Political Economics

[Crafty_Dog]

Woof All:

A lot of bearish sentiment has been expressed around here-- including by me.  Worth noting IMHO that when the PIIG Flu acts up in Europe, the dollar rises.  Also, if I am not mistaken, rising interest rates here in the US tend to strengthen the dollar.  If the scenario envisioned below reifies, we could be surprised by where things go for the dollar.
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Stratfor Summary
Standard & Poor’s said Dec. 14 that it likely will downgrade Belgium’s credit rating due to the size of the country’s government debt and budget deficit, along with its inability to form a stable government. The announcement indicates that Europe’s financial woes are spreading from the PIIGS — Portugal, Italy, Ireland, Greece and Spain — to more established economies, particularly Belgium and Austria.

Standard & Poor’s warned Dec. 14 that Belgium’s mix of high government debt, a high budget deficit and the chronic inability to form a stable government would likely force the ratings agency to downgrade the country’s credit rating (currently at AA+), possibly within six months. Such an event is not yet inevitable, but the mere announcement of the “negative watch” heralds the spread of Europe’s ongoing financial troubles to Europe’s more established states.

Until now nearly all concern for the financial stability of eurozone states has focused on the PIIGS, an acronym investors created to refer to Portugal, Italy, Ireland, Greece and Spain. These states share certain characteristics that include large — and in many cases, popped — bubbles in real estate and finance, high budget deficit and debt levels, and political difficulty in addressing the problems.

To this list of states in distress, STRATFOR would like to add two more developed Western European countries: Austria and Belgium, both of which share key negative characteristics of the PIIGS.

Belgium is certainly the worse off of the two. It suffers from a residential real estate bubble roughly as bad as Spain’s, roughly half again as bad in relative terms as the U.S. subprime crisis. Belgium’s 2009 headline government debt level clocked in at 96 percent of gross domestic product (GDP), 20 percentage points worse than Portugal — the next PIIGS state that STRATFOR expects will need a bailout. But perhaps most important is that modern Belgium cannot seem to hold a government together. Since the last elections in April 2007 it has had three separate governments, and that does not include the 18 months of interim governments required to hash out coalition deals that were complex and unstable in equal measure. The soon-to-be-mounting obsession among investors is that such political dysfunction will make the austerity required to fix the budget next to impossible.

Austria is better off than Belgium by all of these measures. Its debt and deficit are both considerably lower (68 percent of GDP versus 96 percent of GDP and 3.5 percent of GDP versus 6 percent of GDP, respectively), its political system is more or less in order, and its housing sector — nearly alone within Europe — was never overbuilt. Austria’s biggest outlier is that its banks are listing badly, due to their overexuberance in lending into the now-popped credit bubble that plagues Central Europe.



(click here to enlarge image)
The point that Austria and Belgium have most in common, however, is one they share with the weaker states of the PIIGS grouping: They are largely dependent upon external financing to manage their sovereign debt loads. Austria, Belgium, Greece and Ireland are all relatively small states with limited indigenous financial resources. When a state faces financial duress, the first thing the government does is hash out a deal — often forcefully — with its own financial sector, applying those resources to the problem. Such is standard fare in major states such as Germany and Italy. Smaller states often lack such options, forcing the governments to turn to international investors for cash. In good times this is irrelevant, but when money gets tight and investors get scared, an investor stampede can crush a state’s finances overnight. Such a calamity was precisely what forced the Greek and Irish breakdowns and bailouts. The exposure of all four of these states to such outsiders is more than 50 percent of GDP, which as Greece and Ireland have already demonstrated so vividly, is an amount that simply cannot be coped with in a panic.

Austria and Belgium are advanced, technocratic economies with sophisticated financial sectors. Any financial contagion that breaks into the developed states of Western Europe via these two countries would terrify investors who have been fairly convinced that the euro’s problems were safely sequestered in the somewhat manageable states of the PIIGS grouping. Should Austria or Belgium go the way of Greece, all bets will be off in Europe.



Read more: Europe's Financial Troubles Spread to Belgium, Austria | STRATFOR

[Crafty_Dog]

second post of day

Industrial production increased 0.4% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/15/2010


Industrial production increased 0.4% in November, beating a consensus expected gain of 0.3%. Production is up at a 2.8% annual rate in the past six months.

Despite a 6.0% drop in auto production, manufacturing output rose 0.3% in November despite a 6.0% decline in autos. Non-auto manufacturing rose a strong 0.7%. In the past six months, auto production is down at a 4.7% annual rate while non-auto manufacturing is up at a 3.1% rate.
 
The production of high-tech equipment was up 0.9% in November and is up at a 2.9% annual rate in the past six months.
 
Overall capacity utilization rose to 75.2% in November, the highest since October 2008. Manufacturing capacity use increased to 72.8%, the highest since the failure of Lehman Brothers.
 
Implications:  Another month, another increase in factory output and no sign of a double dip. Many analysts are using the election and tax deal to turn bullish. They are scrambling to catch up to an economy that was already growing before a single person cast a vote. Like retail sales, manufacturing output rose for the fifth consecutive month in November. Due to a 2% increase in utility output, overall industrial production rose 0.4%. Look for another surge in utility output next month as December is turning out to be unusually cold in much of the country. In mid-2009, capacity utilization was at a 45-year low of 68.2%. Now, only 17 months later, capacity utilization is 7 percentage points higher, at 75.2%. Two factors are boosting utilization: expanding output and a depreciating capital stock. In fact, because of depreciation, total capacity (the ability to produce) in manufacturing has fallen back down to 2007 levels. Assuming we are correct that real GDP expands 4% in 2011, capacity utilization will climb to near the long-term average of 80% next year. Not only will companies be forced to invest but the Federal Reserve will face greater fears of inflation coming from a constrained sector of the economy. In other news this morning, the Empire State index, a measure of manufacturing in New York, rebounded sharply in December, climbing from -11.1 in November to +10.6.

[Crafty_Dog]

Tuesday, December 21, 2010
Fear subsides, prices rise

http://scottgrannis.blogspot.com/
I must have shown this chart at least a dozen times since late 2008, but it is so important that repetition is justified. (Here is a post from May '09 as an example) The main message here is that fear was the key driver of the 2008-2009 recession: fear of a global depression, fear of a global banking collapse, fear of deflation, and fear of a huge increase in future tax burdens thanks to an equally huge increase in the size of government. Fear drove us to the brink of what was expected to be an awful depression, and the reduction of fear is putting us back on a growth track.

The correlation between fear (represented by the red line, the Vix index inverted) and equity prices that is evident in this chart speaks for itself. The Vix has now returned to its pre-recession levels, and equity prices are on track to do the same, though the S&P 500 will need to rise another 25% to recover its previous highs.

Fears have been assuaged relentlessly since March '09. Swap spreads narrowed sharply. Credit spreads narrowed sharply. Signs of a recovery displaced expectations of a depression. Public reaction to the stimulus plan was mixed. Obama's popularity began declining, and the implementation of his agenda started facing headwinds. The Fed took strong action to expand the money supply. Financial markets began healing instead of collapsing. Commodity prices and gold prices started rising. Global trade got back in gear. Since the recession ended 18 months ago, the economy has proven the skeptics wrong more than once, and the forces of recovery have been working steadily behind the scenes, albeit slowly. Housing stopped collapsing and started stabilizing. A sea-change in the mood of the electorate resulted in a huge change in the congressional balance of power; the private sector now has a friend in Congress, and capital once again is held in high regard. More recently, a major increase in tax burdens was avoided, and a gargantuan omnibus spending bill went down in flames.

Short-term interest rates have been essentially zero for two years now. Investors, faced with the steep cost of safety (i.e., accepting a zero return for the safety of cash) have been realizing that the risks were not as great as they once feared, and they have been slowly deploying their cash hoards. Fearful investors have climbed countless walls of worry along the way, only to see the prices of risk assets moving higher. Consumers have been slowly drawing down their cash hoards, with the result that retail sales have now made a complete recovery. The next shoe to drop will be when corporations begin deploying their immense cash hoards to fund expansion plans and new hiring.

 It's hard to see how this self-reinforcing process of recovery can be derailed.

[G M]

 "It's hard to see how this self-reinforcing process of recovery can be derailed."

Um......Howabout states defaulting on debt? Govenment shutdowns? Trillions in new nat'l debt? QE2?

[Crafty_Dog]

My questions exactly, but I think Scott makes a fair point about the market being a forward looking mechanism.   The market tanked when BO passed McCain in the polls and McCain showed his progressive stripes at the same time-- worth noting is that Palin vigorously participated in some of this too).

I will see if I can get some comments from Scott.

[Crafty_Dog]

Word from the man himself in response to this thread! 
=====================
All the worries about federal state and local budget cuts have been out there for a very long time, and progress is already being made on addressing the issue. Public sector jobs are already shrinking (I'm excluding census workers), down 340K since early last year, marking the first time in decades (or perhaps ever) that we have seen a meaningful decline in the public sector workforce.

Furthermore, it was the huge increase in the public sector that is a problem for the economy. As Milton Friedman always said, the burden of the public sector is best measured by the amount of spending relative to the economy, not by the deficit. Government spends money inefficiently, and thus is a drag on the economy. Cutting back government spending should therefore free up resources for the private sector, thus boosting the economy going forward.

We should not fear budget cutbacks, we should welcome them!

Defaults are very likely to happen, but those are being priced in already. Defaults will only serve to reinforce discipline on the public sector, and that is a good thing.

Finally, I would argue that the self-reinforcing forces of recovery lead to growth, and growth solves all kinds of problems related to debt and budgets. Growth is already boosting federal revenues, which are growing at a 10% annualized rate.

[G M]

States and local governments aren't just cutting spending, some like California are deep in debt where they may well start defaulting as well as no longer being able to provide core services.

[G M]

http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220_page4.shtml?tag=contentMain;contentBody

The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.

"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.

"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."

Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.

"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.

Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.

"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.

No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.

The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.

[Crafty_Dog]

Krugman is usually an ass, but is the main point here a valid one?

Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months.
 
So what’s the meaning of this surge?

Is it speculation run amok? Is it the result of excessive money creation, a harbinger of runaway inflation just around the corner? No and no.

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.

Some background: The last time the prices of oil and other commodities were this high, two and a half years ago, many commentators dismissed the price spike as an aberration driven by speculators. And they claimed vindication when commodity prices plunged in the second half of 2008.

But that price collapse coincided with a severe global recession, which led to a sharp fall in demand for raw materials. The big test would come when the world economy recovered. Would raw materials once again become expensive?

Well, it still feels like a recession in America. But thanks to growth in developing nations, world industrial production recently passed its previous peak — and, sure enough, commodity prices are surging again.

This doesn’t necessarily mean that speculation played no role in 2007-2008. Nor should we reject the notion that speculation is playing some role in current prices; for example, who is that mystery investor who has bought up much of the world’s copper supply? But the fact that world economic recovery has also brought a recovery in commodity prices strongly suggests that recent price fluctuations mainly reflect fundamental factors.

What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008.

Yet inflation has remained low. What’s an inflation worrier to do?

One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.

You do have to wonder what these people were thinking two years ago, when raw material prices were plunging. If the commodity-price rise of the past six months heralds runaway inflation, why didn’t the 50 percent decline in the second half of 2008 herald runaway deflation?

Inconsistency aside, however, the big problem with those blaming the Fed for rising commodity prices is that they’re suffering from delusions of U.S. economic grandeur. For commodity prices are set globally, and what America does just isn’t that important a factor.

In particular, today, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental.

Also, over the past year, extreme weather — especially severe heat and drought in some important agricultural regions — played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.

[DougMacG]

They got it right in a Krugman column?  Sounds like he is on vacation and an aide mailed this in. 

"world commodity prices have risen by a quarter in the past six months"

Maybe a sign of global recovery, but not that pronounced. 

It makes sense to me that oil goes up ever day we consume without committing to any new production.  Copper is another unique commodity worthy of further analysis.  Gold is tied to inflation expectations. Crop related commodities are facing record worldwide freezes.

He notes that commodity prices were also high before the last collapse.  Time will tell what this all really means.

[Crafty_Dog]

Also relevant for cotton prices were the severe floods in Pakistan.  More generally, his point that some price increases are due to a change in the general level of demand and not inflation, is, IMHO, plausible in the current environment.

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Monday Morning Outlook

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First Trust Sees 4% Real GDP Growth in 2011 To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/27/2010


 

Sometime back in 2009, conventional wisdom argued that while the economy would appear to recover from the subprime crisis, the recovery would be tenuous.  A growing chorus argued real GDP would grow at 2% or less, consumption would be lackluster, and any signs of real strength would be ephemeral – based on pent-up demand.
 
Of course, when real GDP grew at an annualized 4.4% over the winter (2009-10) and 3% in the first year of the recovery, the conventional wisdom had an excuse.  “Most of it was inventories,” they said, “and don’t expect this to continue.”  So, when real GDP slowed to 1.7% annualized growth in Q2, they raised the stakes.  They called it a “soft-patch” and argued that a “double-dip” was a real possibility.  At most, they expected a 2% growth rate in the second half of 2010.
 
Instead, we were focused on three things.  First, the economy was not broken.  Once the panic ended, a natural recovery would start.  Second, even without quantitative easing, the Fed was very easy.  And third, productivity would remain robust.  As a result, we predicted 3% growth for the second half (September 20, 2010 MMO).
 
That forecast looks pretty good.  In fact, it may be too low.  Real GDP growth clocked in at a 2.6% annual rate in Q3.  All we need is a 3.4% growth rate in Q4 to get our 3% average, but the data suggest real GDP could expand by more than 4% annualized in Q4, possibly even 5%+.
 
Some of the acceleration in Q4 is because the economy is really picking up speed.  But some of the acceleration in Q4 is also due to a problem the government is having seasonally adjusting oil prices.  This problem artificially boosted growth in late 2009, but reduced growth in mid-2010.  In other words, the soft-patch was never as bad as many thought.  (For further discussion of the problem with oil prices, see our MMO dated November 8, 2010).
 
In 2011, we expect 4% real GDP growth.  The biggest difference between the First Trust forecast and the conventional wisdom is deleveraging.  We do not view the deleveraging process in as negative a light as the conventional wisdom.  Once deleveraging begins to slow, it will not hurt the economy.  If a consumer (or a business) pays down debt but pays down less than she did the prior year, then her spending can go up faster than her income (or profits).  Higher saving is not going to be a negative for the economy.
 
Here are the assumptions behind our forecast for 4% real GDP growth in 2011.
 
Consumption:  Auto sales in October/November were up about 30% from early 2009 levels, and JD Power and Edmunds.com are forecasting even higher sales in December.  Still, the pace of sales remains below the long-term trend in “scrappage,” suggesting further strong gains in sales in the year ahead.  Meanwhile, consumers’ financial obligations are now the smallest share of their after-tax incomes since 1995, and headed lower.  Consumption will grow 3.3% next year, adding 2.3 percentage points to GDP.
 
Business Investment:  Corporate profits and cash on balance sheets are at, or near, record highs.  Meanwhile, capacity utilization has grown from a low of just 68% in mid-2009 to 75% and is on its way to 80% (the long-term average).  Our industrial capacity is depreciating and needs to be updated.  We are on the cusp of a boom in investment in equipment and software.  Business investment should grow about 12% in 2011, adding 1.2 points to GDP growth.
 
Home Building:  Home builders still face the headwind of substantial excess inventories.  However, once those inventories are gone, the pace of housing starts is going to have to be about 150% higher than recent levels.  It may take several years to get there, so we have home building growing 17.5% next year, adding 0.4 points to real GDP growth.
 
Government:  Real government purchases will grow about 2.5% this year.  We assume they will grow at a 1.5% rate next year (below the 30-year average of 2.2%), adding 0.3 percentage points to the GDP growth rate. 
 
Inventories:  Inventories were razor-thin by the end of 2009.  They started to rebound this year and we expect that rebound to continue, but not accelerate significantly.  As a result, we expect the inventory re-build to add only 0.1 point to GDP growth.
 
Trade:  Unless the government fixes its measure of oil prices, expect a wild quarter-by-quarter ride of ups and downs for trade in 2011, just like this year.  Either way, though, trade should, on average, subtract 0.3 points from the GDP growth rate, as the trade deficit expands slightly.   
 
Add ‘em all up and you get a 4% real GDP growth rate for 2011.  Strap in, it’s going to be better than you think.

[G M]

So, when do the jobs come back? Real jobs, not census workers or holiday temps.

[Crafty_Dog]

A key question no doubt.  My SWAG is that ulitmately that they don't really come back very much; that for those who do have jobs things can seem OK-- apart from the tension that come with the diminished margin of error-- and a lot of working poor will simply become poor, and a lot of middle class folks have fallen and will fall further than they ever thought possible.   

A lot of Americans have focused their economic endeavors based upon the false signals of the various bubble economies and now that these bubbles have burst, they are finding themselves stranded by the receding tide.  A lot of Americans are profoundly insufficiently educated and much of what they know isn't so.

[G M]

There is a very common belief in the US that what we've had as a way of life and a standard of living is just the natural order of the universe, and prosperity and safety are inherent, no matter how far we stray from the core principles that allowed such things to come about.

[Crafty_Dog]

The ISM Manufacturing index increased to 57.0 in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/3/2011


The ISM Manufacturing index increased to 57.0 in December from 56.6 in November, exactly as the consensus expected gain. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)

The major measures of activity were mixed in December but all remain well above well above 50.0, signaling continued growth. The new orders index increased to 60.9 from 56.6 and the production index increased to 60.7 from 55.0. The supplier deliveries index declined to 55.9 from 57.2 and the employment index also fell slightly to 55.7 from 57.5.

The prices paid index increased to 72.5 in December from 69.5 in November.
 
Implications:  Manufacturing continued to show strong growth in December, with the ISM index coming in at 57.0, the highest level since May. The new orders and production indices both rose back above 60, suggesting more strong growth ahead. While the employment index fell slightly, it remained solidly above 50 for the 13th straight month. According to the Institute for Supply Management, which publishes the report, an overall index level of 57.0 is consistent with real economic growth at a 5% annual rate, right on pace with our forecast for Q4. On the inflation front, the prices paid index rose to 72.5 from an already elevated 69.5 in November. In other news this morning, construction increased 0.4% in November and an even stronger 1% including upward revisions to prior months.  The upward revisions were for both home building and commercial construction.  The 0.4% gain in November was primarily due to home building and office construction by the federal government.  In other recent news, last week’s report on the Case-Shiller index shows that home prices in the 20 largest metro areas around the country declined 1% in October (seasonally-adjusted) and are down 0.8% in the past year.  However, home prices are still 1.8% higher than the cycle low hit in May 2009. We do not believe the recent decline is a sign of a double-dip in housing. Rather, it’s an aftershock of the government’s tax credit for home buyers.   We expect home prices to rise in 2011.

[Crafty_Dog]

The ISM non-manufacturing composite index increased to 57.1 in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/5/2011


The ISM non-manufacturing composite index increased to 57.1 in December from 55.0 in November, easily beating the consensus expected gain to 55.7. (Levels above 50 signal expansion; levels below 50 signal contraction.)

The key sub-indexes were mixed in December, but remain at levels indicating robust economic growth. The new orders index increased to 63.0 from 57.7 and the business activity index rose to 63.5 from 57.0, both multi-year highs. The employment index fell to 50.5 from 52.7 and the supplier deliveries index fell to 51.5 from 52.5.
 
The prices paid index increased to 70.0 in December, the highest since the collapse of Lehman Brothers, from 63.2 in November.   
 
Implications:  The early stage of the economic recovery was dominated by the manufacturing sector. That phase is now over: the service sector is growing rapidly, too. The US economy continues to pick up steam, supporting our forecast of a 5% real GDP growth rate in Q4. Today’s ISM Services headline of 57.1 is the highest reading since May 2006. The business activity index, which has an even higher correlation with real GDP growth, hit 63.5, the highest since 2005. The new orders index was also the highest since 2005. On the inflation front, the prices paid index increased to 70.0, the highest since the financial panic started in late 2008. In other news this morning, the ADP employment index, a measure of private sector payrolls, increased by 297,000 in December, the largest increase in the index’s history, dating back to 2000.  As a result, we are lifting our forecast for the gain in private sector payrolls in Friday’s official Labor Department report to 230,000. (Non-farm payrolls should climb about 215,000 due to ongoing layoffs by states and localities.) In other news from late yesterday, automakers reported that sales of cars and light trucks hit a 12.5 million annual pace in December, up 2.3% from November and up 13% versus a year ago.   The service sector is getting stronger, firms are hiring again, and workers are confident enough about the future to ramp up their purchases of big-ticket items.  What a great way to start a new year.

[G M]

http://senseofevents.blogspot.com/2011/01/crush-depth-of-debt.html

Monday, January 3, 2011
The crush depth of debt

By Donald Sensing

The wreck of Germany's U-352, sunk off North Carolina in May 1942.
What happens when a submarine reaches its crush depth? The question answers itself. World War II U-boat Capt. Hebert Werner related in his postwar book, Iron Coffins, that no one knew how deep a U-boat could dive. "Because," he said, "the only crews that found out were crushed a half-meter later."

The United States is approaching its financial crush depth. The liberal media (but I repeat myself) have proclaimed that the 111th Congress was the "most productive" in generations. One thing the Triple One did produce was debt - not merely mountains of debt but a whole Himalaya range. In fact, this Congress borrowed more money than all 110 previous Congresses combined. In the right-hand column of this site I run a widget that counts the federal debt as it winds toward the orbit of Pluto; as of today at 1.40 p.m. C. it stood at just under 14 trillion, 27 billion dollars.


Can you imagine what $14 trillion looks like? Let's start with a drawing of $1 billion in 10 stacks of $100,000,000 each, in $100 bills. As you can see, you could carry all this money by yourself to a commercial van in maybe 20 minutes and drive away with it. Note the red-shirted figure - the money reaches only to his waist.


Now here is a trillion dollars, still using $100 bills in stacks of $100M each. What is a trillion dollars? Well, it's a million million. It's 1,000 of the picture above.


Note that the red-shirted fellow is standing at the lower-left corner. Note also that the money is stacked twice as high as the first picture. As we begin the New Year, the federal government is in debt to the sum of 14 of these drawings, more than $44,000 for every American infant, child, man and woman.

So beginning in the first week of the New Year, as the 112th Congress convenes, our national task will not be merely to slow our descent toward financial crush depth, but reverse it. Herbert Stein chaired the Council of Economic Advisors under two presidents. He observed, "Economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop." Fact is, like the sub crews we cannot know in advance what our crush depth is. We will only find out when we've reached it and borrowed one dollar more. And then it will be too late. We have to stop the descent, level off and then head back toward the sunlight by shedding debt. This can only be done by both cutting spending and increasing tax revenue. (Do not confuse the latter with increasing tax rates - tax revenues will rise when the nation's wealth increases; increasing tax rates stunts growth out of a recession.)

The road will be very difficult. I wrote in a column on Right Network that the American people (Tea Partiers included, I think) collectively want to cut the budget but individually don't want it done on their own backs. The two most profligate Congresses in our history were the 111th and (surprise!) its immediate predecessor, the 110th, both entirely controlled by Democrats. Fortunately, the 112th will be dominated, though not controlled, by Republicans. Unfortunately, the 112th's Republicans are still mostly of the political class who did not feel the voters' heat enough to see the light.

Herbert Stein also said, "When something can't go on forever, it won't." Sinking in an ocean of red ink cannot go on forever. Eventually the nation will become insolvent and collapse will follow. But how much longer can it go on? Unlike the old sub crews, we will physically survive reaching the crush depth of debt. But whether we can survive as a great nation is unclear at best, and highly unlikely in probability.

Making sure we do not discover our national, financial crush depth is the most urgent task before us. It must be the number one resolution for the New Year and the new Congress.

Closing note: Compare the live clock below with the image grab I posted above:

[DougMacG]

Interesting interview with Thomas Sowell. Quoting the last question and answer below about why he gave up on Marxism.  Interestingly Milton Friedman didn't change his mind at U. of Chicago.  Watching the government from the inside did.

He just came out with a 4th edition of Basic Economics, they joke about how thick it is.  Buy the book.  Read it all.  And read the chapter he took out and posted on the internet.  There is a lifetime of wisdom there.  The easy and failing government answers to today's problems aren't new.
----
I read that you identified yourself as a Marxist in your college days. What prompted your change in ideology?

TS: I was a Marxist I guess for a decade from about the time I was 20 to 30 roughly. What changed my mind was not anything I had read. I was a Marxist when I went into Milton Friedman’s course at [the University of] Chicago and I was a Marxist when I came out of it.

What changed me was working as an economic intern in the government in 1960 and discovering what the government bureaucracies were like in terms of their motivations and how they do their job. I immediately realized government is not the answer. Life taught me. I think that is true for most people.

Most of the leading conservatives were not conservatives when they were young. Milton Friedman was a liberal, he even described himself in his autobiography as Keynesian in his thinking. Friedrich Hayek was a socialist. Ronald Reagan was so far left that the FBI was keeping an eye on him. So you run through the list — of course the whole neoconservative movement was on the left initially. And the same thing happened in Europe and elsewhere. A lot of the indoctrination that takes place in educational institutions begin to erode when people get into the real world and start thinking for themselves.

http://dailycaller.com/2011/01/24/thomas-sowell-speaks-to-thedc-about-the-financial-crisis-health-care-and-his-ideological-transformation-from-marxism-to-conservatism/#ixzz1By5Svi1F

[G M]

http://finance.yahoo.com/news/Higher-pump-prices-coming-apf-1797090788.html?x=0

Gas pump prices that are around $3 a gallon now may seem like a bargain by the time your kids are on Easter egg hunts.

Pump prices have risen nearly 9 percent since Dec. 1 and topped $3.10 a gallon this week. That's the highest level since October 2008. The price may rise or fall a little over the next few months, but analysts expect it to range between $3.20 and $3.75 gallon by March and April ahead of the summer driving season.

The national average for regular gasoline about $3.12 a gallon on Friday, according to AAA, Wright Express and Oil Price Information Service. That's nearly 12 cents more than a month ago and 38 cents above a year ago.

Average pump prices range from $2.81 to $3.70 in major cities. For example, the average in Salt Lake City is $2.74 a gallon and in New Orleans it's $2.97 a gallon. Drivers in San Francisco pay $3.44 a gallon, and in Honolulu gas is $3.58 a gallon.

Americans typically drive less in the winter. Demand is about 1 percentage point higher than a year ago but remains weaker than the historical average, said energy analyst Jim Ritterbusch. The nation's gasoline supplies remain above the five-year average.

Over the next couple of months, refineries will conduct regular maintenance to prepare for the changeover to summer driving mixes. That could affect supplies, but gas prices should remain steady to a few cents more, according to oil analyst Tom Kloza of Oil Price Information Service.

By spring he expects the average price to rise to between $3.50 and $3.75 a gallon. Ritterbusch expects $3.20 to $3.25 a gallon by Memorial Day.

For every penny the price at the pump increases, it costs consumers overall an additional $4 million, according to Cameron Hanover analyst Peter Beutel. If the price goes up a dime a gallon, consumers pay $40 million more each day for that increase.

_______________________________________________________________________________

http://www.businessinsider.com/david-rosenberg-the-wile-e-coyote-market-2011-1#

[Crafty_Dog]

BW makes his case.  Watch this clip and tell me what you think GM (and anyone else)

[G M]

http://www.theglobeandmail.com/report-on-business/staggering-debt-belies-developed-worlds-wealth/article1880232/

Which country is the world’s wealthiest? When asked this question, economists generally refer to gross domestic product per capita. By this measure, according to the IMF, the top eight for 2010 are Luxemburg, Norway, Qatar, Switzerland, Denmark, Australia, Sweden and United Arab Emirates. The U.S. ranks ninth, the Netherlands 10th and Canada 11th.

But does GDP per capita really measure the wealth of a country? Think about it in personal terms: What if your income ranked among the top tier in the country, but your debt also ranked among the highest? Would you be “wealthy”? Not if your debt were so large that, even with your high income, you have no hope of ever paying it off. Similarly, GDP per capita is an income measure that says nothing about a country's balance sheet.

[Crafty_Dog]

That seems a valid point, but what do you make of this Brian Wesbury clip?-- which I see my previous post forgot to include

http://www.ftportfolios.com/blogs/EconBlog/2011/1/24/wesbury-101---drudge-report-negativity-misleading

[G M]

I think Wesbury is wrong, though I hope he's right. I've listed already the profound problems we are facing economically. We are but one serious bump away from real catastrophe and nowhere near anything like a real recovery, but only time will tell who is correct.

[G M]

http://www.nationalreview.com/exchequer/256396/massive-inflation-right-under-our-noses

Massive Inflation, Right under Our Noses

[G M]

http://seekingalpha.com/article/248043-a-message-from-the-baltic-dry

Meaningful or not?

[Crafty_Dog]

I know Scott Grannis uses the BDI.  In the rush of life I have neglected visiting his blog recently.  What is he saying right now?

[G M]

http://scottgrannis.blogspot.com/

Coach Obama still doesn't understand the game
From a taxpayer's perspective, Obama's biggest weakness is his lack of understanding of how the economy really works. That weakness has already cost us $1 trillion, and what he said in his SOTU speech last night shows that this was a lot of money down the drain, because he learned very little from his failures these past two years. He continues to believe that enlightened politicians can boost economic growth much like a good coach can whip a team or a star player into shape. Last night's SOTU peech was Coach Obama's pep talk before the big game. Problem is, he still doesn't understand the game of economic growth, so there is little chance that his coaching will prove effective.

[G M]

http://finance.yahoo.com/news/Newhome-sales-in-2010-fall-to-apf-452650344.html?x=0&.v=1

WASHINGTON (AP) -- Buyers purchased the fewest number of new homes last year on records going back 47 years.

Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

The year ended on a stronger note. Buyers purchased new homes at a seasonally adjusted annual rate of 329,000 units in December, a 17.5 percent increase from the November pace.

Still, economists say it could be years before sales rise to a healthy rate of 600,000 units a year.

"The percentage rise in sales looks impressive but 10 percent of next-to-nothing is still next-to-nothing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, referencing the December increase. "New home sales are bouncing around the bottom and we see no clear upward trend in the data yet."

[G M]

http://hotair.com/archives/2011/01/27/initial-jobless-claims-jump-51000/

**Not exactly roaring back.....

[Crafty_Dog]

Not disagreeing, but balancing out with intellingent counter POV:

Data Watch

--------------------------------------------------------------------------------
New orders for durable goods declined 2.5% in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/27/2011


New orders for durable goods declined 2.5% in December, coming in well below the consensus expected increase of 1.5%. Excluding transportation, orders increased 0.5%, falling short of the consensus expected gain of 0.9%. Orders are up 6.9% versus a year ago, 11.5% excluding transportation.

The overall decline in orders in December was mostly due to transportation equipment, specifically civilian aircraft/parts (which are extremely volatile from month to month). Other major categories of new orders were mixed.
 
The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft.  That measure rose 1.7% in December (2.0% including upward revisions to prior months). These orders increased at a 6.4% rate in Q4 versus the Q3 average.
 
Unfilled orders fell 0.4% in December but are up at a 3.2% annual rate in the past three months.
 
Implications:  Today's headlines on durable goods orders and unemployment claims were disappointing. However, the details of the durables report and extenuating circumstances on claims suggest the case for robust economic growth remains intact. Almost all the weakness in orders was due to civilian aircraft, which are extremely volatile and which hit a 20-year low in December. Including revisions to prior months, new orders for durable goods excluding transportation rose 1.5%. Meanwhile, shipments of “core” capital goods (which exclude civilian aircraft and defense) showed a strong gain in December, rising 1.7% after a 1.4% increase in November.  We expect orders for durable goods to move higher in 2011 as firms are loaded with cash earning near zero percent interest and capacity utilization is approaching long-term norms.  In other news this morning, new claims for unemployment insurance rose 51,000 last week to 454,000.  The four-week moving average is now 429,000.  Continuing claims for regular state benefits rose 94,000 to 3.99 million.  Initial claims that would have been filed the prior week were delayed due to unusual southern snowstorms. The true underlying trend is likely near the 4-week moving average. On the housing front, pending home sales – contracts on existing homes – rose 2.0% in December.  With three strong months in a row now, existing home sales, which are counted at closing, should continue to gain in January.

[Crafty_Dog]

--------------------------------------------------------------------------------
The first estimate for Q4 real GDP growth is 3.2% at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/28/2011


The first estimate for Q4 real GDP growth is 3.2% at an annual rate, slightly lower than the consensus expected.

The largest positive contributions to the real GDP growth rate were net exports, which added 3.4 points to the real GDP growth rate, and personal consumption, which increased at a 4.4% annual rate. 
 
The weakest component of real GDP, by far, was inventories, which alone reduced the real GDP growth rate by 3.7 points.
 
The GDP price index increased at a 0.3% annual rate in Q4. Nominal GDP – real GDP plus inflation – rose at a 3.4% rate in Q4 and is now up 4.2% versus a year ago.
 
Implications:  Real GDP grew at a 3.2% annual rate in Q4.  This was slightly lower than the consensus (3.5%), but significantly lower than our much publicized forecast of 5.4%, which was the highest forecast in the consensus survey.  But don’t throw us out as being those crazy optimists just yet.  Our forecast was largely based on a key insight about how the government (mis)measures oil prices, so we predicted net exports would add 3.3 points to the GDP growth rate, much higher than anyone else.  And guess what?  Net exports added 3.4 points to the GDP growth rate!  And because we were so bullish on trade, we predicted real final sales (real GDP excluding inventories) would grow at a 7.1% annual rate, the fastest pace since 1984.  And, guess what?  Real final sales came in at exactly that 7.1% growth rate!  Where we were off, was with government spending (much weaker than we had expected), personal consumption and home building (stronger than we expected) and inventories (substantially below both our forecast and the consensus).  Inventories alone subtracted 3.7 points from real GDP growth.  In other words, manufacturers and retailers underestimated consumer demand and ran down inventories dramatically in the fourth quarter.  Anecdotal reports suggest that low inventory levels are having a cost in the form of lost sales.  Moreover, prices are not likely to be slashed to reduce excess inventories after the holidays.  What this means is that there is more room for production increases in 2011 and inflation will continue to move higher.  Our original forecast of 4% real GDP growth this year is probably too low.  Real consumer spending grew at a 4.4% annual rate in Q4, the fastest in almost five years, while business investment continued to advance and home building increased without any assistance from homebuyer tax-credits.

[G M]

Would inflation distort the stats on consumer spending?

[G M]

http://hotair.com/archives/2011/01/28/oil-rigs-and-jobs-already-moving-out-of-gulf/

Jobs, jobs, jobs.

[DougMacG]

Of course there is no such thing as a laser-like focus.  There are lasers and there are other methods of focus. This was more like my teenage daughter saying she will be home at like-10.

Obama also said we can do more than one thing at once.  Lasers don't make very effective flood lights.

[G M]

http://www.foxbusiness.com/markets/2011/01/27/peter-morici-japan-sound-insolvent/

Morici: Japan Sound, U.S. Insolvent

S&P has downgraded Japan's long-term debt from AA to AA-, indicating the U.S. AAA rating should be taken down several notches to less than AA-.

National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.

Japan's ability to pay is simply much stronger than the United States.

Japan has a strong current account surplus-thanks to a powerful manufacturing export machine-and the Bank of Japan sits on $1 trillion in foreign currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The United States can hardly make such a claim.

Domestically, Japan does suffer from deflation, slow growth and maintains a large budget deficit to prop up domestic demand, because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the BoJ has more than enough flexibility to purchase those bonds as needed-monetarize debt-without instigating domestic inflation or creating other adverse macroeconomic consequences.

The United States is a wholly different situation. The U.S. has a gaping current account deficit-on oil and with China-and policies pursued by the Bush and Obama Administrations are worsening those conditions. Owing to the large current account deficit, the United States must run a huge budget deficit, close to 10 percent of GDP, just to sustain growth at 3.5 percent and keep unemployment from flying out of control.

The large U.S. current account deficit indicates the U.S. economy as a whole is not generating adequate revenues to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the United States is much too dependent on the government of China to print yuan to buy dollars, and in turn, to use those dollars to buy Treasuries to finance the U.S. private economy's current account deficit and the federal budget deficit.

Read more: http://www.foxbusiness.com/markets/2011/01/27/peter-morici-japan-sound-insolvent/

[G M]

http://www.bloomberg.com/news/2011-01-28/moody-s-says-time-shortens-for-u-s-rating-outlook-as-s-p-downgrades-japan.html

Moody's Says Time Shortens for U.S. Rating Outlook as S&P Downgrades Japan

Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.

The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.

The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.

U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.

‘Trajectory Is Worse’

“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.

Moody’s said it expects there will be “constructive efforts” to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level.

[G M]

http://hotair.com/archives/2011/01/29/imf-to-us-better-start-taking-care-of-business/

We better.

[Crafty_Dog]

Personal income increased 0.4% in December while personal consumption increased 0.7% To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/31/2011


Personal income increased 0.4% in December, exactly as the consensus expected. Personal consumption increased 0.7%, beating the consensus expected gain of 0.5%. In the past six months, personal income is up at a 3.7% annual rate while spending is up at a 5.8% rate.

Disposable personal income (income after taxes) was up 0.4% in December and is up at a 3.0% annual rate in the past six months. The rise in December was led by private-sector wages and salaries, interest, and dividends.
 
The overall PCE deflator (consumer inflation) increased 0.3% in December and is up 1.2% versus a year ago. The “core” PCE deflator, which excludes food and energy, was unchanged in December and is up 0.7% since last year.
 
After adjusting for inflation, “real” consumption was up 0.4% in December, is up at a 3.7% annual rate in the past six months, and at a 4.6% annual rate in the past three months. 
 
Implications: Watch out above! Consumer spending accelerated into the end of 2010. “Real” (inflation-adjusted) consumer spending increased 0.4% in December and was up at a 4.6% annual rate in the last three months of the year. Why are consumers spending more? First, their incomes are rising. In the past year, real private-sector wages and salaries plus small business incomes are up 3.2%. Second, although consumers are still paying down debt, they’re doing so at a slower pace. Notice that this means spending can grow faster than income, not slower. Third, consumers’ financial obligations – their debt-related monthly payments plus other recurring charges like rent, car leases, and homeowners’ insurance – is now the lowest share of after-tax income since 1995. On the inflation front, consumption prices are up only 1.2% versus a year ago but seem to be accelerating, with prices up at a 2.0% annual rate in the past six months and a 2.4% rate in the past three months. Meanwhile, “core” inflation, which excludes food and energy, remains very subdued, up only 0.7% in the past year. Low core inflation is the excuse the Federal Reserve is using for quantitative easing. We think the Fed needs to focus more on overall inflation, not just the core. So do the Egyptians.

--------------------------------------------------------------------------------

[G M]

http://www.europac.net/pentonomics/gdp_joke

Pentonomics - The GDP Joke
January 28, 2011 - 8:13am — mpento
Friday, January 28, 2011
By:
Michael Pento

The MSM is running around today applauding our 4th quarter GDP report, which increased at a 3.2% annual rate. However, the current dollar or nominal GDP growth rate was 3.4%. That’s correct; the BEA is suggesting that inflation grew at just over a .2% annual growth rate in Q4 2010! Does anybody that’s not a politician or central banker really believe that the rate of inflation for goods produced domestically was growing at a .2% annual rate?

 

To make matters worse, personal consumption expenditures were up 4.4% and final sales surged 7.1%. I say worse because the savings rate is dropping as consumers and business ramp back up their borrowing. Household purchases, which account for about 70 % of the economy, rose at a 4.4% pace last quarter, the most since the first three months of 2006. The increase added 3 percentage points to GDP.

 

To be able to consume one must first have produced. If you consume without having produced, you are spending either borrowed or printed money. And the money that is being spent isn’t used to purchase capital goods, which can expand the productive output of the economy. Consumer credit is up two months in a row and we are spending borrowed and printed money, not money earned from growing real incomes.

 

 The Fed’s preferred inflation metric, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.4% annual pace, the smallest gain in data going back to 1959. So we should expect more borrowing and more Fed printing, as Mr. Bernanke feels inflation is perilously low.


Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

[Crafty_Dog]

Interesting.  FWIW here's Wesbury coming to very different conclusions:

The ISM Manufacturing index increased to 60.8 in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/1/2011


The ISM Manufacturing index increased to 60.8 in January from 58.5 in December. The consensus expected a decline to 58.0, First Trust forecast an increase to 58.8. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)

All of the major measures of activity were up in January and all remain well above well above 50.0, signaling continued growth. The new orders index increased to 67.8 from 62.0 and the production index increased to 63.5 from 63.0. The supplier deliveries index rose to 58.6 from 56.7 and the employment index also rose to 61.7 from 58.9.
 
The prices paid index increased to 81.5 in January from 72.5 in December.
 
Implications:  The manufacturing sector is absolutely booming. Today’s ISM report blew away the consensus (which expected a decline), increasing to 60.8. This is the highest level since May 2004, more than six years ago. The sub-indicies of the report show robust growth in manufacturing, and many of them reached multi-year highs as well. The new orders index rose to 67.8, also the highest level since 2004, and the production index rose to 63.5. The employment index rose to 61.7, the highest level for the index since 1972, suggesting that Friday’s manufacturing payroll number might surprise to the upside. The only bad news in today’s report was on the inflation front, where the prices paid index rose to 81.5 from an already elevated 72.5 in December. The index is quickly approaching levels seen during the summer of 2008, when energy prices spiked. The Fed’s loose monetary policy continues to become more and more inappropriate as the recovery continues. In other news this morning, construction declined 2.5% in December versus a consensus expected gain of 0.1%.  Including slight downward revisions to prior months, construction was down 2.8%.  The decline in December was led by home building (primarily home improvements) and government construction (primarily schools, roads, and federal office buildings).

[Crafty_Dog]

GM:  Remember that prediction of yours, made when the DOW was at 6,500 that 6,000 was next?    If I remember correctly, I did not disagree
==============

Non-farm productivity rose at a 2.6% annual rate in Q4 To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/3/2011


Non-farm productivity (output per hour) rose at a 2.6% annual rate in the fourth quarter. Non-farm productivity is up 1.7% versus last year.

Real (inflation-adjusted) compensation per hour in the non-farm sector declined at a 0.6% annual rate in Q4, but is up 0.3% versus last year. Unit labor costs declined at a 0.6% rate in Q4 and are down 0.2% versus a year ago.
 
In the manufacturing sector, the Q4 growth rate for productivity (5.8%) was much higher than among non-farm businesses as a whole. The faster pace of productivity growth was due to declining hours. Real compensation per hour was up in the manufacturing sector (+0.2%), but, due to rapid productivity growth, unit labor costs declined at a 2.9% annual rate.
 
Implications:  Productivity beat consensus expectations in the fourth quarter, rising at a 2.6% annual rate, equaling the robust average pace of the past ten years. What’s impressive about the fourth quarter is that the gains in productivity came at the same time that the number of hours worked increased at a healthy 1.8% rate. Oftentimes, once a recovery gets to the point where firms are vigorously increasing hours, the pace of productivity growth slows down. Although that happened in the first half of 2010, in the latter half of the year companies found a way to generate efficiencies while still demanding more hours. Not only are hours up but compensation per hour is up as well. Despite this, productivity is pushing down unit labor costs – how much companies have to pay workers per unit of production. In other words, productivity growth has been rapid enough to both generate pay increases and, at the same time, make it worth more for companies to hire. As a result, we expect private sector hiring to accelerate in 2011. In other news this morning, new claims for unemployment insurance declined 42,000 last week to 415,000. Continuing claims for regular state benefits fell 84,000 to 3.93 million. In other recent news on the job market, the ADP Employment index, a measure of private-sector payrolls, increased 187,000 in January. This is consistent with our forecast that the official Labor Department report, released tomorrow morning, will show an increase of 195,000 in private payrolls.
=========
The ISM non-manufacturing composite index increased to 59.4 in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/3/2011


The ISM non-manufacturing composite index increased to 59.4 in January from 57.1 in December, easily beating the consensus expected gain to 57.2. (Levels above 50 signal expansion; levels below 50 signal contraction.)

The key sub-indexes were all higher in January and remain at levels indicating robust economic growth. The new orders index increased to 64.9 from 61.4 and the business activity index rose to 64.6 from 62.9, both multi-year highs. The employment index increased to 54.5 from 52.6 and the supplier deliveries index rose to 53.5 from 51.5.
 
The prices paid index increased to 72.1 in January, the highest since the collapse of Lehman Brothers, from 69.5 in December.   
 
Implications:    The US economy continues to pick up steam and we are now seeing strong economic growth in both the manufacturing and service sectors. Today’s ISM Services report delivered a broad array of data that continued to trace out a V-shaped (possibly a check-mark-shaped) recovery. The overall services index was at 59.4, the highest since 2005. The business activity index, which has an even higher correlation with real GDP growth, hit 64.6, also the highest since 2005. The new orders index was the highest since 2004 and the employment index increased to 54.5, the highest level since 2006. The employment index has been above the key 50 level for five straight months. On the inflation front, the prices paid index increased to 72.1, the highest since the financial panic started in late 2008. The Federal Reserve’s ultra-easy monetary policy is getting increasingly inappropriate.  In other recent news, cars and light trucks were sold at a 12.6 million annual rate in January, up 0.6% versus December and up 17.4% versus a year ago.  Over the next couple of years, these sales will continue to increase to about a 15-16 million annual rate, the pace that offsets the annual scrappage of autos as well as changes in the driving-age population. The service sector is getting stronger, firms are hiring again, and workers are confident enough about the future to ramp up their purchases of big-ticket items. 

[G M]

Hey, if you step up to the plate and swing, you aren't always going to connect.   

I'm still not seeing a roaring economy, and I see a lot of unresolved structural problems, but no one at CNBC wants to ask me my take on the economy.

[G M]

http://finance.fortune.cnn.com/2011/02/02/how-inflation-is-turning-breakfast-into-a-luxury-item/?section=magazines_fortune

[G M]

http://reason.com/blog/2011/02/03/coming-soon-a-300-percent-incr


Coming Soon: A 300-Percent Increase in Foreclosures

[DougMacG]

I enjoyed both the question as well as the answer regarding a botched stock market prediction.  I have given this some thought.  How can the market go up when everyone knows the economy is lousy and nothing has been fixed.  This is what I came up with: More money chasing fewer companies.
-----
Why would things get better when we have done nothing to fix what is wrong?

Here is The Economist with some comment on the lousy jobs report that just came out:
http://www.economist.com/blogs/freeexchange/2011/02/americas_jobless_recovery

So this is the new year?

Feb 4th 2011, 14:15 by R.A. | WASHINGTON

LOOK almost anywhere in the recent economic data and the signs point to an accelerating recovery. A solid fourth quarter GDP report contained a truly blockbuster increase in real final sales. Manufacturing activity is soaring. Consumer spending is up and the trade deficit is down. Markets are trading at their highest level in over two years. And so economists anxiously awaited the first employment figures for 2011, hoping that in January firms would finally react to better conditions by taking on lots of new help.

Instead, the Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December's employment gain was revised upward from 103,000 to 121,000. November's employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000.

But there is bad news, as well. The BLS included its annual revision of the previous year's data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.

The labour market picture becomes foggier still when one turns to the household survey data. America's unemployment rate fell 0.4 percentage points in January for a second consecutive month, dropping the rate to 9.0%. Why? According to the household data, employment grew by 117,000 over the month while the number of unemployed Americans fell by 622,000. A word of caution is in order: new population estimates are used each year to compute the household figures, which means that the January household survey numbers are not directly comparable to the December figures. It would seem from this report that the decline in the unemployment rate is mostly driven by departures from the labour force (which fell substantially), but the employment-population ratio actually rose for the month, thanks to a reported decline in the population of working adults. But according to the BLS, practically the entire drop in the labour force total is due to the population adjustment. If one were going to compare December numbers to January numbers by stripping out the annual adjustment (and this is a dicey proposition) the household survey would show a slight rise in the labour force and a substantial gain in employment (of 589,000) nearly equal to the drop in unemployment (of 590,000).

But the sample size of the household survey is quite small, which means that it would be unwise to read too much into any one aspect of the report. Meanwhile, economists are pointing to the annual adjustments and to bad weather as major factors clouding the picture. But we can say a few things with some certainty. The 39,000 payroll increase will almost certainly be revised upward in coming months. Apart from construction, private sector employment continues to grow, and in manufacturing it is growing strongly. But for another month, the economy has not added the number of jobs we would expect to correspond to the level of observed economic activity. And far too much of the drop in unemployment appears to be due to the exit from the labour force of long-term unemployed workers and early retirees.

So for another month, Americans will wait, frustrated and uncertain, to see when growth will once again mean new employment opportunities.

[G M]

http://pajamasmedia.com/blog/soaring-oil-price-threatens-u-s-economy/?singlepage=true

Soaring Oil Price Threatens U.S. Economy
As chaos spreads through the Arab world, here's one way we can protect ourselves.
February 8, 2011 - by Robert Zubrin


In recent weeks, the price of oil has climbed above $90 per barrel. As chaos spreads through the Arab world, we could soon see much worse. With these facts in mind, it is essential that U.S. policymakers act to protect the U.S. economy from this ever-worsening trend.

The likely impact of a new oil price rise is shown in the graph below, which compares oil prices (adjusted for inflation to 2010 dollars) to the U.S. unemployment rate from 1970 to the present. It can be seen that every oil price hike for the past four decades, including those in 1973, 1979, 1991, 2001, and 2008, was followed shortly afterwards by a dramatic rise in American unemployment.

[G M]

http://finance.yahoo.com/news/Treasurys-fall-after-weak-apf-3481748546.html?x=0&sec=topStories&pos=5&asset=&ccode=

NEW YORK (AP) -- Treasurys extended a weeklong fall on Tuesday after the government's auction of $32 billion in new debt met with tepid demand. The yield on the 10-year note rose to the highest level in 10 months.

The government auctioned three-year notes at a yield of 1.34 percent. That's the most expensive borrowing cost the government has had to pay on those notes since last May.

Foreign buyers showed weak interest in the sale. Indirect bidders, a rough proxy for foreign funds and banks, took 27 percent of the notes, the lowest share since May 2007.

[Crafty_Dog]

These interest rates are still well below the rate of inflation-- and if we add tax considerations into the calculation the rates are even more negative in real terms.

At these rates, working from memory here, we are currently paying something like 1/8 of our tax revenues on interest payments on the national debt.  Double interest rates i.e. take them up to something like zero or slightly positive in real terms, and the contradictions of what we are doing are going to become a lot more apparent.  Take them into normal positive range and , , ,

[G M]

http://directorblue.blogspot.com/2011/02/obamas-tough-budget-cuts-in-pictures.html

President Obama's 2012 budget will be roughly $3,800,000 million ($3.8 trillion).

The anticipated 2012 budget deficit will be $1,500,000 million ($1.5 trillion). This means we are borrowing that amount from our children to fund all of the Democrats' Utopian spending programs.

Finally, the president has proposed "tough budget cuts" that total $775 million. No, that's not a joke.

Let's illustrate the magnitude of Obama's cuts.

**Read it all.

[Crafty_Dog]

If I have my zeros correct $1.5T divided by 320M Americans is about $4,700 for each one of us.