Debt Ceiling: Killing the Golden Goose

Listening to the discussion on the USA debt ceiling, most political pundits would like to have you believe that cutting spending is all that is necessary is to balance the budget. Really simple.

The issue is NOT the spending per se – but growing imbalance in the USA spending. By simply trying to cut spending, the imbalances will remain and grow. The major item out of balance is entitlements.

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Entitlements are the major spending item for the Federal Government, and are overwhelming the budget, squeezing out investments the government needs to make in infrastructure – as well as spending for other vital programs.

A way to look at the underlying issue of government spending is to compare various government revenue and spending items to wages.

It is interesting that wages and taxes have remained roughly in correlation. It is the growth of entitlement spending that should be raising alarm bells. This does not take a Ph.D. to understand there is a serious problem – and without a massive rework of entitlement methodology, stopping the debt growth is impossible.

Most Americans in their lifetimes will receive Government entitlement benefits – especially the old and disabled. The issue is not whether these benefits should be delivered – but how to do it in a way not to kill the golden goose (the Main Street economy).

Economic News this Week:

The Econintersect economic forecast for July 2011 indicates the soft patch will continue. This is based on “less good” data, not data suggesting the economy is falling off a cliff.

This week the Weekly Leading Index (WLI) from ECRI was unchanged from a downwardly revised 1.7%. This level implies the business conditions six months from now will be approximately the same compared to today. This index is eroding and clearly in a downtrend.

Initial unemployment claims fell 22,000 to 405,000 and remains elevated. The real gauge – the 4 week moving average – fell only 3,750 due to backward revisions. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week usually occurs when employment gains less than the workforce growth.

The elevated initial unemployment claims remains an unusual development at this point in a “recovery”. We are beginning to see some stronger economic data this week, but the terrible June Jobs numbers from last week still resonate. However, Econintersect tends to believe the monthly employment situation may be more like the better (but mediocre) ADP employment numbers (analysis here) – as ADP methodology likely produce a better month-over-month metric of changes to employment.

The data this week does not support the premise the economy is weakening except for the mysterious YoY decline in container imports. Opinion – whether from the business or consumers – continues to be at recession levels. Although I am not a lover of opinion surveys as they are a rear view mirror, this funk eventually spreads and the rear view becomes future reality.

Weekly Economic Release Scorecard:

Item Headline Analysis
June Sea Container Counts

A 4.5% YoY contraction in imports after 16 straight months of YoY growth
June Consumer Price Index
The core inflation rate is approaching the Fed’s target inflation rate
July Empire State Manufacturing
Less Bad
Survey remains in negative territory for the second month
July Michigan Consumer Sentiment
Down Big Time
Major drop and well below consensus
June Industrial Production
The data is flat – and that is good because the surveys were suggesting IP would fall
Advance June Retail Sales
Up 0.1%
Likely up 0.5% on record June Sales
June Producer Price Index
Down to 7.0%
Moderation is solely caused by better crude prices in June – literally everything else is rising
June Export Import Prices
Import prices up 13.6% YoY
Export prices up 9.9% YoY.
May Job Openings and Labor Turnover
Contradictory trends in May JOLTS provides only half an answer to the bad employment data
May Trade Balance
Growing deficit
Growing trade deficit is a sign the economy is not softening
June NFIB Sentiment Survey
Down Slightly
The report turned into a rant against government policies
June Diesel Usage
This data suggests the economy may be entering a new growth cycle
Housing Demographics

Chris Porter: Will demographics lead to a home building expansion cycle?
June Rail Traffic
Less Good
Coal shipping is down. Ignoring coal, rail traffic is up strongly
Consumer Metrics
Less Bad
Rick Davis reviews the current data
Oil Price Spikes

Lance Roberts shows the psychological “cost pressure” impacting consumer behavior.
Employment Growth

Graphic proof big business is the cause of poor employment numbers since 2001
June Jobs Data

A leading indicator in the BLS report is still strong – the economy is still expanding
USA President

Frank Li says age makes a difference in selecting a President
Indian Rupee

Ajay Shah suggests policy issues concerning trading of Rupees.
Debt Ceiling

Krugman is criticized for making debt ceiling issue partisan
Mortgage Fraud

John Lounsbury: the mortgage settlement is a whitewash
Greek Debt

Warren Mosler’s plan to end Greek crisis considered by EU
Greek Default

Elliott Morss: open letter to Greek pres. recommends default

Shah Gilani reviews the mechanics of the volatility index
China Investments

Sanjeev Kulkarni: the USA and Europe may become Chinese economic colonies
USA Corporate Earnings

Jeff Miller says that corporate earnings have grown even if the economy has not
Defensive Stocks

Dee Gill suggests some defensive stocks for today’s volatility

Bankruptcies this Week: Bridgetech Holdings International, Omega Navigation Enterprises

Failed Banks this Week:

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