A Guide to Econ Reports This Week


"Despite earlier fears that we were falling back into a double dip, it now looks like growth will come in much better than the very anemic 1.3% rate of the second quarter."

GDP Numbers This Thursday

This week we will get the first look at GDP growth in the third quarter. Despite earlier fears that we were falling back into a double dip, it now looks like growth will come in much better than the very anemic 1.3% rate of the second quarter. The consensus is looking for 2.3%. I suspect that we might well do even better than that, perhaps north of 2.5%.

That's OK if we were already operating the economy near its potential, but we are nowhere close to doing so. The population grows at close to 1% per year, and trend level growth in productivity is more than 1.5%, so that sort of growth does not really close the gap. Then again, at least it keeps the actual level of the economy from falling further below its potential.

Most of the numbers we have gotten so far are for September, and thus there is not a lot of hard data yet on how the fourth quarter is shaping up, but my sense is that the fourth quarter will look a lot like the third quarter.

Durable Goods from September

We get two more important September reports this week. Durable goods orders are expected to decline by 1.0% after edging down by 0.1% in August. However, the headline number is often whipsawed by orders for civilian aircraft. Just a handful of orders for 787's can swamp the news from the rest of the economy, since the price of each one is so high, and the orders tend to be very lumpy.

Thus it makes sense to pay attention to the orders excluding transportation equipment. Those are expected to accelerate to growth of 0.4% from an unchanged reading in August.

Personal Income and Spending

Finally we get the data on personal income and spending. Since consumer spending makes up 71% of the economy, it is a very important indicator. Looking forward, though, personal income is even more important, since that provides the fuel for future spending. Both are expected to do better in September than in August, although given the other data that we have received, I would not be surprised to see the August numbers revised up somewhat, especially on the spending side.

Personal income in September is expected to have risen by 0.3% after declining by 0.1% in August (the first actual decline in over two years). Personal spending is expected to have risen by 0.6%, up from 0.2% in August. Obviously, if spending is rising faster than income, the savings rate is going to fall.

On the income side it is important to look at the sources of income growth. That will give clues as to who is going to have more money to spend, and who is going to have less. For the last three years or so, the most important source of income—wages and salaries—has been very weak. For awhile we were seeing large increases in government transfer payment income, but in recent months those have reversed and are falling.

The most robust source of income growth has been dividend income. Since stock ownership is highly concentrated (the top 1% own 42% of all financial assets like stocks and bonds) that indicates income inequality. That is good news for high-end retailers like Tiffany's, not so good news for the mid-range like J.C. Penney's.

Can't Forget About Europe

The market continues to be whipsawed by rumors and "reports" out of Europe on trying to contain the sovereign debt crisis, and making sure that it does not spread from Greece to Italy and Spain. Despite riots in the streets, the Greek Parliament passed additional austerity measures to try to bring their fiscal house in order. The problem is that the key metric is the ratio of debt to GDP, and the austerity measures are shrinking the Greek GDP almost as fast as they are reducing the build up in debt.

There is a summit of the European leaders going on, but it is not going to reach any final decisions. Those might, and I emphasize the word "might," come at a second summit on Wednesday. My bet is that Greece gets the current 8 billion euro tranche of aid, but that is the last one, and we finally get a Greek default early in 2012.

However, it is possible that some "solution" will be arrived at on Wednesday. If it happens, it will probably result in much larger haircuts to private sector (read: big French and German banks) holders of Greek debt than the 21% already agreed to. That, in turn, will require a major recapitalization of the European banks, sort of a EuroTARP.

The latest numbers I have seen are to the tune of about $150 billion worth of additional capital needed. I suspect event that might be a lowball figure. Ultimately it will be up to the Germans to decide if the political benefits of having the common currency are worth the economic costs of propping up countries like Greece. More Greek austerity is not going to do the trick.

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