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Economic News Summary December 2010

The economy has been expanding slowly but steadily, reaching an estimated annual rate of 2.5%, GDP, well below the 3% to 4% rate needed to increase employment and further strengthen the economy.  The traditional yardstick for core inflation has been the Consumer Price Index, which is a trailing indicator, reflecting what has already happened. It has been running at historic lows.  Deflation is the real concern of the Federal Reserve, provoking their second round of Quantitative Easing (QE2). QE2 is intended to add momentum to the glacial pace of our economic recovery, i.e., putting the “pedal to the metal.” 

Although not an economic term, pressing the accelerator on a car to increase speed is a great visual for the Fed’s recovery strategy.  The Money Supply indicators of M1 & M2 have been added to my dashboard of indicators. They represent the speedometer and tachometer of the economy, equating more fuel with more speed.  My overall grade for December:  C (November was a D-).

Consumer Price Index-Urban (CPI-U)
December 27, 2010

Month to month, the consumer price index inched up 0.14%, in November, for an annual rate of 1.6%.  This historically low rate of inflation means that the economy has room to expand without hyper-inflation.  Grade: B.

Full Title:  All Urban Consumers - (CPI-U): U.S. city average: All items: 1982-84=100
Definition: Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.
Goods & Services Covered by CPI:  The CPI represents all goods and services purchased for consumption by the reference population i.e. Urban, BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups.  Major groups and examples of categories in each are as follows:

Personal Income
December 27, 2010

Personal income increased slightly in Q3 2010 in actual dollars, however as an annual percentage it dropped 51% from Q2 2010.  The annual rate during Q2 210 was 5.51% with the Q3 2010 annual rate at 2.7%.  This indicator could increase as a result of QE2.  Grade: D-

Full Title: Personal income: Personal Income and Its Disposition: Billions of dollars; seasonally adjusted at annual rates (quarterly)

Definition: Personal income. Income received by persons from all sources.  It includes income received from participation in production as well as from government and business transfer payments.  It is the sum of compensation of employees (received), supplements to wages and salaries, proprietors' income with inventory valuation adjustment  and capital consumption adjustment, rental income of persons with CCAdj, personal income receipts on assets, and personal current transfer receipts, less contributions for government social insurance.

Personal Consumption Expenditures (PCE)
December 27, 2010

Personal consumption increased in Q3 2010 in actual dollars by 0.7% over Q2 2010.  Retail sales in Oct/Nov 2010 period were up 8% over the same period in 2009.  Increased consumer spending translates into increased confidence-- a good sign for the recovery.  Grade: C

Full Title: 1) Personal consumption expenditures: Real Personal Consumption Expenditures by Major Type of Product, Chained Dollars: Billions of chained 2005 dollars; seasonally adjusted at annual rates (quarterly.  2) Personal consumption expenditures: Percent Change from Preceding Period in Real Personal Consumption Expenditures by Major Type of Product: Percent; seasonally adjusted at annual rates (quarterly)

Definition : Personal consumption expenditures (PCE).  The goods and services purchased by persons.

Civilian Unemployment Rate
December 27, 2010

Unemployment dropped to 9.8%.  The only good thing about this number is that maybe we are at the bottom.  As the recovery continues to pick up speed, more jobs will be created.  It could be that these “unusually uncertain” times are changing to unusually certain times!  Grade: D-

Definition :  Civilian unemployment rate comes from a survey designed so that person age 16 and over that are neither in an institution nor on active duty in the Armed Forces is counted and classified in only one group. The sum of the employed and the unemployed constitutes the civilian labor force.  Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.)

Gross Domestic Product (GDP)
December 27, 2010

The gross domestic product (GDP) estimates for Q3 2010 have been revised upward to an annual rate of 2.8%, a whopping 46.5% increase over the 2nd quarter.  Strong growth indicators, i.e., industrial production and retail sales, mean positive growth for the 4th quarter.  This growth is still not strong enough at to reduce unemployment.  Grade: C

Full title: 1) Gross domestic product: Real Gross Domestic Product, Chained Dollars: Billions of chained 2005 dollars; seasonally adjusted at annual rates (quarterly).  2)  Quarterly Growth in real GDP at annual rates, as a percentage change.
Definition : Gross domestic product (GDP) price index. Measures the prices paid for goods and services produced by the U.S. economy and is derived from the prices of personal consumption expenditures (PCE), gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.

Industrial Production (IP)
December 27, 2010

Industrial production jumped in November to a 5.1% annual rate up from a -2.3% annual rate in October.  This kind of monthly volatility indicates that industry has excess capacity not utilized and explains why production increases without impacting jobs, i.e. increased unemployment.  Grade: B

Full Title: Industrial Production Index: Index 2002=100: SA
Definition : Industrial production (IP) includes output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities.

West Texas Intermediate (WTI)
December 27, 2010

The price of West Texas Crude increased again in December, nearing the $90 per barrel rate at $88.30 per barrel.  While this will boost Alaska’s gross state product, these increases constrict the greater U.S. economy as a whole.  Grade: C+

Full Title: Price of West Texas Intermediate Crude; Monthly NSA, Dollars per Barrel
Definition : West Texas Intermediate (WTI) crude oil is of very high quality and is excellent for refining a larger portion of gasoline.  WTI is the major benchmark of crude oil in the Americas.  WTI is generally priced at about a $5 to $6 per-barrel premium to the OPEC Basket price and about $1 to $2 per-barrel premium to Brent, although on a daily basis the pricing relationships between these can vary greatly.

Money Supply M1
December 27, 2010

Notice the steep, almost vertical, increase in the money supply as a result of QE2!  The increase in the money supply has grown rapidly since mid 2009.  While this is growing the economy, this much new money will mean greater inflation. 
Grade: Not Graded Yet

Full Title:  M1 Money Stock: Billions of Dollars: Not Seasonally Adjusted (NSA)
Definition :  M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

Money Supply M2
December 27, 2010

The M2 money supply curve has increased steadily since 1998, with a steep climb beginning in 2009. 
Grade: Not Yet Graded

Full Title:  M2 Money Stock: Billions of Dollars: Not Seasonally Adjusted (NSA)
Definition :  M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

ECONOMIC NEWS SUMMARY - NOTES:

• This summary contains some quarterly indicators such as personal income, real personal consumption, and gross domestic product and may not have changed from the last issue of B/N&V®.
• Pink Band:  Indicates recessionary period.
• Grading:  Assigned to each indicator, A-F just like in school. 

Let me know if you have any comments, questions, or suggestions.
Write David W. Weatherholt at david@bnewsviews.com

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