Macro analysis of US payroll, fiscal policy and auto sales post‑Fukushima

US auto sales in the wake of Fukushima Itlooks like pent-up demand for Japanese cars has MoM change in SAAR auto sales, millions of units caught up, SAAR million units 1.0 id 0.5 0.0 nn oS Ss oo BJapan -1.0 BUS+Other 4 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 4 2009 2010 2011 2012 source: BEA Wards DB, J.P. Morgan Privale Bank. Box indicates impact Source: DB, JP. Morgan Private Bank. Shadings indicate Cash for of Japanese earthquake, Clunkers and Japanese earthquake, respectively So where does that leave the US payroll and growth picture? The weakness in the payroll report was almost entirely concentrated in retailing. Net of distortions and seasonal adjustments, it looks like payroll growth is running at 150-175k per month, and GDP growth is running at a 2.25% trend pace, both below prior recoveries. While 2.25% is a barn-burner compared to Europe, it only corresponds to a modest improvement in employment. That’s why 2013 US fiscal policy is so important: this is not a recovery that can withstand much tighter fiscal conditions. So, how tight is US fiscal policy supposed to get next year? Very, if you look at what is supposed to happen according to current law. In the chart, we show the annual change in the budget deficit over the last 25 years. The impact of all provisions scheduled to expire and kick in during 2013 would be very large. But if Congress and the President elect to extend current tax rates, retain lower payroll tax rates and extended jobless benefits, etc, the adjustment would not be as big, and only reflect expiration of Recovery Act provisions, the recently passed Budget Control Act, and some other smaller provisions. There are of course plenty of permutations in between. Wide range of outcomes for 2013 austerity Policies set to expire or take | Fiscal Drag (% Change in cyclically-adjusted federal deficit, % of potential GDP effect under current law of 2013 PGDP) ] Sequester Automatic Cuts 5 4 9, 44 = — (Discretionary Spending) 0.4% 34 Sequester Automatic Cuts 2013 3 0.1% 27 scenario (Mandatory Spending) 14 estimates Bush Tax Cuts ($250k+ ; | 0.3% 0 ncomes, Estate Tax) 14 l Congress Bush Tax Cuts (Middle Income) 0.9% -2 4 | punts Alternative Minimum Tax 0.8% 2] Payroll Tax Cut 0.6% = Current yU | t 4 .Fiscaldrag law Pllecamkett nemploy men 0.2% 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 mpensation Source: CBO, IMF, Goldman Sachs, J.P. Morgan Private Bank Affordable Care Act 0.2% Source: CBO, Goldman Sachs What direction is the Congress heading, and what did Larry Summers and Brad DeLong have to say about this recently? Political outcomes this fall will affect what Congress does, but I get the sense that they will punt fiscal adjustments into the future if they can, and impose austerity of no more than 1% of GDP in 2013. Ifso, Congress can point to a March 2012 paper by Summers and DeLong as justification. The bottom line from the paper: don’t tighten fiscal policy when interest rates are near zero. The authors assert that (a) additional government spending can ease the long-term budget constraint in conditions similar to today’s, and (b) tightening policy now would risk permanent loss of human capital, lower labor productivity growth and lower trend growth. They have held these views for a while; the paper appears designed to convince others. Advocates for more fiscal and monetary stimulus often point to the charts below. Rising Federal debt has not resulted in higher interest rates, so why not keep borrowing more? As for the Fed, balance sheet expansion prevented deflation and HOUSE_OVERSIGHT_025236