MacroScope

Off the rails? Goldman lowers Q2 GDP ‘tracking’ estimate to 1.1 pct

Another round of bad news on the economy has prompted Goldman Sachs to shave another tenth of a percentage point off their already bleak second quarter U.S. GDP forecast.

The July Philadelphia Fed business activity index improved less than expected and remained “significantly negative,” pointing to a third month of contraction. Following news that June existing home sales were much weaker than forecast, Goldman Sachs economists lowered their Q2 GDP tracking estimate to 1.1 percent from 1.2 percent.

The 5.4 percent month-on-month decline in existing home sales in June, reported by the National Association of Realtors, was much weaker than the consensus expectation, the economists noted. The 4.37 million annualized rate of sales was also lower than expected despite upward revisions to the May sales figures.

“On the other hand, median sales prices of all existing homes  rose 7.9 percent year over year to $189,400 in June,” they noted.  The economists added this was the highest growth rate since February 2006 and the highest level since September 2008, “pointing to a continuing slow pickup in house prices.”

One question is whether a rise in home prices in a slow-growing economy might quickly run into an affordability barrier.

Who expects euro bonds? Look outside the euro zone

It’s already been established that economists’ predictions about the euro zone’s future hinge largely on where their employer is based. Euro zone optimists tend to work for euro zone banks and research houses, and euro zone sceptics for companies based outside the currency union.

It somewhat undermined the idea their analyses are based purely on hard-headed economics, and less on national factors.

There was an echo of that in this week’s of economists and fixed income strategists, who were asked whether they expect euro zone leaders will agree to the issuance of a common euro zone bond, as backed by new French President Francois Hollande.

Euro zone survival is in the eye of the beholder

Despite all their years of experience and complex mathematical models, for economists the question of the euro zone’s survival really has them at the mercy of national bias… at least in terms of where their employer is based.

One of the key points from the latest Reuters poll was that a majority of economists from banks and research houses around the world – 37 out of 59 – expect the euro zone to survive in its current form for the next 12 months.

But behind that headline figure, the answers were skewed heavily by region.

Only 5 out of 24 economists from organisations based inside the euro zone thought it would fail to survive in its present 17-nation form over the next 12 months.

Modest U.S. growth prospects riddled with risks: bank economists

Despite all the flashing yellow signs in the global economy, banking sector forecasters are sticking – if a bit uneasily – to their modestly optimistic outlook. Still, a group of economists from the American Bankers Association, a banking lobby that presented its latest economic projections to Federal Reserve officials this week, highlighted plenty of risks. Chief among them were financial contagion from Europe and sharp fiscal adjustments in the United States.

They see U.S. gross domestic product expanding at a pretty subdued 2.2 percent this year, and then slowing to 2 percent in 2013. The forecast assumes that Europe will come to some sort of resolution that puts a floor under its troubled debt markets. Even so, the ABA committee saw a 55 percent chance that one or more countries would exit the euro, with Greece topping the list.

At a press conference on Friday presenting the group ‘s findings, George Mokrzan, chair of the committee and economist at Huntington Bancorporation in Columbus, Ohio, said one worrisome factor for the U.S. economy  was the lack of income growth for most American workers. He said this could crimp consumer spending, which accounts for the vast bulk of U.S. economic activity.

from Edward Hadas:

For growth, focus first on jobs

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Blame small government for U.S. GDP downer

Weak U.S. economic growth in the first quarter was driven in part by a pullback in business investment — but a sharp decline in government spending also played a role. Gross domestic product grew 2.2 percent, well short of the Reuters consensus forecast of 2.5 percent. Business spending fell 2.1 percent while government expenditures saw a 3 percent drop linked to lower defense spending. Consumer spending proved a bright spot in the report, climbing 2.9 percent. Still, there is concern that this too could fade because an unusually warm winter may have brought some spending forward.

Jay Feldman at Credit Suisse breaks down the numbers:

The big downside surprise from our vantage point was in federal government spending, which contracted 5.6% in the quarter (we expected an increase given the firmer readings in monthly Treasury data). Most of the shortfall was concentrated in defense (-8.1%). Combined with the ongoing contraction in state and local government output (-1.2%), the government sector overall shaved 0.6 percentage point from top line GDP.

Yet this pales in comparison to what might happen if Congress fails to break a budget logjam by the end of this year. If left unaddressed, the resulting spending cuts and expiring tax breaks — the dreaded fiscal cliff — could easily tip the world’s largest economy back into recession.

Roubini takes on the ECB

It was fun to watch. Nouriel Roubini, NYU economist and crisis personality, was one of just five carefully selected individuals at a large gathering in the International Monetary Fund HQ1 building’s towering atrium who actually got to ask questions of the policymakers on stage.

Roubini was characteristically biting in his critique of conventional orthodoxy, singling out the European Central Bank for not having done enough to stem the euro zone’s two-year financial crisis. He challenged the notion that the ECB is powerless to boost growth further, suggesting — to the clear discomfort of some policymakers in the room — that measures to weaken the currency could provide a badly-needed boost to exports:

I saw that on the panel there are four central bankers and the panel is about fiscal policy and sovereign debt. So the natural question is then to think maybe about what could be the contribution of central banks in resolving sovereign debt issues. Now, one simple answer would be to just monetize very large budget deficits and I understand why a central bank would say that’s a no-no.

Never mind the pain, feel the austerity

Austerity in the euro zone seems to be working — at least as far as the headline,  dry, soulless numbers of  budget balancing are concerned. Bailed out  Greece and Ireland have reported substantial improvements in last year’s profligacy performance.  Spain, while going in the wrong direction, at least has the satisfaction of being told it is not telling fibs.

We will get to the smoke and mirrors in a bit.

First Greece, the euro zone’s poster child for budget ill-discipline. The 2011 budget deficit to GDP ratio  – basically the annual overspend — came in at 9.1 percent. This may seem like a lot given the EU target is 3 percent, but it was down from 10.3 percent  a year earlier and from 15.6 percent the year before that. Furthermore, if you take out all the debt repayments costs that Athens has to make , you end up with only 2.4 percent (although in truth that is like pretending you don’t have a mortgage).

In Ireland, the craic was all about trouncing expectations. The deficit to GDP ratio for 2011 came in at 9.4 percent, which compared with an original 10.6 percent target and even a revised target just last December of 10.  1 percent. Everything is on track, Dublin reckons, to meet this year’s 8.6 percent.

An upward bias in jobless claims revisions

Weekly data on applications for unemployment benefits have gained renewed importance since a weak March payrolls number left economists wondering whether a tentative labor market recovery was about to cave again. The last two weeks’ readings were just soft enough to leave investors thinking the country’s unemployment crisis may not be healing very quickly.

Daniel Silver at JP Morgan has dug deeper into the claims figures and found a curious trend: a repeated and distinctive tendency toward upward revisions in the numbers.

There has not been a downward revision to the initial claims data reported for the prior week since the start of March 2011, and this recent streak is not a new phenomenon—there have been upward revisions in about 90% of the weekly reports since the start of 2008, as well as going back even further to the start of 2000. These revisions are relatively minor (usually adding only a few thousand claims) and do not change the broader trends in the data, but they can lead to the weekly claims reports showing decreases to the more recent levels, whereas if the prior week had been unrevised, the reports would have shown increases in claims.

The Law of Diminishing Greeks

The Law of Diminishing Returns  states that a continuing push towards a given goal tends to  decline in effectiveness after a certain amount of effort has been expended. If this weren’t the case, Usain Bolt would be able to run the mile in  less than 2-1/2 minutes.

From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit:

More than one in five Greeks is unemployed.

There are more young people without a job than with one.

The record 1.08 million people  without work in January was a  47 percent tumble  in a year.