GDP Growth Slowed to 2% in Third Quarter… After expanding at a 6.7% annualized rate in the second quarter, GDP growth slowed dramatically.
What it means— The actual number split the difference between the Atlanta Fed’s GDPNow 0.5% estimate and the Blue Chip economists’ estimate of 3.75%. It looks like we now know the answer to the question, “How much GDP growth can you buy for $10 trillion?”, including both government stimulus spending and Federal Reserve money printing. GDP shot to the moon in the third quarter of 2020, going up 33.8%, and then increased by 4.5% and 6.3% in the fourth quarter of 2020 and first quarter of 2021, respectively, as more cash poured into the system. The latest report brings GDP growth back to what it was before the pandemic.
But like any good telemarketing program, the government is telling us, “But wait, there’s more!”, as they work on the next trillion-dollar spending programs. If some versions of the Build Back Better (a.k.a. Build Back Broke) proposal and the infrastructure bill pass, the federal government will plow more borrowed dollars into the system. We’ll have to see if it will be enough to offset monetary tightening as the Fed begins tapering bond purchases.
September Durable Goods Orders Fall 0.4%… This was the first decline since April but was better than the expected 1% drop.
What it means— The headline number is a bit misleading. Boeing has issues with plane orders, and auto manufacturers still can’t get enough computer chips, so they’re short on inventory. Non-defense capital goods orders excluding aircraft, a proxy for business spending, increased 0.8%. Overall, goods orders have been up more than 23% year-to-date, which shows how much stuff we’ve been buying during the pandemic.
Monday’s report of the Purchasing Mangers Index reveals business if facing ongoing problems with the supply chain and labor shortages pushed the growth of production “below the long-term average.”
Among the companies that reported lower production in October:
- Around 50% cited “a lack of supplies.”
- Around 10% cited “a lack of labor.”
- Around 25% “reported that demand had fallen, often as a result of customers either lacking other inputs or pushing back on higher prices.”
New Home Sales Jump 14%… New home sales increased to an annualized rate of 800,000 last month, which is much higher than in August but down 17.6% from September 2020. New home sales are notoriously volatile.
What it means— The number of new homes sold each month jumps around. It’s more telling to watch the median sales price, which increased to a new record of $408,800 last month. With housing starts slightly down and median prices marching higher, it’s clear that this market still has legs. New-home inventory sank 12% to a 5.7-month supply.
There will be a blip in supply thanks to Zillow. House flippers became corporate with the run up in prices. Zillow’s stock price topped in February encumbered with inventory that resulted in a decision to sell 7,000 houses which is expected to raise $2.8 billion.
Build Back Better Gets Smaller as Potential Tax Proposals Get Wilder… Democrats cut free community college and paid leave from the bill as they tried to get enough votes to pass the budget reconciliation act. On the revenue side, Democrats suggested and then canned a billionaire wealth tax.
What it means— To get some of what you want, first demand a lot, and then pare back the demands to appear reasonable. This is the classic Overton Window approach, which has been used by politicians of all stripes, and it is clearly what’s happening on the spending side of the Build Back Better plan.
On the revenue side, things aren’t so clear. The Democrats appear to be developing tax legislation on the fly, with just a few days of consideration. One proposal was to tax billionaires on all their unrealized income, such as Elon Musk’s entire stake in Tesla and Jeff Bezos’s Amazon holdings. Someone must have pointed out that the tax is questionable on Constitutional grounds and likely would tank the markets, taking down investors of every size. The proposal didn’t last long. With so many proposals flying around, one is bound to work, which will give the bill momentum.
Pay attention to the discussion of state and local tax (SALT) deductions, which the 2017 tax reform capped at $10,000. Any increase in the cap or straight-out removal overwhelmingly benefits wealthy Americans. The current proposal eliminates the cap for two years in a bid to win support from New York and New Jersey congressional representatives. The move seems at odds with the claim that the bill demands wealthy Americans pay their fair share of taxes.
Removing the SALT limitations is a benefit to the “wealthy.” It reduces federal revenues which must be offset by taxing the general population. It is the exact opposite of Democrat political campaign promises.
South Korean Researchers Develop a Cheap Way to Turn Urine into Power… Urine contains urea, a compound used in fuel cells and some batteries, such as direct urea fuel cells (DUFCs), but the metals required to build the batteries and fuel cells are expensive. That might not be the case any longer. Researchers at the Korea Maritime and Ocean University discovered that it’s possible to use nickel and selenium, relatively cheap metals, to create the catalyst components in a DUFC, eliminating the need for metals such as platinum. The discovery could lead to remote communities using DUFCs for cheap, renewable power that requires only wastewater collection to generate. As an added benefit, the process also purifies the water.
Data supplied by HS Dent Research
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