A Break Down Of PCEs

What do we spend money on? To answer that question, let's take a look at personal consumption expenditures, or PCEs. These are the largest component of the GDP report. Click on all images for a larger image

First, note that PCE expenditures are broken down into services, non-durable and durable expenditures.
Services is the largest area of expenditures, accounting for 65% of PCEs. The three largest areas of service expenditures are housing, health care and "other".
After the "other" category in the non-durable category, we see that food, clothing and energy are the largest expenditures of the non-durable category.


And in the durable goods category, we see that recreational goods (think really big toys), cars and furnishings are the biggest components.





When we put all of this together, notice that housing and health care are the biggest areas of expense. Food and beverages for "off premises consumption" and financial services are also large areas of expense.

Read More

Bonddad In the NY Times

As some of you know, I also write a weekly column for 538.com. That site was recently purchased by the NY Times. My first blog entry as a New York Times Blogger is here.

Read More

Robert Barro - Paste Eater

Yesterday, Harvard economist Robert Barro penned an editorial that has to be one of the most insulting to intelligent economic researchers and should embarrass Harvard University for employing someone willing to put his personal ideology above the academic reputation of Harvard like Mr. Barro. This editorial espoused the idiotic notion that somehow had we only cut off unemployment benefits at 26 weeks instead of extending them (during the worst recession since the 30's) we would only be experiencing a 6.8% unemployment rate instead of the 9.5% rate we are currently at (not to discount U-6 which stands at 16.5%). Mr. Barro makes this claim not through actual intelligent research, but simply by using the long-term unemployment rate from the 1981 recession and applying that to our current situation as if they were identical (this is the kind of "research" one would expect from a high school student). By making this direct comparison Mr. Barro is either a) admitting that a Harvard economist has no idea about the differences between the recessions (which I will get into below) or b) that he is simply an intellectually dishonest shill. Which is it Mr. Barro?

To examine the actual data (which I might add is readily available to anyone with an internet connection these days, a fact perhaps Mr. Barro forgets), we can see that this recession is not at all like the 1981 recession and thus taking a direct comparison of long-term unemployment rates is simply wrong.

First, the 1981 recession was caused by the Federal Reserve hiking interest rates in an effort to combat the pervasive inflation of the times. As we can see from the graph below, the 1981 recession began with extremely high interest rates (I use the 10-year rate as a measure here to reflect not only the fed, but market expectations as well), while our current recession not only began with low rates (by historic standards, but also with a huge economic bubble (ie Housing) that did not exist prior to the 1981 recession).

This graph also clearly highlights one of the prime movers of recovery from the 1981 recession, as a dramatic fall in interest rates at the end of the recession was a huge boon to the economy (and thus hiring).

Next, we should examine the savings rate. Back at the beginning of the 1981 recession, savings rates were high (allowing people and the economy to better sustain a job loss sans additional benefits) and when the recession ended, savings fell, again fueling a very sharp recovery.

While today, we can clearly see that the savings rate is on the rise (crimping current spending and current economic growth) and is still well below even the "recovery level" following the 1981 recession's end.

Drawing on Mr. Barro's argument that the 1981 recession = the 2007 recession, we should examine business loans, as these loans would typically indicate both demand/availability of credit to businesses that are looking to expand (or at least maintain current operations) and would have a direct impact on the ability of business to hire those people that would have jobs after 26 weeks had they simply not been lazy Americans.

Why, look at that, a quick examination of actual data shows that during the 1981 recession business loans stayed relatively flat (the uptick at the beginning was likely due to inflation), while during our "identical" recession they have fallen off a cliff. This indicates that businesses either a)do not have the access to credit to grow (ie hire) those lazy unemployed people or b) do not see the demand in the economy for growth (or both). Once again, data seems to indicate that Harvard made a poor decision in hiring Mr. Barro to teach (or "research") economics.

Finally, we can examine the JOLTS (Job Openings and Labor Turnover) data. This is a relatively new data source (it wasn't around during the 1981 recession) and perhaps because it is so new Mr. Barro didn't realize he could look here to back up his assertions. What we can see from JOLTS is that both job openings (private) and job hires (private) are still far below even the bottom levels from the last recession. Which is interesting, because according to Mr. Barro's theory, what we should be seeing are lots of job openings that go unfilled simply because those lazy unemployed don't want to work.

Openings.

Hires.
JOLTS also conveniently examines "quits" (ie people who quit their jobs), which we would expect to be much higher during a period of fantastic unemployment benefits (since you can qualify for UI benefits if you quit because hours were drastically reduced and/or pay was significantly cut), but when we examine the data we see that in fact quits are at a series low:

Once again displaying Mr. Barro's complete lack of even giving the data a cursory look before shooting his mouth (or in this case pen) off.

I think what we can conclude from all this is not necessarily that an extension of unemployment benefits has no impact at all on unemployment rates (but probably less so during such a deep recession like we are now mired in), but simply that Mr. Barro has shown himself to be the champion of the paste eaters and a person completely lacking in professional integrity as an economist.

Read More

Yesterday's Market

The SPYs were in a downward sloping channel yesterday, bounded by trend lines (a) and (b). Prices continually made lower lows and lower highs(c and d), eventually falling below the lower trend line at the close of trading on increased volume (e).



On the daily chart, prices are in a downward sloping channel (a and b) and are currently in a fairly tight trading range (c).


In the Treasury market, prices for the IEF gapped higher at the open (a) and started to use the 10 minute EMA and line (b) for technical support. Also note several downward sloping consolidation pennants (c) during the morning rally. After the rally prices moved in a sideways pattern for the rest of the day (d).


Notice that prices for the IEF found technical support at the 61.8% Fibonacci level.


Gold is still rallying (A). Notice the EMAs are still very bullish -- the shorter EMAs are above the longer EMAs and all the EMAs are moving higher. However, the last two days have printed incredibly weak candles (A) and the MACD is narrowing (D). Prices are also approaching important resistance levels (E).



The dollar was in a strong downtrend (A), until breaking out a few weeks ago (B). Prices have rallied, but have curved, moving into more of a holding pattern (C). Along the way, prices have consolidated in downward sloping pennant patterns (D). Yesterday, prices moved higher (E). Also notice the MACD is moving higher, although, like gold, the area between the indicator and signal line is decreasing (F).



Yesterday, the dollar was in a clear curving uptrend (A) that consolidated in downward sloping pennant patterns throughout the day (B).

Read More

State Tax Revenue Increasing

From the WSJ:

Overall tax revenue increased 2.2% in 47 states that have reported their receipts for the three months ended June 30, compared with the same period a year ago, according to a report to be released Monday by the Nelson A. Rockefeller Institute of Government at the State University of New York.

This marks the second quarter in a row of recovering tax collections—and follows five quarters of declines in revenue that hammered local-government budgets. The latest figures are still a mixed bag: Some states continue to see declining revenue, but those were offset by states that saw increases.

States continue to face financial pressure, in part because tax collections remain below the levels of two years ago. In addition, aid to state income provided by federal stimulus funds is starting to fall away. Signs that the economy is flagging add to the gloomy outlook for state coffers.

"Most states still show a mismatch between revenue and spending trend lines," said Robert B. Ward, deputy director of the Rockefeller Institute. "It's not time to put away the red ink yet."

Here's the accompanying graphic:

While the quarter to quarter increases are still small, they are there, indicating we are seeing an increase in activity.

Read More

Chip Sales Rise in July

From the WSJ:

Global chip sales rose 1.2% in July from a month earlier despite signs of a slowing economy, with results remaining sharply above prior-year levels, according to the Semiconductor Industry Association.

Chip sales in July reached $25.24 billion, up 37% on a yearly basis. The year-to-date increase was 47% above the moribund levels seen for the same period last year as by midyear the sector was starting to come out of a sharp slump in the wake of the financial crisis.

Meanwhile, "worldwide sales of semiconductors were strong in July despite growing indications of slower growth in the overall economy," said Brian C. Toohey, SIA's new president, who took the helm last month. Although a number of major manufacturers have emphasized limited visibility for the near-term, Mr. Toohey said the industry group continues to expect that sales growth this year will be in line with its prior forecast.

.....

However signs are emerging that the growth could stall amid a choppy economic recovery. Most recently, Intel Corp. on Friday cut its third-quarter revenue and margin outlook on weaker-than-expected consumer demand for PCs in developed markets.

Equipment and software expenditures have been partly responsible for GDP gains over the last four quarters. We'll see if that continues.

Credit Card Losses Are Slowing

From the FT:

US credit-card losses are falling faster than expected, with the six largest card issuers expected to earn nearly $10bn more in the coming 12 months than predicted, says a study by Moody’s.

Historically, US credit-card write-offs have tracked the unemployment rate. But for the first time in a decade, loans considered uncollectible by lenders are falling faster than the jobless rate, prompting analysts to revise earnings models.

The divergence from past experience reflects bank efforts to weed out risky borrowers, moves by consumers to pare back debts after the excesses of the past decade and new credit card rules intended to discourage reckless lending.

“We are getting back to an old-fashioned basis of lending, providing credit only to people who have the ability to repay,” said Curt Beaudouin, an analyst at Moody’s.

The agency expects the six leading credit card issuers to earn nearly $10bn more in pre-tax profits in the 12 months from July than it forecast in March: $2.7bn for Citigroup; $2.6bn for JPMorgan Chase; $2.5bn for Bank of America; $931m for Capital One; $552m for American Express and $658m for Discover.

This ties in with a drop in household debt and a lower financial obligation ratio. Consider these charts from the St. Louis Fed:

These developments have occurred at the same time as we've seen an increase in the savings rate.

In short, households are paying down their debt right now.

Read More

Yesterday's Market

Prices dropped after gapping at the open (a) but rebounded pretty quickly (b). After rallying, prices fell back to key support levels (c) before again moving higher. Notice that prices used the 10 minute EMA as technical support. Finally, prices ended near highs for the day.



On the IEF, notice that prices were in a tight range for a 6 days (a). In addition, prices had three major drops last week (b, c and d). In short, prices couldn't hold onto gains.



On Friday, the IEFs opened with a gap at the open and rallied into the 10 minute EMA before making a strong downward move (c). Notice that prices rallied into the EMAs, but found resistance at those levels on a regular basis.


While the 7-10 year Treasury ETF is still in an uptrend (a) it dropped hard on Friday (b).

After consolidating (A), copper broke out on Friday (B). Note the MACD is close to giving a buy signal (C).



Oil has been an underperforming commodity for the last 4-6 months according to Stockcharts, PERF charts. Recently, prices hit key support areas (A) and bounced higher (D). However, the shorter EMAs are below the longer EMAs, but the MACD may be close to a buy signal (C).

Read More

Weekend Weimar And Beagle

It's that time of the week. Think and work on anything except the markets or the economy. Until Monday ...

Read More

Weekly Indicators: Horse Latitudes Edition

- by New Deal democrat

An initial note: at another, large blog, someone commented that "Krugman = lagging indicator." The person meant it sarcastically, but rephrased as "pundits = lagging indicator," it is true. It has been proven over and over again that pundit opinion as a whole follows trends. Which means that it misses turning points, which is why the KISS method of sticking with the LEI is more successful. As the economic data has deteriorated in the last few months, the range of generally accepted opinion has moved Gloomier and Doomier. It will continue to move that way until AFTER the next turning point.

More specifically, this weekend check out the Barron's website's data section, and see what insiders are doing, since individual investor sentiment is totally spooked by the "Hindenberg omen." Like the "Digby put" almost 2 months ago, it may actually be the "Hindenberg contrary omen." Insider buying vs. selling will tell us so.

This week the reduction of 2nd quarter GDP was made official. The economy is in the doldrums, nearly completely stalled. Durable goods orders, a leading indicator, tanked. New and existing home sales also declined, completing the collapse since the expiration of the $8000 tax credit.

One other item of interest, quite overlooked in the media, was the release of loan data for the second quarter by the Fed. Loans typically do not bottom until well after the bottom of a recession. They are badly lagging indicators, but they do confirm a turn. As it happens, a few of the series did actually turn up. Most all of the rest continued to decline, but at a much lower rate than they had up until this year. Too early to say they've turned, but they look like they are getting ready to turn.

Now here's my look at high frequency weekly indicators:

The Mortgage Bankers' Association reported that "the Refinance Index increased 5.7 percent from the previous week and is at its highest level since May 1, 2009. The seasonally adjusted Purchase Index increased 0.6 percent from one week earlier." The Purchase index continues to tell us that we have hit bottom, but without a significant bounce back yet. Refinancing tells us that household debt as a percentage of disposable income is going down, probably substantially. This is a good sign for the future.

The ICSC reported same store sales for the week ending August 21 rose 2.3% vs. a year earlier, and declined -0.4% from the prior week. Shoppertrak, on the other hand, reported that for the week ending August 21, YoY sales were up 4.5%, and down -0.4% vs. the prior week. The ICSC report concerns me, as this is the poorest YoY showing in several months, and the 4th straight week of WoW declines. Are consumers growing fearful again?

Gas prices decreased $.05 to $2.70 a gallon, at the low end of the range since May. At 9.373 million barrels consumed a day vs. 9.105 the same week last August, we continue to run ahead of last year, indicating expansion.

The BLS reported 473,000 new jobless claims, back in its 8 month range. We won't know if the increase we saw since early June has due primarily to state and local government and census layoffs until we see the jobs numbers a week from today.

Railfax continued to show renewed strong growth vs. last year in all 4 sectors: Cyclical, intermodal, baseline, and total traffic all continued to move sharply up, and intermodal traffic hit a new high! Auto carloads also continued to rebound strongly, although waste and scrap metal remained at last year's levels. In the last few weeks, I have written tht rail traffic has suggested that the double-dip was right now. Last week a reader asked in the comments

Question: when you say that the rail traffic suggests the double dip is right now, does that mean we are already on the way up out of it, given that traffic is turning back up after having been down?

Answer: yes it may be so. The bottom line is, indicators seem to behave differently in deflation vs. inflation, in that lead times become much more compact. Rail traffic has suggested that the downturn foreseen in the LEI beginning in April has already been happening. Rail traffic may now be telling us that the downturn in the private vs. public sector may be abating.

The American Staffing Association reported that for the week ending August 15, temporary and contract employment increased by 1.31%, pushing the index to a two year high of 95.0. This series is a leading indicator for jobs, and again suggests that the private sector is continuing to grow.

M1 declined -0.6% in the last week, but was up 1.0% month over month, and up 4.4% YoY, so “real M1” is up 3.1%. M2 increased less than 0.1% in the last week, and is up 0.3% month over month, and up 2.4% YoY, so “real M2” is up 1.1%. We have never had a recession without a negative real M1 reading, so this is encouraging, although the YoY trend remains down. Additionally, I would like to see real M2 up over 2.5% to feel confident that there will be no double-dip.

Weekly BAA commercial bond rates dropped .22% more last week to 5.56%, a decline of 0.76% in 9 weeks! This is simply totally inconsistent with the notion that another deflationary bust has started and creditworthiness is about to become an issue.

The Daily Treasury Statement as of August 25 (18 reporting days into the month) shows $116.4 B has been collected vs. $110.2 B a year ago, a gain of 5.6%. For the last 20 reporting days, we are up 5.8%, $125.0 B vs. $119.2 B. This is towards the low end of advances since the series turned positive YoY in March. This suggests to me that private sector employment is not continuing to improve relative to last year, although small positive growth may be taking place.

For the first time in awhile, almost all of the weekly indicators were positive, although their strength varied. Mortgage applications and rail traffic are particularly encouraging. The ICSC same store sales figure does concern me, however. Next week we'll get the jobs report, and what I will be particularly watching is whether weakness remains concentrated in the real estate/construction and government jobs area where stimulus programs expired, or whether the weakness is spreading out.

Read More

GDP Redux

After looking at the numbers, this report looks like a one-off. Consider the following points (please reference the posts below).

1.) PCEs are still increasing in line with the previous three quarters.
2.) PCEs of durable goods increased 6.9%.
3.) Service expenditures increased the most in a few years.
4.) Gross private domestic investment increased at a strong rate
5.) Equipment and software investment continues
6.) Residential investment was positive as well.

As I noted in the initial post on GDP, the real issue in the 2nd quarter was a huge increase in imports.

Read More

A Closer Look at GDP: Investment

Let's continue our look at today's GDP report with a closer look at domestic investment.

Total domestic investment is increasing at a solid rate.


Non-residential investment was just positive last quarter, although I wouldn't hold my breath about this number moving strongly higher in the near future.

Equipment and software investment increased at a strong pace, as did


Residential investment.

Read More

A Closer Look At GDP: PCEs

Let's take a deeper look into the data from today's report, starting with the largest percentage component of GDP, personal consumption expenditures or PCEs. You can click on all images for a larger image.


Total PCEs increased 2% from the preceding quarter, right in line with recent experience.


Services -- which comprise 65% of PCEs saw the largest increase since 2Q08.

Purchases of non-durable goods also increased, although at a lower rate than the previous quarter.

Durable goods purchases increase at a healthy pace.

Read More

Growth

As ever, figures provided by the ONS have had to be revised.

This time the figures for growth in Q2 2010 have been revised upwards, from 1.1% to 1.2%. This is the fastest quarterly growth in the UK since 1999. However, the economy had contracted by more than 6% before this.

A large part of this growth is made up of inventory building by companies, therefore it is presumed not necessarily to be sustainable.

Ed Balls, a Labour leadership candidate, used the revised figures to warn of an economic hurricane hitting the UK if the government cuts public expenditure.

The government, on the other hand, notes that the improved growth figures give them a sound base from which to cut excess public expenditure.

Doubtless both are right, but both will also be proven wrong.

Such is the nature of economics and politics!

Read More

GDP Revised Lower to 1.6%

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.6 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

.....

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

Let's take a look at the contributions to the percentage change:



The big issue is that imports subtracted 4.45 points from growth. Everything else is OK. From the preceding quarter, notice the PCEs increased 2%, gross private domestic investment increased 25%, exports were up 9% and government spending increased 4.3%. Imports increased a 32.4%, largely because of a 39.3% increase in imported goods. In other words, the real issue here is the increase in the trade deficit:



I'll touch on this for the rest of the day.

Read More

Yesterday's Market

After gapping higher at the open, prices broke the trend line started yesterday (a). They found support at previous lows (b) and tried breaking out but found resistance at the EMS (C). Even getting above the EMA couldn't give prices enough momentum, so they fell through support (e). When momentum shifter (f) prices rose but found resistance at the EMA (g), so they fell (f) on increasing volume.


The SPYs are currently at important support levels (a).


The IEFS (7-10 year treasury) are still in a rally (b). Notice the number of upward gaps the chart has printed recently (a).


After breaking through important resistance, the TLT has also printed several important upward gaps as well (a and b). Also notice how bullish the EMAs are -- the shorter are above the longer and all are rising (c).

Cattle is still in an uptrend (A), which has continued through important resistance levels (C) and consolidated gains along the way (B). After peaking, prices have fallen (d), but are still at elevated levels.


Copper is clearly consolidating recent gains (A).


Wheat is also consolidating gains (A).



Crude oil is currently at important support levels (A).

Read More

A Look At the Value Line Average

Reader "R" asked the following question yesterday:

Have you noticed that Valueline Arithmetic is currently correcting from a high it made earlier this year? That recent peak was an all time high, and therefore was higher than the peak before the 2008-2009 crash. The Drawdown from this recent peak is approximately 15%. What do you make of this situation? Especially given that the S&P 500 has only recovered about 50% relative to its pre-crash high,while Valueline Arithmetic recovered over 100% and is now correcting. Would be very interested in what you have to say about this situation.

First, I had completely forgotten about Value line. For those of you who are unfamiliar, VL does some of the best fundamental research on the planet. They used to issue two huge binders, broken down by industry. Each industry section began with a general overview of the industry. Then the report would fundamentally break down each company within the industry and assign each company a ranking (which I think was 1 through 5). If I remember correctly, VL's top picks usually outperformed the market on a pretty regular basis. Anyway, this is a great source of information.

That being said, here is how Value Line explains their index:

On June 30, 1961, we introduced the Value Line Composite Index. This market benchmark assumes equally weighted positions in every stock covered in The Value Line Investment Survey. That is, it is assumed that an equal dollar amount is invested in each and every stock. The returns from doing so are averaged geometrically every day across all the stocks in The Survey and, consequently, this index is frequently referred to as the Value Line (Geometric) Average (VLG). The VLG was intended to provide a rough approximation of how the median stock in the Value Line universe performed.

On February 1, 1988, Value Line began publishing the Value Line (Arithmetic) Average (VLA) to fill a need that had been conveyed to us by subscribers and investors. Like the VLG, the VLA is equally weighted. The difference is the mathematical technique used to calculate the daily change.

The VLA provides an estimate of how an equal-dollar weighted portfolio of stocks will perform. Or, put another way, it tracks the performance of the average, rather than the median, stock in our universe. It can be shown mathematically, for all practical purposes, that the daily percentage price change of the VLA will always be higher than the VLG. The systematic understatement of returns of VLG is a major reason that the VLA was developed. Moreover, although the differences between daily price changes may seem small, the magnitude of the annual differential between the two averages can be very large. The greater the market volatility, the larger the spread between the geometric and arithmetic averages becomes.

In 1965, when the current Timeliness Ranking System began, our only market average was the VLG, so we scored the ranks on a geometric basis. This allowed us to compare the performance of the ranks versus the market (as measured by the VLG). After we started the VLA, we began scoring the ranks both on a geometric and arithmetic basis.

In other words, the VLA is an index of the average VL stock. That being said, here is the weekly chart:



Click for a larger image.

The reason this average has outperformed the SPYs is VL has a better selection of stocks. That shows they're pretty good at their job.

The index has printed two highs over the last few years -- A and B. Prices reached areas around previous highs and then started to move sideways. Notice how prices have risen and then turned into more of a sideways orientation (see curved line C). Since hitting previously established highs, prices have found support at line D and the 50 week EMA. Also note the index has declining momentum (F). Finally, take a good look at the EMAs (E). The shorter are above the longer, but the 10 and 20 week EMA are moving lower and the 10 is slowly working below the 20. This is a bearish development.

So -- what does this mean? All the equity averages -- even the VL -- is suffering from the concern over the US economy's overall direction right now. The recent spate of economic numbers indicate the economy is slowing which is bad for all equities.

However, the higher quality of the VL selection process is probably preventing an overall crash in this average.

Read More