reality is only those delusions that we have in common...

Saturday, August 3, 2013

week ending Aug 3

US Fed balance sheet shrinks for first time in nine weeks - (Reuters) - The U.S. Federal Reserve's balance sheet shrank for the first time in nine weeks with reduced holdings of mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities stood at $3.529 trillion on July 31, compared with $3.532 trillion on July 24.The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) dipped to $1.247 trillion from $1.261 trillion the previous week.The Fed's holdings of Treasuries, however, rose to $1.982 trillion as of Wednesday, from $1.970 trillion the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $66.52 billion, unchanged from the previous week.The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $11 million a day during the week, compared with $10 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 1, 2013: Federal Reserve statistical release

FOMC Statement: Downgrade from "moderate" to "modest" - Economic activity downgraded and more concern about inflation too low (update: added "too low).FOMC Statement: Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

FOMC statement, 31 July 2013 - The tweet-length translation of Wednesday’s FOMC statement: “Sorry, but we’re saving any juicy taper-hint deets for the minutes, and otherwise we’ll see you in September.” No policy changes, and there were only minor alterations to the statement, though one worth noting is the addition of this line: “The Committee also recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” Perhaps the line convinced St Louis Fed president James Bullard, who dissented at the June meeting because he believed the committee “should signal more strongly its willingness to defend its inflation goal”, to switch from nay to yay. Also probably worth mentioning is the change from moderate to modest in the description of recent economic activity, along with an explicit mention of rising mortgage rates. That could reflect more caution about when to taper and by how much, or it could mean nothing at all. Just wanted to note it. Below is the full text of the statement, and our earlier preview of the week’s three big central bank meetings is here:

Parsing the Fed: How the Statement Changed - The Federal Reserve releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank’s economic outlook and the actions it plans to take. Much of the statement remains the same from meeting to meeting. Fed watchers closely parse changes between statements to see how the Fed’s views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language. This is the July statement compared with June.

Fed’s Bullard: Need More Data Before Taper Question Can Be Settled -  The first Federal Reserve official to speak publicly after this week’s monetary policy meeting says the central bank does not yet have enough data to know when or if it can start slowing the pace of its bond-buying stimulus. In a speech in Boston Friday, Federal Reserve Bank of St. Louis President James Bullard said the Fed “needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment” about the pace of its $85 billion-per-month program of bond buying. Mr. Bullard is a voting member of the monetary policy setting Federal Open Market Committee, which met on Tuesday and Wednesday of this week. The central bank made no significant changes in its stimulus programs at the gathering. Economists continue to think that the central bank will likely begin to slow the pace of bond buying at the September Fed meeting, or perhaps in December. Mr. Bullard has taken on a prominent role on the FOMC in recent months. He dissented at the late June meeting because he did not believe the Fed was making it clear enough that it wants inflation to hit its 2% official target. Annual inflation gains have been surprisingly weak and have been coming in around 1%. Most central bankers agree that overly weak price pressures are as undesirable as over-target readings. Mr. Bullard’s dissent in June appeared to cause a notable shift in the FOMC’s policy statement this week, as the committee stated prominently that persistently weak inflation was economically undesirable. Mr. Bullard has said in recent remarks that if price pressures continue to stay weak, it may mean the Fed has to press forward with stimulus for longer than many now currently expect.

Milton's Paradise, Still Lost - Paul Krugman  -- Robert Skidelsky has an interesting note asking why quantitative easing has received so much stress in recent economic debates. Its effectiveness is, after all, questionable — whereas there is overwhelming evidence that fiscal policy works as advertised.Skidelsky is right, I think, to downplay the idea that it’s all welfare for the financial service sector. After all, many of the most bitter critics of QE come from Wall Street. He argues that the affection for QE comes, instead, from the alluring prospect — to some conservatives, at least — of getting economic stabilization without any need for activist government outside the narrow sphere of monetary policy. What he doesn’t say clearly, at least in this piece, is that this was the allure of old-fashioned monetarism too. Just stabilize the money supply, declared Milton Friedman, and we don’t need any of this Keynesian stuff. Why, if only the Fed had stabilized M2, there would have been no Great Depression! Friedman’s money supply rule soon proved itself inadequate, but a more flexible kind of monetarism — one that still left no role for fiscal policy — did end up ruling conventional wisdom from the mid-80s to 2007, the era of the Great Moderation. Then came the Great Recession, the Fed funds rate came up against the zero lower bound, and we were banished from the monetarist paradise. In fact, as I’ve written on a number of occasions, recent experience pretty conclusively shows that Friedman’s claims about how easy it would have been to avert depression were all wrong. Still, QE, in the eyes of its most enthusiastic advocates, can return us to Milton’s Eden. And they are determined to read the evidence as confirming that hopeful notion.

Fed Watch: Hawks and Doves, Again - Neil Irwin argues that the classification of Fed policymakers into hawks and doves is too simplistic, and, of course, he is correct. He concludes: In other words, maybe instead of classifying central bankers by the variety of bird they most resemble, we should instead judge them on their ability to adapt their thinking to circumstance. That said, I doubt we are going to change this convention anytime in the near future. We can, however, better define the terms to at least reduce the negative connotations associated with either identifier. I use the terms to refer to a policymaker's judgment as to the appropriate level of monetary accommodation given the current and expected economic situation. A "dovish" policymaker tends to view the economy as likely needing more monetary accommodation than a "hawkish" policymaker. Similarly, if I say the risk is that tomorrow's FOMC statement will sound "dovish," it means that it will suggest a greater amount of monetary accommodation relative to the last FOMC statement. I think this is a refinement of my thoughts the last time I tackled this subject: I tend to think of the distinction in terms of the policymaker's inflation forecast. A hawk is a policymaker who perceives a greater upside risk to the inflation forecast and thus anticipates policy will turn tighter sooner than later. On the other side, doves tend to see less upside risk to the inflation forecast, or even downside risk, and thus do not anticipate a tighter policy in the near term.

Watching the Wrong Central Bank - We study every syllable, pause, and twitch by the Fed, with the belief that Bernanke decides almost everything. Others watch Draghi at the ECB. If you are a fixed income trader that makes sense. But what if the rest of us are watching the wrong central bankers? The US invests a lot in other nations, and other nations invest a lot in the US. The difference between the two is the Net International Investment. The last time the US net was positive was in 1985. Since then foreigners have invested more in the US than the US has invested abroad.  You can see above that the net international US investment position has steadily gone deeply negative. And since the 1980's, both nominal long-term interest rates and real long-term interest rates have also been declining. Until 2009 when the Fed started buying Treasuries through QE, the Fed's influence was mostly on short-term rather than long-term rates. Could interest rates have been declining for years because of the increased demand from foreign investment? In Q1, 2013 only 14% of foreign investments in the US were direct investments in business, another 19% were in corporate stocks, and most of the rest were in bonds. BEA's international investment reporting splits out 'foreign official', which are assets owned by a government, central bank, or a few international agencies such as the IMF. In Q1 2013 the foreign official assets held in the US were $5.8 trillion, versus only $0.6 trillion of foreign assets owned by the US gov't (oddly, most of that was gold). So the international surplus of investment in the US is due to 'foreign official' - which I think here means foreign central banks. The biggest foreign owners of US Treasuries are not surprisingly the central banks of nations that run very large trade surpluses, such as China, Japan, and Brazil (which can be indirect US trade surpluses too). The central banks don't earn dollars to buy US bonds, instead they create more domestic currency to buy dollars from their exporters. This keeps their exchange rate artificially favorable and maintains a trade surplus.  How does a foreign central bank accumulate trillions in US dollars, except through currency manipulation? And only currency manipulation would prevent trade and investment imbalances from naturally pushing the exporters' currency up to a point of equilibrium with the importers' currency. Currency manipulation effectively exports jobs and inflation from the US to developing nations. We thought Greenspan was a genius for keeping inflation low, when he had nothng to do with it. Did he even understand what was going on?

Fear of Froth - Krugman - Carola Binder parses President Obama’s big interview with the Times, and thinks it hints at a Summers, or anyway non-Yellen appointment.   Anyway, the passage in question is striking; whatever it says about the Fed succession, it does give us a sense of how the people Obama listens to talk. And it’s not good: And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.So, here we are with inflation at a long-term low, many economists arguing that we need higher inflation expectations, and unemployment the overwhelming problem we face. Yet Obama appears if anything to give more emphasis to inflation-fighting than to unemployment reduction, and throws in stuff about bubbles; basically, he has a definite tight-money lean. I don’t know who it’s coming from.

A comment on Fed Forecasting Records - Jon Hilsenrath and Kristina Peterson write about a "WSJ analysis of more than 700 economic predictions between 2009 and 2012 by Fed policymakers shows ... Janet Yellen ... the most prescient": Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects. "I expect the pace of the recovery will be frustratingly slow," she A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry: High unemployment and the weak economy would tamp wages and prices. Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable." Ms. Yellen was proved right. A few comments:
1) A good Fed Chair would be hawkish (raise rates) or dovish (lower rates) at the correct times. Over the period in question, 'dove' was synonymous with 'correct'. But no one should think Yellen is a perma-dove.
2)  It is important to remember that Yellen was ahead of most other Fed presidents in the period between 2005 and 2008 (before this WSJ analysis).  In 2005 Yellen was expressing concerns about housing, "analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices", and 'ghost towns' of the West in 2006.
3) This doesn't mean Yellen has a "crystal ball".  She doesn't.  Instead this means she has a strong understanding of macroeconomics and paid close attention to the data. A key for any successful manager is to be able to use a wide-angle lens (see the big picture) and also to be able to zoom in on the details (data driven) when necessary. Yellen's track record suggests to me that she excels at both.

The Fed Fumble - Paul Krugman - Over at FT Alphaville, Cardiff Garcia says the right things about the Yellen affair: Politics really isn’t our thing, but more believable for now is simply that the White House didn’t do its homework, failed to anticipate the backlash, and is now clumsily trying to figure out how to handle it. The politics is unavoidable, of course. But we would just emphasise again that strictly on the merits, you hardly need to make an anti-Summers case to prefer Yellen. One does have the sense that economic policy discussion in the WH has grown dangerously insular; just about anyone outside, if asked, could have told them what a mess they’d make by floating the idea of choosing Summers over Yellen. But they seemed blissfully unaware of what was coming.

The Fed is the Central Bank, and President Obama Should Treat It That Way - President Obama will soon name a successor to Ben Bernanke for the position of Chair of the Federal Reserve’s Board of Governors, and Brad Delong recently offered his views on what qualifies someone as a strong candidate for that position:To be good choices for Federal Reserve chair, candidates must pass three tests. They must have experience at a similar job: this is not something to throw somebody into and expect them to swim. They must fear high inflation as they fear a tornado, and feel in their bones the pain of the unemployed. And they must understand and properly weight the different models of how the economy might behave. DeLong then goes on to argue that this proposed collection of qualifications narrows down the candidate list significantly: Janet Yellen has a proven record of being able to build consensus inside the Fed. Larry Summers is the least likely to bind himself to an institutional consensus past its sell-by date. Only five potential candidates pass this threefold test: Larry Summers, Janet Yellen, Christy Romer, Alan Blinder and Laura Tyson. They are all, in my view, superior by far to others whose names have been mentioned. And DeLong then opts gingerly for Summers, his former boss and a man with whom he has co-authored several papers in the past.  But DeLong’s analysis leaves out what to my mind should be the most important factor among the qualifications for the Fed Chair position: central bank experience. By these criteria, Janet Yellen is the only person on DeLong’s list who qualifies since she has been at the central banking game since the mid-90′s, when she was first named to the Board of Governors.  Yellen also served for six years as President of the San Francisco Fed.   She is an established, very experienced and by all accounts highly competent and professional central banker, who has had hands-on, day-to-day responsibility for Fed governance and policy formation during the intense and politically high-pressured recent period of the Great Recession.

For The Birds - Paul Krugman - Neil Irwin urges us to stop talking about inflation hawks and doves. Tim Duy agrees that the terminology is misleading, but admits that it’s not going to change, so that we should focus on clarifying what the distinction really means. And I’d like to second that. For the hawks/doves divide at the Fed, and more broadly, isn’t really about inflation tolerance. Nor is it about toughness, about being willing to do what needs to be done. It’s about economic models. First, a word on inflation tolerance: the truth is that nobody at the Fed is advocating a significant rise in the inflation target. At most, some players want to turn 2 percent into a true target, with deviations on either side regarded as equally bad; this would actually represent a change in behavior, since the Fed has in practice treated 2 percent as a ceiling. But there’s nothing like Abenomics, an effort to boost the economy by fundamentally changing inflation expectations, on anyone’s agenda — at least not yet. (Give us a lost decade or two, and that may change). So if there isn’t a big divide on the inflation target, what is the difference? The answer is that the hawks believe in immaculate inflation — they believe that a large Fed balance sheet can translate into an inflation surge even with the economy depressed.

While The Fed’s Financial Media Prostitutes Promote the “No Inflation” Lie, Here Is The Reality - Fed apologist, bankster banger journalistic whores are fond of touting the shibboleth that there’s no inflation when they beat up on well meaning but lightly armed pundits who say that there is inflation but can’t articulate very well, exactly why. I just want to show you exactly why these shameless purveyors of Wall Street filth are able to make the argument that there’s no inflation. It is because the BLS does not include housing inflation when computing the CPI. It simply waves a magic wand and pretends housing inflation doesn’t exist. The shameless financial media shills for the Fed line take that banner and run with it. Then the BEA, which produces the PCE deflator figure that the Fed loves to follow, ignores even more data. It comes in quarterly with a number even lower than the CPI. That guarantees that the Fed will, as always, be massively behind the curve and clueless when the shit finally hits the fan in the massaged data they follow. It just amazes me how these people can make speeches and write articles with their heads stuck up their asses all the time. How DO they do that? Amazing.  I also don’t know how the BEA manages to get the PCE deflator, now at 0.8% down that low when the CPI was at 1.7% in June. I’m not much interested in the arcana of how they suppress the number even more, but CPI is the starting point and the number that the media mostly focuses on.  So that’s where I’ll start.

Sumner versus Schiff and ShadowStats - The Sumner versus Schiff spat is going the rounds, and can be seen in the video below. Scott B. Sumner is a market monetarist who blogs at Money, and advocates nominal GDP targeting, the latest neoclassical fad. Peter Schiff spins a vulgarised version of Austrian economics.Of course, Scott Sumner makes a number of good points. To defend his position, Schiff falls back on the verbal legerdemain of using the virtually archaic definition of “inflation” as an increase in the money supply. When Schiff changes the accepted meaning of “inflation” used in the comments of his opponents, he is simply committing a fallacy of equivocation.Secondly, Schiff’s claim that price inflation is actually much higher than the official figures, and that therefore real GDP has been negative since 2008 appears to be based on the alternative inflation figures at ShadowStats and their alternative real GDP estimates.While one has to admit that the US recovery has been weak and that the level of private investment is insufficient, there are nevertheless serious reasons to doubt the ShadowStats figures, and a nice discussion here shows why:  “The Trouble with Shadowstats,” June 1, 2013.

PCE Price Index Update: The Core Measure Remains Well Below the Fed Target -  The June Personal Income and Outlays report for June was published today by the Bureau of Economic Analysis.The latest Headline PCE price index year-over-year (YoY) rate of 1.31% is an increase from last month's adjusted 1.07%. The Core PCE index of 1.22% is little changed from last month's adjusted 1.22%. With this month's release, the PCE Price Index has been subjected to comprehensive revisions. The impact of the post 1985 revisions on the PCE price index has been substantial and, I would suggest, beneficial to the FOMC (see the footnote below).As I pointed out last month, the continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for ten of the last 13 months since its interim high of 2.04% in March of 2012. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

Why Is Inflation So Low? - For some people this is a tough question; that's because they're using the wrong framework. The GDP revisions boosted the level of output, and more interestingly, raised the measured pace of growth since the end of the recession. Figure 1 shows the trajectory of real GDP, normalized to 2009Q2, the trough of the last recession. While the measured pace of growth is faster than previously reported, what's true is that output growth is still pretty tepid. As Jim notes, in a mechanical sense had fiscal drag been less, growth would have been measurably faster.I think these observations link in with a puzzle often remarked upon -- why is inflation so low and declining? I think this is only a puzzle for those who believe that potential GDP has shrunk considerably so that there is little slack in the system. For the rest of us, it's the large amount of slack that is the answer. In the past I've shown output gap relative to potential as measured by CBO; here I plot in addition potential output implied by an alternative approach, inferred from observed inflation.

Fed Watch: Early 3Q Data Lifts Off - The FOMC meeting concluded largely as anticipated, with a tempered downgrade of the economic assessment from "moderate" to "modest" and a new warning about the dangers of low inflation. Of course, given the weak first half evidence in the GDP report, "modest" seems like an appropriate adjective. In addition, the Fed highlighted the recent rise in mortgage rates, signalling their concern about negative feedback effects. Treasuries gained the news, wiping out earlier losses.That said, there was no sense that the general forecast had changed dramatically. The Fed still expects activity to pick up in the second half of this year, and likely still expects that that pickup will be sufficient to require the withdrawal of accommodation, beginning in the next few meetings, with September still the consensus. They will be looking for data that supports that expectation. It is mostly likely the case that strong data for July and forward will be more important than weak data from June and back. With that in mind, the early data is looking good for tapering sooner than later. Treasuries reversed yesterday's gains this morning on the combined strength of the ISM manufacturing and initial claims reports. Manufacturing received a boost in July: It looks like something lit a fire under the manufacturing sector last month. In addition, initial claims surprised positively: More positive employment news came yesterday with the ADP report showing a private sector job gain of 200k for July. While Calculated Risk is correct that the ADP report is not particularly useful in predicting the initial release of the nonfarm payrolls numbers (which could be all over the place), Joe Weisenthal is correct in that it does track the underlying trend of the labor market, and signals that recent strength continued to hold. Moreover, regarding tapering, employment is probably still the most important data

The Government "Revises" 84 Years Of Economic History This Week - Don't like how high debt-to-GDP figures are? Revise 'em. Unhappy at the post-'recovery' growth rates? Revise 'em. Disappointed at the pace of economic improvement in the last decade or two compared to the rest of the world? Revise 'em. This week "we are essentially rewriting economic history" as the BEA is set to revise GDP data from as far back as 1929. The 'adjustments' to account for intangibles (that best known of micro- accounting fudge factors) and as we noted previously in great detail, will increase GDP by around $500 billion. Of course, these changes are defended aggressively (just as the hedonic adjustments to inflation calculations 'make perfect sense') as GDP will now reflect spending on research, development, and copyrights as investment - and reflect pension deficits for the first time (think of all that potential future GDP from massive pension deficits now). With Q2 GDP growth estimates set for a dismal 1.1%, expectations are for the short-term economic data to be revised upwards (and with any luck the great recession never happened at all).

'Knowledge Economy' Will Soon Count As Investments — Making The US Economy Look Better (Reuters) - As many a former factory worker can attest, U.S. companies have invested so heavily in technology that some plants now practically run themselves.So it is rather odd that official data suggests American businesses for decades have been growing less aggressive at investing in their operations.This apparent contradiction helps illustrate a rethinking under way on how to measure economic output, a discussion that is leading to an overhaul of government data this week that will show the U.S. economy is a bit larger than previously thought.The idea is that while companies might be spending less of their income on tangible things like buildings and equipment, they appear to be spending more than ever on ideas, such as the engineering research behind an automated factory.Private spending on research and development has roughly doubled as a share of investment in the last 50 years. The thing is, it doesn't actually count as investment, so America's output of cancer drugs adds to economic growth but the research to develop them does not. This will change on Wednesday when the Commerce Department releases decades of revised data that will include R&D as a category of investment. Under the new framework, R&D added about $300 billion to GDP in 2010.

A guide to the conceptual US GDP changes - The BEA’s comprehensive benchmark revisions to the national income and product accounts will be released later today, and they’ll include the major conceptual changes announced earlier this year. If you want a straightforward summary of the changes and how they matter, we recommend Robin Harding’s piece from Monday. (And remember that the annual benchmark revisions, also to be released today, will affect numbers going back to 2010. Look for GDP and GDI, which had diverged markedly in the year through the end of Q1, to be revised towards each other.)But for a little more detail and a handy guide as you pick through the release later, here are excerpts from a useful primer by Credit Suisse economists, starting with the biggest change and the expected impact on GDP and GDI, emphasis theirs: The most important change is the reclassification of “intangible” asset spending as investment – the largest item being research and development spending. As a consequence, GDP, as well as its income-side sibling GDI (Gross Domestic Income), is expected to be roughly 3% larger in size than currently measured. That’s akin to tacking on another New Jersey, Ohio or Virginia to the nation’s broadest measure of output. We say this tongue and cheek. The revision should not change the fundamental view of the economy’s prospects, asset prices or policy. The GDP will be larger in a statistical sense, but not any healthier. Think of the revision as analogous to measuring something with a ruler denominated in meters as opposed to yards. The unit of measurement is different, but the object being measured is not any different.

U.S. GDP Grows At Rate Better Than Expected in 2nd Quarter -The U.S. economy grew from April through June at a modest seasonally adjusted annual rate of 1.7 percent, as businesses spent more and the federal government cut less. The Commerce Department said Wednesday that growth improved from a 1.1 percent rate in the January-March quarter, which was revised from an initial 1.8 percent rate. While growth remains sluggish, the pickup was surprising as most economists predicted a far weaker second quarter. And it suggests the economy could accelerate later this year as businesses step up spending and the drag from steep government cuts fade. The second quarter figure indicates “the recovery is gaining momentum,” Paul Ashworth, an economist at Capital Economics, said in a note to clients. Businesses increased their spending 4.6 percent in the second quarter after cutting by the same amount in the previous quarter. And spending on home construction grew 13.4 percent, in line with the previous quarter. At the same time, the federal government cut spending only 1.5 percent after an 8.4 percent plunge in the first quarter. And state and local governments increased spending for the first time in a year. The biggest part of the economy is consumer spending and that grew more slowly in the second quarter. And a surge in imports reduced growth by the most in three years. Still, economists are hopeful consumer spending will rebound and growth could improve to around 2.5 percent in the third and fourth quarters.

Real GDP increased 1.7% Annualized in Q2 - 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 1.7 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent (revised). The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE. Personal consumption expenditures (PCE) increased at a 1.8% annualized rate, and residential investment increased 13.4%. Equipment increased 4.1%, Intellectual property products 3.8%, and non-residential investment 4.6%. "Change in private inventories" added 0.41 percentage points to GDP in Q2, and the Federal government subtracted 0.12 percentage points (mostly a decrease in non-defense spending). State and local governments turned slightly positive.

U.S. GDP Grows at 1.7% Pace - The U.S. economy picked up slightly in the second quarter of the year, though the overall pace of growth remained lackluster as consumers held back and the federal government continued to cut spending. The nation's gross domestic product, the broadest measure of goods and services produced across the economy, expanded at an annualized 1.7% pace from April to June after growing just 1.1% in the first three months of the year and nearly grinding to a halt at the end of 2012. Economists surveyed by Dow Jones Newswires had forecast GDP growth of 0.9% for the second quarter. The overall performance shows that the U.S. economy has struggled to gain momentum amid slow growth abroad, domestic political uncertainty, higher taxes and sweeping federal budget cuts. Still, some data suggest that the economy may perk up a little in coming months, supported by a resurgent housing market, renewed business spending and the diminishing effects of government tax and spending policies.  "The focus is now on the second half of the year. Most expect the pace of activity to pick up over the final six months of 2013, though the magnitude of the acceleration is highly debated,"

GDP 1.7% for Q2 2013 -- Q1 2013 real GDP came in at 1.7%   Q1 GDP was revised down to 1.1%.   Government spending declines were much less of a drag on the economy than Q1 while imports sucked out -1.51 percentage points of economic growth.   Exports did recover but were about half of what imports subtracted from GDP.  Investment grew on across the board increases.   Consumer spending decreased slightly from Q1.  Generally speaking 1.7% GDP implies fairly weak economic growth, the third quarter in a row for GDP below 2.0%. As a reminder, GDP is made up of: Y=C+I+G+(X-M)  where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q1 to Q2 GDP major components.  GDP percentage point component contributions are calculated individually. Consumer spending, C in our GDP equation, shows less growth than Q1.  In terms of percentage changes, real consumer spending increased 1.8% in Q2 in comparison to a 2.3% increase in Q1.  Increases were evenly spread with services adding a 0.43 percentage point contribution and goods showing a 0.79 percentage point contribution to PCE.  Durable goods consumer spending contributed 0.48 percentage points to personal consumption expenditures.  Below is a percentage change graph in real consumer spending going back to 2000.

GDP Q2 Advance Estimate Beats Expectations at 1.7% - The Advance Estimate for Q2 GDP was a better-than-expected to 1.7 percent. However, Q1 GDP was revised down from 1.8 percent to 1.1 percent. Both had forecast 1.0 percent and expected 1.1 percent. Today's release includes major historical revisions, which I'll examine in more detail in a subsequent post.  Here is an excerpt from the Bureau of Economic Analysis news release: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 1.7 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent (revised).  The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source. The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. 

US GDP Grows 1.7 Percent in Q2, Beating Expectations, but Earlier Quarters Revised Down to a Crawl - The Bureau of Economic Analysis today released its much anticipated advance estimate of second quarter GDP growth, along with rebenchmarked data for earlier quarters. Q2 growth was reported as 1.7 percent, hardly scintillating, but better than some analysts had expected. However, growth for Q1 was revised down from 1.8 percent to just 1.1 percent, and Q4 2012 was revised down from a feeble 0.4 percent to a near standstill at 0.1 percent. All the numbers are quarterly data stated at annual rates.The best way to see what has been going on since the first of the year is to look at the old, the rebenchmarked, and the newly revised data on a sector-by-sector basis, as in the following table: The first thing we see in this table is that the contribution of consumption to real GDP growth slowed from  1.54 percentage points in Q1 2013 to 1.22 percentage points in Q2. Q1 consumption, in turn, was revised downward from a contribution of 1.83 percentage points. Consumption of durable goods picked up slightly in Q2. The slowdown was about evenly divided between services and nondurable goods.Investment was the strongest performer in Q2, contributing 1.34 percentage points in Q2, up from 0.71 in Q1. A downward revision of Q1 investment explained part of the slow growth in that quarter. Fixed investment contributed .93 points to Q2 growth after shrinking in the first quarter. Residential structures were the strongest component of fixed investment, with nonresidential structures, business equipment, and intellectual property products also making larger positive contributions to growth than in Q1. Inventories grew slightly slower in Q2, with most of the change due to a slowdown in the growth of farm inventories.Fiscal drag—a negative contribution to growth from smaller government—has been a factor slowing growth throughout much of the recovery. However, the negative contribution of government to GDP growth was very small in Q2, just -0.08 percentage points, compared to -0.82 percentage points in Q1. The federal government continued to shrink, but the contribution of state and local government was slightly positive for only the second time since late 2009. The data shown are for government consumption expenditure and gross investment, a measure that includes all government purchases of goods and services but excludes transfer payments.

We should be horrified at 1.7 percent GDP growth - When the Commerce Department reported the latest numbers on U.S. economic growth Wednesday morning, it was received with cheers. Gross domestic product rose at a 1.7 percent annual rate in the spring months! And that is a higher number, you may note if you are good at math, than the 1 percent that analysts had forecast. It is what markets and the journalists who write about them like to call a “huge beat.”Woo?The good news first: The economy is growing a little faster than economists had feared. And it seems to be relatively well-balanced growth, with personal spending driving the growth train (responsible for 1.22 percentage points of the total growth) and business investment and housing making significant contributions. Trade was a significant negative, as imports rose faster than exports, and government spending subtracted from growth for the third straight quarter, though less dramatically than in the recent past.The economy also did better in 2012 than had been earlier thought. In the Commerce Department’s re-benchmarking of data reflecting new calculation methods for GDP, the growth numbers came in at 2.8 percent, not the 2.2 percent earlier believed. But the bad news is this: The better-than-expected second-quarter number came at the expense of a downward revision to estimates to the first part of the year, from 1.8 percent to 1.1 percent. Add in anemic growth (at only an 0.1 percent pace) in the fourth quarter of 2012, and we’ve now faced nine months of an expansion at a bit less than a 1 percent annual rate. Every two steps forward for growth seems to be accompanied by a step and a half back.

Q2 GDP: More Weakness, Data below FOMC June Projections - Overall this was another weak GDP report although slightly above expectations. It appears that the drag from state and local governments might be ending, although the drag from Federal government spending is ongoing. Residential investment (RI) remains a bright spot (increasing at a 13.4% annualized rate), and RI as a percent of GDP is still very low - and I expect RI to continue to increase over the next few years. For the FOMC meeting today, the data showed all indicators are still below the June projections (see bottom three graphs). The first graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.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 11 quarters (through Q2 2013). And the drag from state and local governments may be ending. At the least the drag has diminished, and based on recent news reports, I expect state and local governments to make small positive contributions to GDP going forward. Residential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units. Clearly RI has bottomed, but it still below the levels of previous recessions.

US economy expands at modest 1.7 percent rate in 2nd quarter as businesses step up spending - The U.S. economy grew from April through June at a modest seasonally adjusted annual rate of 1.7 percent, as businesses spent more and the federal government cut less. The Commerce Department said Wednesday that growth improved from a 1.1 percent rate in the January-March quarter, which was revised from an initial 1.8 percent rate.While growth remains sluggish, the pickup was surprising as most economists predicted a far weaker second quarter. And it suggests the economy could accelerate later this year as businesses step up spending and the drag from steep government cuts fade. The second quarter figure indicates “the recovery is gaining momentum,” Paul Ashworth, an economist at Capital Economics, said in a note to clients. Businesses increased their spending 4.6 percent in the second quarter after cutting by the same amount in the previous quarter. And spending on home construction grew 13.4 percent, in line with the previous quarter. At the same time, the federal government cut spending only 1.5 percent after an 8.4 percent plunge in the first quarter. And state and local governments increased spending for the first time in a year. The biggest part of the economy is consumer spending and that grew more slowly in the second quarter. And a surge in imports reduced growth by the most in three years.

Real GDP Per Capita: Another Perspective on the Economy - Earlier today we learned that the Advance Estimate for Q2 2013 real GDP came in at 1.7 percent, up from a downwardly revised 1.1 percent for Q1. Let's now review the latest numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959. I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.2% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 22 quarters beyond its Q4 2007 peak, real GDP per capita is still 0.05% off the all-time high following the deepest trough in the series.  Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Five Takeaways From GDP Report - The economy grew at a rate of 1.7% in the second quarter, the Commerce Department said Wednesday. That’s better than the first three months of the year — but only because the government revised down its estimate of first-quarter growth to 1.1%. Economists are still digesting today’s report, but here are five initial takeaways:

  • Appearances can be deceiving. The 1.7% pace of growth in the second quarter is markedly better than the roughly 1% rate economists expected, and well ahead of the most pessimistic estimates. Those who feared the recovery was stalling out can breathe a sigh of relief. But in many ways today’s report actually makes the recovery look worse, at least in the recent past. Growth in the first quarter, which economists once hoped would top 3%, was revised down to 1.1% from 1.8%, and the government now says the economy barely grew at all at the end of 2012.
  • Mixed bag in the details. Consumers, who have powered the recovery in recent quarters, slowed their spending somewhat in the second quarter, but the business sector, which has been sluggish, performed better than expected: Investment in equipment grew at a 4.1% rate, and investment in structures grew at a 6.8% rate after contracting sharply to start the year. Exports picked up too, a sign that weakness overseas hasn’t yet hit American businesses. And the housing market continued its strong recent performance, with residential construction spending rising 13.4%.
  • Government is a drag. The public sector contracted for the third straight quarter and the 10th time in the past 12. That wasn’t a surprise given the “sequester” budget cuts, which began to take effect in the second quarter. 
  • Inflation stays in check. The Fed’s preferred inflation measure, the price index for consumer expenditures, showed a 1.1% increase from a year earlier; excluding food and energy, the index rose 1.2%.
  • Longer run looks better. In addition to its routine revisions to recent data, the Commerce Department on Wednesday also released a major “benchmark” revision to prior years’ figures. If the updates to recent data were disappointing, the longer-run changes actually made the picture look brighter. The economy grew 2.8% last year, better than the previously published 2.2% rate, and the earlier years of the recovery also look generally better, though this still ranks as the worst recovery since World War II.

Q2 GDP & July ADP Payrolls: Moderate Growth Persists - US GDP increased 1.7% (real seasonally adjusted annual rate) in this year’s second quarter, the Bureau of Economic Analysis reports. The pace of growth beat expectations by a hefty degree (based on the 1.0% growth consensus forecast via economists), although today’s “advance” GDP estimate from BEA is fairly close to The Capital Spectator’s average Q2 nowcast of 2.0%, which was published on Monday. Meanwhile, private nonfarm payrolls grew by a net 200,000 in July, according to today’s ADP Employment Report—a gain that also beat the consensus prediction from dismal scientists. It’s fair to say that today’s numbers offer more evidence that modest growth continues to dominate.If the latest upbeat news on the US economy comes as a shock to anyone, it’s not for lack of clues. As noted in The Capital Spectator's current monthly update of the US Economic Profile, the broad trend for a broad set of indicators continues to signal growth for the foreseeable future. We can certainly have a spirited debate about the prospects for the rate of growth and what it means for particular slices of the economy. But from a top-down perspective, today’s employment and GDP numbers offer more evidence for embracing the view that the economy overall will expand for the near term. Consider today’s ADP release, which shows that “job growth remains remarkably stable,” notes Mark Zandi, chief economist of Moody’s Analytics, in a press release for the July update. “Businesses are adding to payrolls in most industries and across all company sizes.”

Today's Curious GDP Deflator: Understanding Why Q2 GDP Wasn't 0.6% - How do you get from Nominal GDP to Real GDP? You extract inflation from the numbers. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, one that is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.Today's Advance Estimate of Real GDP surprised to the upside at 1.67%, which gets rounded up to 1.7% in the popular press. had forecast 1.0% and's GDP consensus was for 1.1%.But equally surprising was the disinflationary trend in the BEA's deflator for today's calculation. Remember: The lower the defator, the higher the GDP. Also I should point out that the deflator is the compounded annual rate of change. The GDP deflator for Q1 of this year was 1.7%, which is right at the 1.75% deflator average for the past 14 quarters (since Q4 of 2009).'s deflator forecast was for 1.6%, just a tad below the recent average. What would GDP have been if the deflator had been at these levels?

    • GDP with the 1.6% deflator as forecast by would have been 0.78%, which rounds to 0.8%
    • GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%

About that "Beat the Street" GDP Number - GDP beat second quarter estimates of 1 percent easily. However, the BEA revised first quarter growth down from 1.7% to 1.1%. Is this a good thing, bad thing, or nonsense.  The correct answer is "nonsense". One look at BEA GDP Release is all it takes to determine the answer.  The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.3 percent in the second quarter, compared with an increase of 1.2 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter compared with 1.4 percent in the first. How convenient, otherwise real GDP would have printed at 0.8%, prices constant.  Yet, the yoy rate of real final sales per capita is below 1% for the second quarter in a row, whereas the second quarter annualized rate is near contracting. Had the deflator been reported at the rate in Q1, the yoy and 2-qtr. annualized real final sales per capita rates would have been reported as contracting. Doug Short at Advisor Perspectives came up with similar conclusions via email. Doug writes

  • Official GDP with the BEA’s GDP deflator (0.71% which is rounded in the popular press to 0.7%) gives us the official GDP of 1.67%,  which rounds to 1.7%
  • GDP with a hypothetical 1.6% deflator (as forecast by would have been 0.78%, which rounds to 0.8%. 
  • GDP with the average deflator over the past 14 quarters (which is 1.75%) would have been 0.64%, which rounds to 0.6%.

GDP, new and revised! - If you’re anything like the nerd I think you are, today’s GDP report, with revisions back to the beginning of time—that’s 1929 in government accounting—is nothing short of fascinating.  Not so much in that it changes the world as we knew it, though there’s a little of that, but just because of all the nuanced differences in how we conceive of and tote up that beast we call the US economy. First, the headline stuff: Today’s GDP report found the US economy expanding by a better-than-expected 1.7% in the second quarter of the year.  That’s still just a moderate growth rate, and more importantly, since the quarterly numbers are jumpy, you get a more reliable read if you look at the year-over-year growth rates.  They show real GDP up only 1.4% over the past year, a pace that’s similar to last quarter’s and a notable deceleration over the growth rates we were posting a year ago (see figure below). Part of this is linked to fiscal headwinds.  The revised data have the real GDP essentially flat at the end of last year, up 0.1% in 2012q4, with the government sector subtracting a big 1.3 percentage points from growth.  And that was before the payroll tax increase and sequester took hold. The absence of price pressures in today’s report supports the view that growth is moderate at best.  The core personal consumer price index from the GDP report, closely watched by the Fed, was up only 0.8% on an annualized quarterly basis and 1.2% over the past year.  There’s been a lot of talk about doves and hawks of late, and sure, inflation expectations are even more important to Fed policy makers than the actual growth rates.  But the data in this report clearly support continued accommodation. Net exports have also been a drag lately, subtracting just under a point from this quarter’s growth rate.  Bottom line, even if you want to go with the more volatile quarterly number (1.7%), we’re still struggling to grow at trend, which is around 2%.

What Is ‘Seinfeld’ Worth? - THE tinkering of federal government accountants is rarely newsmaking stuff. But after a few tweaks to the way the Bureau of Economic Analysis calculates the gross domestic product, those accountants have pulled off something seemingly remarkable: in the blink of an eye this week, they made the size of the American economy grow by $560 billion. Not only is this a big change — that output, 3.6 percent of the total, lifting the economy to $16.6 trillion this year, is like adding a New Jersey to the nation’s economy — but it raises important questions about what we consider economic value and costs, and what we leave out.  The changes involved are pretty simple. Beforehand, if a factory bought a drill press, the government would count that as an investment that would generate income over time, depreciating along the way until its value added fell to zero. But consider the movie companies or TV studios that produce lasting hits like “Star Wars” or “Seinfeld.” They, too, spin off years of revenues. In that sense, their production is much like a capital investment, though there’s been no place in the national accounts to score that investment. Now there is a new category in the quarterly G.D.P. reports called “intellectual property products,” including “entertainment originals.” For example, the production costs of what the B.E.A., a part of the Commerce Department, calls “long-lived TV shows” — ones that provide a steady stream of income, like “Seinfeld” reruns — will for the first time be counted as investment. That’s right — the ultimate show about nothing will now add billions to G.D.P.  Research and development spending that was previously treated as an expense to business, the same as paper clips and electricity, will also now be treated as an investment with the potential to generate future income.

Still An Anemic Recovery: Second Quarter GDP and the Benchmark Revisions to GDP - The Bureau of Economic Analysis announced here that Q2 real GDP increased at a seasonally adjusted annual rate of 1.7%, beating analysts expectations that were somewhere around 1.0%. In addition, Q1 was revised up to 1.1% from 0.4%. Government spending was revised up slightly in Q1, from -4.8% to -4.1%, and the Q2 change revealed stronger spending than many had predicted, still negative however, -0.4%. Personal consumption growth increased 1.8% and was revised up to 2.3% (was 1.8%) in Q1. Every 5 years or so the BEA undergoes large benchmark revisions to incorporate new methodologies and statistical techniques. In this latest round of revisions the BEA incorporated several major changes (for a more detailed account go here). In particular, the revisions

  • Change the base year for real variables to 2009$ from 2005$.
  • Recognize expenditures by business, government, and nonprofit institutions serving households (NPISH) on research and development as fixed investment.
  • Recognize expenditures by business and NPISH on entertainment, literary, and other artistic originals as fixed investment.
  • Expand the ownership transfer costs of residential fixed assets that are recognized as fixed investment and improve the accuracy of the associated asset values and services lives.
  • Measure the transactions of defined benefit pension plans on an accrual accounting basis by recognizing the costs of unfunded liabilities and showing the pension plans as a sub-sector of the financial corporate sector.
  • Harmonize the treatment of wages and salaries by using accrual-based estimates consistently throughout the accounts.

These comprehensive revisions mainly affect the levels of variables. We plot below real GDP (logged) successively adding the changes in the comprehensive revision. The change to the 2009$ base year shifts up the level of real GDP as can be seen in the graph below (black line compared to the red line). Adding intangible investment shifts the line up further, but also has some growth rate effects (red line compared to green line). The blue line represents the current estimate.

Full GDP Revision Broken Down By Component - Think the pick up in Q2 GDP was due to the desired increase in end consumption? Think again. Following the full data revision, Personal Consumption as a component of GDP dropped from 1.54% in Q1 to 1.22% in Q2, offset however by an increase in fixed investment which rose from -0.23% to 0.93%. In fact, aside for Q3 and Q4 of last year, Personal consumption in the just completed quarter was the lowest goin back to Q2 2011 when PCE was 1.03%.  The full component breakdown of GDP is below.

GDP Revisions Make Recovery Look Better, Recession Not as Bad - The U.S. economy expanded at a stronger pace in 2012 than previously measured and the great recession was less severe, new data from the Commerce Department shows.The country’s gross domestic product, the broadest measure of goods and services produced across the economy, expanded at a 2.8% pace last year versus a previous estimate of 2.2%, due to periodic revisions released Wednesday by the agency’s Bureau of Economic Analysis.The figures also show the 2007 to 2009 recession was less severe than previously thought, with the economy shrinking at an average annual 2.9% pace, compared with the previously reported 3.2% contraction. The recession stretched, officially, from December 2007 through June 2009, according to the National Bureau of Economic Research, which determines the widely accepted benchmarks for U.S. business cycles.The current recovery, which followed that recession, was revised to show stronger growth than previously thought, though it is still the weakest recovery since World War II. The economy expanded at an average annual rate of 2.3% between the second quarter of 2009 and the fourth quarter of 2012, compared with a previously published 2.1% pace.The revisions come as part of a comprehensive overhaul of gross domestic product data dating from 1929 through the end of 2012. The government revised the figures to include new measures and data it says better captures the U.S. economy.

How GDP Revisions Change Our View of the Great Recession: The Story in Charts - On July 31, the Bureau of Economic Analysis released revised data for US national income accounts. The revised data give us a new view of the Great Recession that began at the end of 2007. It still merits its name as the most severe economic downturn since the Great Depression of the 1930s, but the contraction now looks a little shallower than previously thought and the recovery a little more robust. The following chart compares the old and revised real GDP data over the past six years. The old and new data series are not directly comparable. Not only was the old series stated in 2005 dollars and the new in 2009 dollars, but there are numerous statistical and methodological differences as well, as discussed below. For easier comparison, then, the chart displays both the old and new data in the form of an index with the peak of the previous cycle, Q4 2007, equal to 100. Several features stand out in the chart. First, the contraction from peak to trough was not quite as deep as reported earlier. Instead of falling by 4.7 percent, real output fell by 4.3 percent. Beginning from the trough, which came in Q2 2009 in both series, the expansion is somewhat stronger according to the new data, especially in 2011. From Q1 2011 to Q1 2012, the economy is now seen to have grown by 3.3 percent rather than the previously reported 2.5 percent. By Q1 2013, real GDP was 3.9 percent above the previous peak, rather than just 3 percent, as reported earlier. Another interesting feature of the chart is a dip of 0.4 percent in real GDP in the first quarter of 2011. At the time, growth for that quarter was reported as a positive 0.1 percent. Perhaps we should be grateful to have been spared the alarm bells that would have rung forth if the dip had been reported when it happened. As it was, the one-quarter downturn did not turn into a double-dip recession, as it would have been labeled, at least informally, if it had continued for two quarters.

Highlights From GDP’s 83 Years of Revisions - Comprehensive revisions to the country’s economic growth measures were released Wednesday by the Commerce Department’s Bureau of Economic Analysis, an exercise the agency undertakes every five years. The new data doesn’t “rewrite economic history,” as the agency’s senior officials point out, but it does shed new light on several interesting components of U.S. economic growth — and contractions — over the past 83 years. This year, BEA is also including changes to definitions and classifications of some measures that update the data to better reflect the evolving economy. Among the highlights:

  • Dating back to 1929, the U.S. economy grew at a 3.3% annual pace, which is one-tenth of a percentage point higher than previously published estimates. From 2002 to 2012, the growth rate was 1.8%, up from a previously reported 1.6% pace.
  • Intellectual property, which includes research and development, entertainment and the arts, and software, grew by 13% in 1997 from the prior year, as the Internet bubble began. But by 2001 growth had slowed and only rose 0.5% from a year earlier. By 2012, the categories’ contributions to overall growth were negligible.
  • The BEA also tweaked how it calculates pension contributions. The agency will now consider compensation to reflect the value of the pension promises made by the employer, rather than the employer’s cash contributions to the pension fund.
  • In 2012, the economy expanded at a 2.8% pace versus a previous estimate of 2.2%. But that performance was wildly uneven over the course of the year, with a strong 3.7% annualized pace in the first quarter after a big upward revision, followed by two middling quarters and finally an abysmal 0.1% growth rate in the final quarter of the year. In current dollar figures the revisions added nearly $560 billion to the overall figure 2012 GDP figure of $16.2 trillion.
  • The great recession was less severe than previously thought, with the economy shrinking at an average annual pace of 2.9%, revised from a 3.2% contraction.

Those US GDP revisions… This is what $560bn or so of newly-discovered US economic output looks like. Yes it’s the latest BEA estimates/revisions of US GDP. They’re out – and with 1.7 per cent growth in 2013′s second quarter, and 2012 growth revised up to 2.8 per cent from 2.2 per cent at the last estimate, they’re fairly good. Meanwhile Core PCE is up 0.8 per cent quarter on quarter — likely more interesting to taper-watchers — though the nature of the long-term revisions to GDP is interesting. Well, we suggest looking at the BEA’s annual benchmark revisions to the size of the US economy… though the comprehensive revisions (out every 5 years) will get lots of attention. So, from the BEA: Real GDP growth. For 1929–2012, the average annual growth rate of real GDP was 3.3 percent, 0.1 percentage point higher than in the previously published estimates. For the more recent period, 2002–2012, the average annual growth rate was 1.8 percent, 0.2 percentage point higher than in the previously published estimates. For the most recent years, 2009–2012, the average annual growth rate of real GDP was 2.4 percent, 0.3 percentage point higher than in the previously published estimates. For the 3 most recent years, the annual growth rate:

    • * was revised up from 2.4 percent to 2.5 percent for 2010,
    • * was unrevised at 1.8 percent for 2011, and
    • * was revised up from 2.2 percent to 2.8 percent for 2012.

Don’t let the new numbers distract you: GDP Shows The Economy is Growing too Slowly to Improve Employment -  Many will focus on the methodological changes that the Bureau of Economic Analysis introduced this quarter in calculating its estimates of GDP—but in interpreting today’s data we shouldn’t miss the forest for the trees. The most important thing today’s data tells us is that the U.S. economy continues to grow far too slowly (1.7 percent in the second quarter of 2013) to reliably improve job prospects, it remains far from healed from the Great Recession, and the root problem remains deficient demand—a problem exacerbated by austerity.

A Not-So-Great Great Recession - The Great Recession was not as bad as we thought, and the recovery since then has been a little better than we thought. That’s one of the implications of the Commerce Department’s extensive gross domestic product revisions released on Wednesday. The department released revisions going all the way back to 1929. The revisions partly reflect changes in methodology for how gross domestic product and its components are calculated, methodological changes that include adding new categories of spending that weren’t previously included as being part of gross domestic product. The revisions also partly reflect better information the government now has about the categories they were already keeping track of. Among the methodological changes, there’s now a new category of private fixed investment, called “intellectual property products,” that covers research and development; entertainment, literary, and artistic originals; and software. The addition of this new category of investment helped increase the overall size of economic output. Business R.&D. expenditures, for instance, were previously classified as “intermediate inputs.”As an example of the better information piece of the revisions, the Commerce Department says that new source data going back to 1966 help it make better estimates of employers’ contributions to state and local government-sponsored defined contribution pension plans.As a result of all these changes, on net, economic growth since 1929 has actually been a wee bit stronger than previously calculated: the average annual rate of inflation-adjusted growth was 3.3 percent, which is 0.1 percentage point higher than in the previously published estimates.

Uncle Sam Is Smaller (Relatively) Than We Thought - At 8:30 this morning, Uncle Sam suddenly shrunk. Federal spending fell from 21.5 percent of gross domestic product to 20.8 percent, while taxes declined from 17.5 percent to 16.9 percent.To be clear, the government is spending and collecting just as much as it did yesterday. But we now know that the U.S. economy is bigger than we thought. GDP totaled $16.2 trillion in 2012, for example, about $560 billion larger than the Bureau of Economic Analysis previously estimated. That 3.6 percent boost reflects the Bureau’s new accounting system, which now treats research and development and artistic creation as investments rather than immediate expenses. In the days and months ahead, analysts will sort through these and other revisions (which stretch back to 1929) to see how they change our understanding of America’s economic history. But one effect is already clear: the federal budget is smaller, relative to the economy, than previously thought. The public debt, for example, was on track to hit 75 percent of GDP at year’s end; that figure is now 72.5 percent. Taxes had averaged about 18 percent of GDP over the past four decades; now that figure is about 17.5 percent. Average spending similarly got marked down from 21 percent of GDP to about 20.5 percent.

Econbrowser recession indicator index up to 30.5% - The BEA released today its comprehensive national account revisions, according to which real GDP grew at a 1.7% annual rate in 2013:Q2. Although this was above the 1.1% rate that many analysts were expecting, the new estimates also revise down the growth rates that were previously reported for 2012:Q4 and 2013:Q1, with the growth rate over these quarters now estimated to have been 0.1% and 1.1%, respectively, down from the 0.4% and 1.8% figures that had been reported last month. The bare growth of the economy over 2012:Q4-2013:Q1 is the main reason that our Econbrowser Recession Indicator Index jumped up to 30.5%, a significant increase from the 9.2% figure that we released last quarter. This is one objective signal that the recent GDP numbers are even weaker than we've become accustomed to seeing since the economy began its disappointing recovery from the Great Recession in 2009:Q3. Note, however, that this does not mean the economy has entered recession territory. Our index would have to rise above 67% before we would issue such a declaration. Note also that in calculating the current value for the index we allow one quarter for data revision and trend recognition. Thus the latest value, although it uses today's released GDP numbers, is actually an assessment of the state of the economy as of the end of 2013:Q1. However, our index is never revised, so that the numbers plotted in the graph below since 2005 are exactly the values as they were reported one quarter after each indicated historical date on Econbrowser.

GDP shows Washington's fiscal FAIL - While most commentary yesterday was about how 2nd quarter GDP beat expectations, the trend over the last three quarters is very concerning. The business cycle algorythm James Hamilton uses at Econbrowser was updated to register a 30% chance of recession after Q1. That isn't enough for him to believe a recession has begun, but since we are four months past that, it isn't exactly reassuring. Here's the updated graph of GDP for the last 10 years: This is an economy just barely shambling along, similar to what we saw at the end of 2006 and beginning of 2007.  What is particularly disheartening is the contractionary role government is playing in this. Here's the input of the private sector and government sector for the last 3 quarters:  If government's contribution were simply zero as opposed to outright contraction for the last three quarters, GDP would have grown over that period at an annual rate of +1.6% - hardly great but at least palpably positive - vs. the actual +1.0% annualized that we've had. There is going to be another debt ceiling debate this autumn. That's on top of the payroll tax increase that went into effect on January 1, and the ongoing Sequestration. Most likely there will be some sort of compromise with even more cuts in spending. I'm really not sure at all that the economy can handle even more cuts without actually tipping into a contraction.

U.S. Economy Looking More Japanese - In the 1970s, many Americans feared Japan would set the tone for growth in the 21st century economy. One research group says that may be the case — but not in the way feared decades ago. The Economic Cycle Research Institute, a private research firm that has been bearish on the U.S. economy, says the U.S.’s performance in this recovery is looking ominously similar to that of Japan’s “lost decades,” the period from 2Q 1992 until 1Q 2013, when Japan suffered through little economic growth and steep deflation. The business cycle group looked at average yearly GDP growth for major developed nations as well as China for the periods of 1Q 1980 to 1Q 2001 (green bars on chart), 1Q 2001 to 1Q 2013 (yellow) and the last five years 1Q 2008 to 1Q 2013 (blue). For Japan, ECRI divided the periods to 2Q 1992, the lost decades (red), and the last five years. The research showed that over the last five years, the U.S. grew just 0.7%, a notch below the 0.8% pace recorded during Japan’s lost decades.

Consumer Spending and Economic Growth - Economists have been investigating the determinants of economic growth for decades, and conclude that investment is crucial for an economy to grow. High rates of investment in the present make possible future consumer spending. The debate continues as to the type of investment that is most important, and whether specific types of investment might be counterproductive (think of Stalin’s five-year plans). A number of economists have emphasized physical investment: that is, the accumulation of structures, business plant and equipment and other tangible assets. J. Bradford De Long and Lawrence H. Summers found that “machinery and equipment investment has a strong association with growth,” adding that it was “much stronger than found between growth and any of the other components of investment.” Other economists, including Theodore Schultz and Gary Becker, have emphasized the accumulation of human capital through schooling and other kinds of training and learning. Arguably even machinery and equipment investment is not possible or effective unless the work force is skilled enough to install and use the new equipment.A third school of thought points to investment in ideas and new technologies that outlast their inventors (the economist Paul Romer has made some major contributions here). This approach tends to be pro-population and pro-city, because ideas and technologies have economies of scale. Economists are also unsure about the public policies that might promote investment. But we do largely agree that investment, rather than consumer spending, is the means to achieving the high growth. High growth can sustain consumer spending in the future.

The Big Four Economic Indicators: Nonfarm Employment and Personal Income - I've now updated this commentary to include the Nonfarm Employment data for July and the BEA's release of June Personal Income less Transfer Payments. As the adjacent thumbnails illustrate, Nonfarm Employment continued its slow rise, up 0.12% month-over-month, but the Real Personal Income less Transfer Payments slipped fractionally, down 0.06% month-over-month. For more on today's employment report for July, see my update here. See also my analysis of Real Per-Capita Disposable Personal Incomes, updated with the latest numbers.The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data points are for the 49th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.

This graph calls the entire economic recovery into question:  From the Center on Budget and Policy Priorities: The core issue here is that the unemployment rate only counts people actively looking for work. That means there are two ways to leave the ranks of the unemployed. One way — the good way — is to get a job. The other way is to stop looking for work, either because you’ve retired, or become discouraged, or begun working off the books. The yellow line on the left shows the official unemployment rate since 2008. It’s fallen from over 10 percent to under 8 percent. But the red line on the right shows the actual employment rate — that is, the percentage of working-age adults with jobs. What should scare you is that the red line has barely budged. At the beginning of 2007, the employment rate was 63.3 percent, and the unemployment rate was 4.7 percent. By the end of 2009 — so, after the worst of the recession — it had fallen to 58.3 percent, and unemployment was up to 9.9 percent. Today, it’s 58.7 percent, even though unemployment has fallen to 7.6 percent. That means a lot of the people who’ve left the rolls of the unemployed haven’t gotten a new job. They’ve just left the labor force altogether.

Third time unlucky: Recession in 2014? - The current postcrisis economic recovery, though punctuated so far by two “swoons,” growth scares in early 2011 and late 2012, has passed its 48th month. These past swoons notwithstanding, virtually no one is thinking of deflation or recession, even though second-quarter 2013 growth looks to be below 1 percent, perilously close to stall speed. The past two postswoon recoveries have not gotten the economy entirely back on track, but markets and, more notably, the Federal Reserve are betting on the third time being lucky. Instead of resting on this wishful thinking, Congress and the Fed need to start exploring measures that will prolong the expansion. Key points in this Outlook:

  • Economic indicators and long-term business cycle patterns suggest that the United States may be in another recession by early 2014.
  • Two post–financial crisis economic swoons have been curbed with easy money and fiscal stimulus, but flat retail sales, slowing employment growth, and a faltering housing sector may prevent these strategies from working again. 
  • To prolong the expansion, Congress and the Fed should enact near-term fiscal stimulus, lower tax rates and broaden the tax base, deregulate the financial sector, and focus on maintaining low and stable inflation.

Study: US has $70.1 trillion in off-balance sheet debt - A new study assesses the U.S. government’s off-balance-sheet liabilities at six times the size of the official debt, or $70.1 trillion.The working paper, released Monday morning by the National Bureau of Economic Research, finds that the government is on the hook for about $50 trillion in obligations to future retirees through Social Security and Medicare that do not show up in the official debt figures. The feds also have $7.5 trillion in housing commitments through Fannie Mae, Freddie Mac, the Federal Housing Administration and other government housing programs.Bank deposits insured by the Federal Deposit Insurance Corporation total another $7.6 trillion. And the government also has $325 billion in liabilities through its student loan programs. Add another $1.8 trillion in obligations to other government trust funds, and total off-balance-sheet debt is $70.1 trillion. The study’s author, James D. Hamilton, is an influential macroeconomist at the University of California, San Diego. Hamilton is also a popular economics blogger, who has written about his study. Hamilton writes that he is not predicting a crisis based on the $70.1 trillion figure, and that it “may or may not translate into significant on-balance-sheet problems.”

U.S. federal gov't to borrow 444 bln USD in second half - The U.S. Treasury Department on Monday announced that the federal government expected to borrow 444 billion U.S. dollars from the market to fund its operation in the second half of this year. The department said in a statement that it expected to issue 209 billion dollars in net marketable debt from July to September, assuming a cash balance of 95 billion dolars by the end of the quarter. In the fourth quarter, the department would issue 235 billion dollars in net marketable debt, expecting a cash balance of 80 billion dollars by the end of December. In the April-June quarter, the Treasury Department paid down 11 billion dollars in net marketable debt, ending with 135 billion dollars of cash balance. In order to finance government operations, the Treasury Department chose to issue net marketable debt, including bills, notes and bonds, and such issuances have increased dramatically over the past years due to the financial crisis and economic recession. The U.S. budget deficit topped around 1.1 trillion dollars in the 2012 fiscal year ending in September, the fourth consecutive fiscal year that surpassed 1 trillion dollars despite that it was about 207 billion dollars less than the previous fiscal year.

Treasury bill supply hits new lows - Since the beginning of the year the US treasury curve has steepened substantially, with yields on the short-end actually declining.There are two key reasons for treasury bill rates staying at such suppressed levels.
1. In a rising rate environment, durations are cut and demand for treasury bills increases. Investors want to stay liquid without taking rate risk, and there isn't much else out there that can provide both.
2. There are simply fewer treasury bills out there. The supply of bills relative to the overall pool of treasury securities is at record lows. The US Treasury has focused on issuing more longer-term paper to lock in the ridiculously low rates that the Fed and others have been willing to take.

They're Back! Congress threatens to Default Again - Treasury Secretary Jack Lew was on Meet the Press today (recorded Friday). Lew said:  "The fight over the debt limit in 2011 hurt the economy, even though, in the end, we saw an extension of the debt limit. We saw confidence fall, and it hurt the economy. Congress needs to do its job. It needs to finish its work on appropriation bills. It needs to pass a debt limit." Here is a graph of consumer sentiment.  Notice the huge spike down in 2011 - that was due when Congress threatened to "not pay the bills".   As Jack Lew notes, there is no reason to do this again.   I wrote several posts about the "debt ceiling" debate in 2011.  The debate clearly scared many Americans and impacted the economy.  Hopefully this time the "debt ceiling" will be raised well in advance of the deadline.  From the WaPo: GOP dissension over debt-ceiling strategy House Speaker John A. Boehner (R-Ohio) likewise insisted that Republicans hold the line, telling his members they must demand that every dollar they raise the debt limit be paired with commensurate spending cuts. But other Republicans counseled caution, warning that pressure from the business community and the public to raise the $16.4 trillion federal borrowing limit renders untenable any threats not to do so and will weaken the GOP’s hand if their stance is perceived to be a bluff.

That Is Cool - Paul Krugman - Greg Sargent finds Marco Rubio trying to redefine the nature of budget blackmail, declaring that it’s not about Republicans threatening to shut down the government unless Obama defunds heath reform; it’s about Obama threatening to shut down the government unless he gets to implement the law. No, really. Rubio: I think the real question is: Is Barack Obama willing to shut down the government over ObamaCare? In essence, I think we should pay our military. I think we should fund the government. I just don’t think we should fund ObamaCare. And what the President is saying is we either fund ObamaCare or we don’t fund anything. And I think that’s an unreasonable position. And that’s the position he’s taken and the Democrats have taken.

The Cost of Austerity: 3 Million Jobs - Here is the Congressional Budget Office's latest estimate of the economic benefit of eliminating sequestration: Those changes would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014 (the end of fiscal year 2014) relative to the levels projected under current law. Spending cuts and tax increases since 2011 have cut the deficit by about $3.9 trillion over the next ten years. The sequester accounts for $1.2 trillion of that, about a third of the total. So a rough horseback guess suggests that the total effect of our austerity binge has been a GDP reduction of 2 percent and an employment reduction of nearly 3 million. If the economy were running at full capacity, deficit slashing wouldn't have this effect. It would be perfectly appropriate policy. Unfortunately, Republicans don't believe in cutting spending during good times and increasing it during bad times. They believe in cutting it during Democratic presidencies and increasing it during Republican presidencies. That might not be so great for people who wish they had jobs right now, but then, that's never been the party's goal in the first place.

Bipartisan Deal to Reduce Deficit on Backs of Student Borrowers -- The student loan bill about to be signed by the President is touted as “reducing” interest rates for students.  This is nonsense. The “reduction” is only from the jacked-up rates that went into effect a few weeks ago on July 1 because of a prior legislative gimmick.  The basic undergrad student loan rate of 3.4% was scheduled to go up to 6.8% on July 1 mostly so that the federal deficit over multiple years would appear smaller in out years.  Most observers assumed that the rate hike would not happen, but deficit hawks used this gimmick as another pressure point to advance their agenda.  If you compare interest rates before July 1 with rates being charged under the new law, students are paying more interest, not less.  The CBO scores the bill as reducing the federal deficit by about $700 million.  Instead of a fixed 3.4%, students will pay 3.9% this year, and the 10-year Treasury bill rate plus 2.05% in future years.  Graduate students will pay much more (and are lower credit risks.)More problematically, the “rate reduction” bill continues a practice, never fully debated, of using student loan interest as a profit center for the federal Treasury. The student loan Treasury profit is a consequence of the Clinton Administration’s Direct Loan program.   Under that program, instead of subsidizing banks to fund student loans, the Treasury lends money directly to students (albeit through private servicing contractors).  In the 1990s, banks and their Congressional mouthpieces vigorously disputed the proposition that direct Treasury lending would be cheaper than the old system of subsidizing the banks to fund student loans.  Not only were they wrong, but they were so wrong that the same interest rates that had to be subsidized when offered by banks produced a net profit to the Treasury under the Direct Loan program.   In recent years, it has been convenient for Congress to ignore the fact that Direct Loan student borrowers pay much higher interest rates than are necessary to cover the costs of the program.

Pentagon Refuses to Release Names of Enemies it’s Fighting - The Pentagon is refusing to release the names of the enemies the U.S. is currently fighting on the grounds that the information is classified. A Pentagon spokesman told the journalism website ProPublica that revealing the list could cause “serious damage to national security” by allowing listed organizations to use their inclusion to inflate their importance, “build credibility … [and] strengthen their ranks.”

The Costly Failure of Missile Defense - Never mind that no one is firing ICBMs at us. It’s been three decades since Ronald Reagan cooked up his cockamamie plan to shoot down missiles in the sky, and while technology has improved incalculably since then, after countless billions of dollars—according to The  New York Times, it’s $250 billion—the damn things still don’t work.  Last week, following yet another failure, and as if it just occurred to him, the director of the Pentagon’s Missile Defense Agency—yes, it has a whole “agency”—said that he’d look into itFollowing recent testing failures, the director of the Missile Defense Agency told Congress today that he is committed to a full evaluation of the way forward for the nation’s ballistic missile defense system. Of course, he added, the evaluation will cost money, too.  In a devastating commentary by a Reuters analyst, we learn that the test itself was “rigged” and scripted, that there were no countermeasures (as in real-life war), and that the test itself cost $214 million:

GOP Transportation Bill Fail - House Republicans' latest fiasco confirms the suspicion: The GOP loves the Paul Ryan budget in theory, but even Republicans can't get it to work in practice.That was the result of a seemingly nonchalant debate over a bill to fund the Departments of Transportation, and Housing and Urban Development, which blew up in House Republicans' faces on Wednesday. The THUD bill was, well, a thud, and it was pulled from the House floor amid the realization that it did not have close to the 218 votes of GOP support it needed. Republicans couldn't garner the votes while abiding by their standards — billions in cuts on top of the levels of spending under sequestration.  House Majority Leader Eric Cantor said that the House will return to appropriating the bill after Congress' August recess. But a furious House Appropriations Committee Chairman Hal Rogers said that was "bleak at best," and other GOP sources said there's little chance of that, as well.

House Votes to Bar I.R.S. Action on Health Law — In its last action before a five-week summer recess, the House took another jab at President Obama’s health care law on Friday, voting to prohibit the Internal Revenue Service from enforcing or carrying out any provision of the law.  The bill, approved by a vote of 232 to 185, now goes to the Senate, where it has virtually no chance of approval. President Obama said he would veto the measure if it got to him.  The House has now voted more than three dozen times to repeal or roll back some or all of the 2010 law, which is expected to provide coverage to 25 million people who lack health insurance. Under the law, the I.R.S. will play a key role. It will provide tax credits to low- and moderate-income people to help them buy private insurance. It can impose penalties on people who go without insurance and on larger employers that fail to offer coverage to full-time employees. Republicans said the tax agency could not be trusted.  “The I.R.S. has been abusing its power by targeting and punishing American citizens for their political beliefs,” said Representative Eric Cantor of Virginia, the majority leader. “This kind of government abuse must stop. The last thing we should do is to allow the I.R.S. to play such a central role in our health care.”

Obama Offers to Cut Corporate Tax Rate as Part of Jobs Deal - President Obama came to a cavernous Amazon distribution center here Tuesday and backed a cut in corporate tax rates in return for a pledge from Republicans to invest in more programs to generate middle-class jobs. The proposal, an effort to break a stalemate with Republicans over budget policy, comes as Mr. Obama and his Congressional opposition are headed toward a showdown in the fall over taxes and spending. With a sea of cardboard boxes serving as a backdrop, Mr. Obama described a “grand bargain” for the middle class that he said would stimulate the economy while giving businesses the lower tax rates they have long sought. “If folks in Washington really want a ‘grand bargain,’ how about a grand bargain for middle-class jobs?” Mr. Obama told a crowd of 2,000. “If we’re going to give businesses a better deal,” he added, “we’re going to give workers a better deal, too.” It was the president’s first concrete proposal in an economic offensive that he inaugurated last week in Illinois to set his terms for coming budget battles with the Republican-controlled House. But only the packaging was new. The president essentially cobbled together two existing initiatives that have been stalled in Congress: corporate tax changes and his plan to create jobs through education, training, and public works projects.

Tax Repatriation to Pay for One Time Investment in Infrastructure - In the simplest terms possible, it appears that President Obama’s new proposed “grand bargain for middle-class workers” is to use a corporate tax repatriation to pay for a one time boost in infrastructure spending. As best as I can glean from the limited details in his speech and fact sheet, this is the true heart of the proposed bargain. The politics of this possible deal all depends on the Republicans accepting there is a very important technical difference between a tax increase and a revenue increase. Republicans simply won’t accept tax increases but might accept using a revenue increase to pay for spending. Currently, for tax reasons many large corporations have their money sitting in offshore accounts. We don’t collect taxes on the money just sitting in those accounts. The assumption is that if we lower taxes on these foreign earnings, the corporations will bring some of back to the United States within the CBO’s 10 year budget window and at least pay some taxes on it. This can be labeled a “tax cut” because the tax rate would go from one level to a lower level. The CBO would also technically count this as new revenue. Potentially, this would be a pot of money to pay for a “deficit neutral” bill. Obama wants to use some of this money to cut corporate taxes even more to bring Republicans on board and the rest to spend on infrastructure spending to boost the economy. Obama is hoping Republicans could support this deal because, on net, it could be claimed to reduce taxes and reduce the deficit.

This weird little policy is the key to Obama’s grand bargain on jobs: At the core of Obama’s “grand bargain for middle-class jobs” is a one-time fee on foreign earnings. This policy actually gets to one of the most interesting and difficult problems in tax reform: What do you do with the $1.5-2 trillion in foreign earnings that’s sitting overseas because corporations don’t want to pay American tax rates? < The business community’s favored solution is a “repatriation holiday.” That’s when Congress temporarily cuts taxes for corporations bringing money back from overseas. We did this in 2004, and corporations have spent millions and millions of dollars lobbying Congress and the White House to do it again. But so far, they’ve failed — in part because the evidence shows repatriation doesn’t do much for jobs, even as it costs billions. Both the White House and House Republicans have settled on a different solution: A small, one-time fee on all deferred foreign earnings. This isn’t a tax cut for money corporations bring back. It’s a levy on all the money they have sitting overseas, and they pay it whether they bring it back or not. After paying the fee, that money is free and clear so far as the taxman is concerned — corporations can bring it back, leave it overseas, or set it on fire. The difference between the White House and the House Republicans is how they spend the money.

Obama and GOP Speak Same Language: Corporate Tax Cuts = Jobs - President Obama went to a low wage warehouse in Chattanooga in the right-to-work state of Tennessee to renew his offer to massively lower corporate tax rates – from 35 to 28 percent – and had the nerve to call it a Grand Bargain for the middle class. Surrounding the president were employees who do backbreaking work for $11 or $12 an hour – and can by no stretch of imagination be considered middle class. Obama praised their cutthroat Amazon corporation bosses as the sort of benign masters that he’s depending on to bring the country back to economic health – once they’ve been properly incentivized with lower tax rates, on the one hand, and outright public subsidies, on the other. Amazon is only invested in Tennessee because the state has given the corporation huge tax breaks that will allow it to undercut other book sellers, forcing them out of business and their workers into unemployment. Amazon’s 7,000 new, low wage jobs come at the cost of lay-offs and bankruptcies among its competitors. It’s the Wal-Mart business model, which is quite popular at the White House.

Obama’s New Corporate Tax Offer is Another Dead End - In a speech today in Chattanooga TN, President Obama made congressional Republicans an offer they could refuse. And they did.  By doing so, Obama may have quashed the last shred of hope that tax reform can happen before the 2014 congressional elections. In what the White House pitched as a new idea, Obama offered to decouple corporate tax restructuring from individual reform. This is odd since the president proposed stand-alone corporate reform as far back as 2012.    His latest iteration doesn’t seem much different. Like his earlier plan, it would cut the top corporate rate to 28 percent from 35 percent and eliminate billions of dollars in (largely unidentified) corporate deductions and other tax preferences.  But last year he called for revenue neutral reform (that is, a plan that would raise the same amount of money as the current corporate tax code). This time, he is pushing reform that would generate billions of dollars in new revenue, though it is not exactly clear how. 

With Grand Bargain 2.0 coming, Grand Bargain 1.0 talks still going - President Obama is going to try to flip the idea of his Grand Bargain with a new trade of taxes for jobs. But that doesn't mean Grand Bargain 1.0, entitlement cuts for taxes, isn't still proceeding on a separate track. It is. The bullshit caucus, the Republican senators who went around leader Mitch McConnell to broker a filibuster deal with Harry Reid, are still being wooed by senior administration staff, including Chief of Staff Denis McDonough, and it still puts Medicare and Social Security on the chopping block. The talks are aimed at averting a partial government shutdown this fall that would result if the two parties can't agree on federal spending levels for the next fiscal year, as now seems likely, or strike a deal to raise the debt ceiling. Treasury SecretaryJacob Lew, appearing in a series of Sunday television interviews, predicted the U.S. would likely hit its statutory borrowing limit, now $16.7 trillion, sometime after Labor Day. If lawmakers fail to lift the cap, the U.S. will be unable to borrow money to pay all its bills. [...] Republicans, for their part, in the talks have suggested changes to Medicare, including switching to a slower-growing gauge of inflation that would reduce benefits, and "means-testing" the program by charging well-to-do senior citizens higher premiums. In the past, Mr. Obama has said he could consider both ideas as part of a larger deal. Republicans also proposed raising the eligibility age for Medicare, a concept the White House dislikes.

Senate Republicans Eye ‘Grand Bargain’ on Budget - A group of Republican senators who have been meeting privately with top White House officials have concluded that they want to try again to reach a sweeping budget deal that would cut deficits and make changes to Medicare, according to participants in the meetings. The Senate contingent met for more than two hours at the White House on Thursday and got an unexpected visitor. President Barack Obama joined the meeting in White House Chief of Staff Denis McDonough’s office and stayed for about an hour. The senators had been uncertain about whether to seek a more modest deal that would simply replace the across-the-board spending cuts known as the sequester, or to pursue a more ambitious “grand bargain” aimed at shoring up the major entitlement programs, among other goals. Previous attempts to strike a grand bargain have faltered over familiar partisan disagreements over spending and taxes. But the senators seem determined to try again. Sen. Bob Corker (R., Tenn.) who is part of the group of eight GOP senators taking part in the talks, said in an interview after the session at the White House: “I think we’re looking at something larger than [replacing] the sequester.” Another person familiar with the meeting said: “The sentiment in the room is that it has to be a bigger deal in order for both sides to buy into it and to prove to the markets that there is a long-term fiscal sustainability plan here.”

The Challenge of Tax Reform: A Price without a Product = I see the peeps over at Wonkbook were struck by the same quote I was this AM from an NYT piece on tax reform.  “Get rid of the deductions that don’t affect me.” That’s what Debbie Schaeffer, the owner of Mrs. G TV and Appliances, told Max Baucus and Dave Camp, the chairmen of the Senate and House committees charged with tax reform, when they asked for her advice. The Wonkbookers quite reasonably think the problem is that actual tax reform–the type that involves changes to real people’s tax liabilities—is less inviting than the awesome ideas that politicians like Rep. Camp and Sen. Baucus kvell about.To see why, Compare two sentences:  By the end of this year, we’re going to pass revenue neutral tax reform that gets rids of wasteful loopholes and deductions and lowers your rates!  And the translated version: By the end of this year, we’re going to pass a tax-reform plan that doesn’t save Americans any money but cuts things like the state and local tax deduction and the home-mortgage interest deduction and the depreciation rules for businesses in order to lower some of your rates! I think that’s right but I also believe there’s a significantly deeper problem here.  Selling tax reform is selling a price without a product.  Let me explain.

The Question of Taxing Employer-Provided Health Insurance - The Senate Finance Committee recently committed itself to a zero-based approach to tax reform. All tax expenditures – special provisions that reduce taxes – will be deemed expendable unless senators speak up in support of them. I am dubious about the value of this approach but nevertheless think it is useful to re-examine the origins and operation of major tax expenditures, many of which were adopted on the fly, with little thought to their long-run implications. Today I want to begin a series of posts on major tax expenditures, starting with the largest one. The exclusion for employer-provided health insurance is far and away the largest tax expenditure. In part this is because it, like all such exclusions, reduces payroll taxes as well as income taxes; it is as if the worker never received the income it represents, although employers may deduct the cost of health insurance as a business expense. In contrast to exclusions, individuals’ tax deductions, exemptions and credits reduce only income taxes. According to the Congressional Budget Office, the health insurance exclusion will reduce federal revenue by $248 billion this year, including lost income and payroll taxes. That is equal to 1.5 percent of the gross domestic product – more than the federal government spends for interest on the public debt.

The Congressman Formerly Known as Crazy -  At 11:30 a.m., the House Science Committee started marking up NASA’s funding bill, adding and subtracting whatever they could. At 5 p.m., the committee was still at it. When the members finished a half hour later, the only headline they’d generate would be about the killing of a program to “send a robotic mission to a small asteroid by 2016.”  Grayson, once again, had walked under the radar. The Democratic congressman from Orlando had convinced the Republican-run committee to adopt five of his amendments. One would bar “the federal government from awarding contracts to corporations convicted of fraud,” and another would force NASA to “consider American public-private partnership human space flight” before it partnered with foreign space programs. Each was getting him closer to an unheralded title: The congressman who’s passed more amendments than any of his 434 peers. “We’ve passed 31 amendments in committee so far,” says Grayson. “Hardly any Democrats who put in amendments put in any effort to get to 218. They just think they’ve accomplished something when it’s ruled in order, and that’s the end of the story.”

US Agency Says JPMorgan Manipulated Power Prices — U.S. energy regulators are accusing JPMorgan Chase of manipulating electricity prices in California in 2010 and 2011.The Federal Energy Regulatory Commission said Monday in an enforcement notice that the biggest U.S. bank used improper bidding strategies to squeeze excessive payments from the agency that runs California’s power grid. JPMorgan has reportedly been in negotiations with the regulator to reach a settlement over the allegations. The agency recently levied a $453 million fine on Barclays, Britain’s second-largest bank, for manipulating electricity prices in California and other western states. Barclays is disputing the allegations.

U.S. Accuses JPMorgan of Manipulating Energy Markets - The nation’s top energy regulator on Monday formally accused JPMorgan Chase of manipulating energy markets, foreshadowing a multimillion-dollar settlement that is expected as early as this week, according to people briefed on the matter. The action by the Federal Energy Regulatory Commission is largely a formality ahead of the settlement — a deal that is expected to help JPMorgan avert a clash over accusations that the bank orchestrated trading strategies to turn inefficient power plants into profit centers, the people said. From the outset, JPMorgan, which declined to comment on Monday, has denied any wrongdoing. The bank has also mounted a fierce defense of the top executives who supervised the traders in Houston accused of devising the trading strategies. The accusations against JPMorgan stem from its rights to sell electricity from power plants. The rights come from assets that the bank acquired in the 2008 takeover of Bear Stearns. To transform the power plants into profit generators, the agency contends, JPMorgan’s traders adopted eight different “schemes” from September 2010 to June 2011. Under the plan, the traders offered the electricity at prices that appeared falsely attractive to state energy authorities. The effort prompted authorities in California and Michigan to make excessive payments that helped drive up energy prices, the regulator said.

JPMorgan: $7 Billion In "Fines" In Just The Past Two Years - There was a time when Jamie Dimon liked everyone to believe that his JPMorgan had a "fortress balance sheet", that he was disgusted when the US government "forced" a bailout on it, and that no matter what the market threw its way it would be just fine, thanks. Then the London Whale came, saw, and promptly blew up the "fortress" lie. But while JPM's precarious balance sheet was no surprise to anyone (holding over $50 trillion in gross notional derivatives will make fragile fools of the best of us), what has become a bigger problem for Dimon is that slowly but surely JPM has not only become a bigger litigation magnet than Bank of America, but questions are now emerging if all of the firm's recent success wasn't merely due to crime. Crime of the kind that "nobody accept or denies guilt" of course - i.e., completely victimless. Except for all the fines and settlements.Here is a summary of JPM's recent exorbitant and seemingly endless fines. Courtesy of the Daily Beast:

Senators Ask Why JPMorgan Execs Won’t Be Punished For Involvement In FERC Investigation (Reuters) - Two Democratic Senators on Wednesday asked U.S. energy regulators for more details on how terms of a settlement were reached on alleged power market manipulation in California and the Midwest by a unit of JPMorgan Chase & Co.  In a letter to the head of the Federal Energy Regulatory Commission (FERC), Elizabeth Warren and Edward Markey, both of Massachusetts, questioned whether the settlement announced on Tuesday included "adequate refunds to defrauded ratepayers." They also asked FERC why certain JPMorgan executives "who sought to impede the commission's investigation" will not be punished.

Banks Replacing Enron in Energy Incite Congress as Abuses Abound - The U.S. government permitted Wall Street firms to expand in the energy industry a decade ago, when the collapse of Enron Corp. and its army of traders left a void in the market. The results aren’t pretty.  JPMorgan Chase & Co. (JPM) settled Federal Energy Regulatory Commission claims this week that employees engaged in 12 bidding schemes to wrest tens of millions of dollars from power-grid operators. A Barclays trader stands accused of bragging he “totally fukked” with a Southwest energy market. Deutsche Bank AG workers, faced with losses on a contract, allegedly altered electricity flows to make it profitable instead. The FERC’s investigations are fueling a debate among lawmakers and the Federal Reserve over whether to reverse more than a decade of policy decisions that let Wall Street banks keep or build units handling commodities and energy. Senators examining the firms’ roles have said they may call bankers and watchdogs to a September hearing amid concern traders are abusing their ability to buy and sell physical products while betting on related financial instruments.

Swaps Probe Finds Banks Rigged Rate at Expense of Retirees - U.S. investigators uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating a benchmark for interest-rate derivatives.  Recorded telephone calls and e-mails reviewed by the Commodity Futures Trading Commission show that traders at Wall Street banks instructed ICAP Plc brokers in Jersey City, New Jersey, to buy or sell as many interest-rate swaps as necessary to move the benchmark rate, known as ISDAfix, to a predetermined level, according to a person with knowledge of the matter. By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms from the California Public Employees’ Retirement System to Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.  That may run afoul of the 2010 Dodd-Frank Act, which bars traders from intentionally interfering with the “orderly execution” of transactions that determine settlement prices.

Goldman Trader 'Fab' Tourre Liable For Billion-Dollar Fraud, Jury Says - A federal jury in New York City has found that Fabrice Tourre, the former Goldman Sachs trader who regulators say caused investors to lose $1 billion, is liable in the mortgage securities fraud case filed against him by the Securities and Exchange Commission.Regulators say Tourre, 34, a native of France who was nicknamed "Fab" in his office, packaged toxic subprime mortgages into a collateralized debt obligation that was sold to investors under the name Abacus in 2007."The U.S. Securities and Exchange claims Tourre hid the role of hedge fund Paulson &amp; Co. in selecting the subprime mortgage bonds behind the investment, then made a $1 billion bet they'd fail," Bloomberg News reported earlier this week.Tourre was found liable on six of the seven charges he faced. In 2010, Goldman Sachs agreed to pay $550 million to settle SEC charges against it in the case. Tourre left the company last year.The SEC pursued civil charges against Tourre, meaning that his punishment could now range from a fine to a lifetime ban from trading in securities.

Memo to Eliot Spitzer: If Harvard’s Own Law Firm is Really More Loyal to Bain, What Hope Do You Have of Getting Good Legal Advice? - Yves Smith - A commenter in our prior “Memo to Spitzer” post questioned whether big private equity firms could really be getting away with scamming their investors, arguing that: …firms are under more scrutiny than ever these days by LPs (and their attorneys) since the financial crisis. Everything is under spotlight, fees, fund size, deals, track record, etc. Firms live in a hyper-scrutinized environment these days and it’s hard to believe the entire universe of PE LPs would be missing outright criminality. Notice the straw man: we never claimed that the “entire universe” of private equity firms was engaged in “outright criminality”. You can have a hell of securities law and contract violations before you hit criminal conduct. But we’ll put that aside and deal with the widespread myth: private equity is a world of big boys, and the limited partner investors are well-informed, well-advised consenting adults. If you believe this story, it follows that it would be unlikely that anyone could take advantage of them, and if so, it must have been due to some lapse on their end. The problem is we’ve seen what happened in the mortgage backed securities world. In a realm of SEC registered prospectuses, which have much higher disclosure standards than the super-secret limited partnership agreements, we saw widespread abuses and an inability of investors to band together effectively or to get any meaningful restitution individually*.

Hedge funds gripped by crisis of performance - Hedge funds have a performance problem. Since the turn of the decade, Wall Street’s master stock pickers have spectacularly failed to beat the market. The crisis of performance comes as the industry is under intense scrutiny over the source of past returns, with SAC Capital facing criminal insider trading charges that threaten to undermine the record of one of the world’s most successful hedge funds. The firm says it has done nothing wrong. While many hedge funds fared better than the stock market during the financial crisis, and rode the 2009 recovery back to health, they have been confounded by sometimes violent market moves over subsequent years. Since January 2010 the average equity hedge fund has produced profits for its investors, after fees, of just 14.5 per cent, according to the research group HFR. Over the same period an investor in the S&P 500 earned, with dividends, a 55 per cent return: a total which 85 per cent of equity hedge funds have failed to match, finds HFR. Stock trading specialists at hedge funds fared even worse than their peers managing humdrum mutual funds – 83 per cent of mutual fund managers who invest in large-cap stocks and try to beat the S&P 500 have failed to do so, according to the research group Lipper. Among all mutual funds investing in stocks, one-third are ahead of the market, and the average investor return is 44.5 per cent from the start of 2010 to the end of June this year, Lipper finds.

Trader Describes How Dishonesty Pays in Finance, Big Time from naked capitalism - Yves here. It may seem like a “dog bites man” account to describe yet again how traders are fixated on their bonuses, often have tawdry personal habits (cocaine, whores, flashy cars) and have no compunction about leaving rubble in their wake, be it customers or the firms for which they work.  However, it’s one thing to hear it from outsiders or people who’ve managed to spend some time on a dealing room floor, and another to have someone in the industry describe what goes on. It’s almost as if two veils need to be pierced. The first is that behavior that most people would regard as predatory and pathological is cultivated and celebrated in big capital markets firms (ones with large trading and investment banking operations). And when outsiders get a dim perception of how things work and are properly incensed, the insiders get astonishingly angry and defensive (the vehemence of the response is proof that on some level they actually do know what they are doing is wrong but have built all sorts of denial mechanisms and narcissistic responses to protect themselves from that knowledge). The second veil is it’s hard for non-bankers to believe that the conduct is as deeply, pervasively as bad as it is. This is one of those cases where a difference in degree is a difference in kind. I strongly recommend you read this post in the Guardian, ‘The most dishonest bankers walk away with the most money‘, in full.

The Wall Street Cartel - When Congress, the media, the financial experts talk about transparency on Wall Street, it is always in abstract terms: we should have more transparency; we should know more details about the kinds of risks Wall Street is taking with other people’s money; we should be able to see the nature of derivatives trading being conducted in private agreements between Wall Street firms; we should make the big banks hold more capital to offset all the risks we know they’ll never let us see until it’s too late. Unfortunately, we can’t fix Wall Street’s problems by discussing them in the abstract. We need to be comprehensively cognizant of what Wall Street has become, peel away the artifices layer by layer, and put in legislative fixes that get quickly to the problem – not 848 page snafus like Dodd-Frank that require implementation rules to be debated and massaged for years by a tangled web of regulators, most of whom are already captured by Wall Street. The very first artifice that has to be crushed is Wall Street’s private justice system. Wall Street is the only industry in America that is operating its own self-regulatory court system. It is benignly called mandatory arbitration but if you step back and look very closely, it’s a full blown private justice system that was structured by Wall Street’s biggest law firms to give an edge to Wall Street. Today, if you want to become a customer of the largest Wall Street firms, it requires that you to sign away your rights to access the nation’s courts and use Wall Street’s court instead – the Financial Industry Regulatory Authority’s (FINRA) dispute resolution program. This is a program where transparency dies. There is no ability to see a repetitive pattern of fraud because claims are not heard in an open courtroom. Typically, the press is barred from the proceedings. Case law and legal precedent are not required to be followed. Brief decisions are written by an arbitrator which rarely provide the public with adequate insight into the full details of the dispute or any legal rationale for the decision.

Sadly, Too Big to Fail Is Not Over - Simon Johnson -- Writing in Politico earlier this week, former Senator Chris Dodd and former Representative Barney Frank contend that the Dodd-Frank financial reform legislation of 2010 ends forever the ability of the United States government to provide support to failing financial companies. “The Dodd-Frank Act is clear: Not only is there no legal authority to use public money to keep a failing entity in business, the law forbids it,” they write. I respectfully disagree with them. I’m not alone — in response to recent questioning from Senator Elizabeth Warren, Democrat of Massachusetts, the Federal Reserve chairman, Ben S. Bernanke, confirmed that credit markets still believed the government stands behind big banks. There are three issues: the powers of the Federal Reserve, the mandate of the Federal Deposit Insurance Corporation and the vulnerability of taxpayers when one or more large complex financial institutions fail. We have at least five such companies in the United States, all of which are intensely cross-border in their operations (in order of size, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley). On the mechanics of what the Fed is allowed to do, Mr. Dodd and Mr. Frank are of course correct that their legislation changed the powers of the Federal Reserve. The precise legal authority that allowed a loan of $85 billion to American International Group in September 2008 no longer exists.

The Fed Deception - The New York Times recently had a story about how large financial institutions on Wall Street (Goldman Sachs, JPMorgan Chase and Morgan Stanley to name just a few) have been extremely active – and engaging in questionable business practices – in the commodity markets. It appears that exemptions given by the Federal Reserve Bank of the United States (the Fed) in 2003, in conjunction with loosened regulations approved by Congress, allowed banks to invest (i.e. speculate) in the infrastructure used to store, transport and deliver commodities such as metals, oil, wheat, cotton, coffee, petroleum and electricity.  Reportedly, Goldman Sachs moves 90% of its aluminium stock between its different warehouses every day. The results, according to current and former employees at Metro, are artificial bottlenecks which have led to an increase in holding costs.“It’s a drag on the economy. Everyone pays for it.”   Senator Sherrod Brown (D – Ohio), a member of the Senate Banking Committee and the Senate Committee on Finance, says, “Banks should be banks … they should make loans, not manipulate the markets to drive up prices for manufacturers and expose our entire financial system to undue risk.” But a bigger question that can be asked is, “What exactly is the role of the Fed?” According to its own documents it has “supervisory and regulatory authority over a wide range of financial institutions and activities. It works with other federal and state supervisory authorities to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions.”

Judge Rejects Fed’s Cap on Debit Card Fees - The billions of dollars that banks earn when consumers swipe their debit cards are under threat after a federal court ruling on Wednesday. The question is whether consumers will see any savings. As part of its efforts to overhaul banks after the financial crisis, Congress targeted the fees that banks and other firms earn from retailers when consumers use debit cards. Lawmakers intended to limit the fees, and left it up to the Federal Reserve, a primary bank regulator, to work out the specifics of the cap. But on Wednesday, Richard J. Leon, a district court judge in Washington, ruled that the Fed had failed to follow Congress’s wishes in setting the cap. In doing so, the Fed had, in effect, been too kind to the banks. If the ruling stands, the Fed may have to place a lower limit on the so-called interchange fees, which could further reduce the revenue that financial firms reap from debit cards. Judge Leon’s opinion was strongly worded. He said that, in working out the details of the fee cap, the Fed had run “completely afoul of the text, design and purpose” of what Congress had intended.

The Hidden Credit Report That Shuts People Out of the Banking System - Yves Smith  - Jessica Silver-Greenberg at the New York Times has an important account of how a system created by banks to catch scam artists like check-kiters has morphed over 20 years into a shadow credit reporting system. Given how hard it is to get the credit bureaus to fix errors in a system that is visible (for instance, you can get your credit report for free once a year from each bureau), imagine what it would be like to have a bank tell you they wouldn’t let you open a checking account due to reports you had no idea even existed. Here’s the nut: Unlike traditional credit reporting databases, which provide portraits of outstanding debt and payment histories, these are records of transgressions in banking products. Institutions like Bank of America, Citibank and Wells Fargo say that tapping into the vast repositories of information helps them weed out risky customers and combat fraud — a mounting threat for banks…the databases have ensnared millions of low-income Americans, according to interviews with financial counselors, consumer lawyers and more than two dozen low-income people in California, Illinois, Florida, New York and Washington. What has happened is that banks are trying to focus their retail banking services on more affluent customers and dump poorer ones.  These databases provide the justification for refusing to take customers as a result of comparatively minor mishaps, like bounced checks (which may not even be their fault if a check they deposited turned out to bounce). And since customers who are low income will often be living paycheck to paycheck, it’s not hard for them to have short term cash flow problems.  Of course, this system is wonderfully convenient for the banks, since by denying potential customers access to bank accounts, it forces them to use much more costly services like payroll cards. The article estimates that one million consumers have been denied banking accounts thanks to these reports, a 10% increase since 2009.

New York Investigates Disqualification of Customers by Banks - New York State’s top prosecutor is investigating some of the nation’s largest banks in connection with their use of credit-reporting databases that disqualify people seeking to open checking or savings accounts — an inquiry that has gained urgency as the ranks of the unbanked has swelled in the aftermath of the financial crisis. The New York State attorney general, Eric T. Schneiderman, sent a batch of letters seeking information to six banks on Thursday, including Bank of America, Citibank and JPMorgan Chase, people briefed on the matter said. The inquiry on Thursday is playing out as a growing number of banks and credit unions tap into the vast repositories of information — a record of banking transgressions including bounced checks, overdrawn accounts and fees — to guard against risky customers and protect against fraud. Article ToolsFacebookSaveTwitterE-mailGoogle+PrintSharePermalinkBut consumer advocates and state authorities say the databases are disproportionately affecting lower-income Americans, whose precarious financial footing makes them more likely to end up in the databases for relatively small financial errors like amassing fees or bungling a monthly budget. Concerned that banks might be “improperly denying or otherwise restricting banking access to New York consumers,” Mr. Schneiderman’s office is requesting more information about the use of the databases, zeroing in, for example, on how the lenders decide whether to accept a customer, according to copies of the letters reviewed by The New York Times.

Unofficial Problem Bank list declines to 729 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 26, 2013.   Changes and comments from surferdude808: The FDIC released its enforcement actions through June 2013 on Friday. This release led to many changes to the Unofficial Problem Bank List. For the week, there were eight removals and three additions that leave the list holding 729 institutions with assets of $260.9 billion. A year ago, the list held 900 institutions with assets of $349.5 billion. For the month, the list declined by 20 institutions after 19 action terminations, seven unassisted mergers, and six additions. The monthly net decline of 20 institutions is the highest since publication of the list. CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then.

Mortgage Company Sued for Giving Bonuses to Employees who Steered Homeowners to Bad Deals - The Consumer Financial Protection Bureau (CFPB) has sued a billion-dollar mortgage company for rewarding its employees when they convinced homeowners to accept bad deals.  Utah-based Castle & Cooke Mortgage was accused in federal court of paying out $4 million in bonuses to loan officers for steering consumers into unfavorable mortgages.  The litigation represents the first time that CFPB has gone after a financial institution for this kind of business practice, which was common before the financial crisis last decade. Daniel Wagner at The Center for Public Integrity wrote that Castle & Cooke violated a federal prohibition on paying loan officers more when they sell loans with higher interest rates and fees.

Richmond Escalates Eminent Domain Plan With Loan Offers - Richmond, California, is backing a plan to buy mortgages in low-income areas for as little as 25 cents on the dollar and may force the sales under eminent domain laws, moving forward with a controversial program that would potentially seize control of home loans from investors. Richmond is the farthest along in a plan advocated by Steven Gluckstern’s Mortgage Resolution Partners LLC for U.S. cities to confiscate mortgages and write them down in an effort to help homeowners escape oversized debt burdens. The idea has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms.   None of the 32 servicer and bond trustees that oversee the loans will likely sell willingly, Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association, Wall Street’s largest lobbying group, said in a phone interview.  "You just can’t really sell performing loans out of securitizations,” Killian said. “Additionally, everybody we talk to in the industry thinks this is a bad idea that will be bad for the mortgage markets.”

The New Bailout Begins: Eminent Domain Is Upon Us - While one can have sympathy for the over-levered, underwater homeowners that took free-money with both hands and feet as house prices surged in the mid-2000s (just like they are now) but the latest moves to 'save' people from themselves in the city of Richmond, CA is raising both market and constitutional concerns. As NYTimes reports, the city is the first to use eminent domain by the local government (in partnership with a 'friendly' mortgage provider) to seize homes, force investors to take a loss on the mortgages, re-issue a new 'lower' mortgage, and allow the homeowner back with positive equity (ready to lever-it-back-up into a new Harley). As Guggenheim notes, this is likely to hurt supply of new mortgages and as we noted previously (here and here), it seems clear that private-label MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.

"Tax Nightmare" of Eminent Domain Mortgage Seizures - Gayle McLaughlin, mayor of Richmond, California is hell-bent on her plan to seize mortgages via eminent domain, then provide "mortgage forgiveness" for the homeowners. I smacked the idea from a legal standpoint in Illegal Public Seizure of Mortgages Via Eminent Domain in the Spotlight.  Legalities aside, there are also huge tax consequences to consider. A local attorney and real estate broker posting under the name "davecherr" commented on the problem of debt forgiveness.  Under the tax code, discharge of indebtedness is counted as income. There is a safe harbor for people who lose their primary residence to foreclosure, but it would not apply to these Richmond residents, since they would keep their house with magically reduced debt.  That debt reduction would NOT be tax-free. If a homeowner's mortgage goes from $400K to $190K under the proposed scheme, they would owe taxes on $210K of discharged debt (it would likely be much more, because all missed payments, late fees, and missed property tax and insurance payment, and interest on all of that, would be folded into principal -- such costs can easily drive principal from $400K to $500K over the course of 1-2 years of non-payment).  The federal taxes on that would be around $50K, and the state taxes $15K, for a total tax bill of $65K, or around $7K per year on a 15 year payment plan. As a local, I can tell you that most residents of Richmond do not have an extra $7K/year of income to pay such a bill.  

Expirations Loom on Up to $1B in Foreclosure Review Checks -  Nearly all of the 4.2 million payout checks from the failed Independent Foreclosure Review have been issued, worth about $3.5 billion. Rust Consulting, the paying agent, will mail about 37,000 remaining checks totaling more than $43 million later this summer to complete the distribution of checks, according to the latest update from the Office of the Comptroller of the Currency. However, about $1 billion worth of checks have gone uncashed or undeposited. No numbers have been released as to how many represent checks mailed to wrong addresses, or checks that have been lost or checks that recipients have simply refused to claim, one way or another. Although the check amounts were from $300 to $125,000, depending on the degree of wrongdoing by 13 mortgage services, the vast majority were at the lower end of the range, a few hundred dollars each. The OCC is reminding recipients that checks — the first wave was mailed April 12 — carry a 90-day expiration date to prevent fraud. So checks issued in the early waves of mailings that have not been cashed or deposited have begun to expire

400,000 Foreclosure Settlement Checks Sent To Wrong Address -- Like millions of Americans who tried to stave off foreclosure in recent years, Lanette Worles says her bank repeatedly lost vital paperwork she submitted, scuttling her chance at saving her home.  Now, as Worles attempts to collect on a legal settlement intended as a remedy to just this type of practice, she confronts a depressingly familiar predicament: The check for her share of the settlement has gone missing, too.  Worles is one of 4.2 million homeowners who qualify for a share of the $3.6 billion in cash payouts as part of the foreclosure abuse deal. And she's one of 400,000 whose checks could not be delivered because they were sent to the wrong address, according to the Office of the Comptroller of the Currency. That amounts to 10 percent of all foreclosure settlement checks mailed so far. The return-to-sender problem could go a long way toward explaining why such checks totaling nearly $1 billion have not yet been cashed. It's understandable that some of the people owed a check have been difficult to reach, given the nomadic lives many have lived following foreclosure. But if it turns out authorities could have made a greater effort to verify home addresses in advance of mailing out those checks, critics who have blasted the settlement as ill-conceived and poorly executed will have a new reason to complain.

Fannie Mae: Mortgage Serious Delinquency rate declined in June, Lowest since December 2008 - Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in�June to 2.77% from 2.83% in May. The serious delinquency rate is down from 3.53% in�June 2012, and this is the lowest level since December 2008.The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Earlier Freddie Mac  reported that the Single-Family serious delinquency rate declined in June to 2.79% from 2.85% in May. Freddie's rate is down from 3.45% in June 2012, and is at the lowest level since May 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Click on graph for larger image Although this indicates progress, the "normal" serious delinquency rate is under 1%. At the recent rate of improvement, the serious delinquency rate will not be under 1% until 2016 or so.

Colorado attorney turned whistle-blower alleges foreclosure abuses - An attorney turned whistle-blower at Colorado's second-largest foreclosure law firm has detailed to state investigators a pattern of abuses that stretch beyond the scope of their investigation into alleged overbilling practices. Susan Hendrick testified at a hearing Thursday that she told the state attorney general's office about bill-padding she witnessed while a lawyer at Aronowitz & Mecklenburg in Denver, conduct that investigators say needlessly cost homeowners facing foreclosure millions of dollars. She then laid out a number of other alleged abuses she says happened. The abuses ranged from the padding of attorney hours to allegations that the law firm destroyed evidence that prosecutors were seeking in their investigation into billing practices by foreclosure law firms, according to testimony in Denver District Court.

The housing “recovery” is a total sham - Out on the alphabet streets in this once-thriving Florida community, the houses are dotted with black mold. Some have buckled roofs. Others are hollowed out by fire, or the wiring has been stripped. Pests and critters have moved in as the people moved out. On some streets, half of the homes feature boards along the windows, and ubiquitous “No Trespassing: No Traspasar” signs in English and Spanish. At one time, these homes were exciting products sold by Option One, Ameriquest, New Century Financial, and other mortgage lenders who sprouted up during the housing bubble, and disappeared just as quickly. The explosion of lending pumped up this community, one of the oldest in South Florida (Lake Worth turned 100 this year), and raised property values to improbable heights. Houses that traditionally sold for $75,000 were suddenly going for $250,000 and $300,000. When it all crashed, prices fell 60% and the foreclosures rolled through. In one development called Strawberry Lakes, made up of nice, 2- or 3-bedroom masonry homes on quarter-acre lots, Szymoniak culled through records and found almost 1 in 3 homes in foreclosure. “You can find whole blocks gone here,” she said. While nationally, home prices have bounced back, as analysts delight in what they call a housing recovery, in places like Lake Worth, prices remain buried. There’s not much chance for appreciation when you have reams of abandoned properties in the neighborhood. Lake Worth is one of those places across the country where the foreclosure crisis never ended.

MBA: Mortgage Applications decrease in Latest Weekly Survey -  From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey Mortgage applications decreased 3.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 26, 2013. The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. ...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) was unchanged at 4.58 percent, with points decreasing to 0.38 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.The first graph shows the refinance index. With 30 year mortgage rates up over the last 3 months, refinance activity has fallen sharply, decreasing in 11 of the last 12 weeks. This index is down 57% over the last twelve weeks. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending up over the last year (but down over the last several weeks), and the 4-week average of the purchase index is up about 5% from a year ago.

Mortgage Applications Plunging At Fastest Rate In 4 Years; Refis Down 57% - With a number of banks cutting their mortgage departments (Wells Fargo JV and Everbank most recently), it seems the 'weakness' in the housing recovery may be more than transitory. For the 11th week of the last 12, mortgage applications fell for the fastest three-month collapse since June 2009. Mortgage activity is now its lowest in two years with refinancing activity down 57% from its recent peak and new purchases have dropped to their lows of the year (down 13% from the highs) and stand exactly at three-year average levels.

As the Second U.S. Housing Bubble Inflates: Rapidly Escalating Prices - The average rate at which median new home sale prices in the United States has been escalating is over 17% faster than the average rate at which median new home sale prices rose during the initial inflation phase of the first U.S. housing bubble.  The initial inflation phase of the first U.S. housing bubble ran from November 2001 through September 2005, when the Federal Reserve ended its extremely low-interest rate policy following the end of the 2001 recession, as it finally all-but-closed the gap between its Federal Funds Rate and the level at which it would have set that rate if they had been factoring in actual economic conditions in accordance with the Taylor Rule. During this portion of the inflation phase of the first U.S. housing bubble, median U.S. new home prices were rising by $21 for every $1 that median household incomes were increasing.  Taking into account the latest revisions to U.S. housing data, since July 2012, which we count as Month 0 for measuring the inflation of the second U.S. housing bubble, we find that median new home prices in the U.S. are now increasing by $24.71 for each $1 that median household incomes have increased during the period. Our chart below shows the steeper rate at which nominal median new home sale prices in the U.S. are inflating with respect to non-inflation adjusted median household incomes:

 LPS: House Price Index increased 1.3% in May, Up 7.9% year-over-year - Notes: I follow several house price indexes (Case-Shiller, CoreLogic, LPS, Zillow, FHFA, FNC and more). The timing of different house prices indexes can be a little confusing. LPS uses April closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: LPS Home Price Index Report: May Transactions Show U.S. Home Prices Up 1.3 Percent for the Month; Up 7.9 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on May 2013 residential real estate transactions. Beginning with this month's release, the LPS HPI has significantly expanded its property data tracking and now covers approximately 25 percent more U.S. counties - nearly 1,900 in total - and more than 18,500 ZIP codes. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of the ZIP codes covered. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.  The LPS HPI is off 16.3% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 47.9% from the peak in Las Vegas, 39.0% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and at a new peak in Austin, Dallas, Denver and Houston!

Case-Shiller: Comp 20 House Prices increased 12.2% year-over-year in May -- S&P/Case-Shiller released the monthly Home Price Indices for�May ("May" is a 3 month average of March, April and May prices). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities). From S&P: Home Prices Continue to Increase in May 2013 According to the S&P/Case-Shiller Home Price Indices Data through May 2013, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... showed increases of 2.5% and 2.4% for the 10- and 20-City Composites in May versus April. Dallas and Denver reached record levels surpassing their pre-financial crisis peaks set in June 2007 and August 2006. ...The 10- and 20-City Composites annual returns rose slightly from April to May as they posted the best year-over-year gains since March 2006. All 20 cities increased from May 2012 to May 2013 and from April 2013 to May 2013. ...The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 24.8% from the peak, and up 1.1% in May (SA). The Composite 10 is up 14.0% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 24.0% from the peak, and up 1.0% (SA) in May. The Composite 20 is up 14.7% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 11.8% compared to May 2012. The Composite 20 SA is up 12.2% compared to May 2012. This was the twelfth consecutive month with a year-over-year gain and this was the largest year-over-year gain for the Composite 20 index since 2006.

Case-Shiller Shows Home Prices Up 12.2% for May 2013 - The May 2013 S&P Case Shiller home price index shows a 12.2% price increase from a year ago for over 20 metropolitan housing markets and a 11.8% change for the top 10 housing markets from May 2012.  This is the highest yearly gain since March 2006.  Prices are still on a jacked up pace to exceed the the housing bubble.  The monthly jump in the composite-10 was an 1.1% and 1.1% for the composite-20, seasonally adjusted.   Not seasonally adjusted, the monthly increases were 2.5% and 2.4% for the 10- and 20-City Composites respectively. Dallas and Denver are now at record highs and this includes the housing bubble price of June 2007 for Dallas and August 2006 for Denver.  This is the first time a city surpassed their housing bubble price levels and we have two city areas this month which did just that. Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data.  All of California, with some of the highest unemployment rates in the country, is clearly not affordable again.  Twelve of the 20 cities saw double digit annual home price increases for the year,.  above 20% gains for the year are San Francisco, Phoenix, Atlanta and Las Vegas.  For America's middle class trying to afford a home, this is just not sustainable.  S&P reports the not seasonally adjusted data for their headlines.   Housing is highly cyclical.  Spring and early Summer are when most sales occur. and this explains the disparity between the monthly seasonally adjusted and not seasonally adjusted gains.  The below graph shows the composite-10 and composite-20 city home prices indexes, seasonally adjusted.  Prices are normalized to the year 2000.  The index value of 150 means single family housing prices have appreciated, or increased 50% since 2000 in that particular region.  Case-Shiller indices are not adjusted for inflation.

New Record Home Prices in Dallas, Denver - Although imperfect, the S&P/Case-Shiller Home Price Index is fairly closely watched as a guide to housing prices across the U.S. For the past few months, the index has been rising, so it’s not entirely surprising that the numbers released today show yet another jump — of 1.0%, on a seasonally adjusted basis, reflecting May sales. What is raising eyebrows, however, is that in two of the twenty cities tracked by the index, home prices hit new highs. The numbers aren’t “the best we’ve seen post-Great Recession” or “the greatest recovery since the slump.” They are, in Denver and Dallas, new all-time highs. Denver’s seasonally adjusted gain of just 0.6% (monthly up from April) puts prices at a level that surpasses the previous peak of August 2006. Denver’s year-over-year change is 9.6%. Similarly, Dallas, up 0.6% month-to-month and 7.6% year-over-year, is at price levels that beat the previous peak of June 2007. Neither of these cities suffered the level of overbuilding — and subsequent crash — of a Phoenix or Miami. But those cities are recovering too, with Miami up 14.2% year-over-year, and Phoenix up 20.6%.

A Look at Case-Shiller by Metro Area - Home prices extended a winning streak of year-over-year gains and two cities surpassed their prefinancial crisis peaks, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 12.2% in May from a year earlier. All 20 cities have posted year-over-year gains for five straight months. Dallas and Denver both reached levels not seen since before the recession hit in December 2007. Prices in the 20-city index were 2.4% higher than the prior month. Adjusted for seasonal variations, which reflect a traditional stronger spring selling season, prices were 1% higher month-over-month. No city posted a monthly decline, though on a seasonally adjusted basis priced were lower in Cleveland and Minneapolis. Even as mortgage rates rise, many economists expect price gains to continue, though they may moderate. “It takes time for mortgage rates to affect sales and then for sales to affect prices, so the rate effect, if any, won’t hit the CS price data until the fall,” Read the full S&P/Case-Shiller release.

Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities - First a comment from Zillow Economist Dr. Svenja Gudell: “Three straight months of national home value appreciation above 10 percent is not normal, not sustainable and, frankly, not very believable. As the overall housing market continues to improve, the impact of foreclosure re-sales on the Case-Shiller indices continues to be pronounced, as homes previously sold under duress trade again under more normal circumstances, leading to inflated and misleading markups in price,” I agree with Gudell on these two key points: 1) I also think right now the Case-Shiller index is overstating price increases for most homeowners (both because of the handling of distressed sales and weighting of some coastal areas), and 2) I also think price appreciation will slow going forward. I also think it is important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation. The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through March) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q3 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to March 2004 levels, and the CoreLogic index (NSA) is back to May 2004. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q2 2000 levels, the Composite 20 index is back to October 2001, and the CoreLogic index back to February 2002. In real terms, house prices are back to early '00s levels.

Zillow: Case-Shiller House Price Index expected to show 12% year-over-year increase in June - The Case-Shiller house price indexes for May were released this morning. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close. Note: Zillow makes a strong argument that the Case-Shiller index is currently overstating national house price appreciation.  Zillow Predicts Another 12% Annual Increase in Case-Shiller Indices for June The Case-Shiller data for May came out this morning and, based on this information and the June 2013 Zillow Home Value Index (released last week), we predict that next month’s Case-Shiller data (June 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) increased 12.1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) increased 12 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from May to June will be 1.1 percent for the 20-City Composite and 1.2 percent for the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for June will not be released until Tuesday, Aug. 27.

For many Americans rising home prices are no cause for celebration - Economists and the markets have been cheering the jump in housing prices and improving construction statistics. But for many Americans rising demand and higher house prices bring more bad news. Based on the latest data (report below) from the Joint Center for Housing Studies, Harvard University (JCHS), here are some sad facts about the housing situation in the US.
1. The number of homes for sale is still near record lows. That is driving up costs and quickly pricing many households out of the market.
2. The US actually has a large number of vacant homes that are not making it into the market. Vacant homes are often in areas with few job opportunities, making it impossible to renovate, sell, or rent.  Many are in places like Detroit and simply will never be sold.
3. We are seeing the confluence of tight housing conditions and weak household incomes. As JCHS points out "most types of households have seen their real incomes decline over the past decade". This is particularly true for growing households.
4. As a result, "the total number of households paying more than half their incomes for housing soared by 6.7 million from 2001 to 2011, a jump of 49 percent". Note that this is a problem for both homeowners and renters.

Chart Of The Day: Monthly Home Payment Soars 40% To 2008 Levels - The following chart from Credit Suisse fully explains why the US housing "recovery" has just ground to a halt: in a few short weeks, US housing affordability (a topic we first covered a month ago) has collapsed as a result of the monthly payment on the median home sold soaring by nearly 40% from under $800 to just shy of $1100, a level not seen since 2008. Now if only US personal incomes would keep pace, instead of doing this...

The Sales Mix of the New Housing Bubble - Now that we have demonstrated that there is an extremely linear relationship between what people pay for the houses they own and their incomes, we're going to look at how the mix of house sales affects the reported sale prices.  Our first chart looks at the number of new homes sold in the previous twelve months for each month from January 2003 through June 2013, which spans all of the data reported by the U.S. Census Bureau for this measure:  In this chart, we're identifying the peak volume for the trailing twelve month average of U.S. new home sales as January 2006, which directly corresponds to the peak volume of sales for new homes in the $200,000 to $299,000 range and also the $300,000 to $399,000 range.  Our second chart takes the same data, but stacks the data so we can see the overall volume of new home sales recorded in the U.S. during that period: In these two charts, you can see the volume of lower priced homes decline during much of the inflation phase of the first U.S. housing bubble, as these lower priced homes were displaced by higher priced homes in the number of sales each month.

Weekly Update: Existing Home Inventory is up 17.6% year-to-date on July 29th - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.   There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for June).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data). In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.NAR: Pending Home Sales index declined 0.4% in June - From the NAR: Pending Home Sales Slip in June. The Pending Home Sales Index, a forward-looking indicator based on contract signings, edged down 0.4 percent to 110.9 in June from a downwardly revised 111.3 in May, but is 10.9 percent higher than June 2012 when it was 100.0; the data reflect contracts but not closings. Pending sales have been above year-ago levels for the past 26 months, and the pace in May was the highest since December 2006 when it reached 112.8. ... The PHSI in the Northeast was unchanged at 87.2 in June but is 12.2 percent higher than a year ago. In the Midwest the index slipped 1.0 percent to 114.3 in June but is 19.5 percent above June 2012. Pending home sales in the South fell 2.1 percent to an index of 118.3 in June but are 9.5 percent higher than a year ago. The index in the West rose 3.3 percent in June to 114.2, and is 4.4 percent above June 2012. Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in July and August. With limited inventory at the low end and fewer foreclosures, we might see flat existing home sales going forward.

Housing: "Drought of properly priced homes" - Some interesting comments on inventory in an article by Nick Timiraos at the WSJ: Home Prices Jump, but Headwinds Build For now, inventories remain extremely tight in a majority of the nation's major housing markets. The Wall Street Journal's survey of quarterly housing-market conditions in 28 metro areas found that Phoenix, Seattle, Denver, and Sacramento, Calif., had less than a 2.5-month supply of homes for sale at the current sales pace. Dallas, Los Angeles, San Diego, Washington, D.C., and Orlando, Fla., had less than three months of supply, according to data compiled by John Burns Real Estate Consulting in Irvine, Calif. ... There are signs inventory declines will ease as price gains increase. In Sacramento, Calif., the number of homes for sale in June stood 7.5% above the level of a year ago, while inventories in Atlanta rose 9.7%. ... In Orange County, Calif., inventories have increased 68% since March, standing roughly unchanged from year-ago levels at the end of June and reversing what had been a large year-over-year drop. Steven Thomas, a local housing analyst, says buyers are growing frustrated because sellers are getting greedy. "There is a drought of properly priced homes," he wrote in a recent report. Reports of rising home prices "have enticed a herd of homeowners to come on the market who all have thrown discretion out the door." Angela Creech, a real-estate agent with Redfin in Irvine, Calif., says she's refused more listings in the past month because sellers are asking for too much money. "There are more really unrealistic sellers," she said.

Number of the Week: Home Buyers Need to Reset Expectations - Home prices have been on a tear this year, but as mortgage rates move higher that breakneck pace is bound to slow. Most buyers shop for homes based on their potential monthly payments, and the recent jump in interest rates means that the amount of house they can buy for that payment has tumbled. There is a rule of thumb that a 10% drop in affordability results from a one percentage point jump in rates. That’s about how much mortgage rates have increased from early May, and with the Federal Reserve expected to start winding down bond purchases later this year, they may be headed even higher.In May, a borrower could take out a $218,000 mortgage with a $1,000 a month payment. That mortgage dropped to about $197,000 in July — the first time it’s fallen below $200,000 in two years. Higher mortgage rates aren’t the only thing putting the brakes on home prices. Rising inventories and signs that investor appetite is waning also could tamp down increases over coming months.This doesn’t mean the housing recovery is over. In fact, it’s likely good news from a big-picture perspective. The steep ramp up in the chart for house prices this year looks strikingly similar to the rise seen during the height of the housing boom. A hit to affordability could lead to slower and more sustainable increases.

Pundits Cry Over A Minor Spill In June Home Sale Contracts But The Uptrend Continues -- The NAR’s Pending Home Sales Index was 128.5 in June versus 131.1 in May, not seasonally adjusted, in other words, actual. That was equivalent to the sale of 501,000 units based on a simple algorithm which I have used for the past 9 years to convert the Realtors’ Pending Home Sales Index to an equivalent number of actual sales contracts. This represented a decline of 10,400 units from May, apparently due to the rise in mortgage rates.The seasonally adjusted headline number was down 0.4% month to month versus market expectations of a decline of 1.4%. In spite of the “beat” most news reports on the data had a dour tone.Closer examination of the data reveals a more nuanced picture where there was no material change to the trend. Contract volume was up by 10,700 or 8.2% versus June 2012, which was slower than the May gain of 11.2%, but it was similar to the year to year gain of 8.4% a year ago and stronger than the gain in four of the past seven months While there was a downtick in June, it was not enough to break the trend of increasing sales. The data does not support all the moaning and groaning that rising mortgage rates have caused a material slowing in the rate of sales. Considering that 30 year fixed rate mortgages were at 4.07%, versus 3.68% in June 2012 according to Freddie Mac, the continuation of the uptrend in sales attests to the strength of demand. Apparently buyers have been motivated to buy to beat both rapidly rising prices and rising mortgage rates, both of which they apparently believe will continue. This is a dynamic I have seen many times over my 30 years of experience in or analyzing the housing market.  At some point rising rates will crush demand. We’re not there yet.

Housing Shifts Into Reverse - Of course, all you’re reading is stories about the 12.2% year-over-year price surge that’s started the buzz about the next housing bubble.  And it’s true too, housing prices have gone up.  Financial manipulation and corporate propaganda DO work, even in an no-growth, high unemployment economy where half the college graduates under 30 are shackled to loans they’ll never repay, where one-in-six people scrape by on food stamps, and where “four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives.” (AP News) Hurrah, for the American Dream! Hurrah, for propaganda!So, what is the truth about housing, aside from the fact that the fundamentals (wage growth and low unemployment) are weak, weak, weak? Conditions in the US housing market are rapidly deteriorating. Mortgage applications dropped for the seventh weeks straight while refinance activity is down 57% from its peak. Refis are now at a two year low having slipped another 4 percent in the last week in July. The rate-sensitive housing industry has been pummeled by the Fed’s announcement in June that it planned to scale back its asset purchases (QE) by the end of the 2013 ending the program sometime in 2014. The announcement triggered a sharp selloff of US Treasuries which pushed mortgage rates more than a full percentage point higher in less than a month. The 30-year “fixed” mortgage rate is now 4.58 percent, a mere 10 basis points below a two-year high hit earlier in July. The higher rates have dampened demand by prospective buyers who have decided to either hold off on their purchase or abandon their search for a home altogether.   Either way, fewer mortgage apps mean reduced sales in the months ahead.  If sales fall, prices will follow.

Vital Signs Chart: Home Sales Remain Near Postcrash Highs - Home sales remain near postcrash highs. The National Association of Realtors’ Pending Home Sales Index fell slightly in June, which the group warned could be a sign that higher mortgage rates are taking a toll on the housing market. But the index, which measures deals expected to close in coming months, remained well above its April level and was up 9% from a year earlier.

HVS: Q2 2013 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q2 2013 this morning. This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates. However, there are serious questions about the accuracy of this survey. This survey might show the trend, but I wouldn't rely on the absolute numbers. The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate was unchanged at 65.0% in Q2. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range - and given changing demographics, the homeownership rate is probably close to a bottom. The HVS homeowner vacancy rate decreased to 1.9% in Q2 from 2.1% in Q1. It isn't really clear what this means. Are these homes becoming rentals?

US Rents Hit Record Highs As Homeownership Plunges To 18 Year Lows - The American Homeownership Dream is officially dead. Long live the New Normal American Dream: Renting. According to the latest quarterly homeownership data released by the Census Bureau, the raw homeownership rate of 65.0% was unchanged from last quarter and 0.4% lower than a year ago. And on a seasonally adjusted basis (not sure why homeownership is adjusted for seasons: people who live in a house in the winter generally live under a bridge in the summer?), the percentage of Americans who have a house declined from 65.2% to 65.1%: the lowest since 1995.

Helping America’s renters - We shouldn’t have to sue to get Fannie Mae and Freddie Mac to follow their congressional mandate and put some of the billions they are generating into affordable housing for the millions of families who need it. But that’s what is has come to for housing advocates, who are frustrated that the Federal Housing Finance Agency (FHFA) is still refusing to fund the National Housing Trust Fund. In 2008, before the housing market collapsed, a bipartisan promise was made to millions of working families, when President George W. Bush signed the National Housing Trust Fund into law. The fund, capitalized from the operating profits of Fannie Mae and Freddie Mac, was to be a downpayment on affordable apartments, which are desperately needed by the millions of Americans who rent.Yet when Fannie Mae and Freddie Mac crashed along with house prices, and were put into conservatorship, the Federal Housing Finance Agency decided to delay funding the Housing Trust until the mortgage giants got back on their feet. . Today, however, Fannie and Freddie are in the black. They are sending Treasury a combined $66 billion for the past year, applied to deficit reduction, while they are generating record net income on a pace to top $50 billion for 2013 alone. The National Low Income Housing Coalition, a leading advocate for payment, in April gave FHFA’s director a detailed brief arguing that the Federal Housing Finance Agency is now violating the law by failing to fund the Housing Trust. When they got no response, the organization filed suit.

Construction Spending declined in June, Public Construction Spending at Lowest Level since 2006 - The Census Bureau reported that overall construction spending declined in June:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2013 was estimated at a seasonally adjusted annual rate of $883.9 billion, 0.6 percent below the revised May estimate of $889.4 billion. The June figure is 3.3 percent above the June 2012 estimate of $855.8 billion.  ...Spending on private construction was at a seasonally adjusted annual rate of $622.8 billion, 0.4 percent below the revised May estimate of $625.4 billion. ...In June, the estimated seasonally adjusted annual rate of public construction spending was $261.1 billion, 1.1 percent below the revised May estimate of $264.0 billion.

Real Median Household Incomes: Up 0.7% in June But Only 0.1% Year-over-Year -  The Sentier Research monthly median household income data series is now available for June. Nominal median household incomes were up $598 month-over-month and $960 year-over-year. However, adjusted for inflation, real incomes were up $351 MoM and only $62 YoY (0.7% and 0.1%, respectively). And these numbers do not factor in the expiration of the 2% FICA tax cut. In the latest press release, Sentier Research spokesman Gordon Green concisely summarizes the recent data. We are now four years out from the official end of the recession and median household income stands 4.4 percent below the median in June 2009. Median household income reached a post-recession low in August 2011. Since that time we have not seen any sustained trend although the median has risen from that low point. As noted in our noted in our previous reports, we are watching this household income series closely for signs of any sustained directional movement.I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The blue line in the chart above paints the grim "real" picture. Since we've chained in June 2013 dollars and the overall timeframe has been inflationary, the earlier monthly values are adjusted upward accordingly. In addition to the obvious difference in earlier real values, we can also see that real incomes peaked before the nominal. The next chart is my preferred way to show the nominal and real household income -- the percent change over time. Essentially I have taken the monthly series for both the nominal and real household incomes and divided them by their respective values at the beginning of 2000.

Personal Income increased 0.3% in June, Spending increased 0.5% - The BEA released the Personal Income and Outlays report for June:  Personal income increased $45.4 billion, or 0.3 percent ... in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $59.4 billion, or 0.5 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in June, the same increase as in May. ... The price index for PCE increased 0.4 percent in June, compared with an increase of 0.1 percent in May. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent.  Core PCE increased at a 2.6% annual rate in June, but only a 1.2% annual rate in Q2. The following graph shows real Personal Consumption Expenditures (PCE) through June (2009 dollars). The dashed red lines are the quarterly levels for real PCE. Real PCE increased at a 1.8% annual rate in Q2. Note: This includes the comprehensive revisions and the change to 2009 dollars. This is interesting! With the comprehensive revisions, personal income less transfer payments had returned to the pre-recession level. Note: The following graph constructed as a percent of the peak. This shows when the real personal income less transfer payments bottomed - and when the indicator returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. This graph shows real personal income less transfer payments as a percent of the previous peak through the June report. Before the revisions, this measure was off 11.2% at the trough in October 2009. With the revisions, this indicator was "only" off 8.2% at the worst point (the recession wasn't as bad as originally reported). .

Real Disposable Income Per Capita: Down 0.11% Year-over-Year - Earlier today I posted my latest Big Four update which included today's release of the June data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of hikes in 2013. The June nominal 0.21% month-over-month and 1.20% year-over-year numbers are getting us approximately back to the trend we saw near the end of last year prior to the forward pull of income and subsequent plunge to manage expected tax increases. However, the real MoM change was a negative 0.11 percent (more on that topic here).  As of the June historical revisions, the BEA uses the average dollar value in 2009 for inflation adjustment (formerly the 2005 dollar value). But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 53.6% since then. But the real purchasing power of those dollars is up only 17.7%.  Year-over-year disposable per-capita income is up a meager 1.20%. But if we adjust for inflation, it has gone negative at -0.11%.

How Vast Error-Prone Databases Are Trashing Our Economic Lives - Our personal information is compiled, traded, analyzed, and sold off as never before. Not only do business and government track us online, but retailers trace our cell phones through stores, and vast, little-known databases can keep us from getting jobs, qualifying for loans, and opening bank accounts. Three news reports this week highlight the growing impact of these databases on our daily lives—and the critical need for oversight to ensure that information is compiled accurately, that errors can be fixed, and that the resulting data is used fairly rather than becoming a new means of discrimination against already-disadvantaged citizens. The Consumer Financial Protection Bureau, whose director was finally confirmed by Congress after more than two years of delay, will have its work cut out for it. Consider the report in today’s New York Times finding that more than a million low-income Americans have been denied the opportunity to open bank accounts because of little-known databases that penalize them for sometimes minor banking mistakes in their past, including bouncing checks, overdrawing bank accounts, and accumulating fees. Blacklisted from opening bank accounts, many consumers turn to high-cost check cashing operations, wire services, and prepaid cards, which drain their paychecks and make it difficult to save money. While banks have a legitimate interest in deterring fraud, a lack of proportionality and the challenge many consumers face in correcting errors can cripple access to a fair marketplace for basic financial services.

Putting money in the hands of people without creating more debt - People need money. That is the purpose of the Fed’s loose monetary policy. But there is no transmission mechanism that gets money into the hands of people. Money is predominantly created in the economy through loans and credit from banks. Banks have to make loans or extend credit in order for people to have more money, more liquidity, in their hands. Banks simply have not been making enough loans to sectors of the economy where the money will end up in people’s hands. People could have more money if their wages were increased in real terms. However, real wages are not increasing. Increasing wages is much better than extended credit for consumption demand, because extended credit is an injection into the circular flow of the economy that must be offset by a leakage. In other words, leveraged consumption will eventually be balanced by de-leveraging. Wages are not a debt, but rather a debt paid to labor for having done work. Labor is then free to consume without compromising future wages. On the other hand, extended credit for consumption eventually leads to a leakage from the circular flow because it is a debt that compromises future consumption by labor.

Weekly Gasoline Update: Down a Few Cents - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for Regular dropped four cents and Premium three. Regular and Premium are now 14 cents and 12 cents, respectively, off their interim highs in late February.  According to, Hawaii and Alaska are averaging above $4.00 per gallon, down from four states last week. Four states (Connecticut, California, Washington and New York) are in the 3.90-4.00 range.

U.S. Light Vehicle Sales decline to 15.6 million annual rate in July, Best July since 2006 - Based on an estimate from WardsAuto, light vehicle sales were at a 15.61 million SAAR in July. That is up 11% from July 2012, and down 2% from the sales rate last month. This was below the consensus forecast of 15.8 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for July (red, light vehicle sales of 15.61 million SAAR from WardsAuto).This is highest level for July auto sales since 2006. After three consecutive years of double digit auto sales growth, the growth rate will probably slow in 2013 - but this will still be another solid year for the auto industry.The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Consumer prices in July likely up 0.2% - One of my running themes for the last few years is how the engaging or loosening of the Oil choke collar explains the acceleration and deceleration of the economy in general, and the inflation rate in particular. In an era of paltry average wage gains, that makes the difference between households gaining or losing ground.  In fact, knowing what has happened to the price of gas is virtually all you need to know to figure out the inflation rate. Since underlying cor inflation is typically +0.1% or 0.2% a month, all you need to do is divide the percentage change in gas prices by 10 (or by 16 if you want to be more conservative), add that to core inflation, and you are almost always going to be within 0.1% of that month's non-seasonally adjusted inflation rate. Then all you need todo is make the seasonal adjustment.  We now know that the average price for gas in July was $3.59 vs. $3.62 in June (remember that June started at a high price and then declined). This is about a 0.7% decline or less tha 0.1% after we divide by 10. Adding in core inflation gives us roughly +0.1%. As you can see from the below graph of NSA vs. S A inflation each month beginning last July, the seasonal adjustment is +0.1%:

Consumer Confidence Dips - U.S. consumer confidence fell back in July after hitting a five-year-plus high in June, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence fell to 80.3 this month from a revised 82.1 in June, the highest reading since January 2008, originally reported as 81.4. Economists surveyed by Dow Jones Newswires had expected the latest index to be little changed at 81.5. The Conference Board follows a more optimistic consumer index compiled by Thomson-Reuters and the University of Michigan. The Michigan final-July consumer sentiment index increased to 85.1, the highest reading since July 2007. Within the Conference Board’s survey, consumer expectations for economic activity over the next six months dropped sharply to 84.7 in July from a revised 91.1 in June first reported as 89.5. The board’ present situation index, a gauge of consumers’ assessment of current economic conditions, increased to 73.6 from a revised 68.7 in June, originally out at 69.2.

Consumer Confidence Comes in a Bit Below Expectations - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through July 18. The 80.3 reading was below the 81.4 forecast by and 1.8 points below the June upwardly adjusted 82.1 (previously reported at 81.4). The index is now fractionally off its five-and-a-half year interim high set last month. Or, to put it another way, the index is 10.3 points below the December 2007 level, which the NBER declared as the start of the Great Recession. Here is an excerpt from the Conference Board report. "Consumer Confidence fell slightly in July, precipitated by a weakening in consumers' economic and job expectations. However, confidence remains well above the levels of a year ago. Consumers' assessment of current conditions continues to gain ground and expectations remain in expansionary territory despite the July retreat. Overall, indications are that the economy is strengthening and may even gain some momentum in the months ahead."  Consumers' appraisal of current conditions continues to improve. Those stating business conditions are "good" increased to 20.9 percent from 19.4 percent, while those stating business conditions are "bad" decreased to 24.5 percent from 24.9 percent. Consumers' assessment of the job market was also more positive. Those claiming jobs are "plentiful" increased to 12.2 percent from 11.3 percent, while those claiming jobs are "hard to get" declined to 35.5 percent from 37.1 percent.  Consumers' outlook for the labor market was less upbeat. Those anticipating more jobs in the months ahead declined to 16.5 percent from 19.7 percent, while those anticipating fewer jobs increased to 18.1 percent from 16.1 percent. The proportion of consumers expecting their incomes to increase decreased moderately to 15.3 percent from 15.9 percent; however those expecting a decrease declined to 13.8 percent from 14.2 percent.   [press release]

US Consumer Confidence Dips from 5-Year High — Americans’ confidence in the economy fell only slightly in July but stayed close to a 5 ½-year high. The report shows consumers remain upbeat about the outlook for job growth later this year. The Conference Board, a New York-based private research group, said Tuesday that its consumer confidence index dipped to 80.3 in July. That’s down from a reading of 82.1 in June, which was revised slightly higher and the best reading since January 2008. Despite the slight drop in July, confidence remains well above year-ago levels. And while the hiring outlook for the short-term declined, consumers were more optimistic about the job market’s potential in the coming months. “Overall, indications are that the economy is strengthening and may even gain some momentum in the months ahead,” said Lynn Franco, an economist for the Conference Board that oversees the consumer confidence survey.  Consumers’ confidence in the economy is watched closely because their spending accounts for about 70 percent of U.S. economic activity. It surged in June, coinciding with a stronger job market.

Consumer Confidence: What Does It Say About the Economy? - This morning we got the latest Conference Board Consumer Confidence number, an indicator that gets widespread attention and that is generally considered one of the more important monthly metrics. But what does this data series really tell us about the economy? How well does it correlate with major economic indicators? It might seem intuitive that increases in consumer confidence correlates with improvements in income, jobs growth, retail sales, etc. But does a quick look at correlations between consumer confidence and major economic indicators support such an assumption? My initial inquiry was the correlation between Consumer Confidence and the stock market using the S&P 500 monthly averages of daily closes as the representative of the latter. The Conference Board Consumer Confidence data goes back to June 1977. The correlation between the two over that timeframe is 29%. However, if we start the comparison in 1995, the correlation improves to 39%.  Next I worked up the correlations between consumer confidence and the basic components of the Big Four Economic Indicators I routinely track. The adjacent table shows how well the coincident consumer confidence number correlates with Retail Sales, Industrial Production, Nonfarm Payrolls and Personal Income. Essentially these correlations are of little statistical significance, and they weren't improved by changing the relationship to leading or lagging. I've sorted the coincident correlations for the four economic series together with the S&P 500. At the outset I thought I'd find a stronger correlation between confidence and retail sales, assuming a more confident shopper spends more. Strangely enough that was the one inverse correlation in the lot, although too small to be very significant. A better correlation exists between Consumer Confidence and Personal Income with, logically enough, nonfarm payrolls close behind. But even so, correlations in the 17% to 19% range aren't terribly compelling.

Infrastructure skeptics take a hit - Via Barry Ritholtz and Mark Thoma comes the following chart by McKinsey: This chart simultaneously debunks not one, but TWO of the biggest talking points of the anti-infrastructure derpers:
Derp 1: "It's just civil engineers angling for pork!" This is one I hear a lot. The American Society of Civil Engineers released an "infrastructure report card" that gave the U.S. a "D+". In response, anti-infrastructure people often throw up their hands and say "Of course a bunch of civil engineers want us to spend more money on civil engineering!" But now McKinsey says the same thing.  If you think McKinsey itself is in the tank for a bunch of gold-digging civil engineers,you're...well, it sounds pretty silly when you say it out loud, doesn't it?
Derp 2: "Oh yeah? What about Japan in the 90s?" A lot of anti-infrastructure people bring up Japan's infrastructure splurge in the 1990s. Japan built bridges to nowhere and generally committed an epic waste of money, labor, and concrete. So this report clearly says that we are not Japan. We are on the opposite side of the optimal point. They need less, we need more.

Post-Scarcity Economics: It is a paradox: our ever-growing productivity and our more insecure lives. Our understanding of economics is stuck in the past, in a world of scarcity, a world without advertising, where making things rather than selling them was the fundamental economic problem. Technology and the free enterprise system, to an extent that would amaze our ancestors, have solved much of the problem of supply. Our homes are more solid, our clothes more fashionable, our food tastier than our grandparents would have dreamed. In a world where even the residents of housing projects own more computing power than NASA did when they put a man on the moon, we cannot think that making stuff is the problem. Supply side economics was invented by a journalist, a second rate academic, and two politicians (Jude Wallinski, Arthur Laffer, Dick Cheney, Donald Rumsfeld). Practical folk know better. Ask any entrepreneur, and he will tell you making stuff, be it specialty steel, a low budget movie, saltimbocca a la romana, a collateralized loan obligation, a back massage, or an oil tanker is the fun part. It is selling it that keeps you up at night, breaks your heart, drives you into bankruptcy. That is why salesmen get paid more than engineers. Our problems today are purely problems of demand.

Dallas Fed: "Texas Manufacturing Activity Increases but at a Slower Pace" in July - From the Dallas Fed: Texas Manufacturing Activity Increases but at a Slower Pace Texas factory activity continued to expand in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 17.1 to 11.4, suggesting output growth continued but at a slower pace than in June. ...  The new orders index was positive for the third month in a row, although it edged down from 13 to 10.8. ...Perceptions of broader business conditions improved again in July. The general business activity index posted a second consecutive positive reading, although it edged down from 6.5 to 4.4.  Labor market indicators reflected a pickup in labor demand. The employment index rose to 9.3, its highest reading in nearly a year. ... Expectations regarding future business conditions remained optimistic in July. The indexes of future general business activity and future company outlook fell five points but remained in strongly positive territory. Indexes for future manufacturing activity also remained solidly positive. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Manufacturing Expansion Slows in Texas Area - Business activity among Texas-area manufacturers remained in expansion this month but not as strongly as in June, according to a report released Monday by the Federal Reserve Bank of Dallas. The Dallas Fed said its general business activity index fell to 4.4 in July after it jumped to 6.5 in June from -10.5 in May. Readings below zero indicate contraction, and positive numbers indicate expanding activity. Within the Dallas Fed survey, the subindexes were mixed. The new orders index slowed to 10.8 from 13.0 in June. The production index fell to 11.4 after it hit 17.1 last month, the highest reading in more than two years. The shipments index increased to 17.7 from 15.4. Demand for labor showed some pickup. The employment index jumped to 9.3 this month from 0.2 in June. The hours worked index slowed to 1.3 from 4.8. Texas manufacturers are in a cost squeeze. The prices paid index rose to 15.9 from 14.3 in June. But the prices received index remained contractionary, at -1.0 from -2.1.Manufacturers in Texas are reining in optimism about the next six months. The expected general business activity fell to 9.6 in July from 14.7 in June. The company outlook index, which tracks prospects for each respondent’s firm, fell to 16.7 after it jumped to 21.8 in June from 5.3 in May. The expected employment index increased to 25.3 from 23.1

Chicago PMI Misses: New Orders, Employment, Production All Drop, Prices Paid Up - So much for that "priced in" strong start to the second half. All those expecting a major move higher in the Chicago PMI after its June plunge from 58.7 to 51.6 will have to defer their hopes for one more month, following the headline print of 52.3, which missed expectations of 54.0. However, the headline number doesn't do the PMI full justice, because while the growth was driven by all the wrong reasons, namely margin crushing Prices Paid surging from 59.9 to 63.3 - the largest two month jump since 2010 - the much more important trifecta of New Orders (54.6 to 53.9), Production (57.0 to 53.6) and Employment (57.8 to 56.6) all dropped. What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic... which likely means ISM will explode higher.

Manufacturing in U.S. Accelerates More Than Forecast -  Manufacturing in the U.S. expanded at the fastest pace in more than two years as orders and production jumped, indicating more factories were growing optimistic about the second half of the year. The Institute for Supply Management’s factory index increased to 55.4, the strongest since June 2011 and exceeding the highest projection in a Bloomberg survey of economists, after 50.9 in the prior month, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate expansion, and the median forecast of 84 economists surveyed by Bloomberg called for an advance to 52. Sustained demand for automobiles and for materials tied to the recovery in housing are keeping assembly lines busy even as global markets struggle to improve. Manufacturing, which accounts for about 12 percent of the economy, may also find relief in the second half of the year as the headwinds associated with cuts in the federal budget and higher income taxes dissipate. . “Manufacturing is holding in relatively well.” The figure underscores “the Fed’s forecast that we’re likely to see a tick up in the second half of the year.”

ISM Manufacturing index increases in July to 55.4 - The ISM manufacturing index indicated faster expansion in July. The PMI was at 55.4% in July, up from 50.9% in June. The employment index was at 54.4%, up from 48.7%, and the new orders index was at 58.3%, up from 51.9% in June. From the Institute for Supply Management:  July 2013 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in July for the second consecutive month, and the overall economy grew for the 50th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 55.4 percent, an increase of 4.5 percentage points from June's reading of 50.9 percent. June's PMI™ reading, the highest of the year, indicates expansion in the manufacturing sector for the second consecutive month. The New Orders Index increased in July by 6.4 percentage points to 58.3 percent, and the Production Index increased by 11.6 percentage points to 65 percent. The Employment Index registered 54.4 percent, an increase of 5.7 percentage points compared to June's reading of 48.7 percent. The Prices Index registered 49 percent, decreasing 3.5 percentage points from June, indicating that overall raw materials prices decreased from last month. Comments from the panel generally indicate stable demand and slowly improving business conditions." emphasis added Here is a long term graph of the ISM manufacturing index.

ISM Manufacturing Index Surges Above Expectations - Today the Institute for Supply Management published its July Manufacturing Report. The latest headline PMI at 55.4 percent is the best reading since June 2011, twenty-five months ago. Today's number handily beat the forecast of 52.0 percent and's call for 51.5 percent.Here is the key analysis from the report:Manufacturing expanded in July as the PMI™ registered 55.4 percent, an increase of 4.5 percentage points when compared to June's reading of 50.9 percent. July's reading of 55.4 percent reflects the sixth month of growth, and the highest overall PMI™ reading, in the first seven months of 2013. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI™ in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the July PMI™ indicates growth for the 50th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the second consecutive month. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through July (52.1 percent) corresponds to a 3.1 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for July (55.4 percent) is annualized, it corresponds to a 4.1 percent increase in real GDP annually."  Here is the table of PMI components. I've highlighted a key point in advance of Friday's employment report. Manufacturing employment has made a nice move from June's contractionary reading.

Manufacturing ISM Smashes Expectations, Surging To 2011 Levels As Construction Spending Plunges - Readers may recall that in our commentary to yesterday's Chicago PMI disappointment we had a simple prediction "What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic... which likely means ISM will explode higher." Sure enough, to no surprise at all, it just did with the headline ISM manufacturing print for July exploding from 50.9, trouncing expectations of 52.0 with the biggest beat in two years, and hitting 55.4, driven mostly by a surge in production which rose from 53.4 to a ridiculous 65.0, the highest since 2004. And while virtually all of the key subindices in yesterday's Chicago PMI dipped, today it is the opposite, with New Orders (+6.4), Employment (+5.7) and Deliveries (+2.1) all posting increases. Humorously, while Chicago PMI said Prices Paid exploded, today the ISM refuted that and indicated Prices Paid dropped to lowest in a year. One just has to laugh at the Chinazation of US economic data.

ISM Manufacturing PMI 55.4% - Blow Out for July 2013 - The July ISM Manufacturing Survey shows PMI had a blow out increase of 4.5 percentage points to 55.4%.  Manufacturing has moved into sold growth with new orders increasing by 6.4 percentage points and production roaring in an 11.6 percentage point gain.  Even the employment index increased.   Let's hope this month isn't a statistical anomaly for the United States sorely needs her manufacturing base to start humming again. Comments from manufacturing survey responders defied this month's ISM index.  Some said said business is stable, improved slightly, while two said business was flat.  Computer & Electronic Products said business was slower than last year.  Overall comments gave the impression of stable and slowing plodding upward demand in the manufacturing sector.  Back to the index, new orders increased a 6.4 percentage point increase to 58.3%.  This is the highest the new orders index has been since April 2011.  Below is the correlation with the Census Bureau. A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.

Vital Signs Chart: Manufacturing Production Soars - Factories ramped up production last month. An index from the Institute for Supply Management that tracks production leapt to 65 from June’s 53.4 — the highest level since May 2004. A broader index of overall activity hit the highest level in two years. With orders coming in faster than some factories can fill them, manufacturers are picking up the pace, a healthy sign for the economy.

US Factory Orders Miss (Again); Biggest 4-Month Drop In A Year -For the third month in the last four, US Factory Order growth missed expectations. In fact the last four months have seen the biggest plunge in a year. Adding to the disappointment for the 'manufacturing renaissance' hopes (despite proof in the payrolls data that it does not exist) is the fact that New Orders (ex-transports) dropped 0.4% (its worst in 3 months) with non-durable shipments down 0.6%.

The GOP's Relentless Quest to Destroy The US Postal Service Is Almost Done - The fight against the United States Postal Service continues.  While the Post Office looks for ways to save itself, Republicans, led by Representative Darrell Issa, continue to look for ways to destroy it.  Representative Issa, leader of the House Oversight and Government Reform Committee, now wants to end all at-home delivery by the year 2022.Before you can understand why they are doing this, you need to understand the problems facing the Post Office.  Prior to 2006, the US Postal Service workers have a retiree health care benefit in addition to their pension. Before Congress passed the Postal Accountability and Enhancement Act of 2006 (or PAEA), the USPS operated under a pay-as-you-go model for retiree health care funding.   In 2006, the Congress passed the Postal Accountability and Enhancement Act of 2006, and was eventually signed by then President Bush.  The bill stated that the Post Office had to pre-fund its future health care benefit payments to retirees for the next 75 years in just a ten-year time span.  In other words, they have to pay for health benefits for employees that A. have not even been hired yet and B. theoretically, have not been born yet.  No other government or private corporation is required to do this.

Employment Costs Remain Muted - Employment costs rose at a tepid pace during the spring, a development that could reassure Federal Reserve officials that inflation remains tame. The employment-cost index rose a seasonally adjusted 0.5% during the second quarter after climbing by the same pace in the first quarter, the Labor Department said Wednesday. Employment costs were 1.9% higher from a year ago, below the historical average. Economists surveyed by Dow Jones Newswires had predicted that costs would increase 0.4% in April through June. The sluggish growth in employment compensation is a sign that the labor market, while strengthening in recent months, remains weak. Wages and salaries, the biggest component of the employment cost index, rose 0.4% in the April-through-June quarter, after rising 0.5% in the first quarter. Benefits rose 0.4% in the second quarter, after rising 0.6% in the prior period. Because labor costs are the biggest expense for many businesses, they are a key indicator of overall inflation. The data suggest that overall inflation remains below the Fed’s annual target of 2%. Fed officials, who are holding a policy meeting this week, are looking for any signs of higher inflation as they ponder whether to rein in stimulus programs in coming months.

Weekly Initial Unemployment Claims decline to 326,000 -- The DOL reports: In the week ending July 27, the advance figure for seasonally adjusted initial claims was 326,000, a decrease of 19,000 from the previous week's revised figure of 345,000. The 4-week moving average was 341,250, a decrease of 4,500 from the previous week's revised average of 345,750. The previous week was revised up from 343,000. The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 341,250. The 4-week average has mostly moved sideways over the last few months, and is near the low for the year. Claims were below to the 345,000 consensus forecast.

Jobless Claims Beat Consensus, Drop 19K to to 326K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 326,000 new claims number was a 19,000 decrease from the previous week's 345,000 (an upward revision from 343,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell by 4,500 to 341,250.Here is the official statement from the Department of Labor:In the week ending July 27, the advance figure for seasonally adjusted initial claims was 326,000, a decrease of 19,000 from the previous week's revised figure of 345,000. The 4-week moving average was 341,250, a decrease of 4,500 from the previous week's revised average of 345,750. The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending July 20, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending July 20 was 2,951,000, a decrease of 52,000 from the preceding week's revised level of 3,003,000. The 4-week moving average was 3,026,000, a decrease of 500 from the preceding week's revised average of 3,026,500. Today's seasonally adjusted number was well below the forecast of 345K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

ADP: Private Employment increased 200,000 in July - From ADP: Private-sector employment increased by 200,000 jobs from June to July, according to the June ADP National Employment Report®. ... June’s job gain was revised upward from 188,000 to 198,000. ... Mark Zandi, chief economist of Moody’s Analytics, said, "Job growth remains remarkably stable. Businesses are adding to payrolls in most industries and across all company sizes. The job market has admirably weathered the fiscal headwinds, tax increases and government spending cuts. This bodes well for the next year when those headwinds are set to fade.” This was above the consensus forecast for 179,000 private sector jobs added in the ADP report. Note: The BLS reports on Friday, and the consensus is for an increase of 175,000 payroll jobs in July, on a seasonally adjusted (SA) basis

ADP Employment Report Says 200,000 Private Jobs Added in July 2013  - ADP's proprietary private payrolls jobs report shows a gain of 200,000 private sector jobs for July 2013.  ADP revised June's job figures up by 10,000 to 198 thousand jobs.  Overall, July shows improvements in the ADP job figures.  This report does not include government, or public jobs.   Jobs gains were in the service sector were 177,000 private sector jobs, the largest gain since November.  The goods sector gained 22,000 jobs.  Professional/business services jobs grew by 49,000.  Trade/transportation/utilities showed strong growth again with 45,000 jobs.  This was the largest growth services sector and the highest growth in trade/transportation and utilities jobs since the start of the year.  Financial activities payrolls increased by 4,000. Construction work fueled the goods sector job growth with 22,000 jobs added.   Manufacturing lost -5,000 jobs for the month.  Manufacturing continues to lose jobs. Graphed below are the month job gains or losses for the five areas ADP covers, manufacturing (maroon), construction (blue), professional & business (red), trade, transportation & utilities (green) and financial services (orange).  ADP is reporting a stable hiring and claims this is all good as the sun will come out tomorrow on the economy.  We don't see it that way, the decline in manufacturing jobs in particular is not good news.

Anticipating Friday’s Employment Report: A Stunner from TrimTabs - The most important economic news this week is Friday's employment report from the Bureau of Labor Statistics. This monthly report contains a wealth of data for economists, probably the most significant in the near term being the month-over-month change in Total Nonfarm Employment (the PAYEMS series in the FRED repository).Today we have a July estimate from ADP at 200K new jobs and a shockingly low TrimTabs estimate of 23K new jobs.The ADP 200K estimate came in above the estimate of 180K, and was looking for 175K. And ADP's number for June was revised upward to 198K from 188K. Here is the press release from TrimTabs on today's stunner:TrimTabs Investment Research estimates that the U.S. economy added 23,000 jobs in July, down sharply from 135,000 jobs in May and 182,000 jobs in June. "Job growth this month was the slowest since September 2010 when the U.S. lost 65,000 jobs," said David Santschi, Chief Executive Officer of TrimTabs. "The surge in mortgage rates seems to be hitting the economy hard." In a research note, TrimTabs attributed the weakness in the labor market mostly to higher borrowing costs as well as looming Obamacare mandates and slowing growth in emerging economies. TrimTabs’ employment estimates are based on an analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. They are historically more accurate than the initial estimates from the Bureau of Labor Statistics.

U.S. Adds 162,000 Jobs, Continuing a Tepid Run -U.S. employers added jobs at a slower pace in July, suggesting more steady but unspectacular economic growth heading into the summer.  U.S. payrolls grew by 162,000 last month, the Labor Department said Friday. The unemployment rate, taken from a separate survey of U.S. households, fell two-tenths of a percentage point to 7.4%, its lowest level since December 2008. Economists surveyed by Dow Jones Newswires had forecast that nonfarm payrolls would rise by 183,000 and the unemployment rate would tick down to 7.5%.  The latest snapshot of the job market suggests that slow economic growth may be weighing on employers. Higher taxes, federal spending cuts and slower growth abroad have held back the economy for months, though the pace of hiring has been solid so far this year. In one negative sign, the Labor Department revised down the jobs totals for the two prior months by a combined 26,000.

July Employment Report: 162,000 Jobs, 7.4% Unemployment Rate - From the BLS: Total nonfarm payroll employment increased by 162,000 in July, and the unemployment rate edged down to 7.4 percent, the U.S. Bureau of Labor Statistics reported today. ... ... The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000. With these revisions, employment gains in May and June combined were 26,000 less than previously reported. The headline number was below expectations of 175,000 payroll jobs added. Employment for May and June were also revised lower. The second graph shows the unemployment rate. The unemployment rate declined in July to 7.4% from 7.6% in June. This is the lowest level for the unemployment rate since November 2008. The unemployment rate is from the household report and the household report showed a larger increase in employment than the establishment report, and that combined with a decline in the participation rate meant a lower unemployment rate. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate decreased to 63.4% in July (blue line) from 63.5% in June. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio was unchanged in July at 58.7% (black line). I'll post the 25 to 54 age group employment-population ratio graph later. The fourth graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.

Only 162K New Jobs, But Unemployment Rate Drops to 7.4% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Total nonfarm payroll employment increased by 162,000 in July, and the unemployment rate edged down to 7.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in retail trade, food services and drinking places, financial activities, and wholesale trade.  Today's nonfarm number was weaker than the forecast, which was for 184K new nonfarm jobs, but the unemployment rate dropped to 7.4% from 7.6%. was expecting a decline to 7.5%. The nonfarm jobs number for the previous month was revised downward to 188K from the original 195K. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.34% peak in April 2010. The latest number is 2.7% -- down from the 2.8% reading of the past three months. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%. The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.The inverse correlation between the two series is obvious. The latest ratio is 58.7%, which is around the middle of a consistently narrow range (58.2% to 59.3%) since the end of the last recession. For a confirming view of the secular change the US is experiencing on the employment front, the next chart illustrates the labor force participation rate. To two decimal places we're at 63.40%, fractionally off the interim low of 63.28% set in March. Today's level was first seen in November 1978.

Establishment Survey: +162K Jobs, May and June Revised Lower; Household Survey: +227K; Part-Time Jobs +103,000 - The establishment survey showed a gain of 162,000 jobs. The previous two months were revised lower. The employment change for May revised down by 19,000 (from +195,000 to +176,000), and the employment change for June revised down by 7,000 (from +195,000 to +188,000). The unemployment rate dropped 0.2 to at 7.4%.  The number working rose by 227,000 of which 103,000 were part-time jobs. The Civilian Labor Force Declined by 37,000 even though population rose by 204,000 Those "Not in Labor Force" rose by 240,000 Participation Rate fell 0.1 to 63.4%, a mere 0.1 higher than the low of 63.3% dating back to 1979.  July BLS Jobs Statistics at a Glance

  • Payrolls +162,000 - Establishment Survey
  • US Employment +227,000 - Household Survey
  • US Unemployment -263,000 - Household Survey
  • Involuntary Part-Time Work +19,000 - Household Survey
  • Voluntary Part-Time Work +84,000 - Household Survey
  • Baseline Unemployment Rate -0.2 - Household Survey
  • U-6 unemployment -0.3 to 14.0% - Household Survey
  • Civilian Labor Force -37,000 - Household Survey
  • Not in Labor Force -240,000 - Household Survey
  • Participation Rate -0.1 at 63.4 - Household Survey

Economy Added 162,000 Jobs in July; Unemployment Rate Falls to 7.4 Percent, by  Dean Baker: The restaurant and retail sectors accounted for more than half of July’s job growth. The Labor Department reported the economy added 162,000 jobs in July. Job growth for the prior two months was also revised down by 26,000, bringing the average growth over the last three months to 175,000. On the positive side, the household survey showed the unemployment rate falling to 7.4 percent, the lowest level since December of 2008. The employment-to-population ratio (EPOP) remained unchanged at 58.7 percent. More disturbing than the slightly weaker-than-expected job growth number was its composition. Retail trade added 46,800 jobs and restaurants added 38,400, meaning that these two low-paying sectors accounted for more than half of all job growth in July. By comparison, they accounted for 46.8 percent of the job growth over the last three months and 32.2 percent of job growth over the last year. The rapid growth of jobs in these sectors is more likely an indication of the state of the labor market than the nature of job creation. Businesses in these sectors often want to hire people but can’t find workers. In a weak job market desperate workers will take even the lowest-paying jobs.There were few notable areas of growth outside of these sectors. Professional and technical services added 21,100 jobs, almost exactly in line with its 20,000 average over the last year. Wholesale trade added 13,700 jobs, somewhat above its 7,000 average for the last year. Construction employment fell by 6,000. It has been virtually flat since February. Manufacturing added 6,000 jobs in July, but it has seen little net change since January. With the average work week falling by 0.3 hours in construction and 0.2 hours in manufacturing, there is little reason to expect any turnaround in these sectors any time soon.

July payrolls: +162,000, and unemployment rate 7.4 per cent - At the end of a week in which nearly every labour market indicator was surprisingly strong — from the ADP to initial jobless claims to the ISM’s employment index — the one that matters most disappointed. US payroll employment climbed by 162,000 and the prior two months were revised down by a combined 26,000. The household survey was stronger, as the decline in the unemployment rate from 7.6 to 7.4 per cent was driven mainly by employment growth of 227,000, though the labour force also declined slightly. And remember that there remains considerable confusion about the extent to which fluctuations in the labour force participation rate are down to demographic vs cyclical factors. This has important consequences for how the Fed interprets changes in the unemployment rate. Given that these reports are choppy in real-time and get revised later, this one can be understood as fitting into the rough trend that has been ongoing for the last couple of years: steady, unimpressive employment growth. Combined with the revisions, however, the report does suggest that the labour market recovery has slightly weakened since earlier in the year, with the three-month average of payroll gains falling from higher than 200,000 to roughly 175,000 now. This shouldn’t be entirely surprising, especially given the onset of the sequestration cuts, but it does at least bring greater uncertainty to the outlook.

July Jobs Report Disappoints - After two months of fairly respectable jobs numbers, the July jobs report turned out to be fairly disappointing:America’s employers added 162,000 jobs in July, fewer than expected, with the previous two months revised downward slightly as well.The unemployment rate, which comes from a different survey, ticked down to 7.4 percent as people got jobs or dropped out of the labor force. The job gains reported by the Labor Department on Friday were concentrated in retail, food services, financial activities and wholesale trade. The manufacturing sector gained 6,000 jobs; government employment stayed basically flat. July represented the 34th-straight month of job creation, but the latest pace of employment gains is still not on track to absorb the backlog of unemployed workers anytime soon. At the average rate of job growth seen so far this year, it would take more than seven years to close the so-called jobs gap left by the recession, according to the Hamilton Project at the Brookings Institution. Other indicators disappointed, too, with both average hourly wages and the length of the private-sector workweek shrinking modestly in July.Some economists are hopeful that the pace of hiring will pick up once Congress’s latest across-the-board budget cuts have worked their way through the system at the end of the fiscal year on Sept. 30. But battles in Washington over the debt ceiling and further austerity measures mean that the drag from a shrinking government could continue into next year and beyond.

Jobs Report: First Impressions - Payrolls were up 162,000 last month and the unemployment rate fell to 7.4%, the lowest it has been since December 2008.  The report shows continued improvement in the job market, but at a rate that remains moderate, in keeping with an economy that is reliably expanding but has yet to really accelerate.  Most of the decline in unemployment was due to more people getting jobs but part of it was due to a slight fall off in the labor force, a signal of not-too-strong labor demand.  The participation rate ticked down one-tenth, to 63.4%, lower than it was a year ago (62.7%).  Also, May and June payroll gains were revised down by 26,000. Average out the monthly ups and downs, and payrolls have grown in a very narrow band between 1.5 and 1.7 percent every month for over a year (since April 2012), a remarkably steady flow (see figure).Most industries added jobs last month, though manufacturing, which was expanding earlier in the recovery, has hit a soft patch, adding 6,000 jobs in July, after declining slightly in the prior two months.  Over the past year, factory employment is up only 18,000.  The fact that the trade deficit, largely comprised of manufactured goods, took 0.8 percentage points off of first quarter GDP growth is implicated in this slowdown in factory jobs. Retailers added 47,000 jobs and restaurants and bars added 38,000, as consumer spending continues to support the moderate growth in service employment that’s characterized recent reports.  Construction was off 6,000 last month and has hit a flat patch over the last three quarters, though the sector is up 166,000 over the past year, as the housing market has started coming back to life. Government employment was flat overall last month, but state and local governments have slowly started adding jobs in recent months, up 42,000 since January. Weekly hours ticked down slightly, and weekly earnings are up in nominal terms by 1.9% over the past year, about the rate of inflation, meaning paychecks are pretty flat in real terms.

Slower Jobs Growth In July, But The Macro Trend Remains Positive -- Private payrolls increased by a seasonally adjusted 161,000 in July, the Labor Department reports. That’s below expectations, but the moderately disappointing pace of growth last month isn’t out of character with the trend this year. In fact, when you consider today’s number in context with the other economic news of late, there’s still a good case for assuming that a moderate rate of expansion is still with us for the economy overall.Let’s start with today’s private payrolls data. As the chart below shows, July’s net gain was relatively sluggish by recent standards. On the other hand, there’s a fair amount of noise in the monthly numbers, and there’s always revision risk to contend with when focusing on the latest data point. Meantime, the year-over-year percentage change in this series offers a more reliable measure of the trend, and by that standard the latest numbers fall in line with recent history. Private payrolls increased by roughly 2.1% in July vs. the year-earlier level. That’s a respectable gain and one that supports the case for thinking that the labor market continues to heal. Speaking of healing, yesterday’s jobless claims report reveals that new filings for unemployment benefits inched lower to a new five-and-a-half-year low for the week through July 27. That’s a strong signal that suggests that the economy will continue to create new jobs at a moderate pace for the near term. The new low in claims also supports the idea that the upbeat rate of annual growth we saw in today’s payrolls report accurately reflects the primary trend in the labor market.

Highlights from the July Jobs Report - Employers added fewer jobs in July, though the unemployment rate fell to a near five year low as labor force participation declined slightly. Highlights from the Labor Department’s report include:

  • Employment growth eases slightly: The economy added 162,000 jobs in July, slightly less than the 189,000 average for the last 12 months. Payroll gains for June and May were revised down by a total of 26,000. Nonetheless, the unemployment rate fell to 7.4%, its lowest rate since December, 2008 as the more Americans found jobs and a handful of others dropped out of the workforce. Earlier this week, the government said gross domestic product grew at a lackluster 1.7% annual rate in the second quarter after a 1.1% gain in the first quarter.
  • Manufacturing ticks higher: The manufacturing sector added 6,000 jobs in July, breaking a four-month losing streak and providing new evidence the sector could be emerging from its first half slump. The Institute for Supply Management on Thursday said its broad index, in which any reading above 50 indicates expansion, jumped to 55.4 from 50.9 in June — the biggest one-month jump since 1996.
  • Consumer remains strong: The retail trade sector led job creation, adding 46,800 jobs in July, providing evidence that the consumer continues to support the recovery, despite data showing spending weakened in the second quarter. Similarly, leisure and hospitality rose 23,000. The downside: these tend to be lower paying jobs.
  • Government adds jobs: The public sector added 1,000 jobs, its first increase since April, boosted by local governments, which added 6,000 jobs. Local governments have showed strength in recent months as formerly cash-strapped cities start to recover somewhat from their long fiscal slump. Federal government payrolls fell 2,000.

July employment report: almost everything except the headlines stunk; warning flag for 2014 - The headline report for July 2013 employment is that 162,000 jobs were added, and the unemployment rate declined to 7.4%. Don't be deluded. Almost every other indicator in this report was poor. And the unemployment rate is a lagging indicator. Let's examine the carnage.  First, let's look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. Most of these were negative.

  • the average manufacturing workweek declined 0.2 hours from 40.9 hours to 40.7 hours. This is one of the 10 components of the LEI and will affect that number negatively.
  • construction jobs declined by -6,000, .
  • manufacturing jobs rose for the for the first time in 5 months in a row, up 6000.
  • temporary jobs - a leading indicator for jobs overall - increased by 7700
  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - declined by 129,000, and is about 125,000 off its lows.

Now here are some of the other important coincident indicators filling out our view of where we are now:

  • The average workweek for all workers declined 0.1 to 33.6 hours.
  • Overtime hours were down -0.2 to 3.2 hours.
  • the index of aggregate hours worked in the economy declined from last month's level of 98.6 (revised down to 98.5) to 98.4.
  • The broad U-6 unemployment rate, that includes discouraged workers declined from 14.3% to 14.0%, but is still above the sub-14% readings of this spring. The workforce declined 37,000. Part time jobs grew by 19,000.

The Employment Situation (5 graphs) Although the July employment report was weaker than expected, it was still in line with recent experiences. The household survey reported employment gains of 204,000 while the payroll report showed a gain of 162,000 jobs. Average hourly earnings for all employees on private nonfarm payrolls edged down by 2 cents to $23.98, following a 10-cent increase in June. The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour in July to 34.4 hours. In manufacturing, the workweek decreased by 0.2 hour to 40.6 hours, and overtime declinedby 0.2 hour to 3.2 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.6 hours. Hours worked fell below the trend of 0.2% monthly experienced so far in this cycle. The combination of weak average hourly earnings and a drop in hours worked meant that average weekly earnings was very weak. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.2 million in July. Parttime employment as a share of total employment rose from 18.8% to 18.9%. Many are arguing that the rise in part time employment is due to Obamcare. Maybe, but it is not an open and shut case. The series is highly volatile and can be heavily influenced by which sectors are growing. For example, if manufacturing employment is weak and retail employment is strong it will generate an increase in part time work because manufactures use few part-timers while retailers rely heavily on part-timers. Many CEOs are reporting that they will expand part time work to avoid the cost of providing health insurance. Interestingly they all seem to be in the leisure & hospitality industry that has always relied heavily on part time employment. The average work week in leisure and hospitality is about 25 hours that means the average employee in this industry is already a part time worker. Saying that expanded part-time work in leisure and hospitality is due to Obamacare is much like reporting that the sun rose in the east and blaming it on Obamacare.

Employment Report: Steady, but Slow Improvement - If we look at the year-over-year change in employment - to minimize the monthly volatility - total nonfarm employment is up 2.276 million from July 2012, and private employment is up 2.315 million. That is essentially the same year-over-year gain as in June (2.267 million total, 2.331 million private year-over-year in June). Steady, but not strong, job growth. Hourly wages declined slightly in July, but are up 1.9% year-over-year. Hourly wages were up 2.1% year-over-year in June.  In July, average hourly earnings for all employees on private nonfarm payrolls edged down by 2 cents to $23.98, following a 10-cent increase in June. Over the year, average hourly earnings have risen by 44 cents, or 1.9 percent. The decline in the unemployment rate to 7.4% from 7.6% in June was due to a larger increase in employment in the household survey (227,000 increase in jobs) combined with a decline in the participation rate (not good news). If the participation rate had held steady, the unemployment rate would have declined to 7.5% instead of 7.4%. In general this report was more of the same - steady but slow improvement. A few more graphs ...Since the participation rate declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old.This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. At the recent pace of improvement, it appears employment will be back to pre-recession levels next year (Of course this doesn't include population growth).The number of part time workers increased in July to 8.245 million. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 14.0% in July from 14.3% in June.This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.246 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 4.328 million in June and is at the lowest level since May 2009. This is trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US. State and Local Government This graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years.

The BLS Jobs Report Covering June 2013: Slow Build But In Poor Quality Jobs - In July, unemployment fell to 7.4%. This was because the labor force seasonally adjusted (trendline) was largely unchanged and so most of the 227,000 increase in employment came from net hiring among the unemployed and not those entering the labor force. Employment remains 2 million below the last peak in January 2008.  Unadjusted actual, full time employment rose by 288,000 and part time employment fell by 17,000. The trendline showed the opposite of this: a 92,000 increase in full time and a 172,000 increase in part time workers. The trendline is the future maybe. The actual unadjusted numbers are where we live month to month. There is no evidence for a bump in part time work due to the Obamacare corporate mandate. Besides, this mandate has been put on hold for a year.  My various real measures for unemployment (~12%) and disemployment (~17%), that is un- and under employment have been gradually improving, but 2013 is shaping up as not quite as good as 2012. Employment growth this year could be at or a few hundred thousand below what is needed to keep up with population growth, unless there is a larger than usual spurt at the end of the year. In the business survey, jobs increased by 162,000 seasonally adjusted. This was not quite as good as the previous two months. Additionally, the previous two months were revised down 26,000.  Unadjusted, the survey picked up this month a lot of the loss of government jobs (1.219 million) due to the end of the school year. These were mostly at the local government level. Still the overall number of jobs declined by only 113,000. Unadjusted, construction added 62,000 jobs. Manufacturing was static. Healthcare was unusually static too. Overall, the crapification of American jobs continued with increases in retail and hospitalitiy and leisure.  Both earnings and hours (only given in seasonally adjusted terms) fell in June. These losses were broadly based. Year over year average weekly earnings for the bottom 80% increased by 1.6% or at or below inflation. Year over year, the top 20%’s average weekly earnings increased by about 3.1% beating inflation.

An Economy Stuck in Second Gear - According to recent reports on gross domestic product, growth over the first half of the year averaged 1.4 percent.  Similarly, employment growth, including Friday morning’s payroll report of a net gain of 162,000 in July, has been cruising along at a remarkably steady annual rate of 1.5 percent to 1.7 percent for over a year (since April 2012). So what’s wrong with that? The problem is that we’re stuck in low gears.  Sure, first and second are better than reverse, and both the G.D.P. and job results confirm that the risk of going backward is low.  We’re reliably growing, but too slowly to absorb the residual slack in the economy left over from the Great Recession, even four years into an expansion that officially began in the second half of 2009.  Basically, the economics of our situation is that we’ve settled into something slightly below trend growth — with “trend” being the pace of growth that would be acceptable if we had repaired the residual damage. The growth rates presented above may nudge the unemployment rate down a bit, as occurred last month — the jobless rate fell from 7.6 percent to 7.4 percent (though a bit of that was due to people leaving the job market) — but unless we accelerate into higher gears it will be years before we get back to full employment. As The New York Times reported on Friday morning: “At the average rate of job growth seen so far this year, it would take more than seven years to close the so-called jobs gap left by the recession, according to the Hamilton Project at the Brookings Institution.” There’s nothing wrong with trend growth, unless you settle into to it too soon.  After a deep recession, there first needs to be a number of quarters of “bounce back,” as demand that was pent up during the downturn helps to quickly close output gaps.  But that’s not something we’ve seen in the United States economy in recent decades.  Our recoveries have been much too jobless and wageless for their first few years.

An Employment Number That Isn’t Budging - You’ve probably noticed that our friends over at the unemployment report are feeling pretty good this morning. After all, the unemployment rate fell to 7.4 percent, the lowest level since 2008. But alas, our news is not as good. The share of American adults with jobs is stuck at just 58.7 percent.Think about it this way: For every 100 American adults, 63 had jobs before the recession; now, only 59 do.We are adding jobs, but we also are adding people. And since the recession ended in 2009, we’ve added jobs and people at about the same pace. The unemployment rate is falling nonetheless because it doesn’t actually measure the share of people who are unemployed. It only counts people who are actively seeking work. And since the recession, a growing share of Americans are not even trying to find jobs. Some have given up; others appear to be avoiding the labor market by staying in school or at home.That’s not good for the economy. But it’s not clear how much we can realistically aspire to raise the employment rate.Part of the trend is driven by demographics. Americans are getting older, and retirees make up a growing share of the adult population. Some of the damage caused by the recession may also be irreversible. The share of Americans on disability has soared, in part because the program is serving as a safety net for people who might have find work in better times. But once on disability, people almost never return to work.

About the 7.4% Unemployment Rate for July 2013 - The BLS employment report shows the official unemployment rate declined two percentage points to 7.4%, mainly on a lower labor participation rate and more people being considered not part of the labor force.   This is the lowest official unemployment rate since December 2008 and at least a percentage point of the unemployment rate drop is due to the decline in labor force participation.  More people were employed as well.  People stuck in part-time jobs maintained their increases from last month.  Overall the CPS statistics do show a significant increase in those employed over the last year, yet the labor participation rate remains at artificial lows.  This article overviews and graphs the statistics from the Current Population Survey of the employment report.  The labor participation rate is now 63.4%, mentioned above.   The labor participation rate has declined -0.3 percentage points from a year ago.  This implies that those who were dropped from the labor force are staying out of the labor force  The -0.3 percentage points represents about 730 people.  For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age. The number of employed people now numbers 144,285,000, a 227,000 monthly increase.  We describe here why you shouldn't use the CPS figures on a month to month basis to determine actual job growth.  These are people employed, not actual jobs.   In terms of labor flows, those employed has increased 2.035 million from a year ago.  The noninstitutional population has also increased by 2.402 million during the same time period, so this is actually a good sign that people employed did really increase over the past year.  The statistics from the CPS do generally vary widely from month to month, yet two million more employed per annum is still not enough to correct the jobs crisis in America.   Below is a graph of the Current Population Survey employed.

The Age Equation in Employment Numbers - The rosiest take on the jobs report is that the aging of the country’s population has made the employment statistics look worse than they really are.That rosy take, in brief, goes like this: Yes, the percentage of Americans with jobs may not have risen much in the last couple of years. But the unemployment rate has fallen substantially during that time, and the unemployment rate is a better measure of the health of the labor market because its calculation excludes people who have stopped looking for work. With more people aging into retirement – the leading-edge baby boomers are now in their late 60s – it’s perfectly natural for more people to have stopped looking for work. The fact that the percentage of adults with jobs has held steady, rather than declined, is a sign that the economy is getting healthier. To figure out whether this take is basically correct (and whether those of us emphasizing the lack of increase in the employment-population ratio have been too downbeat), you can look at the employment-population ratio for people 25 to 54 years old. They are in the prime of their working lives, old enough to have graduated from high school or college and young enough not to be retired.  As you can see in the chart below, the ratio for people between 25 and 54 has not dropped as much as the overall ratio since the downturn began in late 2007: Yet it’s hard to take too much comfort in this chart. The percentage of prime-age Americans with jobs fell sharply during the 2007-9 downturn. It did not budge from 2009 through mid-2011, before rising somewhat in late 2011. In the last year and a half, it has not risen much further.

Construction Jobs Are a Wreck - The housing industry may be resurgent but construction jobs aren’t helping build payrolls. Friday’s employment report showed that construction industry jobs fell by 6,000 in July and are down three of the past four months. At a seasonally adjusted 5.79 million, the number of jobs in the sector is up less than 3% from a year earlier. Most other housing data has been solid. Home prices posted their largest gain since the housing boom peaked seven years ago during the first half of 2013. New-home sales surged in June, according to the most recent data. Of course, there have been some warning signs. Mortgage rates are rising, potentially putting off some first-time buyers. Private residential construction spending paused in June, though it remained up more than 18% from a year earlier. But the real culprit appears to be a big drop in public construction. Residential and specialty trade contractors — home builders — added 6,300 jobs in July. Meanwhile, the nonresidential side cut 9,500 jobs. Heavy and civil engineering subtracted another 2,000 positions. That fits with Commerce Department data earlier this week showing that public construction spending dropped to a nearly seven-year low, reflecting federal and state budgets remain constrained.

Record Jobs For Old Workers; For Others - Not So Much - While we have banged the table on the full vs part-time disconnect for so long even the mainstream media has finally caught up, another issue that few outlets mention let alone discuss is that all the job growth in the US has, so far, only benefited old workers: those 55 and older. July was no difference. As the chart below shows, of the 160k jobs broken down by age group, 60% went to workers aged 55-69. No jobs were added by those 16-19, 49K jobs went to recent college grads, or those otherwise aged 20-24, and a measly 15K jobs were gained by Americans in the prime working age between the years of 25-54.

Obamacare Full Frontal: Of 953,000 Jobs Created In 2013, 77%, Or 731,000 Are Part-Time - When the payroll report was released last month, the world finally noticed what we had been saying for nearly three years: that the US was slowly being converted to a part-time worker society. This slow conversion accelerated drastically in the last few months, and especially in June, when part time jobs exploded higher by 360K while full time jobs dropped by 240K. In July we are sad to report that America's conversation to a part-time worker society is not "tapering": according to the Household Survey, of the 266K jobs created (note this number differs from the establishment survey), only 35% of jobs, or 92K, were full time. The rest were... not.

Where The Jobs Are (Retail) And Aren't (Construction) One of the overlooked components of today's NFP report is that in July the one industry that posted a clear decline in workers was none other than Construction, the sector which is expected to carry the recovery entirely on its shoulders once Bernanke tapers and ultimately goes away, which saw a decline of 6,000 workers: the largest job loss by industry in the past month. Perhaps there isn't quite as much demand as some would propagandize? But most notably, and disturbingly, is that the industry with the most job gains in July was also the second lowest paying one: retail, which saw an addition of 47,000 jobs: far and away the biggest winner in the past month. The worst paying industry - temp jobs - rose by 8K in July following a revised 16K increase in June. And the reason for the swing in July: the plunge in another low-quality job group: Leisure and Hospitality, which increased by only 23K in July following 57K additions in June.

Ten Times More Waiter And Bartender Than Manufacturing Jobs Added In 2013 - This data really doesn't need much explanation. Here are the facts: so far in 2013:

There have been 246.5K Waiter and Bartender (Food Service and Drinking Places) jobs added
There have been 24.0K Manufacturing jobs added

The ratio of waiters and bartenders to manufacturing jobs: 10 to 1.

A Job, at Last -- Perhaps the most disturbing part of the Great Recession was how high long-term unemployment got. It is getting better, slowly, and finally is at least lower than it was at the economic bottom in the early 1980s. The chart below shows the proportion of the labor force that has been out of work for at least 15 weeks. At the worst in 2010, that figure was up to 5.9 percent, by far the highest since the government began collecting that data in 1948. The highest it had gotten before 2009 was 4.2 percent, in January 1983. Now it is down to 3.9 percent, at least within the range of past experience.There are still six million people listed as unemployed for more than 15 weeks, but that number is down by a third from the peak. Of course, it is possible that some of the long-term unemployed simply gave up and dropped out of the labor force, and are therefore no longer counted as unemployed. But it appears that a lot of them have found work — finally.

Five Takeaways From Jobs Report - Economists are still digesting today’s report, but here are five initial takeaways:

  • A weakening trend: Don’t get too concerned about the headline number being weaker than expectations — it’s well within the margin of error. But the Labor Department also revised down its estimates of May and June hiring by a combined 26,000 jobs. That pushes the six-month average for job growth below 200,000 jobs.
  • Bad news about “bad jobs”: June’s job figures showed an unexpected 10-cent rise in average hourly wages, which sparked hopes that the labor market had improved enough to start pushing up earnings. Today’s report suggests that was too optimistic. Hourly wages fell by 2 cents on average — not a huge drop, but nonetheless a move in the wrong direction. Meanwhile, more than half of all private-sector hiring came in the low-paying retail and restaurant sectors. That will likely add to fears that the jobs being created are of poor quality.
  • Storm clouds ahead: Job growth is generally a so-called lagging indicator, reflecting economic changes only in the rearview mirror. But there are hints of the future in the jobs report, and this month they generally suggest a weakening outlook. Companies trimmed employees’ hours, a sign they’re seeing less demand for their products and services, and temporary jobs — which can be an indicator of permanent hiring in the future — grew at their slowest pace since last fall. Little confidence from workers: Job seekers saw their fortunes improve somewhat in July: 19.8% of unemployed workers found jobs, the best mark of the recovery. But if anything, workers appeared to grow more pessimistic. Some 2.3 million unemployed workers gave up looking in July, the most since last fall, and fewer people re-entered the job market to look for work. Close to a million Americans say they’ve given up looking for jobs because none are available, a figure that’s actually risen over the past year, while the number saying they’re stuck in part-time jobs involuntarily was unchanged from a year earlier.
  • Health hiring slows: Few engines of job growth have been more reliable in recent years than the health care industry, which added workers throughout both the recession and recovery. But the sector added a mere 2,500 jobs in July, the fewest in a decade.

Good and Bad News in Unemployment Rate Drop - The U.S. unemployment rate dropped 0.2 percentage point to 7.4% in July and a broader measure of unemployment fell to 14% from 14.3%, but there was good news and bad news behind the declines. The drop in the main unemployment rate was driven by both positive and negative factors. Most of the drop was due to more people finding work. Some 227,000 more people said they were employed in July compared with June. But at the same time the overall labor force dropped by 37,000, a possible sign of discouraged long-term jobless dropping out. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force. While the number of people who were employed increased, another positive sign was a big drop — 263,000 — in the number of people who say they’re unemployed. Many of the unemployed found jobs this month, but at least some gave up and stopped looking for jobs. Another mixed sign came from the decline in the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department. That includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The drop in the U-6 rate last month was driven by the same positives in the main rate, fewer unemployed. However, the drop only partially offset a huge jump in June. Meanwhile, the number of part-time workers who would like full-time jobs continued to increase, even after a big surge in June. There are still many workers who can’t find a full-time position, highlighting the continuing problems. More than four million people have been out of work for more than six months and over 11.5 million in total are looking for work. There’s still a big hole in the jobs market.

Low Pay Clouds Job Growth - The U.S. labor market's long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries. Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. Yet even as job growth slowed, the unemployment rate fell to 7.4% from 7.6%, the lowest level since December 2008. The falling jobless rate reflects to some degree a pace of hiring that, though slow, has remained steady over the past year even as the broader economy has grown in fits and starts. The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth. But the drop in the unemployment rate is also the result of a job market that remains too weak to draw back workers who have dropped out of the labor force. Some 6.6 million workers say they want a job but don't count as unemployed because they aren't actively looking, a number that has barely budged in the past year. The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low.

U.S. Cuts Take Increasing Toll on Job Growth - The number of federal workers forced to work shorter hours soared this summer — to 199,000 in July, from 55,000 a year earlier — in a sign of the problems that federal budget policy is causing for the economy. The Labor Department reported on Friday that the economy continued to add jobs in July and that the unemployment rate fell to 7.4 percent, from 7.6 percent. But the pace of job growth slowed somewhat from the first half of the year and remains modest enough that the economy is years away from a full recovery. Contributing to the hangover from the worst financial crisis in decades is a wave of cuts in domestic and military spending, known collectively as the sequester, which is causing government furloughs as well as job losses and curtailed hours among federal contractors. Although the sequester became law on March 1, some of the effects, like the forced leaves, have begun to ramp up only recently. More job losses, rather than shorter workweeks, are predicted if the cuts remain in place into next year.

Furloughed Fed Workers Boost Underemployment - The number of federal employees working part time but who would prefer full-time jobs more than tripled in the past year, a figure that shows the underlying effect of across-the-board budget cuts on the labor market. Last month, 199,000 federal workers were working part-time because they couldn’t obtain full-time work, a sharp increase from 55,000 a year earlier, according to Labor Department data released Friday. The cutbacks appear to be propping up the number of U.S. workers said to be working part-time for economic reasons, an important measure of under utilization of the labor force. The overall number of employees involuntarily working part-time is virtually unchanged from a year ago. As the labor market improves, the expectation is the number of underemployed workers would fall. More federal workers are likely reporting working part-time for economic reasons because many full-time employees are taking unpaid days off as a result of the budget slashing known as the sequester. For example, many of the Defense Department’s civilian staff began taking one furlough day per week in July and are scheduled to continue to do so through September. The average workweek for federal employees fell by a half-hour from a year earlier to 39.4 hours in July.

Skyrocketing Numbers of Federal Workers on Forced Leave -  The latest jobs report showed that federal workers didn’t lose jobs in July, leading to some suggestions that the sequester hasn’t affected government employment. But the overall federal government jobs total doesn’t capture furloughs — that is, forced unpaid leave — because people who are being furloughed for say, one day a week, are technically still counted as being employed. The picture looks very different if you examine the number of federal workers who say they are reluctantly working part time because they cannot get full-time hours. The number of these “involuntary part-timers” jumped in July, to 199,000. That is nearly four times the number of involuntary part-timers in the federal government in 2012 and in 2011. (The numbers are not seasonally adjusted, so it’s best to use year-over-year comparisons.) In fact, as I explained in July, in every month since February, the number of reluctant federal part-timers has been higher than its level in 2012. In each of those months in 2013, the level has also been higher than in 2011, with the exception of April, when there were an equal number of federal part-timers for economic reasons in 2011 and 2013 (64,000).And of course, these figures show only what’s happening with federal workers. There are many private-sector workers whose jobs and hours depend on federal money, too, as I wrote in an article in June. 

Graphs: Duration of Unemployment, Unemployment by Education, Construction Employment and Diffusion Indexes - A few more employment graphs by request ... This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The general trend is down for all categories, but only the less than 5 weeks is back to normal levels. The long term unemployed is at 2.7% of the labor force - the lowest since May 2009 - however the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment - and the unemployment rate is moving sideways for those with a college degree! Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". This graph shows total construction employment as reported by the BLS (not just residential). According to the BLS, essentially no construction jobs have been over the last five months. Historically there is a lag between an increase in activity and more hiring - and it appears hiring should pickup significant in the 2nd half of 2013 (I also think construction employment will be revised up in the annual revision). The BLS diffusion index for total private employment was at 54.5 in July, down from 57.3 in June. For manufacturing, the diffusion index increased to 50.0, up from 45.7 in June. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Seasonality adjustment magic aside, private payrolls are growing in a linear fashion - The media is making a great deal of July's non-farm payroll numbers in the US. The situation is quite simple actually - we are seeing the same level of growth we've seen in the past couple of years - no more, no less. Part of the issue here is the noise related to seasonal adjustments. As the US job market composition changes, so do some seasonal patterns - which is what the Labor Department is having a bit of trouble with.  Analysts in the highly seasonal energy industry often don't bother with seasonal adjustments. They simply compare each data point to the range for the same month during previous years. Focusing just on the private sector payrolls without the seasonal adjustments, here is what we get. No surprises, no seasonal adjustment magic.And this is what the July payroll number looks like through time. The post-2009 growth is nearly linear, adding on average 2.25 million private jobs per year. Similarly, some are pointing out that there is a higher than expected number of temporary jobs in the July report. Once again, it's the issue of seasonal adjustments. The percentage of temporary workers is actually right where it has been for the past several years in July - just over 20%.

U.S. Multinationals Were Hiring Like Mad in 2011...Abroad - U.S. multinational corporations were actually hiring in 2011 as they were in 2010.  In an updated BEA summary on sales, investment and employment by Multinational Corporations for 2011, we have a 0.1% increase in hiring for jobs in the United States while MNCs increased their hiring abroad by 4.4%.  Graphed below are multinational corporation employees residing in the United States, scale on the left, against multinational corporation employees located abroad, scale on the right.  As we can see multinational corporations are clearly reduced their staff in the U.S. while increasing it in foreign nations.  In other words, multinational corporations are not just offshore outsourcing to external, 3rd parties, but also offshore outsourcing American jobs directly. This is the third year in the row for hardly any growth in U.S. payrolls by these multinational firms.  Yet while America goes hurting for jobs, we see multinationals are doing plenty of hiring, just in other countries.  Worldwide employment by U.S. multinational companies (MNCs) increased 1.5 percent in 2011 to 34.5 million workers, with the increase primarily reflecting increases abroad. In the United States, employment by U.S. parent companies increased 0.1 percent to 22.9 million workers, compared with a 1.8 percent increase in total private industry employment in the United States. The total employment by U.S. parents accounted for roughly one-fifth of total U.S. employment in private industries. Abroad, employment by majority-owned foreign affiliates of U.S. MNCs increased 4.4 percent to 11.7 million workers.

Unemployment’s Down, But More Unemployed Workers Lack Jobless Benefits:  Here’s another reason why the need for SNAP remains high:  while the number of unemployed workers has fallen since 2010, the number who receive no state or federal unemployment insurance (UI) benefits has risen and is higher now than at the depths of the recession (see graph).  These jobless workers are the most likely to qualify for SNAP because they have neither wages nor UI benefits. As our new paper explains: A smaller share of unemployed workers now receive UI for several reasons.  One is the length and depth of the protracted jobs slump, which has left many workers unable to find work before their UI benefits run out.  In addition, a number of states have cut the number of weeks of regular, state-funded UI benefits in recent years; these changes also shorten the number of weeks of federal UI benefits a person can subsequently receive.In addition, the duration of federal UI benefits (which go to long-term unemployed workers) has fallen.  This reflects several factors.  One is the decline in the official unemployment rate in many states, which itself leads to automatic reductions in the number of weeks of federal Emergency Unemployment Compensation benefits available in those states. Another factor is federal changes implemented in 2012 in the number of weeks of federal UI benefits provided irrespective of improvements in economic conditions. A third factor is the disappearance from every state except Alaska of another source of long-term UI benefits, the federal Extended Benefits program (which is designed to “trigger on” automatically when a state’s unemployment rate is rising rapidly, but under the same formula, ceases to remain available once unemployment stops rising even if the state continues to experience a long period of severely elevated unemployment).

Oldest Boomers Are Increasingly Facing Discrimination in the Workplace - The oldest boomers begin turning 68 next year, when they will exceed full retirement age for even the youngest of their generation. Yet many remain on the job and have pushed back their target date for calling it quits. About half of the oldest boomers, born in 1946, have left their employer for good, according to a MetLife report. But 21% remain on the job full time and 12% are working part time. They have delayed retirement for reasons that range from hardship to simply wanting to stay in the game longer. On average, they now want to retire at 71; in 2008 the target retirement age was 66. As the oldest boomers blaze the trail into an extended working life, increasingly they are experiencing classic age discrimination. One in five workers between 45 and 74 say they have been turned down for a job because of age, AARP reports. About one in 10 say they were passed up for a promotion, laid off or denied access to career development because of their age.

More Jobs and Higher Middle Class Incomes as Economic Policy Job #1: Housing Policy Edition - Four years ago, Obama pivoted to the Axelrod-Geithner line that the decline had stopped, economic recovery was on the way and could handle itself, and that economic policy job #1 was stabilizing the long-term finances of the federal government. Now, after four largely wasted years spent mostly talking about the deficit, he may be pivoting back:"I want to make sure that all of us in Washington are investing as much time, as much energy, as much debate on how we grow the economy and grow the middle class as we’ve spent over the last two to three years arguing about how we reduce the deficits", Mr. Obama said. He called for a shift "away from what I think has been a damaging framework in Washington."This is most welcome. Let us hope that it is indeed permanent.

Most Cities See Unemployment Improvement, but Some Still Languish - Unemployment continued to fall in June in most of the nation’s metropolitan areas as payrolls increased, though progress remained uneven. The unemployment rate was down in 272 of the country’s 372 metropolitan areas year over year, the Labor Department reported Tuesday. The rate rose in 73 and was unchanged in 27 areas. Two border towns about 60 miles apart had the highest unemployment rates — Yuma, Ariz., at 31.8% and El Centro, Calif., at 23.6%. The two cities, both pinched by the housing bust and tighter border security, are moving in opposite directions. El Centro saw the biggest year-over-year decrease, with unemployment down 5.4 percentage points, while Yuma had the largest increase at 3.4 percentage points. A separate report by Arizona’s Department of Administration said Yuma county lost most heavily in the government jobs category during June — likely seasonal losses in public education. Bismarck, N.D., enjoying an energy boom, had the lowest rate among metropolitan areas at 2.8%. The average national unemployment rate in June was 7.8%, not seasonally adjusted.

Fighting Back Against Wretched Wages – NYTimes -  OFTEN relegated to the background, America’s low-wage workers have been making considerable noise lately by deploying an unusual weapon — one-day strikes — to make their message heard: they’re sick and tired of earning just $8, $9, $10 an hour.  Their anger has been stoked by what they see as a glaring disconnect: their wages have flatlined, while median pay for chief executives at the nation’s top corporations jumped 16 percent last year, averaging a princely $15.1 million, according to Equilar, an executive compensation analysis firm.  In recent weeks, workers from McDonald’s, Taco Bell and other fast-food restaurants — many of them part-time employees — have staged one-day walkouts in New York, Chicago, Detroit and Seattle to protest their earnings, typically just $150 to $350 a week, often too little to support themselves and their families. More walkouts are expected at fast-food restaurants in seven cities on Monday. Earlier this month hundreds of low-wage employees working for federal contractors in Washington walked out and picketed along Pennsylvania Avenue to urge President Obama to press their employers to raise wages.

Obama Says Income Gap Is Fraying U.S. Social Fabric -  In a week when he tried to focus attention on the struggles of the middle class, President Obama said in an interview that he was worried that years of widening income inequality and the lingering effects of the financial crisis had frayed the country’s social fabric and undermined Americans’ belief in opportunity. 40-minute interview with The New York Times, “was part and parcel of who we were as Americans.”  “And that’s what’s been eroding over the last 20, 30 years, well before the financial crisis,” he added.  “If we don’t do anything, then growth will be slower than it should be. Unemployment will not go down as fast as it should. Income inequality will continue to rise,” he said. “That’s not a future that we should accept.”

Inequality: Obama’s Speech, Detroit’s Bankruptcy, Taxes - The progressive prescription for curing the economy isn’t austerity–it is investment in infrastructure, education, innovation, and restoration of a manufacturing base that makes things in the USA for sale and use in the USA. Manufacturing: “The first cornerstone of a strong and growing middle class has to be an economy that generates more good jobs in durable, growing industries. Over the past four years, for the first time since the 1990s, the number of American manufacturing jobs hasn’t gone down; they’ve gone up. But we can do more. So I’ll push new initiatives to help more manufacturers bring more jobs back to America.” Innovation: “And I’ll push to open more manufacturing innovation institutes that turn regions left behind by global competition into global centers of cutting-edge jobs.” Infrastructure: “We’ve got ports that aren’t ready for the new supertankers that will begin passing through the new Panama Canal in two years’ time. We’ve got more than 100,000 bridges that are old enough to qualify for Medicare. Businesses depend on our transportation systems, our power grids, our communications networks – and rebuilding them creates good-paying jobs that can’t be outsourced. And yet, as a share of our economy, we invest less in our infrastructure than we did two decades ago.” …[and Education:] If we don’t make this investment, we’ll put our kids, our workers, and our country at a competitive disadvantage for decades. So we must begin in the earliest years. That’s why I’ll keep pushing to make high-quality preschool available to every four-year-old in America – not just because we know it works for our kids, but because it provides a vital support system for working parents.

Text of Obama’s Remarks on Middle-Class Jobs - President Barack Obama's remarks on middle-class jobs in Chattanooga, Tenn., as prepared for delivery.

Inequality in America - The Data Is Sobering -  The good news is that President Obama appears to have decided to devote the rest of his presidency to trying to tackle the forces behind the yawning inequities that have hamstrung social and economic mobility, eroding the living standards of the middle class.  The bad news is that he may not be up to the task.  Consider the ideas he outlined during his speech at Knox College last week. Some are old. Some are new. Some are good, some less so. But the main problem with the set is that the politically feasible — those that he articulated with the most specificity — are the least likely to change the nation’s economic dynamics. Connecting the nation’s schools to broadband is a good idea. So is tweaking the tax code to help ordinary Americans save for retirement. Measured against what the president called “the forces that have conspired against the middle class for decades,” however, they are less than overwhelming.  The president’s most powerful proposals, by contrast — including investment in infrastructure, a higher minimum wage and universal preschool for 4-year-olds — remain as unlikely as ever to emerge from the nation’s partisan divide.  Many opponents simply reject Mr. Obama’s basic premise. Some researchers on the right of the political spectrum argue that inequality is not, in fact, gaping. Others contend that middle class stagnation is a myth concocted by the left to justify retro government activism à la 1970.

More Obama Big Lies: Touting Sweatshop Amazon Warehouse Jobs as “Middle Class” - Yves Smith - Obama needed a visual to show that, no, really, truly, jobs really are being created somewhere in America for yet another one of his exercises in trying to pretend that he’s on the side of ordinary Americans. But it’s hard finding any really good success stories in an economy with 12.2 million counted as unemployed and over 28 million as “disemployed” which is the number of people out of work relative to normal labor force participation rates when the economy is in good shape. So Obama chose as his backdrop an American success story, Amazon, which is opening a new a warehouse in Chattanooga and hiring 7,000 people. But Obama in trying to tout this as a success story revealed either that he’s completely out of touch or that he’s conditioning American to regard a state of peonage as middle class. Not all that long ago, “middle class” meant you could after a few years of work and savings, buy a house in the suburbs, afford to have children and have a reasonably comfortable family life, and send those kids to college.  If you had any doubts that that vision of middle class life was on its way to extinction, the Obama speech made it official. Amazon has been repeatedly cited here and abroad for abusive conditions in its warehouses. The Los Angeles Times reported in 2011: Workers said they were forced to endure brutal heat inside the sprawling warehouse and were pushed to work at a pace many could not sustain. Employees were frequently reprimanded regarding their productivity and threatened with termination, workers said. The consequences of not meeting work expectations were regularly on display, as employees lost their jobs and got escorted out of the warehouse. During summer heat waves, Amazon arranged to have paramedics parked in ambulances outside, ready to treat workers. In a better economy, not as many people would line up for jobs that pay $11 or $12 an hour in a hot warehouse.

Obamacare and Employment - If you listen to CNBC or read right wing blogs you would think that the Obamacare regulations that require  large employers — over 50 full time equivalent employees –to provide their employees insurance or pay a penalty is leading to a massive shifting of employees from full time to part time.  CNBC is constantly interviewing business owners who say they are shifting time workers from full time  to part time.  It makes for a logical argument, but the data does not support it.  So far this cycle part time employment is growing slower than full time employment so  part time employees share of employment is falling.  Part time share of employment seems to be following a normal cyclical development of surging during recession and declining during the recovery.   At a minimum this ratio says that shift full time employees to part time employees is not large enough to show up in the  the data. Another way to look at the issue is to look at the average workweek.  The average workweek is impacted by two types of changes.  One, is employment growth in different industries with different work practices.  For example, manufacturing uses very little part time labor and the average workweek is actually over 40 hours.  While retail has long used part time labor extensively and the average workweek in retail is now only 30.1 hours.  If manufacturing employment is growing faster than retail employment the average workweek will tend to lengthen.  But it will shorten if retail employment is growing faster than manufacturing employment. What we have this cycle is that employment in these two industries appear to be in balance, and so generating a flat workweek.

STUDY: Very Few Employers Have Actually Cut Workers' Hours Because Of Obamacare - With implementation of the Affordable Care Act inching closer by the day, there’s been a slow but steady stream of employers claiming that the law is forcing them to cut back workers’ hours and rely more heavily on part-time employees. But for all the talk, very few companies have actually cut hours because of Obamacare, according to a new analysis by the Center for Economic and Policy Research (CEPR).  Obamacare requires firms that have 50 or more employees to provide a minimum level of health coverage to their full-time workers.  Nonetheless, reform critics have latched onto the narrative that the requirement is a job-killer, citing the example of retail and service sector companies like Regal Theaters that are cutting back hours to avoid paying for workers’ health care benefits.  The CEPR report shows that to be a minority position among larger employers. Since 30 hours per week is the threshold for employees receiving benefits under the law, researchers expected companies that didn’t want to comply with Obamacare to roll back workers’ hours to just below that threshold. But only about 0.6 percent of the labor force worked between 26 and 29 hours per week in 2013. Since 2012, the number of part-time employees working that range of hours actually stayed statistically the same.

80 Percent Of U.S. Adults Face Near-Poverty, Unemployment: Survey  — Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor, and the loss of good-paying manufacturing jobs as reasons for the trend. . As nonwhites approach a numerical majority in the U.S., one question is how public programs to lift the disadvantaged should be best focused – on the affirmative action that historically has tried to eliminate the racial barriers seen as the major impediment to economic equality, or simply on improving socioeconomic status for all, regardless of race. Hardship is particularly growing among whites, based on several measures. Pessimism among that racial group about their families' economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy "poor."

80% Of US Adults Are Near Poverty, Rely On Welfare, Or Are Unemployed - Despite consumer confidence at a six-year high, the latest AP survey of the real America shows a stunning four out of five U.S. adults struggle with joblessness, are near poverty, or rely on welfare for at least parts of their lives amid signs of deteriorating economic security and an elusive American dream. Hardship is particularly on the rise among whites, based on several measures. Pessimism among whites about their families' economic futures has climbed to the highest point since at least 1987.

US Fast Food Workers Strike, Demand 100% Pay Raise - "It's noisy, it's really hot, fast, they rush you. Sometimes you don't even get breaks. All for $7.25? It's crazy," is how one worker described the conditions that have caused her and the rest of America's fast-food employees to go on strike today. They demand the right to unionize and better pay - calling for a raise in the minimum wage from $7.25 to $15. Workers chanted, "Supersize our wages," as spokespersons for the Fast Food Forward campaign explained the economic logic, "If they have more money in their pockets, they'll spend it right here, helping to boost the entire economy." Which leaves us asking the always awkward question - where does this new 'economy boosting' money come from for this 107% pay rise? With gas prices rising, rents soaring and many employees already reliant on food stamps and medicaid, "I can't even order something off the menu with what I earn," one worker noted, "It makes me wonder what I'm even doing there." Indeed it does with all those benefits on offer elsewhere.

Fast Food Strikes Catch Fire - Early this morning, fast food workers in New York, St. Louis and Kansas City, Mo. launched strikes demanding both a wage increase to $15 an hour—from a median of $8.94—and the right to form unions without employer interference. Later this week, workers in Chicago, Milwaukee, Detroit and Flint, Mich., will also go out on strike, expanding the reach of the movement of fast food workers (and, in Chicago, retail workers) that started with protests in New York and Chicago last year and grew into a series of one-day strikes throughout 2013. In Flint and Kansas City, strikes are taking place for the first time; in other cities, strikes will expand to target new franchises. Organizers anticipate that thousands of fast food workers will join in the strikes, which coincide with heightened public awareness of wage stagnation and economic inequality. Some strikers may stay out longer than a single day.The fast food strikes are part of a broader movement by low-wage workers for higher pay and union representation that has caught fire over the past year.

Strikes, Alliances, and Survival - Fast-food workers in seven cities are set to walk off their jobs today in one-day actions, escalating what is quickly becoming a nationwide effort to win pay hikes in one of America’s premier poverty-wage industries. Backed by the Service Employees International Union (SEIU), the campaign is succeeding in publicizing the plight of low-wage workers in a growing number of states and cities. How it goes about actually winning higher wages, however, remains unclear. For its part, the AFL-CIO is preparing for its biennial convention this September, at which it will begin to hammer out some kind of formal affiliation or partnership with other, nonunion progressive organizations such as the NAACP and the Sierra Club. There are changes afoot within the union’s Working America affiliate—a Federation-run and –funded neighborhood canvass that has expanded from a purely (and brilliantly successful) electoral operation, building support for progressive Democrats among white working-class swing-state voters, to an organization bent on raising the minimum wages in selected states and cities.

“The Media Just Won’t Report on This Crappy Economy,” Such As 80% of US Adults Near Poverty, GDP Funny Business - Yves Smith - Reader Cathryn Mataga complained yesterday in comments about the under-reporting of how bad things are out in the real world where most people live. It’s not hard to find proof of her thesis. I received an e-mail today about an Associated Press story that ran on July 28, “80 Percent Of U.S. Adults Face Near-Poverty, Unemployment: Survey.” The findings are grim: Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor, and the loss of good-paying manufacturing jobs as reasons for the trend.The findings come as President Barack Obama tries to renew his administration’s emphasis on the economy, saying in recent speeches that his highest priority is to “rebuild ladders of opportunity” and reverse income inequality. Notice the framing: the story uses as its hook the contrast between how precarious most Americans’ hold on prosperity is, versus Obama’s rather late in the game efforts to do something to improve the welfare of ordinary citizens.  This piece tells us that things are much worse than most pundits would have you believe, namely, that the overwhelming majority of Americans encounter serious hardship. Now perhaps it was just an accident of happenstance that it didn’t get traction (Huffington Post did feature it, but Obama has told us that you can’t believe everything you see in the Huffington Post, so that doesn’t count). But I wonder if it was politely ignored by many MSM reporters precisely because reporting the survey on a timely basis would undercut Our Fearless Leader’s empty gestures towards what is left of the middle class.

More Than 1 in 3 Young Adults Still Live With Their Parents - The Great Recession ended in 2009. Isn’t it about time that 20-somethings start striking it on their own?Despite the improving job market, 36% of young adults aged 18 to 31 — also known as Millennials — were living in their parents’ homes in 2012, up from 34% in 2009, according to a new Pew Research Center analysis of U.S. Census Bureau data. In fact, Pew finds that it’s the highest share in at least four decades. “I was surprised by this recent increase. If we look at 1981, 31% of young adults were living in their parents’ households. For 25 to 30 years, there wasn’t much of a change,” said Richard Fry, senior research associate at Pew Research Center and the author of the report. “This is a new increase.”  Mr. Fry named some contributing economic and social factors to account for the increase in young adults living with mom and dad. Millennials are still having trouble finding their footing in the job market since the financial crisis. A larger share have been putting off entering the real word altogether by enrolling in school. And, an increasing share has been postponing major life events, such as marriage. ”I think these three basic factors, particularly job holdings, are important,” said Mr. Fry.

Millennials, in Their Parents’ Basements - Last year, a record 36 percent of people 18 to 31 years old — roughly the age range of the generation nicknamed the millennials — were living in their parents’ homes, according to a new Pew Research Center analysis of Census Bureau data. That compares to 32 percent of their same-aged counterparts in 2007, the year the recession began. Pew Research Center Notes: “Living at home” refers to an adult who is the child or stepchild of the head of the household, regardless of the adult’s marital status.  And despite the frequent stories of recent college graduates stuck on their parents’ couches (or in their basements or above their garages), it is actually young people without bachelor’s degrees who are most likely to be living at home. The survey data, by the way, counts people who are living in college dormitories as living at home with their parents. Younger millennials (those 18 to 24) are more likely to be counted as living with their parents, partly because they are more likely to be in school.

Low Pay Keeps Millennials Stuck at Home - It seems that fast-food wages can't pay the rent these days, so this week fast-food workers took to the streets in protest. Then panic ensued, and Fox News immediately launched a counter-offensive by putting on a high-priced restaurant lobbyist to argue that America's most titanic and profitable corporations, as well as the largest job creators, can't afford to pay their employees a living wage. If this is true, then capitalism, as we once knew it, has come to a shuttering halt. According to a new report by the Pew Research Center, as of last year 36% of the nation's young adults (ages 18 to 31) were living in their parent's home...the highest share in at least four decades. Pew reports that 21.6 million Millennials lived in their parent's home in 2012, up from 18.5 million before the Great Recession hit in 2007. The reasons given were declining employment, rising college enrollment and declining marriage. In 1973, as an unskilled laborer working at the Spalding factory in Chicopee Falls Massachusetts, one could earn $7.50 an hour, more than the minimum wage is today. (Back then, the minimum wage was $1.60 a hour). And as a union member, one also had healthcare and pension benefits as well. Today, according the Bureau of Labor Statistics' inflation calculator, that same $7.50 an hour 40 years ago would be $39.44 an hour in today's dollars, as the minimum wage is currently $7.25. Accounting for inflation, it should be at least $8.41 --- but because now, most rely on service industry jobs, as opposed to manufacturing jobs, it should be much higher. Back in 1973, a job at McDonald's wasn't a considered a "real" job, but a part-time job for those still in school. But the times, they are a changing.

The Backyard Shock Doctrine -  Economically speaking, the Obama era has been a five-year nightmare for Black America.The unemployment rate for blacks now stands at 13.7%, almost twice the rate for all eligible workers. Under other circumstances, 13.7% unemployment would be a national crisis; it would dominate the headlines and the nightly news and the editorial pages; 13.7% unemployment would have any politician in office fearing for his or her career. In Washington, there would be blue-ribbon commissions, congressional hearings, and expert panels. But because we're talking about 13.7% of eligible black workers, there is no outrage. Except for the anger and pain felt within the black community, that jobless rate is a silent scandal.The wealth of African Americans is in similarly dire straits. Many black families saw their personal wealth, significant amounts of it invested in their homes, evaporate in the economic collapse of 2007-2009, triggered by a housing meltdown in which African Americans were disproportionately targeted for shoddy subprime mortgage loans. As of 2010, the median net wealth of black families was $4,900; of white families, $97,000. A third of black households had zero or negative wealth. Gains made across generations were wiped out like that.Consider these statistics the vital signs of Black America in the Obama era. As Laura Gottesdiener writes in her debut at TomDispatch, there may be no more vivid illustration of their collective economic distress in these years than the foreclosure crisis pocking the inner cities of Atlanta, Chicago, Detroit, Minneapolis, and Philadelphia, among other places.

Report: 5 Million Could Lose Food Stamps by November - The House Agriculture Committee's farm bill would have denied food stamp benefits to as many as 5.1 million Americans, or more than 10 percent of the Supplemental Nutrition Assistance Program's enrollment, according to a new analysis by the Pew Charitable Trusts and the Robert Wood Johnson Foundation.The estimate, based on an exhaustive analysis of how new asset tests (such as having $2,000 or more in cash, or by owning a second car, or by receiving assistance through the Low Income Home Energy Assistance Program) could disqualify applicants, reveals a deeper impact than the one last estimated by the Congressional Budget Office, which had said the House bill would cut fewer than 2 million from benefits. Also according to the report:

  • Approximately 97.3 percent of SNAP households actually have net incomes at or below the poverty line.
  • More than 42 percent of SNAP households live in deep poverty, meaning their gross monthly incomes were at or below 50 percent of the federal poverty level; for a family of four in 2012, that equaled $960 or less per month.
  • Fifty three percent of households self-identified as White, 22 percent as African American,19 percent as Hispanic and 6 percent as from other racial and ethnic categories.
  • Seniors over 60 and the disabled wouldn't be affected by the cuts.

The GOP Wants to Slash Food Stamps: Here's Exactly How Many of Their Constituents Would Suffer - To get an answer, we dug through Census data* on the number of food stamp recipients in each House district in the 112th Congress, which was in session from January 2011 until January 2013, then compared areas represented by Democrats and Republicans (check out the spreadsheet here). What we found wasn't necessarily shocking, but it was instructive. Republicans tend to represent plenty of food stamp recipients, but unlike many Democrats, not nearly so many that they'd ever have to worry about them at the polls.  In the average congressional district, we found that about 11 percent of all households received food stamp benefits. In Democrat-controlled seats, the average was about 13 percent, while in Republican districts it was about 10.7 percent. That difference might seem small, but as is often the case, the averages hid some vast variations.  As shown in the chart below, GOP districts tended to be very consistent. In almost half of them, 8 to 12 percent of households benefitted from food stamps (percentages are rounded). Not so for Democrats, who represented a much larger number of high-food stamp areas. Of the 34 districts where at least 20 percent of all households got food help from Washington, all but four were represented by Democrats.

Still living with your parents? Inequality hits home - In recent days, President Obama has returned to speaking on the theme of rising economic inequality in America since the 1970s (e.g., here and here), addressing the insecurity that it has caused the middle class, which now needs more hands on deck working harder to keep up, and speaking about how it has demorilized young people unlucky enough not to be born into advantage. To be sure, some claim that inequality has not been widening and that, even if it has, the middle class has nonetheless done just fine (e.g., here). The dueling calculations in this debate can get pretty complex, though most serious scholars agree with the President’s summary (see these earlier posts: here, here, here, here). A new study reveals what has been going on from yet another viewpoint: that of parents and grown-up children who are living together. Demographers Joan Kahn, Frances Goldscheider, and Javier García-Manglano have just published an important paper [1] tracking Americans’ living arrangements over 50 years. Their results send two strong messages: One, the economic struggles of young adults today, particularly of men and of the less-educated, have led many more of them to live with their parents than before. And, two, young people living with parents increasingly depend on their parents’ income. Both findings reinforce the President’s concerns about our economic stagnation.

Record 21 Million 'Young Adults' Now Live With Their Parents - Just about a year ago we questioned the "demographic demand" thesis for why the US housing 'recovery' would become self-sustaining and lead to yet another fiscal and monetary 'nirvana'. However, while the 'household formation' meme remains front-and-center among bloviating Fed apologists; the sad facts are that not only is household formation actually still falling but, as a recent Pew Research study finds, a record 21 million young adults are now living at home with their parents.

Record 8.9 Million Workers Now on Disability Benefits - More than 76,000 workers went on the federal government's disability program in July, according to the latest data from the Social Security administration, bringing the total number of new enrollees this year to 534,038. Although that is down somewhat from the same month last year, enrollment in the Social Security Disability Insurance program remains sharply higher than it has been historically. Since 2009, an average of about 1 million workers have gone on SSDI annually — a 31% increase from the average enrollment over the previous 10 years. As a result, a record 8.9 million workers are now collecting disability benefits, which is up 15% since the recovery officially started in mid-2009. Today, there are fewer than 13 Americans working in private sector jobs for each worker on disability. That's down from 31 workers per disabled in 1990. At the same time, the SSDI program is heading rapidly toward insolvency. At current spending and income rates, the program's trust fund will become insolvent by 2016 — less than 2-1/2 years from now.

The Safety Net: Lifting Millions Out of Poverty - A House Budget Committee hearing tomorrow will examine the progress we’ve made in fighting poverty over the last 50 years.  Extensive research shows that the set of supports the United States has developed to help low-income Americans make ends meet and obtain health care do, in fact, lift millions of people out of poverty, help “make work pay” by supplementing low wages, and enable millions of Americans to receive health care who otherwise could not afford it, as we explain in a new paper. Federal assistance lifts millions of people, including children, out of poverty and provides access to affordable health care.  Public programs lifted 40 million people out of poverty in 2011, including almost 9 million children, according to the Census Bureau’s Supplemental Poverty Measure, which counts non-cash benefits and taxes (see chart). While Social Security lifted the largest number of people overall out of poverty, the Earned Income Tax Credit (EITC) lifted the largest number of children.  Together, the EITC and Child Tax Credit (CTC) lifted 9.4 million people — including nearly 5 million children — out of poverty in 2011.  SNAP (Supplemental Nutrition Assistance Program, formerly food stamps) is particularly effective at keeping children out of severe poverty — that is, out of living below half of the poverty line.  In 2011, SNAP lifted more children — 1.5 million — above half of the poverty line than any other program. Similarly, Medicaid provided access to affordable health care to 66 million Americans in 2010.  Medicaid and the Children’s Health Insurance Program (CHIP) make children far less likely to be uninsured than adults. Click here to read the full paper and here and here for the 50-state data.

How to Ease Inequality on the Cheap: Invest in Early Daycare: The president wants Congress to expand daycare access to every child in America, an expensive and politically complicated proposition according to critics. But much less intensive pre-k support for moms could still produce major windfalls down the road for their babies, claims a new working paper from the World Bank. The authors found that once-a-week, one-hour visits from a childcare aide for mothers and kids in poor Jamaican communities resulted in nearly 50 percent higher earnings and improved mental health when those babies became adults—20 years after only a two-year intervention.You might think starving kids that got extra food saw the best outcomes later in life. But previous surveys of the kids’ lives established that the food aid had no long-term effect on health and earnings. On the other hand, the impact of the one-hour weekly visits from an aide appeared far greater: Average earnings for 22-year-olds whose moms participated in those weekly sessions were 42 percent higher than the control group. But kids who received an aide’s intervention didn’t just leave behind their stunted-growth peers—their earnings actually caught up to a group of children from the same neighborhoods that grew up less impoverished and received no such intervention

Growing copper theft 'like an epidemic' sweeping US -- Copper is such a hot commodity that thieves are going after the metal anywhere they can find it: an electrical power station in Wichita, Kan., or half a dozen middle-class homes in Morris Township, N.J. Even on a Utah highway construction site, crooks managed to abscond with six miles of copper wire.Those are just a handful of recent targets across the U.S. in the $1 billion business of copper theft. "There's no question the theft has gotten much, much worse," said Mike Adelizzi, president of the American Supply Association, a nonprofit group representing distributors and suppliers in the plumbing, heating, cooling and industrial pipe industries. "There was a perception that copper theft slowed down after the recession, and the rise in commodity prices seemed to ease off," he said. "But that's not the case. The theft has only been growing."Stolen copper is valuable as scrap because the metal is used for so many items—from fiber optics to plumbing to anything electrical—and the profits are tempting.

Prisons are shrinking. That won’t necessarily last. - The Bureau of Justice Statistics on Thursday released its count of the number of prisoners in the country. There are 1,571,013 individuals under the jurisdiction of state and federal correctional authorities. However, that number represents a decline, having fallen 1.7 percent since last year — the third consecutive annual drop and the largest of the three. This multi-year falling trend is also true if you consider everyone in the correctional system, or the nearly 7 million people you get when you include local jails, probation and parole. This is after decades of rapidly expanding prisoner populations in the United States. Meanwhile, the Corrections Corporation of America (CCA), the nation’s leading provider of private, for-profit prisons, had a happy announcement in a recent PowerPoint presentation: State budgets will soon be no longer in crisis. One must imagine that CCA shareholders who are U.S. residents were excited that school budgets would no longer be slashed, public services more broadly would no longer be cut, and the dangerous state-level austerity holding back the economy would no longer be an issue. But the real excitement was over the idea that states could finally start arresting people again, thus filling the depleted ranks of the incarcerated.

Businesses Paid Nearly Half of All State-Local Taxes in 2012 -- Each year, the Council on State Taxation (COST) examines the share of U.S. state and local taxes that are borne by businesses. This year, they estimate that number to be 45.2 percent.The distinction between individual and business taxpayers is important when it comes to crafting smart sales tax policy. Sales taxes shouldn’t be levied on business inputs, so understanding the proportion of them borne by businesses is a good place to start when lawmakers seek to reform their tax codes. I’ll touch more on this shortly.COST estimates that businesses paid $649 billion in state-local taxes in the 2012 fiscal year, which is a 3.9 percent increase from 2011 (note that overall tax collections increased, as well). The largest chunk of business taxes come in the form of property taxes (35.3 percent of total), as you can see from the figure below. Sales taxes ring in second (21.2 percent), followed by excise, utility, and insurance taxes (12.3 percent).

Private Capital Is Eating Public Capital - For example, for centuries US churches and communities established hospitals organized as non-profit entities. These hospitals provided medical care to contributors and non-contributors alike. Now for-profit corporations, with treasuries fattened by the profits reaped from sick people, are buying out those entities, leaving the communities dependent on the rich people who control those corporations for their medical care. The logical outcome is spiraling hospital costs, because the only goal of a corporation is to maximize returns to shareholders at any price. Including your health. In the same way, states and cities have turned over their prisons to private companies. Again, the goal of these corporations is to maximize profits at any price, including the health and safety of prison inmates. Since I live in Chicago, I am duty bound to mention the outrageous parking meter deal, and the stupid Indiana Toll Road deal.  In each of these situations, we as citizens bought and built things for our mutual benefit. Some rancid government types in thrall to the idea that the market should do everything decided that we shouldn’t own things as a community, and sold them to some private company. That means that instead of getting things at a reasonable price, paying for them with tax revenues and user fees, and owning important assets and services ourselves, we are getting screwed over by a bunch of rich people and their minions devoted to taking as much of our money as they can for themselves. One big reason governments are selling public assets to the rich is to raise money to pay on government debts. Governments have debts because they borrowed from the rich instead of taxing them. That, of course, is the real scandal. But the rich want you to think it’s your fault so you should pay, or forfeit all that juicy public property.

Stranded by Sprawl, by Paul Krugman - Detroit is a symbol of the old economy’s decline. It’s not just the derelict center; the metropolitan area as a whole lost population between 2000 and 2010, the worst performance among major cities. Atlanta, by contrast, epitomizes the rise of the Sun Belt; it gained more than a million people over the same period, roughly matching the performance of Dallas and Houston without the extra boost from oil.  Yet in one important respect booming Atlanta looks just like Detroit gone bust: both are places where the American dream seems to be dying, where the children of the poor have great difficulty climbing the economic ladder. In fact, upward social mobility — the extent to which children manage to achieve a higher socioeconomic status than their parents — is even lower in Atlanta than it is in Detroit. And it’s far lower in both cities than it is in, say, Boston or San Francisco, even though these cities have much slower growth than Atlanta.  So what’s the matter with Atlanta? A new study from the Equality of Opportunity Project suggests that the city may just be too spread out, so that job opportunities are literally out of reach for people stranded in the wrong neighborhoods. The new project asks how social mobility varies across U.S. cities, and finds that it varies a lot. In San Francisco a child born into the bottom fifth of the income distribution has an 11 percent chance of making it into the top fifth, but in Atlanta the corresponding number is only 4 percent.

Philadelphia sues big banks over swaps losses - Philadelphia has joined the ranks of municipalities suing some of the world's biggest banks for losses caused by the alleged manipulation of a benchmark interest rate during and after the financial crisis. The lawsuit, filed Friday in federal court in Philadelphia, does not specify damages, but it disclosed that the city paid $109.6 million in recent years to end financial contracts with the banks that were designed to cut borrowing costs but backfired when interest rates fell instead of rising as expected. The interest rate at the core of the complaint is the London Interbank Offered Rate, known as Libor, which is used throughout the world to set interest rates for many forms of debt, including consumer credit cards. Libor was often used to help determine payments that would go back and forth between the banks and the city under contracts - known as interest-rate swaps - that were supposed to protect taxpayers from rising interest rates. Because Libor was artificially low, payments to the city by the banks were lower than they should have been, the lawsuit alleged. "The systematic suppression of Libor, as our attorneys have uncovered, caused financial harm to the City of Philadelphia," Rob Dubow, director of finance, said in a news release.

Chicago's budget gap seen jumping to $1 billion without pension fix (Reuters) - Chicago's preliminary budget gap is expected to fall next year but is on track to nearly triple in 2015 without pension reform, Mayor Rahm Emanuel said on Wednesday. The city, which faced budget shortfalls topping $600 million in fiscal 2011 and 2012, projects a budget gap of $338.7 million for fiscal 2014, down from $369 million this year. But that gap is projected to widen to nearly $995 million in fiscal 2015 and $1.15 billion in fiscal 2016. Chicago, the third-largest U.S. city, has to comply starting in 2015 with a state law that requires it to increase pension payments to bring the pension funding level to 90 percent by 2040.The city's pension payments are expected to grow from $479.5 million in 2014 to about $1.07 billion in 2015 and $1.11 billion in 2016, according to a financial analysis released by the mayor.Emanuel has been pushing for the Illinois Legislature to pass a plan to curb the city's pension costs - a move complicated by a state constitutional provision prohibiting the impairment of public pension benefits. "As outlined in this report, the need for action on comprehensive pension relief is immediate so that Chicago can continue to make the critical investments needed today while building the economic foundation for tomorrow," Emanuel said in a statement.

Chicago Penalty Up 25% as Rating Cut Evokes Detroit - Detroit’s bankruptcy filing is bringing added scrutiny to the finances of Chicago, as the Illinois city’s struggle to contain its murder rate and swelling pension costs leave it with the lowest credit grade in 26 years. Moody’s Investors Service dropped Chicago’s rating three levels on July 17. A cut of that magnitude is unprecedented for a U.S. city as populous as Chicago, according to Moody’s data since 1990. Detroit, about 280 miles (450 kilometers) to the east, filed the nation’s biggest municipal bankruptcy the next day as $18 billion of debt compromised its ability to protect its citizens. Chicago’s fiscal strains are taking a toll on its debt. In the $3.7 trillion municipal market, the extra yield buyers demand on some city bonds jumped 25 percent the week after Moody’s move, pushing interest rates to a two-year high. The credit rank of the third-biggest U.S. city is A3, four steps above junk and the lowest since 1987. Detroit “should be a real warning sign and a great opportunity to get the political will behind them to really make some meaningful changes” in Chicago

MOTOWN DOWN - Detroit, as everyone knows, has a lot of problems. Great swaths of the city have been left to crumble, or return to pasture. There are some sixty thousand parcels of vacant land and seventy thousand empty buildings, including the majestic Michigan Central Station, a cousin to Grand Central. Detroit’s seven hundred thousand inhabitants—more than eighty per cent of whom are African-American—are plagued by crime and deprived of many basic services. Nearly forty per cent live in poverty. Detroit is broke—it can’t even afford batteries for its parking meters—and broken. But other industrial cities, such as Pittsburgh, have come back from near-death experiences. What is needed is a comprehensive and adequately funded plan to stabilize the city’s finances, repair its public infrastructure—almost half the street lights don’t work—and raze its semi-abandoned neighborhoods, consolidating its population into a smaller, more manageable area. (At the moment, Detroit sprawls across a hundred and thirty-nine square miles, more than Boston and San Francisco combined.)

Detroit casts shadow on municipal bonds -- Although a municipality filing for bankruptcy protection is rare, you still ought to be paying attention to what happens to bondholders in the case of Detroit. The city's Chapter 9 filing will likely set some precedents including how investors and their investment advisers view municipal bonds, also known as munis. "I think that the potential risks to the municipal bond market are serious," said David D. Tawil, co-founder and portfolio manager for Maglan Capital, a New York investment firm that specializes in distressed assets. "At the very least, municipal bonds will no longer be considered a risk-free asset." Detroit's filing comes at a time when the Securities and Exchange Commission is increasing its investigations of municipalities that aren't being upfront about their finances in disclosures about their bonds. Earlier this month, the SEC charged the city of Miami and its former budget director with securities fraud related to several municipal bond offerings. The SEC alleges that misleading financial information was given to investors.

Bad Derivatives Trades Added to Detroit’s Woes -  Yves Smith - Only now that the narrative around Detroit is pretty well established – city in long-term decline whose distress was intensified by a series of corrupt city governments, compounded by state governments that were opposed to Detroit’s interests – does an important additional factor come to light, that of derivatives losses. While the bad derivatives bets were far from large enough to have changed the outcome (one commentator called the bankruptcy a “five-decade Katrina,”) it’s another example of how Wall Street wins, even on a relative basis, while little people lose.  Just as Jefferson County, which was faced with big payments (this for a massive sewer project) and got snookered by Big Finance in its efforts to minimize the costs of its funding. Detroit did JeffCo one better by first going the extend and pretend route by borrowing $1.4 billion in 2005 to address its pension shortfall. The piece de resistance was a series of derivatives done in connection with that financing.  The problem is that the most detailed account on this so far, from the Financial Times. leads me scratching my head as to how much the derivatives trades cost Motown. Here is the overview of the transactions: …the city government decided to deal with the underfunding…. by establishing two service corporations, which in turn established trusts which sold so-called Pension Obligation Certificates of Participation to investors – in effect IOUs.

Bad real-estate bets hurt Detroit pensions - Detroit’s public-sector retirees will go to court later this week to argue that the city’s Chapter 9 bankruptcy filing shouldn’t lead to cuts in their pension benefits. But the pension funds, which are underfunded by anywhere from $700 million to $3.5 billion, depending on who you ask, wouldn’t be in such a mess to begin with if it wasn’t for some extraordinarily bad real-estate investments they made in the middle of the last decade.In a recent article for Bloomberg Businessweek, Martin Z. Braun and Chris Christoff report that Detroit’s general-employee pension fund and its police-and-firefighter fund saw the value of their real estate investments drop by 47% and 33%, respectively over the four years ending June 30, 2012. The losses totaled $521.5 million, about 10% of the funds’ current value. More embarrassing, the funds took huge losses in an otherwise rising market – an index of property owned by pensions and nonprofit investors nationwide was up 3.6% over the same span.How did the pensions blow it? Their failed investments include housing developments in Sarasota, Fla., and Dallas, both of which imploded during the housing-market crash, and a loan guarantee for a hotel-and-condo project in downtown Detroit. As for how the funds chose those duds, Braun and Christoff recreate the giant sucking sound of politically connected but under-qualified “consultants” convincing the funds’ boards to funnel money into dubious projects.

When should we aid Detroit? -- John Cassidy and Steve Rattner agree that the destruction which has been visited upon Detroit, in recent decades, is at least as devastating, and as worthy of federal support, as the chaos which was wreaked by Hurricane Sandy in richer parts of the country. Cassidy and Rattner disagree, however, on how they would like to spend Uncle Sam’s billions. Rattner, you won’t be surprised to hear, concentrates on financial engineering, and he singles out Detroit’s pension plans: he calls them “grossly underfunded” (which is highly debatable), and calls for “shared sacrifice by creditors, workers and other stakeholders”. Beyond that, he wishlist seems to consist simply of the “$1.25 billion in reinvestment spending that Detroit’s emergency manager, Kevyn Orr, has included in his proposed budget”. Cassidy, on the other hand, goes further: What is needed is a comprehensive and adequately funded plan to stabilize the city’s finances, repair its public infrastructure—almost half the street lights don’t work—and raze its semi-abandoned neighborhoods, consolidating its population into a smaller, more manageable area. What Cassidy is talking about here, under the happy euphemism of “consolidation”, is a massive program of destruction, displacement, and forced relocation — one affecting hundreds of thousands of families. Rattner is, depressingly, entirely correct when he says that “while logical, the potential for downsizing Detroit is limited because the city’s population didn’t flee from just one neighborhood”. Detroit is too big; it must get smaller; it can’t get smaller. That’s the real tragedy of Detroit, and it’s one that no amount of federal funds can solve.

Amid bankruptcy, Detroit has a bigger problem - Last week, the city of Detroit filed for Chapter 9 bankruptcy, leaving many of its residents wondering what this will mean for their families, their neighborhoods and their economic security. Whether it turns out to be a real opportunity to turn things around — or a trajectory to an uncertain, grim future — remains to be seen. The problem is that even before bankruptcy was declared, Detroit's children were in deep trouble. An astounding 60% of the city's kids live below the poverty line — nearly three times higher than the national rate of child poverty. What's more, with the city officially broke, Michigan experiencing massive budget cuts, and federal sequestration in full swing, programs needed to provide essential services to poor children — from anti-hunger programs to day care — are in greater jeopardy than ever before.  And while Detroit may be the only major city in America filing for bankruptcy, it is far from the only place where children are living in dire conditions. According to the Annie E. Casey Foundation's latest "Kids Count" report, the U.S. child poverty rate has crept upward even as the economy begins to recover. Nearly one in four children are trapped in a cycle of poverty, all too often accompanied by hunger, poor housing, reduced access to medical care and substandard schools. And the fact is that kids who grow up under such conditions are far more likely to fail in school, wind up in the criminal justice system, and become dependent on society rather than contributing to it.

U.S. Higher Education Enrollments, Falling Behind - In almost every high income country, the share of 25-34 year-olds with higher education is higher than that for the age 25-64 population as a whole--about 7 percentage points higher. This is the pattern one would expect to see if a country is expanding access to higher education. But the U.S. is an exception, where the share of 25-34 year-olds with with a tertiary education degree is lower than for the age 25-64 population. Here's an illustrative figure, taken from Education at a Glance 2013, published by the OECD, and freely available with a slightly clunky browser here.  Although the U.S. used to lead the world share of adults with tertiary education few decades back, the figure shows that this is no longer the case. There's no reason to expect this to change in the next few years. When it comes to graduation rates from upper secondary school, the U.S. now falls below the OECD average.Similarly, if you look at the share of students who are going to enter tertiary education and emerge with a degree, the U.S. falls below the OECD average. The issue here doesn't seem to be primarily one of underspending. The U.S. has above-average spending per student by OECD standards--but this is expected, because the U.S. also has higher income levels, and so paying salaries to teachers will cost more. The following graph shows per capita GDP on the horizontal axis and spending per student on the vertical axis. The best-fit line drawn through the graph shows the average pattern of how education spending rises with a country's per capita income. For primary education and for secondary education, the U.S. spending levels are right on the best-fit line. For tertiary education, the U.S. is noticeably above the line--that is, we spend more than one would expect given U.S. per capita incomes.

What Can’t Moocs Teach? - How optimistic faculty members are about the educational value of MOOCs seems to turn largely on what they think of as the status quo classroom experience. Colleagues at elite institutions, especially small liberal arts colleges, are generally skeptical, because they think of what they do in their classrooms as being very intellectually alive, and cannot see how that could be replicated online. But most of the credit hours at my institution are not taught in small, intellectually lively, classes. My own department keeps our classes small for majors, and offers very few classes larger than 100 students—still, I am pretty sure that in any given semester most of our credit hours are taken in rooms with 50 or more students. I know of one social science department which offers no classes with fewer than 70 students, even for majors, and many departments in which lectures with 300 or more students are commonplace. It is easy to see how MOOCs could replace such classes.What seems irreplaceable is the small, discussion-heavy, course.[1] What do students learn in those courses? Not information, but skills—especially skills like being able to articulate ideas, and reason, in public. This excellent piece by Jennifer Morton at the Chronicle notes how much more valuable small classes can be for lower-income, or first generation, students:

Reneging on an MBA Job Offer? It May Cost You $20,000 - As two MBA students from Georgia Tech learned recently, reneging on an internship offer can have consequences. Big ones. The two students are no longer welcome at career services, can’t participate in on-campus recruiting, and won’t be allowed to sit in on company information sessions. It could be worse. Many top business schools have policies about reneging on MBA job and internship offers that are draconian by comparison. Consider these: Wharton: Reneging at Wharton is considered a violation of the school’s recruiting policies, and it takes the matter very seriously. Students who are even thinking about it have to meet with the dean, and if they go ahead and do it, they have to offer a written apology to the snubbed company. The penalty for reneging includes loss of on-campus recruiting privileges and loss of career assistance for up to five years after graduation. Wharton says it will even impose a fine of up to $20,000 and will not release the graduate’s diploma or academic transcript until the fine is paid..

Student Loan Rates Reset Lower — But Probably Not for Long - Student borrowers can breath a little easier. After much dithering, the federal government is on track to bring back low rates on government-backed college loans before classes begin in the fall—and these rates will be retroactive to July 1, when the old program expired. But the new low rates won’t work like the old ones. Under a bill likely headed for approval, rates no longer will be set each year by Congress; they will be tied to the bond market and thus subject to market forces. That means student debt will remain relatively cheap for now. But a few years down the road government-sponsored student loans may cost a great deal more. Ballooning student debt is a crisis. Loans outstanding total more than $1 trillion. “The student loan issue for the millennial generation will rank up there with the draft for our generation,” Robert L. Borosage, a co-director of the Campaign for America’s Future, told The New York Times. In Washington, parallels are being drawn between higher education and health care, according to a Wall Street Journal report. The draft? Health care? These rank among the most contentious issues in recent American history, and now student debt is being mentioned in the same breath.

Congressional Student Debt Deal Perpetuates Predatory Practices, Higher Education Cost Inflation - Yves here. This Real News Network interview with Alan Collinge, author of Student Loan Scam: The Most Oppressive Debt in U.S. History and How We Can Fight Back, gives a short and clear overview of how student borrowers lack the protections that exist in other types of consumer lending, and how the Congressional deal to tinker with interest rates completely sidestepped the real problems in this market.

The US student loan problem - facts, charts, thoughts - The US Congress is nearing a compromise on the issue of student loan interest rates. Apparently loan rates will be changed from fixed to floating with an overall cap (see story). While rates are important, there is a much bigger issue at hand. Now with the help of some great data from Barclays Research let's take a quick look at where we stand with the overall student loan problem and how we could potentially move forward. Here are six facts to consider:
1. There is about a trillion dollars worth of student loans outstanding with all but 15% of that owned or guaranteed by the government. The chart below shows the student loan amount held directly by the federal government. That balance is rising at about $110 bn per year.

2. Higher education still provides a clear financial edge, with the unemployment rate among college graduates at about half that of those with just a high school diploma. However when you add student loans into the mix, the financial advantage of college graduates is not as compelling. For example, while homeownership has declined across the board, the decline has been much sharper for those with student loans.
3. Not surprisingly, since 2008, the credit score of young people with student loans increasingly lags the score of those without this type of liability.
4. Based on the expected repayment schedule of outstanding student debt, an increasingly large volume of loans is forecast to be repaid each year. Yet since 2007 the actual repayments keep falling further behind the repayment expectations. Based in this trend, the situation for 2013 looks a bit scary.
5. Based on the expected repayment schedule of outstanding student debt, an increasingly large volume of loans is forecast to be repaid each year. Yet since 2007 the actual repayments keep falling further behind the repayment expectations. Based in this trend, the situation for 2013 looks a bit scary.

If Detroit cuts pensions, will your city be next? - If the federal bankruptcy court sorting out Detroit's financial mess allows the city to cut pensions, other cities and states may try to take that route to deal with their lopsided liabilities, an investment manager whose company oversees $26 billion for endowments and pension plans warned on Monday. Detroit Emergency Manager Kevyn Orr wants to reduce pension benefits for thousands of retired and current city employees. In its Chapter 9 bankruptcy filing, the city claimed $3.5 billion in underfunded pensions. That's nearly 20 percent of all of the city's total debts of $18.5 billion.  "Michigan has a law, which says, it's basically a general obligation of the city of Detroit to pay pensioners," Commonfund CEO Verne Sedlacek said on CNBC's "Squawk Box." His comments came days after Michigan Attorney General Bill Schuette said he's prepared to intervene to defend the state's pension protections against any impairments.  Last Wednesday, the U.S. bankruptcy judge overseeing the case suspended legal challenges from public employee unions and pension funds in Michigan state courts while he reviews the city's petition for protection from creditors. The judge did say that retirees have raised "very serious questions" in their complaints.  Sedlacek agreed: "If it appears that states, particularly localities, can get out of this large pension issue by declaring bankruptcy, we may see more bankruptcies."

Court ruling allows Flint to start collecting on retiree cuts - Flint can begin collecting on the $3.5 million in cuts to retiree health care benefits made by an emergency manager in 2012, following a Federal court ruling. Detroit Federal District Judge Arthur J. Tarnow denied Flint’s initial request for a stay of the injunction on June 25. Former emergency manager Ed Kurtz has said that reinstating the benefits would push the city toward bankruptcy and benefits would be “significantly reduced or eliminated and retiree pensions could also be negatively impacted.” Larry Guiling, 63, said he made a budget and lived within his means, but his wife has a chronic medical condition that has increased their medical bills. He said the increase will cost him an extra $157 per month. “Everything was all situated so that I could live on what I was getting. I can no longer do that,” Guiling said. “I can’t even make my house payment because of all the deductibles and copays.”

Social Security is the Most Effective Anti-Poverty Program in the U.S., In One Chart - Tomorrow, the U.S. House Committee on the Budget is holding a hearing on the progress of the War on Poverty. While the United States is still slowly recovering from the worst recession since the Great Depression, fortunately this time around government safety net programs have been in place to keep more people from falling into poverty. The Supplemental Poverty Measure (SPM) shows the strength of the government to mitigate the incidence of poverty. As the figure below shows, Social Security is, by far, the most effect anti-poverty program in the United States. Without Social Security, an additional 8.3 percent of Americans, or over 25 million more people, would fall below the SPM poverty threshold. Refundable tax credits, such as the Earned Income Tax Credit, kept 2.5 percent, or nearly 8 million Americans above the SPM poverty threshold. Other programs such as SNAP (food stamps), unemployment insurance, Supplemental Security Income, and housing subsidies also have a significant impact on the ability of families to stay afloat.

Retiree healthcare gap to burden U.S. states, cities: economists (Reuters) - U.S. state and local governments have about $1 trillion of unfunded retiree healthcare liabilities, a shortfall that is expected to pressure budgets in the near future even more than pension costs, two Federal Reserve Board of Governors senior economists said on Thursday. "Because retiree health obligations are mostly unfunded, they exert pressure on state and local budgets long before the pension plans do, even though the size of the pension problem is significantly greater in the long run," wrote Byron Lutz and Louise Sheiner in a paper to be published in the next couple of months. The future pension shortfall is about twice as large and will supplant retiree healthcare concerns in the long term, the two economists said. The authors discussed their preliminary findings, which are their own opinions and not those of the Federal Reserve, at a municipal finance conference in Boston. They expect to release full results as a working paper later this year. America's public pension systems have been in the spotlight as mounting costs threaten to crowd out services in areas where pensions are more poorly funded. Growing pension and healthcare costs are among the reasons behind municipal bankruptcies, such as the filing in July by Detroit, or the cases of Stockton and San Bernardino in California. Retiree healthcare benefits have fewer legal protections than pensions, which are often protected by state laws. But such benefits are largely unfunded in the United States, with most states and cities paying as they go. By contrast, public pension funds are between roughly 60 to 73 percent funded on aggregate, depending on how they're measured.

State Run and Free Healthcare Clinics ? ? ? - “For goodness sakes, of course the employees and the retirees like it, it’s free,” says Republican State Sen. Dave Lewis. 11,000 Helena state employees, retirees, and dependents now go to a state run healthcare clinic which is free. No co-pays, no deductibles, doctors are salaried, wait time is a few minutes, and visits are up 75%. Of course, the skepticism is high: - “I thought it was just the goofiest idea” - “If they’re taking money out of the hospital’s pocket, the hospital’s raising the price on other things to offset that,” Lewis suggests . . . - He (Lewis) and others faulted then-Gov. Brian Schweitzer for moving ahead with the clinic last year without approval of the state legislature, although it was not needed. One year has passed and what about today’s feelings ? - “They’re wonderful people, they do a great job, but as a legislator, I wonder how in the heck we can pay for it very long,” Lewis says. (me)Someone changed his mind. - division manager Russ Hill says it’s actually costing the state $1,500,000 less for healthcare than before the clinic opened. (me) Sounds like it will fund itself in the end. - “Because there’s no markup, our cost per visit is lower than in a private fee-for-service environment,” Hill says.

Growing Number Of States Are Reporting Lower Than Expected Health Care Premiums - Health premiums in Maryland’s exchanges will be “among the lowest of the 12 states that have available proposed or approved rates for comparison,” the state’s exchange — Maryland Health Connection — announced Friday. The news comes just as New York,Oregon, Montana, California, and Louisiana are also reporting lower than expected premiums. In Maryland, a 25-year-old will be able to purchase a plan that is more comprehensive than policies currently available on the individual market for $114 per month, while a middle aged adult will have to pay approximately $260 per month for insurance. A 21-year-old non-smoker can start as low as $93 a month. Officials say they used their authority to deny rate increases to reduce the proposed premiums by “more than 50 percent.” Thirty other states have have similar authority.  The prices Marylanders will pay are lower than the Congressional Budget Office (CBO) anticipated, but do cost more than the bare-bones plans that are available today. Residents will have a choice of nine insurance carriers and three out of four people purchasing coverage through the exchange will qualify for tax credits, further reducing the cost of coverage. Nationally, 6 million out of the 7 million people who are expected to enroll in 2014 will receive subsidies.

It Is Not Good News That Obamacare Will Create Lots of Jobs to Steer People Through the System - "Which way is up?" reporting makes a big-time appearance in this Washington Post article telling us that Obamacare will create a boom in jobs since workers will have to be hired to steer people through the system. The article reports: "About 7,000 to 9,000 new customer service agents will be needed to man phones and Web chats for the marketplace, called an exchange, the federal government will run for more than half of the states,." The next paragraph raises the stakes to: "Altogether, tens of thousands of people could be hired over the next several years to set up and support the online marketplaces, according to some estimates." Okay, let's make it three tens of thousands (a.k.a. 30,000). If we continue to create jobs at the rate of 170,000 a month (an assumption, not a forecast), then we will create 6.1 million jobs. This means that our 30,000 Obamacare jobs will be a bit less than 0.5 percent of net job creation over this period. That's a plus, but not exactly a boom. More importantly, the jobs needed to steer people through the system are a waste from the standpoint of the economy as a whole. In an efficient system people can figure out how to get their health care without needing a consultant to guide them through a complex process. The fact that Obamacare may require people for this task means that it is adding waste to the health care system.

Howard Dean Sells Out: Monday Health Care Lobbyist Smackdown Weblogging - The government already sets rates for Medicare, through the RVS and the RUC process.The Independent Payment Advisory Board--IPAB--is an attempt to set rates in a less-stupid and more evidence-based way.Thus Howard Dean claiming that "the ACA's rate-setting won't work", thereby telling his readers that the creation of IPAB introduces rate-setting into some equilibrium of free-market prices for Medicare, is Howard Dean being mendacious to try to protect the profits of the clients of McKenna, Long, & Aldridge. It is not Howard Dean weighing in on public policy trying to make America a better place. Shame on Howard Dean. Disgraceful. Howard Dean: The Affordable Care Act's Rate-Setting Won't Work: Experience tells me the Independent Payment Advisory Board will fail…. The [ACA] law still has its flaws, and American lawmakers and citizens have both an opportunity and responsibility to fix them. One major problem is the so-called Independent Payment Advisory Board. The IPAB is essentially a health-care rationing body. By setting doctor reimbursement rates for Medicare and determining which procedures and drugs will be covered and at what price, the IPAB will be able to stop certain treatments its members do not favor by simply setting rates to levels where no doctor or hospital will perform them…. Rate setting--the essential mechanism of the IPAB--has a 40-year track record of failure…. Bureaucrats… are making medical decisions without knowing the patients… these kinds of schemes do not control costs….

ObamaCare’s Relentless Creation of Second-Class Citizens (4) - By design, ObamaCare doesn’t treat health care as a right, and does not give all citizens equal access to health insurance, let alone to health care. In three earlier posts, I gave examples of the whimsical and arbitrary distinctions that ObamaCare makes between citizens who should be treated equally; in this post, I’d like to give three more. Two are based on jurisdiction; one is based on class. I’ll start with jurisdiction. Our famously free press, along with the ObamaCare sales force, keeps saying that ObamaCare provides “universal” coverage. In practice, ObamaCare will cover only 7 million additional people in its first year, and leave 26 million without coverage when and if it’s fully rolled out. Sloppy implementation could account for that, of course — or the sheer fun of throwing people under the bus — but ObamaCare, right now, could never provide universal coverage. This propaganda video on flat out lies: “And now everyone will be able to find health insurance at the health insurance marketplace.” No, not “everyone,” and the reason is Medicaid: When Americans begin shopping for benefits on the law’s health insurance exchanges on Oct. 1, the people who would qualify for Medicaid but live in the 20-plus states where Republican governors or state legislators won’t approve the expansion will see a note explaining that federal law allows them to get coverage that their states’ leaders won’t provide them, Why can’t they get coverage? Obamacare set aside billions of dollars for states to expand their Medicaid programs. Twenty-four of them, most led by Republican governors, have opted out since the Supreme Court ruled a year ago that states could choose not to participate in the expansion. That’s left their low-wage workers in a bind: They make too much to qualify for Medicaid in its present form, but too little to afford a plan their employer might offer. And they don’t earn enough to qualify for subsidies available to help the uninsured buy plans on the state-run Obamacare marketplaces opening in October.

A new Obamacare flaw: Many could face a precipitous ‘subsidy cliff’ as income approaches certain limits - Although this won’t affect everybody, many individuals and households whose income is near 400% of the Federal Poverty Level (FPL) will fall off a precipitous Obamacare “subsidy cliff” as soon as their income exceeds the 400% FPL limit by one dollar. The 400% FPL is currently about $46,000 for individuals, $62,000 for a married couple, and $78,120 for a family of three. As income approaches those limits, there may be some perverse incentives to work less, refuse overtime, etc., to avoid falling off the “Obamacare cliff.” ValuePenguin does the math and finds this serious flaw in the Unaffordable Care Act:If your income is at or below the above 400% FPL figure for your household size, the government will subsidize your healthcare so that you spend no more than 9.5% of your income. But earn one dollar above the 400% FPL threshold and the subsidies disappear completely. This obviously creates a problem! If insurance costs substantially more than the capped premium for your family, that extra dollar may actually cost your household a huge amount in actual dollars.Here’s an example for a family of three in New York: Using insurance premium data released by New York state, lets calculate the pre and post 400% FPL impact on health insurance expenses for a family of three in New York, NY. From the premium data we can see that the second lowest silver plan (this is the plan used to determine subsidies) available on the exchange costs $394.58 for an individual and will cost $1,065 for a family monthly.

An Obamacare scorecard - Columbia Journalism Review - For all that has been written, spoken, screamed, and whispered about the Affordable Care Act, there is still a lot of confusion and lack of knowledge among the public. No wonder, I suppose. Republicans continue to attack it as if it were a scourge from hell. Democrats are desperate to tout it. Meanwhile, it keeps changing, as portions are altered, fixed, or dropped. Maybe it’s a good moment to take stock. For starters, after all those changes, what is Obamacare, exactly? What is out, what is on hold, and what is still standing in this large and controversial law? And what have been Obamacare’s plusses and minuses so far? Here’s the first of a two-part scorecard.

Treat health care as a social need, not a commodity - The 48th birthday of Medicare on Tuesday reminds us that the birth of the Affordable Care Act has not and will not fix our broken health-care system. Health care is simply unaffordable for too many of us. In October, the last phase of the reform act known as “Obamacare” will begin with the opening of the health-care exchanges (now known as “the marketplace”). Here many more people will be able to buy more affordable health insurance. However, by continuing to rely on our for-profit, market-based system, we are wasting billions of dollars on inflated administrative costs. These dollars should instead be going to pay for actual health care. We need to follow Medicare’s lead — with greatly reduced administrative costs — and treat health care as a social need instead of as a commodity, as an opportunity for profit-making.

The Sleeper in Health Care Payment Reform - In late June news organizations reported on a practical application in the United States of “reference pricing” for hospital care. The concept has been well known for decades to health policy wonks and already applied to prescription drugs in many other countries, but it is still novel in the United States. In the arsenal now being assembled on the payment side of health care to address rising costs, reference pricing may well turn out to be the sleeper, because it is a potentially powerful method of “putting the patient’s skin in the game,” the delicate phrase we use for “cost-sharing by patients.” As it is able to shift significant market power from the supply side to the payment side of the health sector, reference pricing is much feared by the providers – physicians, hospitals, pharmaceutical companies and others.  Reference pricing also leads to concerns that it could be used simply for rationing by income class in disguise, unless good care is taken to enforce high quality standards for the health care being delivered.

Congress to get Obamacare fix: reports - The White House has approved a deal that will create a regulatory fix for members of Congress and their staff related to some of the provisions of the Affordable Care Act, according to media reports. Under the law, popularly referred to as Obamacare, lawmakers and their aides were required to source health insurance "created" by the law or offered through one of its exchanges; and without the subsidies they currently have, the members of Congress would have faced thousands of dollars in additional premium payments each year, the reports said. However, the Office of Personnel Management now plans to rule that the government can continue to make a contribution to the health-care premiums of the lawmakers and their staff, according to unnamed congressional sources and a White House official.

Medicare for All’ Would Cover Everyone, Save Billions in First Year: New Study - Upgrading the nation’s Medicare program and expanding it to cover people of all ages would yield more than a half-trillion dollars in efficiency savings in its first year of operation, enough to pay for high-quality, comprehensive health benefits for all residents of the United States at a lower cost to most individuals, families and businesses.That’s the chief finding of a new fiscal study by Gerald Friedman, a professor of economics at the University of Massachusetts, Amherst. There would even be money left over to help pay down the national debt, he said.Friedman says his analysis shows that a nonprofit single-payer system based on the principles of the Expanded and Improved Medicare for All Act, H.R. 676, introduced by Rep. John Conyers Jr., D-Mich., and co-sponsored by 45 other lawmakers, would save an estimated $592 billion in 2014. That would be more than enough to cover all 44 million people the government estimates will be uninsured in that year and to upgrade benefits for everyone else.“No other plan can achieve this magnitude of savings on health care,” Friedman said.His findings were released this morning at a congressional briefing in the Cannon House Office Building hosted by Public Citizen and Physicians for a National Health Program, to be followed by a 1 p.m. news conference with Rep. Conyers. Sen. Bernie Sanders, I-Vt., and others in observance of Medicare’s 48th anniversary at the House Triangle near the Capitol steps. A copy of Friedman’s full report, with tables and charts, is available here.

Which States Are Getting Fattest Fastest? - While Mississippi (34.9%) and Louisiana (33.4%) have the highest percentage of obese adults, Bloomberg's latest data shows that Delaware and Oklahoma are getting fatter the fastest of all US states. Notably, every state has seen an increase in the level of obesity since 2000 (though D.C. and California have risen the lease). Colorado has the highest number of 'ideal weight' citizens per obese adult (4.83) but even there it has plunged from over 7 adults in 2000. Things are not getting better anywhere.

What Does Heart Surgery Really Cost, And Why Is It 70 Times More Expensive In The US? - Indian philanthropist and cardiac surgeon, Devi Prasad Shetty is obsessed with making heart surgery affordable for millions of Indians. As Bloomberg notes, Shetty is not a public health official motivated by charity. He’s a heart surgeon turned businessman who has started a chain of 21 medical centers around India. By trimming costs, he has cut the price of artery-clearing coronary bypass surgery to 95,000 rupees ($1,583), half of what it was 20 years ago, and wants to get the price down to $800 within a decade. The same procedure costs $106,385 at Ohio’s Cleveland Clinic. Of course, this will come as no surprise after we showed the incredible spread of the price of an appendectomy. “It shows that costs can be substantially contained,” notes the World Heart Federation, "it’s possible to deliver very high quality cardiac care at a relatively low cost." But, for Americans of course, when you have government footing the cost (and deficit spending), who cares?

The Maddening of America - The relative global decline of the United States has become a frequent topic of debate in recent years. But the exclusive focus on economic indicators has prevented consideration of the geopolitical implications of a US domestic trend that is also frequently discussed, but by a separate group of experts: America’s ever-increasing rates of severe mental disease (which have already been very high for a long time). The claim that the spread of severe mental illness has reached “epidemic” proportions has been heard so often that, like any commonplace, it has lost its ability to shock. But the repercussions for international politics of the disabling conditions diagnosed as manic-depressive illnesses (including major unipolar depression) and schizophrenia could not be more serious. It has proved to be impossible to distinguish, either biologically or symptomatically, between different varieties of these conditions, which thus constitute a continuum – most likely of complexity, rather than severity. Indeed, the most common of these illnesses, unipolar depression, is the least complex in terms of its symptoms, but also the most lethal: 20% of depressed patients are estimated to commit suicide. Both manic-depressive illness and schizophrenia are psychotic conditions, characterized by the patient’s loss of control over his or her actions and thoughts, a recurrent state in which s/he cannot be considered an agent with free will. Obsessive suicidal thinking and paralyzing lack of motivation allow depressed patients to be classified as psychotic as well.

Botulism Threat Found in Infant Formula Ingredients - — One of the world’s leading suppliers of dairy products said Saturday that a type of bacteria that could cause botulism had been found in tests of ingredients the company sells for use in infant formula and sports drinks, leading New Zealand officials to urge a recall. The company, Fonterra, is based in New Zealand and is the world’s fourth-largest dairy company. It sells its milk products to other companies that make infant formula and said those companies would be responsible for any recalls. The New Zealand Ministry of Primary Industries said that in addition to New Zealand, six countries were affected: Australia, China, Malaysia, Saudi Arabia, Thailand and Vietnam. Botulism is a rare but serious illness caused by the bacteria Clostridium botulinum. Even tiny amounts of this toxin can lead to severe poisoning. “Our focus is to get information out about potentially affected product as fast as possible so that it can be taken off supermarket shelves and, where it has already been purchased, can be returned.” Infant formula from New Zealand is in huge demand in China, largely because of concerns about the quality of domestic formula there, particularly since milk formula tainted with melamine led to the deaths of several babies and sickened thousands more in 2008. Fonterra owned part of one of the companies involved in that scandal, but that company, Sanlu, has since been shut down.

MRSA: Farming up trouble - Nearly six years ago, an outbreak of 'outies' at this nursery marked the first known infection with methicillin-resistant Staphylococcus aureus (MRSA) in pigs in the United States. MRSA has troubled hospitals around the world for more than four decades and has been infecting people outside of health-care settings since at least 1995 (see Nature 482, 23–25; 2012). It causes around 94,000 infections and 18,000 deaths annually in the United States. In the European Union, more than 150,000 people are estimated to contract MRSA each year. Its first appearance on a US farm signalled the expansion of what many believe is a dangerous source of human infection. Scientists and health experts fear that it is, and that drug-resistant bacteria from farms are escaping via farmworkers or meat. Last year, the US Food and Drug Administration (FDA) recommended more restraint in the use of antibiotics in livestock, following the lead of regulatory authorities in other countries (see Nature 481, 125; 2012). But the meat and agricultural industries are fighting those restrictions. They claim that MRSA and other drug-resistant bacteria that cause human infections arise in hospitals, and that meat production includes safety measures, such as sanitation rules in slaughterhouses, that prevent resistant bacteria from spreading to and infecting people.

Bee-Killing Germs May Leave You With Less Food Options - In 2006, after a sudden increase in CCD, researchers went on the hunt to see if there was a cause. Their first suspects were germs known to cause problems in bees. Several were found, but one particular microbe became a major target. The name was Nosema, a small single-celled parasite known to cause colony problems in the past. But as researchers took a closer look at how this parasite went from casual annoyance to all-out bee terrorist, an incredible web of information was revealed showing that the real problems were not natural at all. One of the trademark problems associated with any parasitic infection is the lack of an appropriate immune response. Because Nosema has been known to infect immunocompromised humans, researchers decided to look at whether there were any problems with bee immunology.  In 2011, a collaborative group of agricultural researchers from Japan and China tested this hypothesis and found that problems with immune function led to increased Nosema infections. Their claim was that the overall nature of beekeeping was causing undue stress on colonies leaving them prone to infection and collapse. But the results could not explain all cases as even those who kept bees in the least stressful means were experiencing problems.

The Dubious Economics of Crop Insurance: Insurance is normally limited to situations in which people face a pure loss. For example, if I insure my house against fire, I either experience a fire, in which case I suffer a loss, or I do not, in which case I have neither a loss nor a gain. In contrast, if I build a house for resale, I may suffer a loss if no one likes it or if the market declines, or make a profit if someone falls in love with it and pays me a premium price. The risk of fire is a pure loss, and is insurable; the risk of a business venture that carries the possibility of gain as well as of loss is not. Insurance against crop risks, especially in the popular form of crop revenue insurance, departs from the pure loss principle. Crop revenue insurance does not just protect farmers against bad harvests due to natural causes like drought or floods. It also protects their profits against the economic risk of low prices, even when a good harvest is the cause of the low price. In fact, if the premium is low enough and the benchmark price is high enough, crop revenue insurance provides a guaranteed profit no matter what happens. Congress is now considering changes to farm legislation that would introduce so-called shallow loss revenue insurance, which means that revenues would have to drop only 10 percent below the benchmark in order to trigger a payout, rather than the 25 or percent or more that has been common in the past. As an article in the High Plains/Midwest Ag Journal explains, shallow loss insurance means no-risk farming: I wouldn’t want to be the one to explain this concept to Wall Street investors, futures market speculators, Las Vegas gamblers and small business owners. All of these groups also face much uncertainty but with few exceptions receive no government subsidy.

The Energy Cost Of Food - At the grocery cooperative nearest my home I can buy kale from California, grapes from Argentina, olive oil from Italy, miso from Japan, and apples from New Zealand. I can enjoy a diet that’s utterly dissociated from Vermont’s Champlain Valley where I live, one that renders my local climate, the character of the local soil and geography, and even the passage of seasons irrelevant to my food choices. As I walk out of my co-op I’m reminded of the source of this modern food miracle: a nearby service station sells gasoline for $3.67 per gallon, and diesel for 30 cents more. This is pricy compared to what these fuels cost a decade ago, but they still provide astonishingly cheap energy. Just how much energy does it take to fuel the US food system? A lot. It required just over 12 Calories of fuel to produce one Calorie of food in 2002, once waste and spoilage were accounted for. Of these, 1.6 fuel Calories were used in the agricultural sector, while 2.7 were used to process and package food. Distribution, which includes transportation, wholesale and retail outlets, and food service operations such as restaurants and catering services, used another 4.3 fuel Calories. Finally, food-related household energy use added another 3.4 Calories to the tab. This figure has been on an upward trend; it took just over 14 fuel Calories to deliver a Calorie of consumed food in 2007, and if we extrapolate this trend the US food system requires about 15 Calories of fuel to deliver a Calorie of consumed food in 2013.

Pooping Canada geese may have spread GM wheat seeds - Canada geese may have spread viable seeds of genetically modified wheat grown at the Central Experimental Farm, documents from Agriculture Canada show. The odds aren’t high, the department says. But the geese ate the experimental wheat last summer at the Experimental Farm. Geese are voracious eaters and leave droppings every few minutes. The fear is that these geese may have left poop with living GM wheat seeds that could allow GM wheat to spread outside the controlled field, or even away from the farm itself. The issue blew up on a Friday night in 2012, taking the department by surprise. Now the Citizen has obtained internal emails, with many of the relevant details blacked out, showing the rush by federal bureaucrats to find out whether the GM seeds had flown the coop, potentially to other farms. GM wheat is not approved in Canada. Many growers, including the Canadian Wheat Board, strongly oppose it, saying that growing GM wheat will make all Canadian wheat harder to sell in Europe and Asia. And the last thing any grower wants is to have ordinary wheat crops accidentally mixed with the GM varieties.

Grassland butterflies in rapid decline in Europe - Europe's grassland butterfly population has plummeted in the past two decades, new research published on Tuesday shows, with a near halving in the numbers of key species since 1990. The precipitous decline has been blamed on poor agricultural practices and pesticides, by the European Environment Agency, which carried out the research. Falling numbers of butterflies are bad news not just for nature-lovers and for biodiversity, but have a knock-on effect on farming, as – like bees – they act as pollinators, and their disappearance harms birds and other creatures that need them for food.Butterfly populations are a leading indicator of the health of other insect species. The new study therefore suggests many other species of insect, which are also food sources for birds and small mammals, and which play a key role in the health of the countryside, are also under threat.  Grassland butterflies make up the majority of butterflies in Europe, with over 250 species out of the more than 400 found in Europe. Others species prefer to colonise woods, wetlands, heaths and other habitats. Chris "The pesticide problem is especially a problem in the intensive agricultural areas of western Europe," he said. "In eastern Europe, it is less of a problem."

New Mexico's Elephant Butte Reservoir Dries Up - Severe drought has driven New Mexico’s Elephant Butte Reservoir to its lowest water level in four decades, a problem that’s the latest in a series of drought-related challenges facing the state. The reservoir, which is New Mexico’s largest, currently holds just 3 percent of the water it held in the 1980s and 1990s, when the region received a streak of plentiful rainfall. The lack of water is due to the extreme drought that has gripped New Mexico for the past three years. Right now, 100 percent of the state ranks on some level of drought, according to the U.S. drought monitor, and 80 percent ranks in the monitor’s most severe categories of drought. Rising temperatures coupled with low snowpack on the mountains that feed the state’s rivers and abnormally low rainfall — the past two years have been the driest in New Mexico’s history — have fueled the drought.  The reservoir is located along the Rio Grande River, which is so exceptionally dry that one local paper dubbed it the “Rio Sand.” This year, the river experienced its shortest irrigation season in recorded history, ending just a month and a half after it started. Alberquerque has imposed water use limits on its residents, and El Paso, which gets half its water from Elephant Butte, has been urging its residents since May to use less water. In the meantime, the city is relying on a desalinization plant to get water to its residents.

The Climate Is Set to Change 'Orders of Magnitude' Faster Than at Any Time in the Past 65 Million Years - Some of the earliest clues scientists had that Earth's climate has changed over time were mismatches between the fossil record and a current ecosystem. How could this palm tree have grown in Wyoming? Why have fossils of the tropical breadfruit tree been found as far north as Greenland? These cold places must have once been warm and wet. The world is not as it has always been.And somehow, despite the tumult, species adapted, moving thousands of miles to habitats where they could survive. Won't species today just do the same as temperatures rise in the years ahead?It seems they may not have the chance. A new paper in the journal Science finds that climate change is now set to occur at a pace "orders of magnitude more rapid" than at any other time in the last 65 million years. That breakneck speed may mean extinction for species that cannot keep up.

Maniitsoq, Greenland, at nearly 80 F, its highest temperature ever recorded - The Danish Meteorological Institute is reporting that on Tuesday, July 30, the mercury rose to 25.9 C (78.6 F) at a station in Greenland, the highest temperature measured in the Arctic country since records began in 1958. The balmy reading was logged at the observing station Maniitsoq / Sugar Loaf, which is on Greenland’s southwest coast, the DMI reports. It exceeded the 25.5 C (77.9 F) reading taken at  Kangerlussuaq on July 27, 1990, in the same general area. Mantiitsoq is Greenland’s sixth-largest town, with a 2010 population of 2,784.The DMI says the record warmth was brought about by southeasterly winds, funneled by the flow between a large area of high pressure over continental Greenland, and low pressure over Baffin Island to the west. It adds the warmth may have been enhanced by a phenomenon known as the Foehn Effect, in which air flows over nearby elevated terrain and compresses and heats on its way down. In this case, DMI believes the air may have passed over the elevated Sugar Loaf ice cap and then dried and warmed up as it descended (or downsloped) on its leeward side into Maniitsoq.

Alun Hubbard, glaciologist: Greenland's ice sheet is deglaciating - Latest video for The Yale Forum on Climate Change & the Media, the first since returning from Greenland – includes interviews with ice expert Alun Hubbard, whom I met in Kangerlussuaq, as well as a snip from Richard Alley, at June’s Chapman conference in Granby, CO, and Jason Box, who spoke from our DarkSnowProject HQ in Sisimiut, in early July. Takeaway – Greenland represents 22 feet of sea level rise, it’s moving faster than anyone thought it could just a few years ago, and there are processes occurring deep in the ice that may make even faster inevitable. According to Hubbard, we may we witnessing the deglaciation of a major ice sheet, with serious global implications.

Greenland: A Global Warming Laboratory - As the sea levels around the globe rise, researchers affiliated with the National Science Foundation and other organizations are studying the phenomena of melting glaciers and the long-term ramifications. Rapid warming at the summit of the Greenland ice sheet has caused year after year of record melting at the surface, raising concern, even as recent research indicates the ice sheet has endured warmer periods. The warmer temperatures that have had an effect on the glaciers in Greenland also have altered the ways in which the local populace farm, fish, hunt and even travel across land. Getty Images photojournalist Joe Raedle traveled north recently, spending two weeks documenting the scientists tracking Greenland's transformation, as well as some of the spectacular scenery and residents engaged in their daily lives. [34 photos]

The Alaskan village set to disappear under water in a decade - Almost no one in America has heard of the Alaskan village of Kivalina. It clings to a narrow spit of sand on the edge of the Bering Sea, far too small to feature on maps of Alaska, never mind the United States. Which is perhaps just as well, because within a decade Kivalina is likely to be under water. Gone, forever. Remembered - if at all - as the birthplace of America's first climate change refugees. Four hundred indigenous Inuit people currently live in Kivalina's collection of single-storey cabins. Their livelihoods depend on hunting and fishing. The sea has sustained them for countless generations but in the last two decades the dramatic retreat of the Arctic ice has left them desperately vulnerable to coastal erosion. No longer does thick ice protect their shoreline from the destructive power of autumn and winter storms. Kivalina's spit of sand has been dramatically narrowed. Retreating ice, slowly rising sea levels and increased coastal erosion have left three Inuit settlements facing imminent destruction, and at least eight more at serious risk. The problem comes with a significant price tag. The US Government believes it could cost up to $400m (£265m) to relocate Kivalina's inhabitants to higher ground - building a road, houses, and a school does not come cheap in such an inaccessible place. And there is no sign the money will be forthcoming from public funds.

Each degree of global warming might ultimately raise global sea levels by more than 2 meters - The following article is a reprint of a press release posted by the Potsdam Institute for Climate Impact Research (PIK) on July 15, 2013.  Greenhouse gases emitted today will cause sea level to rise for centuries to come. Each degree of global warming is likely to raise sea level by more than 2 meters in the future, a study now published in the Proceedings of the National Academy of Sciences shows. While thermal expansion of the ocean and melting mountain glaciers are the most important factors causing sea-level change today, the Greenland and Antarctic ice sheets will be the dominant contributors within the next two millennia, according to the findings. Half of that rise might come from ice-loss in Antarctica which is currently contributing less than 10 percent to global sea-level rise.

 Finding the New Equilibrium - Many systems have been in an equilibrium for years, decades, millennia, or longer. So we take them for granted, as a rule of God or nature. Equilibria can have many different factors pushing the balance in different directions, with interactions and feedback loops. Since some equilibria are fairly stable, we don't have enough data to identify all the independent variables. I keep thinking of this as I watch the extent of the Arctic sea ice, which I do almost daily. Last year's September minimum was about half of the average in the 80's and 90's. Correspondingly, the thickness of the ice has also fallen by about half. Thinner ice melts faster. Water absorbs the sun's heat, while snow and ice reflect it. The interaction and feedback are accelerating the ice shrinkage. But in order to have stayed in equilibrium for so long, there must be forces that create and preserve Arctic sea ice. One is the perpetual winter darkness due to the Earth's leaning axis. Another is simply the insulation created by the existing presence of ice that has been around since glacial periods.  Sea ice is melting so rapidly that we have clearly entered disequilibrium. I think it is likely that artic ice does not have continuous possible equilibria. Either you have a lot of ice, or none. Unintuitively, you can't have just a little arctic sea ice. Unless something new intervenes, like a major volcanic eruption, Arctic sea ice in the summer could disappear this decade. At this point I doubt there's anything man can do to stop it.

Illargi: Capitalism, A Norwegian Rat And Some Cockroaches - All I started out with was the notion that if we put a dollar value on something like an Arctic melt, or the extinction of species, we are making fundamental mistakes. Which invariably show in the way we reach the conclusions, presented as “scientific”, that make us put such values on potential or already final events.It may be getting increasingly hard to accept in our present worldview, but it’s still true that not everything can be expressed in dollar terms. We may still find this to be obvious when we talk about losing our loved ones, our children, but other than that, there are hardly any questions raised when some individual or institution reports a $100 billion price tag for the loss of the bumble bee, or, the example that led me here, that a sudden Arctic “methane belch” could cost $60 trillion.These reports come with such regularity these days that we have come to see them as normal. In reality what they depict is our loss of values, and a tendency towards moral bankruptcy. The problem in all this is that as long as we keep expressing the damage done by climate change, pollution or extinction in dollar terms, we have no chance of turning any of it around. Putting a dollar value on our very own destruction of our very own and sole habitat (which we share with all other species) carries with it an unspoken suggestion that there also must be a dollar value price tag we can put on halting the destruction, as well as undoing and repairing it. Which is, just like the original claim that an arctic melt would cost $60 trillion, the peak of absurdity.  But still, for 99% of people who read a headline with such numbers, their first reaction will be: that’s a lot of money. If you are one of those people, you have some thinking to do. It makes no difference whatsoever what the financial cost is of an animal going extinct, or half the arctic melting. The fact that we increasingly tend to describe destruction in monetary terms is precisely why it will continue, since if a dollar value is all you have left, you might as well have no values.

Methane gas likely spewing into the oceans through vents in sea floor - Could speed up global warming more efficiently than carbon dioxide. - Scientists worry that rising global temperatures accompanied by melting permafrost in arctic regions will initiate the release of underground methane into the atmosphere. Once released, that methane gas would speed up global warming by trapping the Earth's heat radiation about 20 times more efficiently than does the better-known greenhouse gas, carbon dioxide. An MIT paper that appeared online August 29, 2009, in the Journal of Geophysical Research elucidates how this underground methane in frozen regions would escape and also concludes that methane trapped under the ocean may already be escaping through vents in the sea floor at a much faster rate than previously believed. Some scientists have associated the release, both gradual and fast, of subsurface ocean methane with climate change of the past and future. "The sediment conditions under which this mechanism for gas migration dominates, such as when you have a very fine-grained mud, are pervasive in much of the ocean as well as in some permafrost regions,"

Methane hydrates: a volatile time bomb in the Arctic - The risk with climate change is not with the direct effect of humans on the greenhouse capacity of Earth’s atmosphere. The major risk is that the relatively modest human perturbation will unleash much greater forces. The likelihood of this risk is intimately tied to the developments over the next decade in the Arctic. Accelerating ice loss and warming of the Arctic is disturbing evidence that dangerous climate change is already with us. As I have argued earlier, now that we have realised this our efforts should be directed at managing the situation in the Arctic and avoiding the spread of dangerous climate change elsewhere. The Arctic is a core component of the earth system. Six of the 14 climate change tipping points of the earth system are located in the Arctic region.Whereas the term tipping point was initially introduced to the climate change debate in a metaphoric manner, it has since been formalised and introduced in the context of systems exhibiting rapid, climate-driven change, such as the Arctic. Tipping points have been defined in the context of earth system science as the critical point in forcing at which the future state of the system is qualitatively altered.Tipping elements are defined, accordingly, as the structural components of the system directly responsible for triggering abrupt changes once a tipping point is passed. This is because they can be switched into a qualitatively different state by small perturbations.

‘Fire Ice’ Could Be The Newest Form Of Risky Energy Under The Sea To Warm The Globe - Most fossil fuels that humans burn come from deep reservoirs of oil, or coal mines on land. But a risky, potentially disastrous new technology could mean that a huge new source of greenhouse gases could come from the ocean floor. And new research suggests that submarine earthquakes are already paving the way to carbon emissions we didn’t even know were happening. Methane is a potent carbon-based greenhouse gas that is emitted from decaying organic matter (i.e. landfills, cow digestion, and melting permafrost). The natural gas industry has been harvesting methane buried deep underground for decades to supply their product, despite persistent climate and safety concerns. Yet there’s an even more dangerous collection of methane hidden at the bottom of the sea. Though it’s somewhat easy to forget about it, a potentially enormous source of carbon pollution: methane hydrate.  Fossil fuel companies have not forgotten and they are extremely interested in finding an economical way to extract it from the sea floor. The reason is that the latest estimates put the amount of methane hydrate at 700,000 trillion cubic feet, or more energy than all oil and gas that has ever been discovered.  Also known as methane clathrate, or “fire ice,” methane hydrate is created when decaying organic matter under the ocean floor emits methane. This seeps up and mixes with seawater at the bottom of the ocean.  If the water above it gets warmer, some of the methane hydrate melts as methane, which bubbles up through the water column.

Report: Emissions From North Dakota Flaring Equivalent To One Million Cars Per Year - A new report released today by the investor group Ceres found that the unconventional oil boom in North Dakota has led to a dramatic increase in the amount of natural gas that is intentionally burned off, or flared, carrying major economic and environmental consequences. In 2012 alone, flaring resulted in the loss of approximately $1 billion in fuel and greenhouse gas emissions equivalent to adding nearly one million cars to the road.According to Ceres, nearly 30 percent of North Dakota gas is currently being flared each month as a byproduct of oil production — double the volume of just two years ago. This is due to the fact that at current market rates, oil is approximately 30 times more valuable than natural gas. Therefore, as companies rush to extract oil from the Bakken shale field and cash in on the high price of crude, they have little economic incentive to invest in the infrastructure necessary to capture the gas that bubbles up alongside the oil. So the gas is treated as waste and burned.Not only is North Dakota wasting enough natural gas each day to heat half a million homes, but the flaring is so widespread that it is now visible from space, with North Dakota starting to rival some of America’s biggest cities in light pollution.

Religious orders Sisters of Loretto and Abbey of Gethsemani deny access to land for gas pipeline - Two Roman Catholic communities, which collectively own more than 3,000 acres in Central Kentucky, are refusing to permit access to their historic properties for a proposed underground pipeline that would transport flammable, pressurized natural-gas liquids across the state.The Sisters of Loretto in Marion County and the Abbey of Gethsemani in Nelson County have denied representatives of the pipeline developers permission to survey their property and said they won’t consent to participating in the project. The pipeline is being proposed by a partnership of the Tulsa-based Williams Co., an energy-infrastructure company, and Boardwalk Pipeline Partners, which oversees a network of natural-gas-related pipelines and operations.

Gangplank to a Warm Future - — MANY concerned about climate change, including President Obama, have embraced hydraulic fracturing for natural gas. In his recent climate speech, the president went so far as to lump gas with renewables as “clean energy.”  As a longtime oil and gas engineer who helped develop shale fracking techniques for the Energy Department, I can assure you that this gas is not “clean.” Because of leaks of methane, the main component of natural gas, the gas extracted from shale deposits is not a “bridge” to a renewable energy future — it’s a gangplank to more warming and away from clean energy investments.  Methane is a far more powerful greenhouse gas than carbon dioxide, though it doesn’t last nearly as long in the atmosphere. Still, over a 20-year period, one pound of it traps as much heat as at least 72 pounds of carbon dioxide. Its potency declines, but even after a century, it is at least 25 times as powerful as carbon dioxide. When burned, natural gas emits half the carbon dioxide of coal, but methane leakage eviscerates this advantage because of its heat-trapping power.  And methane is leaking, though there is significant uncertainty over the rate. But recent measurements by the National Oceanic and Atmospheric Administration at gas and oil fields in California, Colorado and Utah found leakage rates of 2.3 percent to 17 percent of annual production, in the range my colleagues at Cornell and I predicted some years ago. This is the gas that is released into the atmosphere unburned as part of the hydraulic fracturing process, and also from pipelines, compressors and processing units.

Another View on Gas Drilling in the Context of Climate Change - U.S. shale gas production began to ramp up around 2007 (the earliest data available from the Energy Information Administration), increasing from 1.99 trillion cubic feet to 8.50 trillion from 2007 to 2011 (latest data available from the agency). The global atmospheric methane value (from the Mauna Loa Observatory) increased from 1796 to 1836 parts per billion (volume) over the same interval. Let’s assume a 3 percent leak rate during shale gas production. Then U.S. shale gas production could account for about 12 percent of the global methane increase over that time (it scales at approximately 4 percent of global increase per 1 percent leak rate). The actual leak rate is poorly known, but in any reasonable case U.S. shale gas production is a small, but not trivial, contributor to the global methane increase over the last several years. More than 80 percent (perhaps more than 90 percent) of the increase in methane must come from other sources. What are the climate impacts of this increase? Using standard expressions for calculating the approximate change in radiative forcing resulting from the increase in different greenhouse gas concentrations, we can compare the climate impact of increasing CO2 and CH4.  Over the same 2007-2011 interval, the calculated increase in forcing from methane is 0.008 watts per square meter. In comparison, the increase in forcing from carbon dioxide is 0.107 watts per square meter, or a factor of 13 greater. Even if one accepts the estimates advocated by some of a higher “global warming potential” for methane by a factor of approximately three, the increase in climate forcing by methane is significantly smaller than for carbon dioxide.

More Costly BC Hydro Work Needed - Costly upgrades to old dams are not enough to prepare BC Hydro for a major earthquake, and electricity rates will continue to rise as upgrades and expansion continue. Energy Minister Bill Bennett acknowledged Thursday that further rate increases will be needed to finance improvements to the vast hydroelectric network and pay debt on works already completed or underway. NDP critics focused Thursday on a disaster preparedness audit commissioned by BC Hydro last year. The PricewaterhouseCoopers audit reported in December that BC Hydro is at high risk of a prolonged power outage after a major earthquake because of a lack of coordinated emergency plans. BC Hydro is spending about $2 billion on seismic refits of two of its oldest dams, the John Hart dam at Campbell River and the Ruskin dam on the Mission-Maple Ridge border. Its current expansion project, the Northwest Transmission Line from Terrace to Iskut, was revealed last week to be $140 million over budget.

The Silent Partner Behind the Shale Energy Boom - Taxpayers - NYTimes - Since 2011, Alex Trembath, a tireless and talented energy analyst at nonprofit The Breakthrough Institute, has been digging into the complicated history of public and private initiatives and investments that unlocked the vast gas and oil resource contained in layers of shale rock. He charted evidence that investments in basic research, testing and development by the federal government lay behind the private-sector initiatives that have since fundamentally reshaped global forecasts for energy, economies and geopolitics. After I ran Daniel Yergin’s reflection on the pivotal role played in the shale boom by George P. Mitchell, the Texas energy entrepreneur and philanthropist who died last Friday, Trembath and the leaders of Breakthrough, Michael Shellenberger and Ted Nordhaus, sent a reaction focused on the silent partner in this energy revolution — the American taxpayer.

Absent Climate Policies, Global Coal Use Will Soar In Coming Decades, EIA Report Says --- The federal Energy Information Administration (EIA) released its 2013 International Energy Outlook yesterday, and the picture it paints of coal use is not pretty. Furthermore, the overwhelming bulk of the increase will come from the developing world.  If business as usual continues for the world’s climate policy, the EIA’s mid-range projections show consumption of coal — the dirtiest fossil fuel in terms of carbon emissions — increasing by over a third by 2040. It nearly doubles by that time under the worst case scenarios. Specifically, the EIA’s “Reference Case” projects global coal consumption jumping from 147.4 quadrillion Btu of energy in 2010 to 219.5 in 2040. That’s despite coal dropping slightly, from 28 to 27 percent, as a share of the world’s overall energy supply.But looking across the range of scenarios the EIA lays out, coal consumption could only reach 182.2 quadrillion Btu by 2040 — or go as high as 297.3 quadrillion Btu. What the EIA’s interactive tables also reveal is that virtually all this increase in consumption will come from China, India, and the developing world. Under every scenario, the United States’ coal consumption plateaus around 22 quadrillion Btu between 2010 and 2040. The advanced countries as a whole stop at 44.8 quadrillion Btu total in 2010, then stay flat or decrease slightly. Meanwhile, China, India, and the other developing countries in Asia rocket from 88.4 quadrillion Btu in 2010 to 156.8 quadrillion under the Reference Case — or 231.6 quadrillion under the worst case scenario. Russia and the other developing European, the Middle East, Central and South America, and Africa all see jumps of varying degrees as well.

Why is the White House aiding and abetting lawbreaking by coal plants? -- A new report documents widespread lawbreaking among the nation's coal-power utilities that endangers public health  -- and it reveals an effort by the White House to let them continue skirting the law. The report, titled "Closing the Floodgates: How the Coal Industry Is Poisoning Our Water and How We Can Stop It," was released this week by Waterkeeper Alliance, Environmental Integrity Project, Clean Water Action, Earthjustice, Beyond Coal and the Sierra Club. It comes as the Environmental Protection Agency is collecting public comments on proposals to limit how much pollution coal-fired power plants can discharge to rivers, lakes and other surface waters under the federal Clean Water Act. "Our review of 386 coal-fired power plants across the country demonstrates that the Clean Water Act has been almost universally ignored by power companies and permitting agencies," the report states.  Of the 274 coal plants found to be discharging into waterways either coal ash or wastewater from air pollution devices known as "scrubbers," 188 operate with no limits on the toxics most commonly found in such discharges, including arsenic, boron, cadmium, lead, mercury and selenium, in violation of the Clean Water Act. These pollutants are known to cause cancer and/or brain damage.

Fukushima Problems Escalating, Radioactive Water Going into Pacific -  Yves Smith  - The Fukushima nuclear plant crisis continues unresolved in a bad way. Two reports in the last week indicate that the cheery face that plant mismanager operator Tepco has been trying to put on the aftermath of the disaster is not in line with conditions at the plant. If I parse these English language accounts correctly, there are two separate problems that Tepco has been forced to confess to in the last week (corrections and amplifications from those who can read Japanese appreciated).  One outstanding problem got a nasty update over the weekend. Tepco admitted some time ago that radioactive water was getting into the Pacific, but has been at a loss to explain how that was happening. The Japan Times tells us that Tepco announced this past weekend that they think they’ve figured it out: Tokyo Electric Power Co. said Saturday that the trench problem at the crippled Fukushima No. 1 nuclear plant has cropped up again and is sending highly radioactive water into the sea. The water in the underground passage, which runs under the turbine building of reactor 2, contains 2.35 billion becquerels of cesium per liter, roughly the same as that measured right after the crisis began in spring 2011… The trench is believed to be the source of the groundwater problem that’s been baffling Tepco’s experts for months. Their current theory is that the highly radioactive water found and left in the trench in 2011 is now leaking directly into the groundwater, which is seeping into the sea.

Tar Sands Oil Has Been Leaking Into Alberta For 10 Weeks And No One Knows How To Stop It - A Canadian oil company still hasn’t been able to stop a series leaks from underground wells at a tar sands operation in Cold Lake, Alberta. The first leak was reported on May 20, with three others following in the weeks after — making it at least 10 weeks that oil has been flowing unabated.  Indeed, recent documents show that the company responsible for the spill estimates that the tar sands oil has been leaking into the ecosystem for around four months, based on winter snow coverage. (CNRL), the owner of the operation, hasn’t specified the total amount of oil that has leaked. Documents show that about 67,400 pounds of oily vegetation has been cleared away from the latest of the four spill zones, and the Alberta environment ministry says the spill has killed 11 birds, four small mammals and 21 amphibians so far. CNRL did say in a press release Thursday that the “initial impacted area” of the spill was about 50 acres, which includes a lake, a vast swath of boreal forest, and muskeg — the acidic, marshy soil found in boreal forests.  Not only does CNRL not know how to stop the leaks — it also isn’t completely sure yet what caused them.  A spokesperson for the Alberta Energy Regulator, which regulates oil production in the province, said the the leaks were “basically cracks in the ground and bitumen emulsion is seeping out of these cracks,” and said “the challenges are basically figuring out what happened and then how to stop it.” The spokesman also admitted he doesn’t know when the company was “going to get control” of the leaks. 

CNRL's Ongoing Cold Lake Spill Puts World Scrutiny On Alberta's New Regulator: Critic -- An ongoing spill of tarry bitumen in northern Alberta is focusing the world's attention on the province's new energy regulator, says an environmental think-tank. "The way in which Alberta and Canada is managing the oilsands has already attracted significant international attention and that's because it's not possible to point to significant progress in terms of the big environmental issues," "When stories like this emerge, here's another problem. The regulator doesn't seem to be in control of the situation." For weeks now, bitumen has been oozing to the surface at an oilsands project owned by Canadian Natural Resources Ltd. on the Cold Lake Air Weapons Range. The leak has so far released almost a million litres of bitumen and has fouled about 20 hectares of land. The bitumen is probably being forced to the surface through cracks in overlying rock created by the company's extraction method, which uses hot, high-pressure steam to force the product up wells. This year's spill seems similar to a 2009 release in the same spot. After that spill, the Energy Resources Conservation Board, as the regulator was then known, allowed CNRL to resume production using lower steam pressure, even though an investigation failed to discover exactly what happened.

BP warns Gulf spill costs will exceed $42.4bn - BP’s total bill for the Gulf of Mexico disaster will rise well beyond $42.4bn (£27.6bn), the oil giant warned on Tuesday, as it raised its estimate of compensation claims by $1.4bn to $9.6bn. The company said that the final cost for the compensation settlement would be “significantly higher” than $9.6bn, even if it succeeded in a legal battle to try to stem the claims, many of which it insists are “fictitious” and “absurd”. The total provision for the 2010 disaster rose to $42.4bn – up $200m – as legal costs increased, with just $300m of that yet total yet to be allocated. The third quarter would see "additional amounts charged to the income statement" as a result. The disclosure came as BP reported second quarter profits that fell well below analyst expectations as the legacy of the Gulf accident continue to overshadow its operations. Excluding one-off items, underlying profits fell to $2.7bn, down from $3.6bn a year before, and undershooting analysts’ consensus of $3.4bn.

Dudley Says BP Gulf Spill Settlement Unlikely as Costs Rise - - BP Chief Executive Officer Bob Dudley said it’s unlikely Europe’s second-biggest oil company will reach a settlement with the U.S. over the Gulf of Mexico disaster as provisions set aside to pay for the spill rose.“It’s highly unlikely we are now going to enter into detailed settlement discussions,” Dudley told reporters in London today. “We’re digging in for the long term.” BP fell the most in a year on Dudley’s remarks and after second-quarter profit dropped more than analysts expected. The company lost a bid this month to halt payments to spill victims that it says are being unjustly awarded and today raised its estimate for the accident’s total cost to $42.4 billion. The final bill is still uncertain three years after the blowout at the Macondo well. “The loss claims have really been misinterpreted from the agreement that we signed in good faith,” Dudley said in a Bloomberg Television interview. “We’re going to fight this.”

US shale threatens demise of OPEC - Saudi Arabia and the Opec oil states must wean their economies off energy exports immediately or spiral into decline as America’s shale revolution shatters the world order, a top Saudi business leader has warned.   Prince Alwaleed bin Talal, the country’s best-known global investor, said the business model of Middle East oil exporters risks unravelling rich industrial states find ways of cutting demand. “Our country is facing a threat with the continuation of its near-complete reliance on oil: 92pc of the budget for this year depends on oil,” he said in a letter to Saudi oil minister Ali Al-Naimi.  Mr Al-Naimi and Opec leaders have taken a relaxed view of growing US shale output. “This is not the first time new sources of oil are discovered. There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now?” he said last month.  Prince Alwaleed said oil demand from OECD rich states is in “continuous decline”, and the Saudis will not be able to ratchet up their output from 12.5m to 15m barrels per day (bpd) to cover growing budget costs. “It is necessary to diversify sources of revenue, establish a clear vision, and start implementing it immediately,” he said.

Vital Signs Chart: U.S. Drilling Boom Leveling Off - The U.S. drilling boom is leveling off. There were 1,401 onshore rigs drilling for oil in the U.S. last week, according to oil-field-services firm Baker Hughes Inc. That figure has changed little over the past year, ending a three-year ramp-up. Meantime the number of rigs drilling for natural gas has also stabilized after plummeting due to low gas prices.

Commodity supercycle in rude health despite shale - The Oil Drum is closing down after eight years, giving up the long struggle to alert us all to "peak oil" and the dangers of an energy crunch. The demise of Britain's leading website for oil dissidents has been seized on by critics as an admission that peak oil is just another malthusian myth like so many before. It comes amid a spate of reports from global banks announcing the death of the commodity supercycle, slain by creative technology and a surge of new supply. Yet if you stand back, it is hardly evident that the world is again enjoying abundant sources of cheap energy, metals or indeed food. Commodity prices have held up remarkably well given that we are in a global trade depression, albeit one contained by monetary stimulus. The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13pc below the pre-Lehman peak. Average growth in the US has been 1.1pc over the past three quarters as it grapples with the most drastic fiscal tightening since demobilisation after the Korean War. The Economic Cycle Research Institute continues to insist that the US is in recession right now, a claim less absurd than it sounds. Russia and Brazil have ground to a near halt. China is in its second "mini-recession" in two years, its growth rate near zero on a GDP deflator basis. China's oil imports were down 1.4pc in June from a year earlier. Imports of iron ore were down 9.1pc. It all adds up to a prostrate global economy, yet on Wednesday Brent crude oil was still trading at $106, and US crude at $103. There is no comparison with the collapse to $11 in 1998. The CRB commodities index is still three times higher than a decade ago. You might conclude that the supercycle is in rude good health given what has been thrown at it.

The Social Importance of Energy Return - Seasoned naturalists observe that animals are quite adept at deciding whether or not a particular food acquisition strategy is worthwhile for them. Energy return isn’t just meaningful within the context of animal behavior; energy analysts have developed a similar framework to judge the value of fuels manufactured and used within human societies. The energy return of a fuel is calculated as a ratio, with the fuel’s heat output in the numerator and its required energy inputs in the denominator. Fuels with energy returns greater than one yield an energy profit and generate an energy surplus, while those that yield a return less than one are net energy losers.  Modern industrial nations, with their complex economies, must retain access to fuels that deliver a high enough energy return that they yield substantial energy surpluses. Some of the fuel available in an economy must be diverted into its energy sector to manufacture tomorrow’s fuel, so only surplus fuel not needed by the energy sector is available to produce, transport and power other goods and services, enabling the transactions outside of the energy sector that make up the bulk of economic activity. Fuels that yield high energy returns and deliver substantial energy surpluses can support abundant economic activity, and societies with access to these fuels can build and maintain large, diverse, resilient economies. Societies forced to rely on lower yield fuels, on the other hand, can support little economic activity outside of their energy sectors and will face the trials and tribulations of energy poverty.

Why Oil Could Move Higher... Much Higher  -  The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.

What Happens When the Oil Runs Out? - Of greatest concern is how much oil is remaining. As noted, we currently use 30 billion barrels a year – 84 million barrels a day, or a thousand barrels every second. When it is trumpeted about some new and huge find of oil, e.g. the Tupi field off Brazil, thought to contain 8 billion barrels, in reality this is only enough to run the world for three months. Context should not be lost in these matters. The quality of the oil is also at issue. For example, much of the remaining oil is of the “heavy”, “sour” kind, meaning that it is not necessarily liquid at all, but bitumen, and contains relatively high levels of sulphur, necessitating complex and energy-intensive processing to get the sulphur out – which would otherwise be corrosive toward the steel used in the refinery – and to crack the heavier material into lighter fractions that can be used as fuel, or as feedstocks for industry. So, it’s not just that we have got through much of our original bestowal of oil, but that what remains is of poorer quality – in other words, we have used-up most of the “good stuff”! Oil shale is not oil at all, but contains a material called “kerogen” which is a solid and needs to be heated to five hundred degrees Centigrade to break it down into a liquid form that in any way resembles what we normally think of as “oil”. So, when it is claimed that there are “three trillion barrels” of oil under America, really this is only to encourage voters and investors, because the actual Energy return on Energy Invested (EROEI) is so poor that there has been no serious commercial exploitation of oil shale to date, and probably there never will be.

The Logical (and Coming) End to the US Empire -  Regarding the scarcity of resources issue, none other than the World Bank produced a detailed study of demand and supply projections for the immediate future. The study projects that, on the basis of current consumption and immediately precedent rises in it, the demand for food will rise by 50% by 2030, for meat by 85%, for oil by 20 million barrels a day, and for water by 32%, all by the same year. This is met by alarming statistics and predictions from the supply side. In their report, they state that global food growth rates fell by 1.1% over the past decade, and are continuing to fall, while global food consumption outstripped production in seven of the eight years between 2000 and 2008. Further, the Food and Agricultural Organization and the UN Environment Program estimate that 16% of the arable land used now is degraded. Intensifying competition between different land uses is likely to emerge in future, including food crops, livestock, etc., and the world’s expanding cities. Current rates of water extraction from rivers, groundwater and other sources are already unsustainable in many parts of the world. Over one billion people live in water basins in which the physical scarcity of water is absolute; by 2025, the figure is projected to rise two billion, with up to two thirds of the world’s population living in water-stressed conditions (mainly in non-OECD countries). On oil, the International Energy Agency has warned consistently that there is a significant risk of a new “supply crunch” as the global economy “recovers.” Additionally, the IEA’s chief economist argues that peak production could take place by 2020 (from the “World Development Report 2011, Background Paper: Resource Scarcity, Climate Change and the Risk of Violent Conflict,” ).

Screw Panama; Chinese & $40B 'Nicaragua Canal' - Recently, a young Chinese telecoms magnate came to an arrangement with the (rather impoverished) Nicaraguan government to develop a Panama Canal alternative slicing through that Central American republic:  Wang Jing, a 40-year-old Chinese telecommunications billionaire, has emerged as the next mogul to give it a go. Nicaraguan President Daniel Ortega, who fought the U.S.-backed contras in the 1980s, signed a 50-year concession on June 14 that grants Wang’s HK Nicaragua Canal Development Investment Co. (HKND) rights to develop a $40 billion project that includes a canal, an oil pipeline, two deepwater ports, an interoceanic railroad, and two airports. Apart from his youth, question marks surround whether a telecoms guy knows anything about infrastructure development. Certainly there is no lack of such projects in the PRC--it just so happens that Wang has no experience with any of them. So obscure is this guy that the Nicaraguan leader even described him as a "ghost" during the signing ceremony:

Why China's Leaders Know There's A Storm Ahead - Positive demographic cycles have been one of the key components in the strong growth trends for a number of Asian countries. As Morgan Stanley note in their most recent 'China Deleveraging' discussion, the decline in the ratio of the non-working (elderly and children) to working-age (15-64 years) population has coincided with periods of economic boom for various countries in Asia in the past 50 years. But... as Nomura's Richard Koo notes - having experienced the very same unstoppable shift in Japan - "demographics will cease to be a positive for China’s economic growth and start to have a negative impact." Fundamentally, Koo adds, this means "the nation will grow old before it grows rich." Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth. Given the lessons of Japan and the Asian Tigers, China is set to suffer notably from this demographic drag - and its entirely foreseeable.

China plans government debt audit - China will conduct an urgent audit of all government debt, underlining concerns over rising financial risks in the world’s second-biggest economy. The National Audit Office said in a one-line statement on Sunday that it had been instructed by the state council, China’s cabinet, to come up with a tally of how much money is owed by all levels of government from villages up to central authorities. A separate article on the website of the People’s Daily, the official newspaper of the Communist party, said the state council had called for the audit on Friday afternoon and that it had ordered the national audit office to halt other projects to start on the debt tally immediately. Chinese towns, cities and provinces racked up vast amounts of debt over the past five years as they fell back on heavy borrowing to power the economy through the global financial crisis. The central government has tried to slow the rise in debt but it has had little success as the economy has become increasingly reliant on credit and local governments have fallen deeper into the hole. With growth now slowing, fears about the ability of local governments to repay what they owe have become more pressing. Earlier this year, Zhang Ke, a senior Chinese auditor, told the Financial Times that local government debt was “out of control” and could spark a bigger financial crisis than the US housing market crash. The audit is set to begin on August 1. The audit office did not say when the results would be published.

Word and action show China’s commitment to slow - Yesterday the People’s Bank of China conducted its first reverse repo operation since February. From Bloomberg: China’s central bank conducted reverse-repurchase operations for the first time in five months, helping alleviate a cash squeeze that drove the benchmark interbank lending rate to a four-week high.The People’s Bank of China added 17 billion yuan ($2.8 billion) to the financial system today at ayield of 4.4 percent using seven-day reverse repos. That compares with 3.35 percent when the contracts were last issued on Jan. 31 and 3.45 percent at a Feb. 7 auction of 14-day agreements, according to central bank data compiled by Bloomberg. “The PBOC is not prepared to ease liquidity aggressively; that’s why they offered these reverse repos at a higher rate than before,” China’s central bank has injected money into the financial system for the first time in nearly half a year, seeking to stave off a repeat of the cash crunch that blighted the economy in June. The People’s Bank of China pumped Rmb17bn ($2.8bn) into the money market via seven-day reverse repurchase agreements on Tuesday, the first time it has conducted that kind of liquidity injection since February 7.

Again, with the China PMIs divergence - The official China manufacturing PMIs for July are not helping any bearish narratives. Unless you are of the opinion that the official stats are often manipulated from one month to the next.HSBC/Markit’s number, meanwhile, stayed firmly at 47.7, in contrast to the official PMI rising to 50.3 from 50.1 in June. Yep, we’re here, again, attempting to understand the mysteries of the China PMIs. Let’s be clear, however, divergence is nothing new here:… although this is the largest for 15 months.Let’s look at the official one first. Wei Yao of SocGen points out that, unusually, all the sub-indices moved in a positive direction. The input price component rose sharply to 50.1 from 44.6. HSBC/Markit’s PMI found that input costs fell, but at the slowest rate for four months. Employment, notably, remained below 50 despite improving for the first time in five months.

China's Slowdown Means It's Joining the Big Leagues - China's era of spectacular economic growth is coming to an end. That's a popular theme at the moment, with any number of culprits cited — an overleveraged financial system, pollution, too little consumer spending, corruption, anti-corruption campaigns, and of course bad driving. It's reached the point that the Chinese government's International Press Center felt compelled to gather a group of reporters in Beijing earlier this week just so that Justin Yifu Lin, the former World Bank chief economist who is now a professor at Peking University and a government adviser, could tell them that he's "reasonably confident the Chinese government has the ability to maintain a 7.5% to 8% growth rate." Here's the thing: a 7.5% to 8% GDP growth rate already is a significant slowdown from the nearly 10% annual pace at which China's economy had been growing until last year. And while all the economic issues cited above are real, the big issue confronting the Chinese economy is something simpler and more encouraging. The country is on the cusp of succeeding in its epic quest to break into the ranks of the world's affluent nations. When that happens, growth tends to slow.

China's slowdown and the global glut -- In case you hadn't noticed, China's economy is going through an enormous gear change. And, given the monster that China has grown into, its planned "rebalancing" is not something the rest of us can afford to ignore. In fact, the next few years promise to be quite rocky. Lumbering giant China has been following the Asian development strategy pioneered by Japan from the 50s to the 80s, and then pursued by the "Tiger" economies of Korea, Taiwan, Hong Kong and Singapore. Unfortunately for China, its population is almost seven times those of Japan and the Tigers combined. So its impact on the rest of the world has been far bigger, and its room for manoeuvre more limited.China's economy can produce more than ever before, but who is going to buy it all?

Japan suffers industrial output drop - Japan’s industrial output declined for the first time in five months in June, contracting 3.3 per cent, but manufacturers’ promises of production increases this month suggested the broader growth trend remained intact. Factory output figures often show large month-to-month swings, but June’s decline was roughly twice as big as economists had projected in polls conducted by news agencies. A 4.1 per cent fall in car production contributed to the contraction in industrial output, according to a survey published by the industry ministry on Tuesday, but output also declined in other sectors including electronic components and factory machinery. However, economists said production would keep expanding partly because of a weaker yen, which has lifted profits at export-focused manufacturers such as Toyota and Canon and should boost their overseas sales by trimming the foreign-currency prices of their goods.

 Japan's industrial production drops at the fastest pace since the Fukushima disaster - Japan experienced a surprisingly strong decline in industrial production in June, which many view as temporary. The Japan Times: - Industrial production fell in June by the most since March 2011, when the Great East Japan Earthquake and tsunami struck, as automakers cut output after a gain the previous month.  Output declined 3.3 percent in June from May, the Ministry of Economy, Trade and Industry said Tuesday, marking a steeper fall than any economist forecast in a Bloomberg survey in which the median of 29 estimates was for a 1.5 percent drop.  In May, output climbed the most since December 2011. Production slid 4.8 percent in June from a year earlier. Tuesday’s report adds to the challenges facing Prime Minister Shinzo Abe, who must decide whether to proceed with the consumption tax increase even though it could slow down a rebound in the economy. Weakening production would undermine his calls for higher wages to bolster his reflation efforts after temporary boosts from monetary and fiscal stimulus. Indeed this adds to the concerns described earlier (see post). Japan's new government needs to improve wage growth in order to keep up with rising prices. Without stable pay increases - which have been declining for years in large part due to demographics and Japan Inc.'s approach to cost adjustments - reaching sustainable inflation rate will be difficult. Yet higher wages could also reduce the competitiveness of Japanese companies. That is why this sudden drop in industrial production, if not corrected in July, could become an issue.

BOJ May Hold Off on Economic-View Upgrade Until GDP Data - The Bank of Japan may wait until the release of April-June growth and investment data before proclaiming that the nation’s economy is making a full-fledged recovery, people familiar with the matter say. Since their January meeting, the central bank’s policy board has incrementally raised its assessment of the economy for seven months in a row. But it has danced around categorically describing the economy as being in recovery in its assessment by using expressions that are open to interpretation. Japan’s economy is taking shape as the central bank has predicted, but officials want to examine capital investment trends “a bit more,” a person familiar with the BOJ’s thinking recently told The Wall Street Journal when asked about the bank’s economic view. The policy board’s next meeting is scheduled for Aug. 7-8. On the radar screens of BOJ board members now are preliminary second-quarter gross domestic product data, which will be released by the Cabinet Office on Aug. 12, and separate business investment data for that quarter from the Ministry of Finance due out on Sept. 2.

Japan's July monetary base hits record high for 5th straight month - Japan's monetary base expanded 38.0 percent in July from a year earlier to 170.39 trillion yen, marking a record high for the fifth straight month, the Bank of Japan said Friday as it continued injecting money into the financial system under its ultra-easy monetary policy. The average daily balance of liquidity provided by the central bank -- consisting of cash in circulation and the balance of current account deposits held by commercial financial institutions at the bank -- increased for the 15th straight month. The country's monetary base at the end of July stood at 173.31 trillion yen, the highest level ever, the BOJ said. The balance of current account deposits -- the sum of funds the institutions can use freely -- more than doubled to 82.35 trillion yen, with the BOJ injecting more liquidity into the banking system by buying a large number of financial assets from banks. In pursuit of "quantitative and qualitative monetary easing" introduced on April 4 to beat deflation, the BOJ said it set the monetary base as the main target for its monetary policy, instead of the overnight call rate. The BOJ said it will double the monetary base within two years and for that purpose increase it at an annual pace of about 60 trillion to 70 trillion yen, with the aim of conquering Japan's nearly two decades of economic slump in which prices have fallen.

Ex-Soros Adviser Fujimaki Sees JGB Bust From Tax Delay, Fed - Takeshi Fujimaki, a former adviser to billionaire investor George Soros who won a seat in Japan’s upper house of parliament last month, said a delay in increasing the sales tax and reduction of Federal Reserve stimulus could cause the nation’s government bond “bubble” to burst. Prime Minister Shinzo Abe’s administration plans to release later this year its medium-term fiscal plans and a final decision on a two-step doubling of the consumption levy to 10 percent in 2015. Fed Chairman Ben S. Bernanke said in June the U.S. central bank may start scaling down its third round of quantitative easing of asset purchases this year and end it altogether in mid-2014. Japan’s public debt, the highest ratio globally, may balloon to 245 percent of gross domestic product this year, according to the International Monetary Fund. Even as the nation struggles to turn its primary balance into a surplus, it enjoys the world’s lowest borrowing costs as record bond buying by the Bank of Japan helps keeps yields anchored. “The JGB market is in a bubble and the tapering of QE in the U.S. or cancellation of the planned tax hike could become a thin needle to prick it,”

The Dark Side Of The Guys Who Run Japan Oozes To The Surface - Japan’s Prime Minister Shinzo Abe skillfully used his miraculous economic salvation plan, a religion lovingly dubbed Abenomics, as a platform to catapult his party, the LDP, into power. With the LDP controlling both houses of parliament, real changes, after years of dickering, might now finally be possible. Abenomics is being implemented. The core element, the Bank of Japan’s frenzy of printing money and buying assets, has been kicked off in April. Government spending on corporate welfare projects has been increased in the new budget. The nuclear power industry, despite strong opposition from the people, is gradually being returned to its former omnipotent glory. Asset bubbles are being inflated. Prices for many consumer items are jumping. Inflation overall is up. Wages are not. But hey, life is good at the top. The LDP isn’t new at this. With the exception of four years, it has ruled Japan since 1955. If the economy has been in trouble for two decades, it’s the LDP that has gotten it there. But now it’s time to move on to the next stage. No longer being threatened by an effective opposition, the government can show its true colors.  The conservative think tank has called for revising Japan’s constitution to make it more militaristic and to introduce more public order and government control at the expense of civil rights. The organization has also been vocal about denying that the Japanese military forced women to work in brothels during the war – the “comfort women.”

RBI Says Restoring India Rupee Stability Is Key Policy Goal - The Reserve Bank of India said steadying the rupee to help preserve economic stability has become the priority for monetary policy and that more steps are needed to curb the nation’s current-account deficit.  “The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth,” the Reserve Bank said in an economic review before tomorrow’s rate decision in Mumbai. Such a strategy will work only if reinforced by “structural reforms” to reduce the deficit and spur investment, it said.

India central bank pat on rates, cuts growth view -- The Reserve Bank of India on Tuesday left its policy lending rate and the amount lenders must keep as reserves unchanged, as expected, as it attempted to balance risks to growth against a possible increase in inflation. The central bank left the repo rate, at which it lends money to financial institutions, at 7.25% and the cash reserve ratio at 4%. The central bank said its recent tightening measures to support the rupee were aimed at checking "undue volatility" in the foreign-exchange markets and would be "rolled back in a calibrated manner" when stability returns. The RBI also urged the government to launch structural reforms to bring down the nation's current-account deficit, a key factor behind the rupee's weakness. The central bank lowered its growth forecast for the year ending March 31, 2014 to 5.5% from 5.7%, citing persistent weakness in industrial activity and tepid global growth. The U.S. dollar jumped to 59.80 rupees from around 59.55 rupees before the RBI issued its statement

India's short-term yield goes vertical; RBI struggling - Here is a quick update on India's ongoing financial stress. Capital outflows from stocks over the past couple of months reached a post-2008 high, prompting Goldman to downgrade the nation's equity market. Bloomberg: - Foreigners sold a net $2 billion of domestic debt last month through July 30, extending the record $5.4 billion withdrawal in June. The two-month outflow from stocks reached $2.8 billion, the most since the global financial crisis in November 2008, regulatory and exchange data compiled by Bloomberg show. Goldman Sachs cut its rating on the nation’s shares to underweight in a report dated July 31. The rupee is trading near record lows as RBI's recent actions are proving to be ineffective. With liquidity conditions remaining tight, the short end of the government curve is under severe pressure. The one-year note yield has gone vertical, approaching 10%. The yield curve remains heavily inverted, with further economic slowdown sure to follow.

India at a watershed as it confronts the spectre of stagflation - Long-hailed as a growth-superstar, India has staged a remarkable fall from economic grace during the past year. Growth in the year to March was just 5%, compared with the 9% average annual growth rate in the 10 years prior. Growth engines are sputtering. The warning signs of stagflation – slowing growth, rising inflation and stubbornly high unemployment – are all around, with even the head of the PM’s economic advisory council sounding the alarm. In common with other emerging markets, India’s currency has plunged against the US dollar on fears related to the tapering of QE, making its large current-account deficit more costly to sustain. Borrowing costs have surged in response to recent government efforts to prop up the currency by restricting liquidity in the rupee money market. The rupee was changing hands at 59 to the dollar in a recent trade. Turkey, Brazil and Indonesia have raised rates to try to counter outflows of capital, while India has kept its overnight repo rate at 7.25%. Together with government bond investors reallocating their holdings, this has helped push the yield on 10-year debt to 8.1%. Foreign investors in government bonds have withdrawn $6.5 billion since the middle of May, according to the Securities and Exchange Board of India, but equities have not seen a similar sell-off, so far

India Housing Bubble Still Expanding -  RBI has released the latest data for their House Price Index and it looks like the mad pace of real estate price growth has mellowed, but only slightly. Price growth at an all India basis is now 19% from last year.Unfortunately, RBI has not released information about transactions, so we don’t know if volumes are up or down. Housing prices were very high last quarter as well, with prices up 26% year on year. However, every city is different; some cities seem to have slowed down price growth while others have picked up pace significantly. Mumbai shows YoY growth of just 11% after a scorching 30% growth in the December quarter (year on year).  Delhi, though, continues to be in scorched earth territory, moving up 33% from last year. Prices have gone up an annualized 30% or more since September 2011, and the index has now reached 259 from a 100 in March 2009 (a compounded growth of 27%, the highest of all cities).

Cost of economic growth have 'outweighed benefits' - Development policies should urgently shift from trying to maximise production and consumption towards attempts to improve real welfare, which — unlike growth in GDP (gross domestic product) — has not improved since the late 1970s, according to a study. The study, which examined 17 countries from 1950 to 2003, found that, although GDP has on average more than tripled in these countries, overall social wellbeing has decreased since 1978. To reach this conclusion, researchers used the global 'Genuine Progress Indicator' (GPI). Among the things it considers are income distribution for each country, along with household and volunteer work (activities that enhance welfare but do not involve monetary transactions), and, for example, the cost of environmental degradation. The countries for which GPI has been estimated comprise more than half the world's population, over five continents, as well as representing nearly 60 per cent of global GDP. They are: Australia, Austria, Belgium, Chile, China, Germany, India, Italy, Japan, Netherlands, New Zealand, Poland, Sweden, Thailand, United Kingdom, the United States and Vietnam. "We got some pretty interesting results showing that global GPI per capita peaked in 1978. This means that, globally, the external costs of economic growth have outweighed the benefits since this year," The researchers also found that GPI does not increase once GDP per person reaches around US$6,500 a year.

Indonesia Growth Falls Below 6% as Risks to Economy Increase - Indonesia’s economy grew less than 6 percent last quarter for the first time since 2010, adding to risks for the Southeast Asian nation as investments ease, inflation accelerates and the currency slumps.  Gross domestic product increased 5.81 percent in the three months ended June 30 from a year earlier, the Central Bureau of Statistics said in Jakarta today. That compares with a revised 6.03 percent pace for the first quarter and the median estimate of 5.9 percent in a Bloomberg News survey of 19 economists. Indonesia is contending with easing growth at a time when higher fuel costs spurred the fastest price gains in more than four years and the rupiah trades near the weakest since the global financial crisis. The central bank has raised interest rates at the past two meetings in an effort to temper prices and reduce capital outflows, actions that may hurt domestic spending and compound the slowdown in Southeast Asia’s largest economy.

What If The Emerging Markets Aren't? - During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world—and, in the case of China, the largest of all by as early as 2020. But the BRICS, as well as many other emerging-market economies—have recently experienced a sharp economic slowdown. So, is the honeymoon over? Brazil’s GDP grew by only 1 percent last year, and may not grow by more than 2 percent this year, with its potential growth barely above 3 percent. Russia’s economy may grow by barely 2 percent this year, with potential growth also at around 3 percent, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2 percent in 2010 and 7.7 percent in 2011) but slowed to 4 percent in 2012. China’s economy grew by 10 percent per year for the last three decades, but slowed to 7.8 percent last year and risks a hard landing. And South Africa grew by only 2.5 percent last year and may not grow faster than 2 percent this year. Many other previously fast-growing emerging-market economies—for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe—are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets?

Brazil's central bank under pressure as demand for resources slows and foreign capital exits - Brazil is facing a situation not to dissimilar to India (discussed here). In order to stem the recent currency declines, the central bank (BCB) has raised the benchmark rate. Unfortunately raising rates at this stage in the cycle is absolutely the wrong thing to do for Brazil's economy - although given the currency declines BCB had little choice. Brazil's economy is facing serious headwinds and the higher rates will not help. The nation's manufacturing is starting to contract again. According to HSBC,  "the loss of momentum observed in recent months evolved into an actual weakening of economic conditions, with negative implications for the next quarters." Unlike the situation in India, Brazil is also struggling with declining demand for natural resources (see post), particularly given its economic ties with China. The trade surplus the nation has enjoyed for years is beginning to erode.

Argentine Housing Bust Has Government Dialing for Dollars - In a region where booming real estate markets have governments from Chile to Brazil to Colombia warning of potential property bubbles, Argentina stands out as a bust.  Two years after President Cristina Fernandez de Kirchner clamped down on Argentines’ purchase of dollars, the currency of choice for real-estate transactions, the housing industry is grinding to a halt. While prices soared to records in Sanhattan, a high-end strip in Santiago, Rio de Janeiro and Medellin, Colombia, in Buenos Aires they dropped an average 1.2 percent in the second quarter from the previous three months, the first decline in data that goes back to 2005.“The main issue in Argentina is that the real estate market has historically been transacted in dollars so when you make it impossible for people to source dollars liquidity gets disrupted,”

World-Wide Factory Activity, by Country -- World-wide manufacturing activity was a mixed bag in July, as conditions in the U.S. and Europe improved while Asia showed signs of weakness.The U.S. posted a strong increase in the purchasing managers’ index from the Institute of Supply Management, rising to 55.4 from 50.9 a month earlier, the highest level in over a year. A number above 50 indicates expansion in the factory sector. Meanwhile, the euro zone moved back in expansionary territory on the back of stronger numbers out of Germany and Italy.Asia’s struggles were epitomized by numbers out of China. Two separate indexes presented a schizophrenic picture. The official figure noted a slightly stronger expansion, while a private number from HSBC and Markit noted a worse contraction. The official number covers mostly state-owned enterprises, while the HSBC figure includes smaller private firms.China’s slowing contributed to contractions across Asia, and a slowing of manufacturing expansion in Japan.

Greece’s Unemployed Young: A Great Depression Steals the Nation’s Future - Jobs of any kind are scarce in today’s Greece. Nearly six years of deep recession have swept away a quarter of the country’s gross domestic product, the kind of devastation usually seen only in times of war. In a country of 11 million people, the economy lost more than a million jobs as businesses shut their doors or shed staff. Unemployment has reached 27 percent—higher than the U.S. jobless rate during the Great Depression—and is expected to rise to 28 percent next year. Among the young, the figure is twice as high. Meanwhile, cuts to Greece’s bloated public sector are dumping ever more people onto the job market. In July, 25,000 public workers, including teachers, janitors, ministry employees, and municipal police, found out they would face large-scale reshuffling and possible dismissal. An additional 15,000 public workers are slated to lose their jobs by the end of 2014. Greece’s jobs crisis is a window into a wider emergency that threatens the future of Europe. Across the continent, a prolonged slump has disproportionately affected the young, with nearly one in four under the age of 25 out of work, according to the European Commission. (In the U.S., youth unemployment is 16.2 percent.) That understates the severity of the situation in Italy and Portugal, where youth unemployment rates have soared above 35 percent; Spain’s is 53.2 percent, the second-highest after Greece, at 55.3 percent.

No End in Sight to Italy's Economic Decline - Italy, despite being the third-largest economy in the euro zone after Germany and France, finds itself in dire straits, having been in decline for years. Its GDP has dropped by 7 percent since 2007. The last few years, says Gianni Toniolo, an economics professor in Rome, represent "the worst crisis in (the country's) history," even more devastating that the period between 1929 and 1934. Some sectors have lost even more capacity, with the automobile industry having declined by 40 percent. According to Paolazzi, Italy is experiencing an "unprecedented process of deindustrialization.  Wages aren't the problem. They are 15 percent lower than Belgian and French wages and 30 percent lower than wages in Germany, according to a current Bank of Italy comparison. But according to Confindustria, the Italian economy faces a tax burden that is 20 percent higher than in Germany. And unit labor costs are about 30 percent higher than German levels, say central bank officials. In addition to the tax burden, a bloated bureaucracy obstructs almost all economic activity, an inefficient judiciary deters potential investors with trials that can last for decades. Italy has a relatively low education level and a poor infrastructure characterized by potholed streets, an energy supply prone to failure, constantly delayed trains and outmoded communication networks.

Former ECB Chief Economist Warns "ECB Will Soon Have to Support France with Bond Purchases" - Juergen Stark, former ECB chief economist (who resigned in 2011 over a dispute regarding bond purchases), says in an interview in Handelsblatt "The Euro crisis will worsen in late autumn".  Via Google Translate: A year ago, ECB chief Draghi announced plans to do anything to save the euro. The former ECB chief economist Juergen Stark considers this fatal. He fears that the ECB will soon have to support France with bond purchases. "I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management, "Stark told the Handelsblatt (Friday edition). After the parliamentary elections in late September that France would increase the pressure on the ECB and Germany. The government bond purchase program OMT should actually be used in Spain and Italy. "But the pressure will be enormous, use the instrument in France. And without that, the country must go to the rescue, "said Stark.

Spain Recession Eases as Unemployment Drops From Record Level - Spain’s recession eased in the second quarter, pushing unemployment down from its highest level in the country’s democratic history and lending support to the government’s prediction of an economic recovery in the second half of the year.  Gross domestic product fell 0.1 percent from the first quarter, when it declined 0.5 percent, the Madrid-based National Statistics Institute said today. That matched the Bank of Spain’s estimate on July 23. Inflation in July was 1.8 percent, INE said in a separate release.  Economy Minister Luis de Guindos said last week that the government must continue to overhaul the fourth-largest economy in the euro region to consolidate a “fragile” recovery. Four years of budget cuts have sapped domestic demand, hindering an exit from a slump triggered in 2008 by the end of a real-estate boom that lasted over a decade.

Economic Recovery in Spain? Tax Collections, Retail Sales Prove Otherwise - In an attempt to distract voters from all the political scandals in his administration, Prime Minister Mariano Rajoy is talking about the pending economic recovery in Spain. Don't believe it. Huky Guru at Guru's Blog in Spain takes a good look at numbers that prove Rajoy is disingenuous.  Via Mish-modified Google translation, please consider Debt Remains Uncontrolled, €40 Billion Deficit in First Half The government deficit totaled €40 billion in the first six months of the year in terms of national accounts, 3.81% of GDP, according to data released Tuesday by the Ministry of Finance and Public Administration.  The figure represents a decline of 8.2% compared to the same period last year, although an increase of 19.9% ​​compared to the figure recorded until May, which was around €33.3 billion.The result of the shortfall until June due to an income reached €49.528 billion euros (+12%) and expenditure of €89.529 billion euros, up 2%. Cumulative to June, revenues fell by 7.1% and non-financial payments fall by 1%. What's worse, is that for nearly every euro that enters government coffers, it is burning one euro in cash.State revenue from indirect taxes, with €36.221 billion, an increase of 5.1%. But remember the VAT went from 18% to 21%, an increase of 17%, so that a rise of only 5.6% in revenue means that economic activity or the collection capacity of the tax has diminished.

Retail Sales Rise in Germany and France, Decline in Italy; Margin Squeeze in Germany and France - It's a mixed bag of retail PMI news in Europe today (assuming of course one believes that spending is good).  In Italy, Markit reports Sharpest drop in retail sales since April Key points

  • Rate of decline in retail sales accelerates for second straight month
  • Stocks levels fall amid sharp drop in retailers’ purchasing activity
  • Purchase price inflation dips to modest rate

In Germany, Retail PMI indicates strongest sales growth for two-and-a-half years. Key points

  • Retail PMI hits highest level since January 2011
  • New job creation maintained in July
  • Wholesale price inflation eases since June

In France, the Markit PMI shows Retail Sales Rise for First Time in 16 Months Key Points

  • Slight expansion of sales recorded in July
  • Slowest fall in employment for over a year
  • Further reduction in purchasing activity

More Good News from Europe - Some more good news from the Eurozone, and in fact broader Europe, overnight with the release of the manufacturing PMI data. Eurozone manufacturing returns to growth at start of third quarter:

• Final Eurozone Manufacturing PMI at two-year high of 50.3 in July (flash: 50.1)
• PMIs rise in all nations except Spain
• Price pressures remain on the downside, as input costs and output prices fall further

July PMI data signalled a welcome return to growth for the Eurozone manufacturing sector. Production and new orders both increased at the fastest rates since mid-2011, as new export business expanded and a number of domestic markets moved closer to stabilisation Eurozone manufacturing production rose for the first time since February 2012, underpinned by the first growth in new order volumes for over two years. New export orders also posted a slight increase following June’s marginal decline. By country, Germany recorded the strongest output growth in July, mainly due to improving domestic demand as new export orders declined (albeit at a slower pace). Production increased further in Italy, the Netherlands and Ireland, and returned to growth in France and Austria. Unlike Germany, the expansions in these nations were generally led by solid increases in new export business. Greece remained the worst performer overall, recording the steepest reductions in output, new orders and new exports of all the nations covered by the surveys. Spain was the only nation to report a faster rate of contraction in output.

Italy Banks Bad Loans Underline Southern Europe Malaise -- Italian banks are more reluctant to lend as a recession saddles them with mounting bad debt, highlighting a growing malaise in southern Europe’s finance industry.  Growing non-performing loans may mean second-quarter profit at Intesa Sanpaolo, Italy’s second-biggest bank, slides to 189 million euros ($250 million) from 470 million euros a year ago when it reports tomorrow, according to the average estimate of four analysts surveyed by Bloomberg. Bailed-out Banca Monte dei Paschi di Siena SpA is expected to announce its fifth-straight quarterly loss next week. Intesa is among banks in southern Europe reporting a drop in earnings. At the heart of the problem is a debt crisis that ravaged the region’s finances, forcing firms to sell assets and pare back lending to stay afloat. Standard & Poor’s cut the ratings of 18 Italian banks last week, saying the economic recession will be longer than expected. Increasing non-performing loans may hurt credit ratings in Spain, Moody’s Investors Service said last week.

Italy's High Court Affirms Berlusconi's Tax Fraud Conviction - A tax fraud conviction against ex-Premier Silvio Berlusconi has been upheld by the country's highest court in a move that could imperil a fragile coalition government.The Court of Cassation's five-judge panel decided Thursday to reject Berlusconi's final appeal, threatening the stability of Premier Enrico Letta's ruling coalition, which depends on support from Berlusconi's party. The flamboyant media mogul turned politician had earlier been sentenced to four years, but that had been commuted under an amnesty.The charges stem from the October conviction of 76-year-old Berlusconi and three others on tax fraud charges related to the tycoon's purchase of television rights for his Mediaset network.However, the judges ordered a lower court to review its imposition of a five-year ban on Berlusconi's participating in public office.

Bank of Cyprus depositors lose 47.5 per cent of uninsured savings as part of national bailout - The Cypriot government says depositors at the country's largest bank will lose 47.5 per cent of their savings over the 100,000-euro ($132,000) insurance limit. Losses at Bank of Cyprus were initially estimated at 37.5 per cent. Another 22.5 per cent of the deposits remained tied up while experts calculated how much money the bank would need to remain solvent. Government spokesman Victoras Papadopoulos announced the figure Monday. Depositors hit with losses will get shares in the bank. Large depositors in Cyprus' two biggest lenders were forced to take losses as a condition of a 23 billion-euro ($30.5 billion) rescue package the country agreed on with its eurozone partners and the International Monetary Fund in March. Restrictions on money withdrawals and transfers were imposed for all banks to head off a run

Greece May Face Gap of 11 Billion Euros, I.M.F. Says - The International Monetary Fund warned in a report that a persistent recession and the government’s failure to accelerate overhauls may create an 11 billion-euro hole in Greece’s finances over the next two years. The concerns come as Greece received 4 billion euros, or $5.3 billion, in aid late Wednesday from its so-called troika of creditors: the I.M.F., the European Commission and the European Central Bank. The latest financing gap may require Greece’s European creditors to consider giving it debt relief and more money so that it can meet the requirements of its current 172 billion-euro bailout program, which came on top of a 110 billion-euro bailout program given in 2010, the I.M.F. said. The Fund also cautioned that investment and growth were unlikely to resume in Greece if investors were not convinced that Greece’s creditors had a credible policy to deal with its debt crisis. That set off alarm bells in some corners of the I.M.F. Earlier this week, Paulo Nogueira Batista, who represents Brazil and 10 other countries on the I.M.F. board, abstained from voting for additional aid to Athens. On Wednesday, he said the I.M.F.'s latest report showed that “awareness of the risks of the program going off track seems to be increasing.” He added: “One cannot but notice an undertone of despair in staff’s repeated calls on the Greek and the euro-area authorities to stand by their commitments.” Greece must show it has at least a year’s worth of money in its coffers to fund government operations and repay its loans before the I.M.F. will continue its own lending to the country.

Greece should defy the gunboat creditors - The IMF’s latest report on Greece lays bares the country’s grotesque situation, and exposes the charade of EMU policy. It states that public debt will reach 176pc of GDP this year, despite the haircut already imposed on pension funds, insurers and sovereign wealth funds (Norway for instance) who loyally stood behind Greece after categorical assurances by EMU leaders that Europe would never let an EMU sovereign state default. The debt level is supposed to return to 124pc by 2020; a figure for some reason deemed sustainable. Such a feat is obviously preposterous in an economy that is still contracting violently, has seen a decline in exports over the last year, still has a structural current account deficit of 6pc, and (in my view) still has a badly over-valued currency. This target can be achieved only by massive debt write-downs. “The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program,” said the Fund. The IMF’s mission chief Poul Thomsen was explicit yesterday, saying the only question is how much it will have to be. There is already an €11bn shortfall to meet targets by the end of the year, but that is a fraction of the losses that must inevitably come. Yet German Chancellor Angela Merkel insists there can be no second package of debt relief. She knows all too well that the next haircut is for German taxpayers — and of course Dutch, Finnish, Austrian, French, Italian, and Spanish taxpayers — who have yet to suffer one bent Pfennig in losses from all the EMU guarantees handed out like confetti.

Spain To Suffer At Least 25% Unemployment Until 2018, IMF Forecasts - With the mean-reverting extrapolators all calling the bottom in Europe and scandal-plagued PM Rajoy desperate for distraction repeatedly arguing that the country's depressed economy is finally emerging from a two-tear slump, the FT reports that IMF has just popped that balloon of hope. "Spain has historically never generated net employment when the economy grew less that 1.5-2%,” the IMF notes, pointing out "yet growth is not projected to reach these rates even in the medium-term." In fact, echoing recent warnings from independent economists at exuberance over the most recent data (driven by seasonally-enhanced tourism) as the start of a new trend, the IMF warns, "the weak recovery will constrain employment gains, with unemployment remaining above 25 per cent in 2018."

IMF "Baseline Scenario" Projects Spain Unemployment Will Remain Above 25% for 5 Years with Little Growth = I am normally critical of IMF forecasts, but their baseline unemployment projection for Spain of 25% or more with no more than .6% annual growth through 2017 seems reasonable. The pessimistic scenario is a toxic deleveraging downward spiral that continues right now. The optimistic scenario assumes 2% growth, but that scenario does not start until 2018, and only if labor reforms in Spain and Europe take place. Via Mish-modified Google translate from El Economista, please consider IMF estimates that Spain will grow by an average of 0.6% over the next five years The team led by James Daniel, Chief of Mission of the International Monetary Fund (IMF) to Spain, estimates unemployment, which will remain above 25% over the next five years.Ignoring the 1.6% downturn that the IMF expects the country to suffer this year, the average growth for the Spanish economy between 2014 and 2018 will be 0.6%. GDP growth will remain below 1% until 2017 and thereafter only begin to expand beyond these levels. In 2018, the optimistic scenario in which reforms (both from Spain and Europe) are accelerated and gain ground would result in an acceleration of growth of 2% in 2018 and a significant increase in employment.

European Pundits Starting to Give Up on the Eurozone  - Yves Smith - We’ve been pointing out for some time that Germany has refused to budge from wanting contradictory things relative to the Eurozone. Germany wants to continue to run trade surpluses, which are now predominantly with other countries in Europe. That means it needs to finance its trade partners’ deficits. But Germany simultaneously does not want to do that, at least with other Eurozone members. The only way to square that circle would be if the euro were vastly cheaper, so that Germany’s trade surplus was more with the rest of the world than with its fellow Europeans, and that countries like Spain could come closer to a trade balance or achieve a trade surplus via trade with the rest of the world. No one has entertained that as a solution, since the required level of euro depreciation would be so large as to invite retaliation from Europe’s major trade partners (I haven’t seen good estimates, but early on, Wolfgang Munchau suggested between .6 to .9 to the dollar).The whole premise of the EU/Eurozone project was successive crises would force further integration. We’d assumed that the Eurobanks were sufficiently wobbly that absent more banking integration (at a minimum, a deposit guarantee), you’d eventually see some sort of Big Problem (see an analysis by Josh Rosner from last year of the poor condition of the German banks). Yet the European officialdom has managed to pull off years of “barely enough at the last minute” salvage operations to keep things from falling over. But the Germans have also insisted on crushing and failed austerity, and refuse to relent even as compliant periphery countries keep missing their targets and in the case of Greece, the result of breaking a country on the rack is a failed state.Even though we’ve had quite a few individual commentators from Europe argue in favor of a Eurozone dissolution, the pundit class has treated that as impossible because the costs were so high that whatever compromises needed to be made would eventually be reached.

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