Mish's Global Economic Trend Analysis |
| Posted: 30 Jan 2013 04:26 PM PST Inquiring minds are digging into the 4th Quarter and 2012 Annual GDP Advance Estimate. Heading into the report, the WSJ Economists' GDP Forecasts were +1.6% for Q4 2012 and +1.7% in Q1 2013. "Shocking" Contraction The GDP report was a shocker, coming in at an annual rate of negative 0.1%. Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent. Choice Comments From Consumer Metrics Rick Davis at Consumer Metrics had some choice comments via email (also in the preceding link). We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in "real time." The first quarter of 2008 was a classic example, initially being reported in "real time" as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the "Great Recession." We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions.Real GDP Inquiring minds may want to further investigate the above comments, with a look at actual BEA data from the top link.  click on chart for sharper image Note the highlights in yellow for Federal and defense spending, quarter by quarter. Now let's turn our attention to personal income. Table 10. Personal Income and Its Disposition  click on chart for sharper image Personal Transfer Receipts I highlighted line 12, "Personal current transfer receipts". Those are social security payments, disability payments, Medicare, unemployment insurance, etc. In spite of a falling unemployment rate, transfer payments go up and up. More people are retiring of course, but much of that is involuntary. Simply put, many people of retirement age want a job and need a job, retired involuntarily to have some money coming in. Moreover, Disability Fraud is rampant. In 4th quarter of 2012, $2.4 trillion went into "transfer payments". From Table 3 of the BEA report (not shown) we see that nominal GDP for 4th quarter was $15.829 trillion. Thus personal transfer payments accounted for 15.16% of GDP. In the 4th quarter of 2012 we also see that federal government spending added an additional $2.46 trillion to GDP. Thus federal government spending + personal transfers (more government spending) was $4.86 trillion, 30.7% of the stated GDP. State and local adds another $1.46 trillion to GDP. All totaled, government spending accounts for 40% of GDP. Don't Worry It's Transitory For those looking for sugar-coated thoughts, I offer soothing comments from the Fed from today's FOMC Statement. Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Yes, indeed. Let's blame hurricane Sandy for the rapid drop in military spending. However, if it's not transitory (and I suggest it isn't), Bernanke will be tossing massive hints to Congress begging for more fiscal stimulus. Here is a formula for measuring GDP. GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M). Y = C + I + G + (X − M) G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. Always remember: Government spending and government giveaways (regardless of how stupid or unproductive) add to nominal GDP, by definition. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 30 Jan 2013 02:20 AM PST In the wake of rising housing prices a reader asked if I would revisit my March 2102 article How Far Have Home Prices "Really" Fallen. The reader specifically wanted an update on inflation as measured by the HPI-CPI (a measure of the CPI where actual home prices instead of rent is the largest CPI component). Here is some background on the request: The CPI does not track home prices per se, rather the CPI uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices. The BLS determines OER from a measure of rental prices and also by asking the question "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?" If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices. OER Weighting in CPI OER has the single largest weight of any component in the CPI, at 23.957%.  Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?" Home Price Data Home price data in this post is courtesy of Lender Processing Services(LPS), Specifically the LPS Home Price Index (HPI). I passed on an Excel spreadsheet of LPS HPI aggregate housing prices to Doug Short at Advisor Perspectives and he produced the following charts. Notes
Let's start with a look at the rate of increase in home prices vs. the rate of increases in OER. Comparative Growth in HPI vs. OER  From 1994 until 1999 there was little difference in the rate of change of rent vs. housing prices. That changed in 2000 with the dot.com crash and accelerated when Greenspan started cutting rates. The bubble is clearly visible but neither the Greenspan nor the Bernanke Fed spotted it. The Fed was more concerned with rents as a measure of inflation rather than speculative housing prices. Fed Funds Rate vs. CPI and HPI-CPI  The above chart shows the effect when housing prices replace OER in the CPI. In mid-2004, the CPI was 3.27%, the HPI-CPI was 5.93% and the Fed Funds Rate was a mere 1%. By my preferred measure of price inflation, real interest rates were -4.93%. Speculation in the housing bubble was rampant. In mid-2008 when everyone was concerned about "inflation" because oil prices had soared over $140, I suggested record low interest rates across the entire yield curve. At that time the CPI was close to 6% but the HPI-CPI was close to 0% (and plunging fast). As measured by HPI-CPI real interest rates were positive from mid-2006 all the way to 2010, even when the Fed Funds rate crashed to .25%. That shows the power of the housing crash. Real rates went positive again in mid-2010 until early 2011. CPI and HPI-CPI Variance From Fed Funds Rate  The above chart shows the "Real" (inflation adjusted) Fed Funds Rate as measured by the Fed funds rate minus the CPI, and a second time by the Fed Funds Rate minus the HPI-CPI. With the recent rise in housing prices, the HPI-CPI is 2.78% while the CPI as stated by the BLS is 1.76% (both numbers from November). In my estimation, the BLS and Fed now understate price inflation by a full percentage point. Inflation as measured by expansion of credit is another matter. Variance Between the CPI and HPI-CPI  The above chart shows the difference between the CPI and HPI-CPI. Note that the largest negative discrepancy marked the exact top of the housing market in summer of 2005. Some suggest the top was in 2006. However, 2006 is too late. Massive housing incentives such as "free garages", "free landscaping", "free trips", etc., etc. started in summer of 2005. So did fraudulent kickbacks to the buyer. "Official" prices did not reflect those incentives and kickbacks. Moreover, condo prices in many areas crashed in summer of 2005 and condos are not in the home price indices. How Far Have Home Prices Crashed?  In nominal terms, home prices are about where they were in mid-2003. In "real" inflation adjusted terms, this time using the CPI and PCE (personal consumption expenditures) as a measure of inflation, home prices are about where they were in mid-1998. What a crash! Credits
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish I am hosting an economic conference in April, in Sonoma, California. Please consider attending. Click on Image to Learn More  |
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