Thursday: Trade Deficit, Unemployment Claims

Last night I was asked if the FOMC would do anything bold today (the statement was released earlier today). I said it was pretty clear that the FOMC would not change policy at this meeting, but they could express more concern about inflation being too low or - if they were really feeling bold - warn about fiscal policy.

On inflation, the FOMC kept the phrase "Inflation has been running somewhat below the Committee's longer-run objective ..." so there wasn't any additional emphasis on inflation.

However, on fiscal policy, the FOMC added the phrase "fiscal policy is restraining economic growth."  This was severe criticism of short term deficit cutting. 

As we all know, the deficit is declining rapidly (probably too rapidly).

Public employment is down sharply over the last four years, and this morning the Census Bureau reported that public construction spending was at the lowest level since 2001 in real terms (and has declined for four years).   Not as much austerity as in Europe, but still too much given the high unemployment rate.

In the short term, U.S. policymakers should not be looking to cut the deficit further, instead they should be focused on unemployment (longer term deficit reduction is a different topic).  Eliminating the sequester budget cuts would be good policy since these cuts were an obvious mistake.

As Bernanke noted two months ago, the sequester budget cuts might actually lead to less deficit reduction:

"The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.

A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.

Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

Unfortunately certain policymakers remain impervious to data ...

Thursday economic releases:
• At 8:30 AM ET: the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 345 thousand from 339 thousand last week.

• Also at 8:30 AM, the Trade Balance report for March from the Census Bureau. The consensus is for the U.S. trade deficit to decrease to $42.4 billion in March from $43.0 billion in February.

Fannie Mae, Freddie Mac: Mortgage Serious Delinquency rates declined in March

Fannie Mae reported that the Single-Family Serious Delinquency rate declined in March to 3.02% from 3.13% in February. The serious delinquency rate is down from 3.67% in March 2012, and this is the lowest level since February 2009.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate declined in March to 3.03% from 3.15% in February. Freddie's rate is down from 3.51% in March 2012, and this is the lowest level since June 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

Although this indicates some progress, the "normal" serious delinquency rate is under 1%. 

At the recent rate of improvement, the serious delinquency rate will not be under 1% until 2017 or later.

U.S. Light Vehicle Sales decreased to 14.9 million annual rate in April

Based on an estimate from AutoData Corp, light vehicle sales were at a 14.92 million SAAR in April. That is up 6% from April 2012, and down 2% from the sales rate last month.

This was below the consensus forecast of 15.3 million SAAR (seasonally adjusted annual rate).

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for April (red, light vehicle sales of 14.92 million SAAR from AutoData).


Click on graph for larger image.

This was the lowest sales rate in six months.   

After three consecutive years of double digit auto sales growth, the growth rate will probably slow in 2013 - but this will still be another positive year for the auto industry.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

Unlike residential investment, auto sales bounced back fairly quickly following the recession and have been a key driver of the recovery.    Looking forward, growth will slow for auto sales.  If sales average the recent pace for the entire year, total sales will be up about 5% from 2012.

FOMC Statement: "fiscal policy is restraining economic growth", "prepared to increase or reduce the pace of its purchases"

The key changes:

1) "fiscal policy is restraining economic growth."

2) "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

The FOMC is clearly signaling that fiscal policy is hurting the economy ...

FOMC Statement:

Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations