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A Raft of Reports
by Sinclair Noe
DOW + 136 = 13,232
SPX + 15 = 1427
NAS + 42 = 3020
10 YR YLD +.03 = 1.71%
OIL +.65 = 88.48
GOLD – 5.20 = 1716.00
SILV un = 32.26
We have a drove of economic data to cover today; a mass of intelligence; a flock of facts; a legion of lowdowns; a swarm of information; and we’ll sort through the stories and try to make sense of it all. Of course, tomorrow we’ll get the big report on the monthly jobs picture for October. Friday’s jobs report is expected to show non-farm employers added just 125,000 jobs last month – not enough to prevent the jobless rate from rising a tenth of a point to 7.9 percent. The unemployment rate fell to a near four-year low in September at 7.8%.
Today, we heard some hints about tomorrow’s non-farm labor report. Automatic Data Processing, the payroll processor, always releases their report prior to the government’s report. The ADP report is not a particularly good indicator of the BLS report. ADP shows private employers added 158,000 workers last month. There is some evidence of labor market improvement. It is not totally convincing yet but overall the message is positive.
Weekly initial unemployment claims declined to 363,000 for the week ending October 27, down 9,000 from the previous week. Unemployment claims topped out over 650,000 back in the first quarter of 2009 and have been moving mostly sideways this year, but are near the cycle bottom. Don’t be surprised to see an increase in claims over the next couple of weeks, due to Hurricane Sandy.
The Institute for Supply Management, or ISM, issued its manufacturing index for October. The Purchasing Mangers’ Index was 51.7% in October, up from 51.5% in September. The new orders index was 54.2%, up from 52.3%; the employment index was 52.1%, down from 54.7%. Any reading above 50 indicates expansion in the manufacturing sector, however this was not robust expansion. In a separate report, Eurostat says unemployment in the Euro-zone hit a new high of 11.6%; that bodes poorly for exports from the US.
These reports are not considered solid indicators for tomorrow’s jobs report, which is expected to show of 125,000 payroll jobs for October, on a seasonally adjusted basis; the unemployment rate is expected to inch up to 7.9%. ADP has altered their methodology slightly, and we’ll see if that makes them a bit more accurate. The bottom line here is that the economy continues to add jobs, although probably at a sluggish pace.
In a sign that businesses may not be poised to ramp up hiring significantly, the Labor Department said growth in non-farm productivity held steady at a 1.9 percent annual rate in the third quarter. The report also showed unit labor costs, a measure of the labor costs for producing any given measure of output, fell 0.1 percent as growth in hourly pay braked sharply. It was the first decline since the fourth quarter of 2011.
And even while the jobs picture shows only slow growth, consumers are confident and they are apparently buying houses and cars. The Conference Board’s consumer confidence index increased to 72.2 last month from a downwardly revised 68.4 in September; it is now at the highest level since February 2008. Generally when the economy is growing at a good clip, confidence readings are at least 90. The Conference Board’s gauge of consumers’ views on the present situation rose to 56.2 in October from 48.7 in September. The portion of survey respondents saying jobs are “plentiful” rose to 10.3% in October from 8.1% in September, while those saying jobs are “not so plentiful” declined to 50.3% from 51.2%, and those saying jobs are “hard to get” ticked down to 39.4% from 40.7%. Now, this confidence is in the face of next week’s election and the end of the year fiscal cliff and a weak jobs market. What do we make of it? Are consumers delusional or are they just not buying the fear about the fiscal cliff that Wall Street is selling?
The Census Bureau reports overall construction spending increased 0.6% in September to $851 billion from $846 in August. The September figure is 7.8% above September a year ago. Private residential spending is 58% below the peak in early 2006, and up 29% from the post-bubble low. Non-residential spending is 29% below the peak in January 2008, and up about 29% from the recent low. Public construction spending is now 17% below the peak in March 2009 and at the post-bubble low.
The Federal Reserve released its quarterly survey of senior loan officers, and the report found that American banks and branches of foreign lenders have made it easier to get business loans, commercial-real-estate projects, car loans and credit cards, but not mortgages. Despite not making it easier to obtain home loans, banks have reported increasing demand for mortgages, in line with data showing improving sales of homes as well as a big spike in refinance activity. Why were the banks were reluctant to lend? Putback Risk, which is the risk that the FHA would force them to buy back bad loans. In other words, the banks still haven’t learned how to underwrite a mortgage, or more specifically, they are more concerned with generating paper which can be sold into a mortgage-backed security, than they are with underwriting a good mortgage.
Automakers reported strong sales for the month of October. GM sales rose 4.7 percent to 195,764 vehicles, while those at Chrysler, an affiliate of Italy’s Fiat, increased 10 percent to 126,185 vehicles. Both totals were the best either automaker had seen since 2007. Ford Motor’s sales last month edged up 0.4 percent, while Toyota Motor’s sales rose about 16 percent. Still, annualized sales figures are running slightly below expectations of 14.9 million sales, and Hurricane Sandy will likely mean a poor November. Still, car sales are getting some spillover benefits from an increase in housing prices, and the massive refinancing boom; plus light vehicle sales have been an area of strength as people replace older cars with smaller, more fuel efficient cars.
I told you there was a gaggle of economic reports today. What does it mean? Well, the economy is improving; it isn’t powerful but it is progress. The jobs picture isn’t strong but it has been growing for 31 months and will likely grow for a 32ndmonth, and there seems little fear of a job market meltdown. Manufacturing is still a sore spot. American workers remain extremely productive, which shouldn’t be a surprise to anyone. Consumers are feeling better, without being unrealistic. There is pent-up demand for houses and cars, but that demand is not yet strong enough to unleash a virtuous circle of powerful growth – that would require an added spark, which we haven’t seen yet. And Hurricane Sandy will likely dampen any spark for the next couple of months.Of course, tomorrow, we’ll hear about the impact of the monthly jobs report on the presidential election. I really don’t think the impact will be profound.
At least that is my interpretation.
And another thing: Hurricane Sandy will influence the economy for at least the next few months. Gauging the disaster’s effect requires assessing economic activity that might be lost entirely against activity that is substituted with other products or services (like when entertainment spending falls but hardware-store sales rise).
This is the idea that Gross Domestic Product or GDP is a measure of all economic activity, both good and bad; the sale of cigarettes counts in GDP just as the sale of broccoli; therefore, you might think that all those people on the eastern seaboard who will now have to rebuild their damaged communities, you might think that would add to economic activity – but it doesn’t. Conversely, whatever the direct losses from Sandy, they won’t show up in GDP, which focuses on the flow of new production, sales and employment, rather than the condition of existing wealth.
In the very short term, like the next few weeks,the impact is likely to be negative, as workers are forced to stay home, capital equipment is either unusable or idled temporarily, and shops are closed. In the slightly longer term–that is, the remainder of 2012 and the first few months of 2013; the impact is likely to be slightly positive because workers make up for lost output, capital equipment is brought back online, consumers make purchases that did not take place during the disruptions, and the rebuilding of damaged property begins.
Natural disasters result in the destruction of an economy’s capital stock and generally lead to the disruption of business activity. You need look no further than the long lines waiting for gasoline in New Jersey and New York, or the long lines of people trying to get a bus to get to work in New York. Somebody waiting in line for 2 hours to fill the gas tank does not add to productivity. Most guesstimates peg the economic losses around $30 to $50 billion, which would represent .2% to .3% of nominal GDP. Gains from reconstruction activity will be mostly offset by losses in overall output. The net effect will likely be slightly negative; not a huge hit to the economy, but enough to slow down growth momentum.
One final note: in the past few days, we’ve talked about climate change; we weren;t the only ones thinking about this issue. After previously indicating that he wasn’t going to back either candidate this election cycle, New York Mayor Michael Bloomberg endorsed President Obama in a column for Bloomberg News emphasizing that — in the wake of Hurricane Sandy — he wanted a candidate who would take climate change science seriously.
As Californians debate the “rich tax” contained in Gov. Jerry Brown’s Prop 30, a new report challenges one argument for lowering tax rates on the wealthy: that millionaires simply move to avoid higher taxes, leaving the middle class with a higher burden.
The study, by sociologists at Stanford and Princeton, looked at two tax changes in California, a 1996 tax cut on high-income filers and a 2005 levy called the Mental Health Services Tax that took one percent of income over $1 million. Using tax-return data, the researchers examined how the changes affected “millionaire migration” in or out of the state before and after the tax laws were passed.
The research showed that millionaires not only were unmoved, so to speak, by their taxes being raised, “the highest-income Californians were less likely to leave the state after the millionaire tax was passed,” wrote Charles Varner and Cristobal Young in their report.
In fact, the richer the Californian, the more likely he or she was to stay, the study found. Nor did the data suggest that lowering taxes lured millionaires to the state.
The pair previously studied millionaire migration in New Jersey, with largely the same results. But California’s dynamic, tech-based economy may be, if anything, a better testing ground for the notion that job creators are forced out by taxation. “The presumption that exceptionally skilled, monied, and entrepreneurial individuals are also exceptionally mobile is debatable,” Varner and Young concluded.
Aware, no doubt, of the politics swirling around their topic, Varner and Young appear to have considered every likely objection to their findings. They looked at the periods before each tax change in order to scoop up any high earners who moved in anticipation of being taxed. They scrutinized part-year returns to capture those who might take a second home to remove their out-of-state earnings from California’s purview.
What they found is that California’s millionaires, no matter the circumstances, move very little. “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” the report said.
Most of the fluctuation in numbers of millionaires, as my colleague Robert Frank pointed out in his book The High-Beta Rich, relates to the rise and fall of personal fortunes. “The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top,” Varner and Young wrote, “California residents growing into the millionaire bracket, or falling out of it again.” 
This constant turnover in the top income brackets, the researchers say, may explain why millionaires aren’t more sensitive to tax changes. A top earner who breaks into the millionaire’s club only a few times in his career would be less likely to consider the tax when deciding to stay or go.
Indeed, the typical Californian millionaire only repeated his or her feat 54 percent of the time in the years from 1996 to 2003, the researchers found. Instead of paying one percent of their million-plus income to the government, this typical taxpayer would pay an effective tax rate of one-tenth of one percent over the 13 years. “This is a key question for someone considering whether to migrate for tax purposes,” the study said.
The up-and-down fortunes of rich Californians is another reason they don’t leave. “Most people who earn $1 million or more are having an unusually good year,” Varner and Young wrote. “It is difficult to migrate away from an unusually good year of income.”
So what does control millionaires’ residential status? Loss of that golden opportunity for one: the greatest exodus of wealthy Californians in the years studied came after the collapse of the tech bubble. (The trend wasn’t reversed until just after the Mental Health Services Tax was passed in ’05.)
The other clear impetus for millionaires to get out of California was divorce. Knowing that the end of a marriage both occasions a move and shows up in tax data, the researchers used marital splits a “reverse placebo” to test tax data’s ability to detect migration. In the first year after a divorce, 1.2 percent of divorcees start a new life elsewhere, according to the study.
“Divorce is something that has a very clear effect on migration, modest changes in the tax rate for high-income earners do not,” the researchers concluded.
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