Thursday, August 29, 2013 - Pre-Labor Day GDP

Pre-Labor Day GDP

by Sinclair Noe

DOW + 16 = 14,841
SPX + 3 = 1638
NAS + 26 = 3620
10 YR YLD - .01 = 2.76%
OIL – 1.30 = 108.80
GOLD – 10.60 = 1408.20
SILV - .52 = 23.97

No new war yet. The British parliament voted against military action in Syria. Britain was considered a key ally in any US-led coalition. PM David Cameron said the government would respect the decision of parliament which means that Britain will not take part in military strikes against Syria.

Initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 331,000. Claims for the prior week were revised to show 1,000 more applications received than previously reported. So, modest strengthening in the labor market. Next week, we'll get the monthly jobs report.

Meanwhile, the US economy accelerated more quickly than expected in the second quarter thanks to an increase in exports. Gross domestic product grew at a 2.5 percent annual rate, according to revised estimates, up from the initial guess of 1.7% growth. The second quarter’s growth rate followed gains of 0.1 percent in the fourth quarter and 1.1 percent in the first three months of this year.

The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years.  Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 2.5 percent annualized rate in the second quarter, matching the gain in GDP. Corporate spending grew at a 9.9 percent annualized rate, exceeding the 9 percent gain previously reported. This reflected a $62.6 billion gain in stockpiles that was larger than first estimated. Investment in housing accounted for nearly a fifth of the economy's growth during the period. However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could reduce bond buying as early as next month have driven mortgage rates sharply higher since May.

The bond-buying program is one of America's last major economic stimulus programs, as the federal government's fiscal austerity began dragging on the economy in late 2010. In the second quarter, higher taxes appeared to hold consumers back. Consumer spending slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

Problems remained in the US economy and the revision in GDP also highlighted some of those weaknesses. Consumer spending remained unchanged in the quarter and state and local government spending fell in the quarter as compared to being up in the initial estimate.

It's still just a 1.6% rise year over year, and that's soft. We are still down 2 million jobs and unemployment is still 7.4% and we are seeing significant drag from tax increases and spending cuts.

The GDP figures come amid a looming clash in Washington over the "debt ceiling"; the limit set by Congress on the US's ability to borrow. Treasury secretary Jack Lew warned earlier this week that if Congress fails to act soon, the US would hit its debt limit by mid-October.

Even with upward revisions to 2Q GDP, there has been a sea change in the composition of the global economies. For the first time ever, the combined gross domestic product of emerging and developing markets, adjusted for purchasing price parity, has eclipsed the combined measure of advanced economies. Purchasing price parity adjusts for the relative cost of comparable goods in different economic markets.

According to the International Monetary Fund—the supplier of this data—emerging and developing economies will have a purchasing price parity-adjusted GDP of $42.8 trillion in 2013, while that of emerging economies will be $44.4 trillion. In other words, emerging markets will create $1.6 trillion more value in goods and services than advanced markets this year. Another way to consider it is that the emerging markets have emerged, sort of, kind of.

It’s worth keeping in mind that the emerging economies have strength in numbers. Not only are there more emerging and developing nations; those nations also boast a larger combined population. As such, emerging and developing economies trail far behind advanced economies in per-capita terms. Their aggregate per-capita purchasing price parity-adjusted GDP is $7,415, while the same measure for advanced nations totals $41,369.

Those per capita numbers can be a bit deceptive for both emerging-markets and developed-markets. The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. CNNMoney reports that the nation’s biggest banks are expected to hand out more in compensation in 2013 than they did in 2009 including $23 billion in bonuses. Banks' losses on loans were down 30 percent from a year earlier to $14.2 billion, the lowest in six years. The biggest banks, with assets exceeding $10 billion make up only 1.5 percent of U.S. Banks, yet they accounted for about 82 percent of the industry's earnings in the April-June quarter.

Meanwhile, low wage workers kicked off the Labor Day holiday early in more than 50 cities, striking fast food restaurants. The demands are largely the same as in the past; a minimum wage of $15 per hour and protections against retaliation for joining a union.

Determining GDP numbers and most economic data is sketchy business at best, in part because the financial world is often sketchy at best. For example, the Tax Justice Network estimates that wealthy individuals are hiding between $21 trillion and $32 trillion in offshore accounts. Further, it's estimated that about 80% of the top 100 US companies are sitting on more than $1.2 trillion offshore to avoid paying taxes on it. How do you count that?

In 2009, UBS, the Swiss financial services company, reached a landmark deferred prosecution agreement with the US government and agreed to turn over the names of more than 4,000 American account holders. In the aftermath, the Internal Revenue Service has netted more than $5 billion from 38,000 Americans who came forward under a voluntary disclosure program.

Since then, US authorities have aggressively pursued Swiss banks they suspect of sheltering American tax cheats. A pending deal between U.S. and Swiss authorities could provoke another surge of recovered tax dollars. The agreement would require Swiss banks to disclose records showing outgoing transfers from American account holders. Authorities likely will use that information to pressure financial institutions in other popular offshore destinations.

A new report shows the last 30 years have been good for a few. CEOs saw their total compensation climb by 876 percent between 1978 and 2012. During that same period, worker compensation grew by 5.4%. And it doesn't seem that the so-called economic recovery is going to give workers a boost anytime soon. In June, the Bureau of Labor Statistics reported that hourly wages fell 3.8% during the first quarter of 2013 -- the biggest quarterly drop since the BLS started tracking wage growth in 1947.

A new report by the Institute of Policy Studies, called “Bailed Out, Booted and Busted” has come out with a listing of the 241 highest paid CEOs of the past two decades. An astonishing 38% of these titans of finance and industry have either been kicked out of their jobs, put in jail or had to have their companies be rescued from bankruptcy.

A poster child for overpaid CEOs performing poorly would be Richard Fuld, who raked in $466 million in salary and stocks in seven years as CEO of Lehman Brothers, the Wall Street investment bank, before the company collapsed in September 2008, precipitating global financial crisis. I don't mean to pick on Fuld; we could also look at the case of Dennis Kozlowski, or Eckhard Pfeiffer, or Ken Lay; Fuld is just one of 112 such CEOs whose companies were given a total of $258 billion in taxpayer bailouts, which means we all paid a little smidge of his paycheck.

It's easy to argue that there are a couple of bad apples in every cart, but if 38% of the apples are rotten, that indicates a problem. Shareholder activism doesn't seem to help, largely because shareholders are looking for the best returns and the thinking is that they can buy better returns, even though the results don't bear that out. Boards of directors are not going to change this. They are mostly made up of other CEOs who says if you scratch my back, I'll scratch yours. One idea is to change the makeup of the Boards. Another possible solution is  governments can eliminate taxpayer subsidies for excessive executive pay and encourage reasonable limits on total compensation by not giving out contracts to companies who pay excessive CEO salaries (effectively subsidized by the taxpayer) and rewarding those who pay their workers well.

Spare a thought this Labor Day holiday, when you fire up the barbecue for the last weekend of the summer and raise a beer for the workers in this country, and don't forget the almost 20 million who are unemployed or underemployed. 

Happy Labor Day.