by Calculated Risk on 1/10/2013 05:00:00 PM

Back in November I was interviewed by Joe Weisenthal at Business Insider. One of my comments during our discussion on state and local governments was:

I wouldn’t be surprised if we see all of a sudden a report come out, “Hey, we’ve got a balanced budget in California.”

And today from Reuters: California Governor's budget has surprise: a surplus

The state expects $98.5 billion in revenues and transfers and plans spending $97.7 billion, according to the proposal published on the state Department of Finance website.

That leaves a surplus of $851 million for the year, in addition to a projected $785 million surplus for the current fiscal year, which ends in June, allowing the state to put $1 billion toward a rainy day fund.

Brown said he saw a balanced budget for the next four years.

Spending in the upcoming year is set to rise 5 percent, or $4.7 billion, from the current 2012-13 budget. Schools and universities will see a $4 billion boost, health care spending will rise $1.2 billion, while transfers to local government will drop $2.1 billion.

This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly in the upcoming year after several years of budget cuts.

As I mentioned in the previous post, moving from state and local budget cuts to some small increases will be a plus for the economy.

by Calculated Risk on 1/10/2013 01:30:00 PM

Note: Sometimes it is useful to jot down a few thoughts on how the economy is expected to perform. This isn't to test my forecasting skills; sometimes I learn more when I get something wrong!

Some years I make some big out-of-consensus calls, but my forecasts this year are mostly in line with the consensus.

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

2) Economic growth: Heading into 2013 there are still significant downside risks from the European financial crisis and from U.S. fiscal policy. Will the U.S. economy grow in 2013? Or will there be another recession?

There are several positives for the economy at the beginning of 2013: residential investment is picking up (usually the best leading indicator for the economy), the state and local government layoffs and cutbacks appear to be ending, and a substantial amount of household deleveraging has already happened.

Here are a couple of graph on household debt (and debt service):

Click on graph for larger image.

This graph from the the NY Fed shows aggregate consumer debt decreased in Q3. This was mostly due to a decline in mortgage debt.

Household debt peaked in Q2 2008 and has been declining for over four years. There is probably more deleveraging ahead (mostly from foreclosures and distressed sales), but this suggests some improvement in household balance sheets.

The second graph is from the Fed's Household Debt Service and Financial Obligations Ratios. These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt. The overall Debt Service Ratio has declined back to early 1980s levels, and is near the record low - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is at 1994 levels.

The blue line is the homeowner's financial obligation ratio for mortgages (blue). This ratio increased rapidly during the housing bubble, and continued to increase until 2008. Now, with falling interest rates, and less mortgage debt (mostly due to foreclosures), the ratio is back to 2001 levels. This will probably decline further, but for many homeowners, the obligation ratio is low.

There are always downside risks from Europe and China, but usually with these positive trends I'd expect a pickup in US growth in 2013. However, the recent austerity (aka "fiscal cliff") - especially the payroll tax increase compared to 2012 - will be a drag on economic growth this year.

Here is a graph showing the rolling real GDP growth (over 4 quarters) since 2000 through Q3 2012. The rolling four quarter graph smooths out the quarterly up and downs, and show that the US economy has been growing at a little over 2% for the last few years.

We still don't know the size of the "sequester", but right now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/10/2013 10:15:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in November was 3.7 million, unchanged from October.
...
The level of total nonfarm job openings was 2.4 million at the end of the recession in June 2009.
...
The number of quits (not seasonally adjusted) was little changed over the 12 months ending in November for total nonfarm and total private.

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased slightly in November to 3.676 million, up from 3.665 million in October. The number of job openings (yellow) has generally been trending up, and openings are up about 12% year-over-year compared to November 2011.

Quits increased slightly in November, and quits are up 8% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Not much changes month-to-month in this report, but the trend suggests a gradually improving labor market.

All current employment graphs

by Calculated Risk on 1/10/2013 08:37:00 AM

The DOL reports:

In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000.

The previous week was revised down from 372,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.


Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 365,750.

Weekly claims are very volatile during and just after the holiday season, but even with the increase, the 4-week average is near the low for last year.

The recent spike was due to hurricane Sandy.

Weekly claims were above the 362,000 consensus forecast.


And here is a long term graph of weekly claims:

Note: There are large seasonal factors in December and January, and that can make for fairly large swings for weekly claims.


All current Employment Graphs

by Calculated Risk on 1/09/2013 09:04:00 PM

A few articles on Jack Lew (Obama's pick for Treasury Secretary).

From the NY Times: Obama’s Pick for Treasury Is Said to Be His Chief of Staff

President Obama will announce on Thursday that he intends to elevate his chief of staff and former budget director, Jacob J. Lew, to be his next secretary of Treasury ...

While Mr. Lew has much less experience than Mr. Geithner in international economics and financial markets, he would come to the job with far more expertise in fiscal policy and in dealing with Congress than Mr. Geithner did when he became secretary at the start of Mr. Obama’s term. That shift in skills reflects the changed demands of the times, as emphasis has shifted from the global recession and financial crisis of the president’s first years to the continuing budget fights with Republicans in Congress ...

From the WSJ: Obama Aide Is Treasury Pick

President Barack Obama plans to nominate Jacob Lew to be the 76th U.S. Treasury secretary, putting the White House's chief budget expert in a top economic post as it enters a grueling year of fiscal battles with Congress.
...
Mr. Lew, 57 years old, is a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s. He would likely draw on that experience during the looming fights over the debt ceiling, government spending levels and a possible overhaul of the tax code.

From the WSJ: Jacob Lew, in His Own Words

2010 – confirmation hearing before Senate Budget Committee

“Throughout my career, I have tried to work collaboratively across partisan and ideological divides to cut through gridlock and to help solve what seem like intractable problems. If confirmed as OMB Director, I will work in that bipartisan fashion again–with the members of this Committee, the leadership of both chambers, and with all those committed to taking constructive steps to rejuvenating our Nation’s economy and its fiscal standing.”

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 362 thousand from 372 thousand last week.

• At 10:00 AM, the Job Openings and Labor Turnover Survey for November will be released by the BLS. In general jobs openings have been trending up. Openings were up about 8% year-over-year in October.

• Also at 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories report for November. The consensus is for a 0.3% increase in inventories.