Everything You Need to Know About GDP, Consumer Sentiment, Debt, and Europe: Top Econ Stories of the Week

Here’s your Cheat Sheet to this week’s top econ stories:

Initial Unemployment Claims

Market participants who want to use this week’s initial unemployment insurance claims report to gain some insight in the the labor market may end up disappointed. The report, released on Thursday morning by the U.S. Department of Labor, indicates more of the same give-and-take that has characterized most unemployment data for the last year.

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Initial unemployment claims for the week ended February 23 declined about 6 percent month over month to 344,000. The four-week moving average declined about 1.9 percent month over month to 355,000. This is a 3.2 percent improvement over the moving average for same week in 2012.

Ostensibly this is a slight improvement, but it’s hard to determine whether new hiring or the expiration of benefits caused this shift. Several states reported fewer layoffs in construction and manufacturing, which could be a reflection of healthy housing and PMI data that was released earlier in the month, but the slight drop is not enough to convince anyone that the headline rate will decline this month.

Next Friday, the Department of Labor will release the highly-watched Employment Situation report that sets the headline U-3 unemployment rate. The official rate ticked up from 7.8 percent in December to 7.9 percent in January, and only the most optimistic observers are expecting it to drop in the February report…

Fourth Quarter GDP

Also released on Thursday morning was the government’s second estimate of fourth-quarter GDP. The first estimate showed an unexpected drop in economic activity with a reading of -0.1 percent. Based on better-than-expected trade and manufacturing data, consensus estimates for the revised reading were looking for +0.5 percent growth.

But, in line with the tepid nature of the U.S. recovery, the revised GDP report once again disappointed, and showed just +0.1 percent growth. The report comments: ” While today’s release has revised the direction of change in real GDP, the general picture of the economy for the fourth quarter remains largely the same as what was presented last month.”

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Last month the Commerce Department’s Bureau of Economic Analysis produced some shocking news: advance figures showed that the United States economy unexpectedly shrank by 0.1 percent from October through December. But according the revised estimate, real gross domestic product grew at a rate of 0.1 percent in the fourth quarter, a decided improvement to the previously reported figures, yet still missing the 0.5 percent growth analysts had expected.

“While today’s release has revised the direction of change in real GDP, the general picture of the economy for the fourth quarter remains largely the same as what was presented last month,” commented the news release, putting the numbers in harsh perspective.

As the BEA reported on Thursday, GDP — the output of goods and services produced by labor and property located in the United States — reflected contributions from personal consumption expenditures, nonresidential fixed investment, and residential fixed investment that were only partly offset by negative additions from private inventory investment, federal government spending, exports, and state and local government spending.

This most-recent calculation of GDP still represents a deceleration in economic growth. In the third quarter, the U.S. economy grew at rate of 3.1 percent…

For the three-month period, real personal consumption expenditures increased 2.1 percent, compared with an increase of 1.6 percent in the third quarter; real nonresidential fixed investment increased 9.7 percent,compared to a decrease of 1.8 percent in the previous quarter; and nonresidential structures increased 5.8 percent. In comparison, federal government consumption decreased 14.8 percent in the fourth quarter, pushed down by a drop of 22 percent in defense spending.

Two factors stand out in the data. First, inventory investment was stifled more than originally expected, possibly as a results of hesitation by businesses about the fiscal cliff and its fallout. Also, the report showed that inflation is low, a condition that will allow the Federal Reserve to theoretically keep up its easy-money policy.

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In terms of hard numbers, the BEA’s revised figures show that current-dollar GDP for the fourth quarter — the market value of the nation’s output of goods and services — amounted to $15.8 trillion in the fourth quarter. When expressed in dollar amounts, a difference a 0.2 percentage point revisions seems almost insignificant, but that slight gain does mean that GDP has grown for 14 consecutive quarters.

The annual numbers do show an improvement over the previous year. Last quarter’s results pushed full-year GDP growth to 2.2 percent in 2012, up from 1.8 percent in 2011.

GDP

Consumer Debt

Although the side-effects of the Great Recession are still being felt by Main Street, consumer debt in the fourth-quarter increased for the first time in four years.

According to the New York Federal Reserve’s latest household debt and credit report, outstanding consumer debt edged $31 billion higher in the final three months of 2012 for the first time since 2008, compared to the previous quarter. Americans are now carrying a total debt load of $11.34 trillion, higher than the third-quarter, but still below the peak of $12.68 trillion in 2008.

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All non-housing debt balances increased for the third consecutive quarter. Auto loans led the way with a $15 billion gain, while student loans and credit cards rose $10 billion and $5 billion, respectively.

“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle, though we’ll need to see if this is sustained in upcoming quarters,” said Andrew Haughwout, vice president and economist at the New York Fed. “At the same time, we observed mixed developments, mortgage originations increased and fewer accounts entered the foreclosure pipeline but delinquency rates remain considerably higher than pre-crisis levels”…

While some may see higher debt loads as a positive sign for the economy, a large part of the deleveraging in recent years has come from the housing bubble bust. Delinquency rates are improving, but still remain elevated on a historic basis. In the fourth-quarter, delinquency rates for mortgages improved to 5.6 percent, compared to 5.9 percent in the previous quarter, while home equity lines of credit declined from 4.9 percent to 3.5 percent. Overall, 8.6 percent of total debt was in some stage of delinquency.

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Furthermore, the student debt bubble continues to grow. Outstanding student loan balances increased $10 billion during the fourth-quarter to reach a total of $966 billion. Even more concerning, the number of borrowers who have fallen behind on their student debt by at least 90 days continues to climb higher. In the fourth-quarter, it surpassed the delinquency rates of credit cards to reach 11.7 percent. Thirty-five percent of people under 30 years old who have student loans are at least 90 days late on payments, compared to 26 percent in 2008.

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Interestingly, the delinquency rates of student loans is likely even higher than reported. In the fine print, the Fed explains, “These delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

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Europe’s Economy

euro zoneData released Friday morning highlighted struggles facing some of the world’s largest economies. A report issued by London-based Markit Economics showed that the downturn in European manufacturing continued relatively unabated in February.

A composite index based on a survey of purchasing managers in the European Union services and manufacturing industries decreased to a reading of 47.3 in February, from January’s 11-month high of 48.6. Any reading below 50 indicates that the economy in question in contraction. While no economists had been predicting the bloc’s economy to expand this quarter, those polled by Bloomberg had anticipated the purchasing managers index to increase to a reading of 49 for the month.

The index was held back by a drop in the region’s manufacturing gauge, which fell to 47.8 in February from 47.9 in January. A drop in the services index to 47.3 from 48.6, the steepest drop in 10 months, also hurt results…

This data reinforced other indications that the economy of the 17-nation currency bloc will continue to contract in the first quarter of 2013, after recession deepened in the last quarter of 2012. The European Central Bank has predicted that gross domestic product will drop 0.3 percent this year. However, the central bank’s President, Mario Draghi, said this week that the region should begin to recover towards the end of 2013 as the effects of monetary stimulus begin to be felt throughout the economy.

“While the manufacturing sector is likely to have have again acted as a drag on the overall economy in the first quarter, causing GDP to fall for a fourth consecutive quarter, there are signs that the downturn has become less severe,” stated Chief Markit Economist Chris Williamson in the press release.

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Even data from Germany — Europe’s biggest economy —  could not provide much of a bright point in the generally-depressed outlook; the country’s services measure declined more than forecasted, hitting a reading of 54.1, while its factory gauge edged just above 50, a sign of tepid expansion.

Unemployment figures, which were also released Friday morning, gave yet another grim indictment of the European economic situation. Austerity measures taken to counter the debt crisis deepened the currency bloc’s recession, reported Bloomberg, and as a result, the jobless rate in the euro zone hit a record high in January. Unemployment in the 17 nations of the bloc rose to 11.9 percent, from a revised 11.8 percent in December, according to the European Union’s statistics office in Luxembourg.

“The situation is very serious,” Alexander Krueger, chief economist at Bankhaus Lampe in Dusseldorf, told the publication. “There’s no support any more from Germany. It’s more or less a sideways movement which I expect to continue. Other economies like Italy, Spain and Portugal are very bad at the moment, so in the end the unemployment rate can only climb.”

Consumer Sentiment

Despite never-ending bickering among politicians, and a recovery dependent on central bank easing, Americans continue to feel…

better-than-expected about the economy.

The index of consumer sentiment compiled by Thomson Reuters and the University of Michigan increased to 77.6 in February, compared to 73.8 from the previous month. On average, economists projected the reading to come in at 76.3, the same as the preliminary reading. In a Bloomberg survey, projections of 58 economists ranged from 74 to 78.

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During the last recession, the index averaged slightly above 64. In the five years before the financial crisis, it averaged almost 90. Consumer sentiment is one of the most popular measures of how Americans rate financial conditions and attitudes about the economy. The University of Michigan’s Consumer Survey Center questions 500 households each month for the index.

The reading on current economic conditions increased from 85 to 89, while consumer expectations jumped form 66.6 to 70.2. However, 43 percent of those surveyed considered government economic policies to be poor and only 15 percent said the administration was doing a good job, according to Reuters. With the sequester set to take effect, consumers are not poised to feel any better about government policies in the coming weeks and months.

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“Consumers find the blame-game for policy inaction a very unsatisfactory substitute for a concerted effort to improve the economy,” survey director Richard Curtin said in a statement.

Earlier this week, The Conference Board also reported a jump in consumer attitudes that exceeded expectations and every estimate in a Bloomberg survey. On the other, the future looks dismal for consumers.

Higher payroll taxes and gas prices are taking a toll on wallets. On Friday, the Commerce Department announced personal incomes in the United States fell 3.6 percent in January, the biggest plunge in two decades. Meanwhile, the personal savings rate dropped to 2.4 percent, compared to 6.4 percent in the previous month. It is the lowest savings rate since 2007…

International Economy

china-flagInternational economic data flooding the financial news airwaves on Friday was generally pessimistic; yet for some countries the news was worse than for others.

In the European Union, the survey of purchasing managers in both the services and manufacturing industries declined more than analysts had expected — giving another sign that the economy of the 17-nation currency bloc will continue to contract in the first quarter of 2013. Also under pressure, China’s manufacturing output shrank on a month-over-month basis, although the gauge remained barely in growth territory.

The official Chinese manufacturing index fell for the second consecutive month in February, reported Bloomberg, revealing the challenges to economic growth the country faces as it prepares for a change in leadership.

China’s new government — headed by President Xi Jinping — will take power after the annual session of parliament begins on March 5. Then, the National People’s Congress will set this year’s growth target. With this recent drop, that metric will draw particular focus from the country’s leaders, who may, economists fear, implement more governmental controls.

“We are still waiting for the congress,” First Shanghai Securities strategist Linus Yip told Bloomberg. “The major concern is whether there will be more controls coming out.”

China’s Purchasing Managers’ Index gave a reading of 50.1 for the month of February, according to the country’s National Bureau of Statistics. That level indicated that the index expanded by the tiniest margin; any reading of below 50 means that the gauge contracted for the measured period. Economists had hoped for slightly better results, with their consensus estimate set at 50.5 for the month, but even that figure would not have signaled an overwhelming boost to the economy.

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A separate reading of manufacturing data compiled by HSBC gave a reading of 50.4 — the lowest level recorded by the firm in four months. This reading, down from 52.3 in January, evidenced a marginal improvement in operating conditions in China, with a slight expansion in output and an increase in total new orders.

The final February manufacturing PMI suggests “a slower pace of expansion,” stated Chief Chinese Economist Hongbin Qu in the press release. “But China’s recovery continues on improving domestic demand conditions and the labour market. The pace of ongoing recovery is mild, implying no need for the PBoC [The People’s Bank of China] to tighten policy any time soon,” he added, referencing other analysts concerns over the possibility of a change in monetary policy.

The unexpected decline in the rate of expansion in manufacturing, pushed down Hong Kong Stocks and gave the city’s benchmark index its first decline in the past three days. The index has retreated 3.6 percent since the beginning of January when it hit a 20-month high.

CHINA FEB PMI

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