How The BEA Goosed 3rd Quarter GDP——With A Phony 74% Leap In Defense Spending

Capital Economics lays it out (via  James Pethokoukis):

And from this a thousand conspiracy-themed blog posts will be born. Here is Capital Economics on the surprisingly strong (3.5% vs. 3.0% forecast) third-quarter US GDP report:

– The reported leap in third-quarter defence spending, which added 0.7 percentage points to annualised  GDP growth was, as far as we can tell, largely due to a failure of the BEA’s seasonal adjustment  process. As a result, we expect defence spending to plunge this quarter, subtracting a similar amount  from fourth-quarter GDP growth.

– All of the upside surprise in third-quarter GDP growth (the 3.5% outturn was well above the consensus  forecast of 3.0%) can be explained by the 4.6% increase in government spending, which added 0.8  percentage points (ppts) to overall growth. Moreover, nearly all of that boost was due to a 21% leap in Federal defence consumption. That’s the largest increase since the second Iraq war in  early 2003. Drilling down further, more than two-thirds of the rise was due to a 74% annualised leap in  defence spending on support services for installation, weapons and personnel. This is unusual given that  spending on such services typically makes up just 25% of total defence spending.

– Some of the rise in the third quarter could be due to the escalation in military action in the Middle  East, but most of it appears to be due to a failure of the seasonal adjustment process. Looking at the  averages over the past five years, defence support services spending has increased by 38% annualised in  the third quarter only to fall by an average of 34% annualised in the fourth quarter. (See Chart 2.) The BEA all-but confirmed this problem when in an email it told us that it is “trying to determine if any  methodology changes are necessary”.

(via David Stockman's Contra Corner)

Early Indications are that US Christmas Spending Will Be Strong

The Gallup Poll's  initial estimates of the total amount Americans will spend on Christmas gifts this year point to an above-average holiday season for the nation's retailers.

Gallup's October spending forecast is an initial read before its key measure in November.  The organization  finds Americans expecting to spend $781, on average, up from $704 last November.

The current figures are based on an Oct. 12-15 Gallup poll of 1,017 U.S. adults, aged 18 and older.

Remember. the greater the desire to spend cash balances, the more potential for accelerated price inflation.

Wage Expectations Back to 2006 Levels

The Fed's mad money printing is resulting in the masses becoming optimistic again. Wage expectations are soaring. Will this mean that they will lower their desire to hold cash balances? I believe so. The lower the desire to hold cash balances declines, the greater the price inflation will be.

Mainstream economists, who simply are projecting out current price inflation trends, have no clue as to how this occurs. They have no idea how quickly price inflation can accelerate once the tide turns toward aggressive consumer spending.

In U.S., 31% Say Now Is a Good Time to Find a Quality Job...

In the US, the Fed manipulative trick continues to do its trick. More and more people continue to to view the current period as a good time to find Fed induced "quality job."

This will continue until we have another severe pullback in Fed money printing.

(via Gallup)

‘Saudi Texas’ and the OIl Shale Boom

(via Mark Perry)

The Unemployment Rate is Below 5% in 15 States. Where Does Your State Rank?

Below is the unemployment rate in each state.  Currently, North Dakota has the lowest unemployment rate at 2.8% (thanks to the oil boom) and Georgia has the highest at 7.9%.

Search: 

State	Sep 2013	Aug 2014	Sep 2014
Alabama	6.4%	6.9%	6.6%
Alaska	6.6%	6.8%	6.8%
Arizona	8%	7.1%	6.9%
Arkansas	7.7%	6.3%	6.2%
California	8.8%	7.4%	7.3%
Colorado	6.6%	5.1%	4.7%
Connecticut	7.7%	6.6%	6.4%
Delaware	6.6%	6.5%	6.5%
District of Columbia	8.2%	7.7%	7.7%
Florida	6.9%	6.3%	6.1%
Georgia	8%	8.1%	7.9%
Hawaii	4.7%	4.3%	4.2%
Idaho	6%	4.7%	4.5%
Illinois	9.1%	6.7%	6.6%
Indiana	7.3%	5.8%	5.7%
Iowa	4.5%	4.5%	4.6%
Kansas	5.3%	4.9%	4.8%
Kentucky	8.3%	7.1%	6.7%
Louisiana	6%	5.8%	6%
Maine	6.6%	5.6%	5.8%
Maryland	6.5%	6.4%	6.3%
Massachusetts	7.2%	5.8%	6%
Michigan	8.8%	7.4%	7.2%
Minnesota	4.9%	4.3%	4.1%
Mississippi	8.4%	7.9%	7.7%
Missouri	6.4%	6.3%	6.3%
Montana	5.6%	4.7%	4.6%
Nebraska	3.9%	3.6%	3.6%
Nevada	9.6%	7.6%	7.3%
New Hampshire	5.2%	4.4%	4.3%
New Jersey	7.9%	6.6%	6.5%
New Mexico	6.9%	6.7%	6.6%
New York	7.5%	6.4%	6.2%
North Carolina	7.7%	6.8%	6.7%
North Dakota	2.8%	2.8%	2.8%
Ohio	7.4%	5.7%	5.6%
Oklahoma	5.6%	4.7%	4.7%
Oregon	7.6%	7.1%	7.1%
Pennsylvania	7.3%	5.8%	5.7%
Rhode Island	9.5%	7.6%	7.6%
South Carolina	7.3%	6.3%	6.6%
South Dakota	3.7%	3.5%	3.4%
Tennessee	8.2%	7.4%	7.3%
Texas	6.3%	5.3%	5.2%
Utah	4.3%	3.5%	3.5%
Vermont	4.5%	4.1%	4.4%
Virginia	5.5%	5.5%	5.5%
Washington	6.9%	5.6%	5.7%
West Virginia	6.4%	6.6%	6.6%
Wisconsin	6.6%	5.7%	5.5%
Wyoming	4.6%	4.6%	4.7%

(via WSJ)

A Key Indicator to Watch that May Be a Strong Indicator of Future Price Inflation

By Robert Wenzel

The Fed has pumped massive amounts of new money into the system since the financial crisis of 2008, so where is the price inflation?



Part of the answer is soaring productivity, especially in the energy and high tech sectors,

But another part of the answer is the strong desire by individuals and corporations to hold on to large cash balances. A very rough indicator of this is the declining velocity of money, since the crash.

There was a major decline in velocity during the Dot Com Bubble, but the it started to recover again, only to nosedive in line with the more recent financial crisis.



What could turn this around? At this point, consumer and corporate optimism. Which is why I keep a close eye on the the Thomson-Reuters/University of Michigan sentiment index. The more optimistic consumers are at this point, the more likely they are going to spend more of their cash balances.

The  preliminary October sentiment index "unexpectedly" (by Keynesian economists) increased to 86.4 from the final September reading of 84.6, according to a source who has seen the numbers, reports WSJ.

It's a continuation of increases in sentiment since the lows reached during the peek in the financial crisis.

At some point, the sentiment will become so positive that consumers will start spending so aggressively that it will overpower any productivity gains and that's when price inflation will really kick in. Timing on this is always difficult, but the trend is pretty obvious.

The Fed, Paul Krugman and most Keynesians (except probably Marty Feldstein) do not understand this. They are simply watching the current price inflation trendline (of just under 2%) and are projecting this out in their heads without understanding the powerful underlying force that will eventually cause price inflation to rocket.

Be prepared my friends, it's coming.

Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

New York Business Activity Slows

 For the month of October, the general business conditions index of the Empire State Manufacturing Survey declined. The index  fell twenty-one points to 6.2, signaling that the pace of growth slowed significantly from last month. The new orders index dropped nineteen points to -1.7, indicating a slight decline in orders, and the shipments index fell twenty-six points to 1.1, indicating that shipments were flat. The employment index rose seven points to 10.2, pointing to an increase in employment levels, while the average workweek index fell to a level just below zero, suggesting that hours worked held steady.

he decline in the general conditions index was driven by a drop in the share of respondents reporting that conditions had improved relative to the preceding month’s; this share fell from 46 percent to 25 percent in October, while the share of respondents reporting worsening conditions was little changed at 19 percent.

Bottom line; Money supply growth has been slow to sluggish and it is now being reflected in a decline in business conditions.

Producer Price Index Falls

The U.S. Producer Price Index fell a seasonally adjusted 0.1% in September to mark the first decline in more than a year.

The increase in producer prices over the past 12 months fell to an unadjusted 1.6% September from 1.8% in the prior month to reflect the smallest gain since March.

The decline in prices, as expected at EPJ, was led by the index for gasoline, which dropped 2.6 percent.

The index for final demand foods also decreased 0.7%, during the month. In
contrast, prices for final demand goods less foods and energy advanced 0.2%.