosted by NACM's April survey. Remarkably, the manufacturing sector there shows up as better than the service sector. Usually weakness in the manufacturing sector flags weaknesses in services a few months later. Thus one feels a certain sadness and foreboding. While weaker than last year, favorable factors for both manufacturing and services are holding up. But unfavorable factors are not - at 50.2 in manufacturing and 50 in services, this may well forecast declines in favorable factors this summer.
The final editorial comment from the report:
The year over year numbers are declining, and that is a worrisome trend. The index is at a year and a half low point. If the trend of the last two months does not reverse, the chances are good that the whole CMI will drift below that all important 50 mark, and if it does, the PMI will be right behind.Needless to say, the Fed is going to continue its buying program. It's probably close to adding on to it!!!
You can safely ignore the home sales numbers. FHA increased insurance premiums beginning April 1st, and after June 3rd of this year, they are increasing insurance premium terms. When the increase in insurance premium terms goes through, I expect housing purchases to be somewhat suppressed. Admittedly, this does not change qualifying ratios, but the cost of buying is increased over the longer term.
The worst thing that's happening now in the US is that actual would-be home purchasers are being pushed out of many markets by investors, who have gobs of money to spend, much of it handed to them by the Fed's buying program. FHA premiums now at or exceeding 130 bps are going to quash first-time buyers. Charging eleven years of annual insurance premiums for loans with LTVs below 80% seems insane.
Because the effective cost of buying is so much higher for many first-time buyers than it is for investors, you see price increases, which feed the desire of investors. But this shifts the market unfavorably for buyers who don't have at least 10% down.
Friday, April 26, 2013
In Q1 PCE contributed the bulk of the gain at 76.1 billion versus Q1's 43.8 billion. That was more localized in services, and given the colder weather it shouldn't be surprising that services picked up. All property and casualty insurance rates need to rise due to low investment returns, and so there was a relatively large gain there (10 billion). This is all the more notable because we should be shedding medical insurance costs right now as more people go on Medicare!
Gross Private Domestic Investment moved from 6 billion to nearly 57 billion. A lot of that was the change in private inventories. Nonresidential fixed investment fell from 46 billion to about 8 billion. This category is mostly business spending, and the weakness there is a warning. It may be somewhat weather related. Residential investment did not change much, especially considering generally adverse weather, moving from 15.3 billion to 11.6 billion. It should pick up in Q2.
In short, although the headlines were quite different (+0.4 versus +2.5) there is not a huge amount of underlying change. My diagnosis would be that we move into Q2 running at about 1.8-1.9% GDP growth, which is not materially different than it has been.
Thursday, April 25, 2013
We've been through spring break-age in the initial claims series, and we came out the other side with a very favorable NSA 323K, with a four-week moving average of 357K. Further, continuing claims continue to drop.
If anything, the current employment data should be slightly influenced to the negative by the bad northern weather, which has slowed construction.
And just simulating income flows this year indicates that we have some strong tenacity at the GDP +1.5% level, because if you were born in 1947, you turned 65 last year. And if you were born in 1948 you turn 65 this year. SS retirements are really picking up - over the last three months (Dec-March) the SS only bracket increased 416K, and the total increased 450K. It's not going to slow down from here.
You can't have such large withdrawals from the workforce without dropping unemployment, unless you are in the middle of a deep recession. And these withdrawals come with increased income flows due to retirement checks.
Also, the exit from the workforce generated by each retirement is more than one - it's at least 1.3. A lot of older couples will have one working in part-time employment or low-level who also leaves when the main one gets that SS check. The net additional income flow on that 416K should be be over 4.5 billion a month. Over the year, that alone goes a long way toward offsetting the FICA increase.
Assuming that 800,000 additional retirees exit in the first half of the year, the net SS bonus in net cash flow to the economy should be almost 9 billion a month in the second half. Employment may be slack, but as people exit most of these jobs will be filled. They may be filled at lower wages, but they will be filled, and by the time you add the tax subsidies for working it equates out.
Further, I am ignoring an average Medicare monthly bonus which must be at least $200 a month for all those turning 65 and qualifying for Medicare. Those who were paying for insurance on their own, which was probably about 30%, get a nice monthly income supplement.
So on income flows alone, the US cannot go into recession this year barring something truly remarkable. I think the Fed's employment forecasts are idiotic and I think their forecasting is done on the macro level and makes no sense given the massive demographic shift we have operating. Of course Congress is trying to give us massive unemployment by importing 15 million immigrants, but we'll see whether they succeed or not.
Next year things get rougher, because we don't really know the impact of Obamacare, but I think the big negative there hits in 2015.
What about consumer inflation? Well, interestingly, everything I have shows that average household incomes should continue dropping, indicating that consumers will be very price-sensitive and that only government subsidies for consumption categories (food stamps, government insurance) can keep inflation above the GDP growth rate.
Therefore I think the Fed is a bit drunk and dangerous. Too many Okun's Law cocktails are being imbibed over there. It would not be able to fuel consumer inflation even if it bought 300 billion of bonds a month. The only thing it could possibly do is create a recession, but first it would create another large asset bubble.
NOTE: In this post, I am trying to roughly annualize the figures so that they can be compared with the figures used by the Personal Income and Outlays report. Annualizing the figures in that report allows them to be compared with GDP figures, but of course it can produce some startling effects, such as January's reported massive personal disposable income decrease. When March figures come out this will make more sense.
Wednesday, April 24, 2013
Not Very Encouraging Durables
YTD YoY, shipments are up 2.5% but new orders are fractionally down. Capital goods new orders are down 5.8%. Nondefense capital goods orders are down 3.5%. Fabricated metals and machinery orders are still up.
Motor vehicle new orders are up 9.8%, and total inventories are down less than 1%. That's the bright spot. Computers continue to be the worst, really.
This report agrees pretty well with the slowing shown in Markit US PMI, released yesterday and showing a slowing trend with slightly contracting backlogs of work. Richmond Fed manufacturing survey was startlingly negative, but most US surveys seem to show a pattern of slowing activity, rather than contracting/stagnant activity. CFNAI showed the pattern quite clearly, with a big bounce in Feb and then a decline in March.
Still, the US looks sharply better than Europe. Chinese manufacturing PMI was distinctly worse than ours. The signals are that the global economy isn't moving into the second quarter with any great abandon or energy.
India has been weak and may continue to be quite weak. Singapore really does usually flag slowdowns in the Asian economies, and in the first quarter it fell into an annual negative for the first time since the Late Great Unpleasantness. That despite large rises in construction.
We have to wait for one more month to see how much trouble Germany is really in for 2013. Construction PMI has shown consistent weakening and March was particularly bad, but weather had to be a significant factor. France is in a very weak state, so Germany has to stay up for Europe to stabilize. There's a lot more to come in France, because the drag from increasing unemployment has accumulated and they are just beginning to hit their housing wall. The Dutch economy stinks because of the hangover from their own housing funny-money loan debacle.
In May the real drag from the FICA increase begins to hit the US, and some additional negatives from the sequester should start showing up. Housing should continue to be a positive for this year, but not a huge positive. Maybe it will be better than I think now - the next two value of construction reports should give us a better indication.
But real growth in the US won't be epic this year. The first quarter was assisted by income effects - especially the shift in income payments last last year to beat the tax increases. But that implies a takeback this year.
Thailand is doing well, probably out of Chinese outsourcing. I have no idea how Japan's going to work out this year. Their Scylla/Charybdis ploy takes some luck and good management. There is no doubt it helps their exporters.
Monday, April 22, 2013
Mortgages And Home Prices
You can get US median household income historical data at this census page. It's split by ages in the H9 table. The data is currently only available through 2011.
The housing market is determined by new buyers, esp. first-time buyers. Therefore, when discussing affordability, you have to concentrate on the possible first-time buyer brackets.
This, of course, is the most important one. There has been over a 10% drop in real median incomes since 2000.
But catch-ups are a factor also:
They've actually done worse compared to the kids. For both of these brackets, prices with comparable interest rates should not be back to 2003 levels, but mid-1990s levels.
Actually, it should be worse. These cohorts will face higher real tax rates than they have during the last decade, especially on the state and local level. They will face higher insurance costs than they historically have, because the population is aging and that cost will be redistributed across the younger cohorts.
If interest rates come up meaningfully, prices must fall pretty damned hard. But interest rates cannot remain where they are after the Fed ceases its frenetic bond-buying campaign. They cannot. I don't expect the Fed ever to sell out, but they also cannot continue to buy at these levels.When they start to come off it, I expect mortgage rates to rise to 4.5%.
Student loan debts are an issue for the younger crowd. Obviously they will find it harder to save even a 3.5% downpayment. Not only do they have lower real incomes, but more of their incomes must be diverted to basic costs such as food, energy and medical. Even if they do not have high debt levels, this generation will find it harder to accumulate cash.
We are coming to a situation in which a household in the 25-34 bracket composed of 2 graduate degree holders is going to be less likely to buy a home than a working-class household. This is not stable.
The investors in the market are producing price increases that can't be supported longer term. Vacancy rates are still way too high. Homeownership rates are way down and must fall for some time further:
This doesn't mean that housing will be a drag the way it has been in recent years. It does mean that home prices will be constrained for a long, long time, and that home prices in many areas will slowly continue to fall over time.
Rental vacancies are still quite high:
This is in no sense a strong housing market, and it contains future price devaluation risks that are substantial, so creditors are facing a high-risk environment.
Does all of the above look like it supports this?
No. And if you think it does, you are demented, no matter what job title and credentials you hold. To even have a chance of getting back to supportable levels, this pricing index has to fall to about 140, assuming that mortgage rates don't get back over 4.75%.
It is true that household formation is picking up, but that doesn't mean that finances support much buying, and anyone with any sense should already have realized that strong investor buying coupled with falling single-family rents in some markets amounts to a screaming canary in a mine rapidly filling with gas.
There ain't no gold here, folks. Real household incomes for the most important home-buying bracket are about where they were in 1973. They are also very comparable to where they were in the mid 1990s.
Thursday, April 18, 2013
This is why you shouldn't sleep
There was like a shooting at MIT, two perps carjacked a cop car? Pursuit in Watertown, MA, now grenades.
If this isn't the bombers, but a separate incident, this is the most bananas f'ed up week in Boston since, roughly, the Revolutionary War.Video, two suspects in custody now.