Morning Report: Third quarter GDP revised downward 6/28/18

Vital Statistics:

Last Change
S&P futures 2695 -8.5
Eurostoxx index 376 -3.9
Oil (WTI) 72.39 -0.39
10 Year Government Bond Yield 2.83%
30 Year fixed rate mortgage 4.53%

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

The third estimate for first quarter GDP came in lower than expected, as an upward revision in the price index and a downward revision in consumer spending lowered the third and final estimate from 2.2% to 2%. The price index was revised upward from 1.9% to 2.2%, while consumer spending was revised downward from 1% to 0.9%. Housing was actually a negative in the first quarter. I may sound like a broken record, but from 1959 to 2002, housing starts averaged 1.5 million per year, with a much smaller population. Post-bubble, we have averaged around a million per year. Just to get supply and demand into balance probably requires 2 million starts, which would do wonders for GDP. Incidentally, yesterday’s inventory figures prompted the Atlanta Fed to take up its tracking estimate for second quarter GDP to 4.5%.

The drop in the 10 year yield has probably been influenced by the Fed Funds futures, which have been inching towards one more hike this year as opposed to 2. Current probability levels:

  • No more hikes: 11%
  • One more hike 44%
  • Two more hikes: 42%
  • Three hikes 2%

While the US economic data probably supports more hikes in interest rates, wage growth remains muted, and the sell-off in emerging markets is being viewed as a canary in the coal mine for global growth. Finally fears of a trade war are bearish for the economy, which would give the Fed another excuse to hold off in either September or December.

Initial Jobless Claims increased to 227k last week, which is still an astoundingly low level. Meanwhile corporate profits were revised upward in the first quarter from 0.1% to 2.7%.

Ben Carson testified in front of the House Financial Services Committee yesterday, where he laid out some of the changes he has implemented at HUD. He has made some changes with the Home Equity Conversion Mortgage program (aka reverse mortgages) to put the insurance fund on sounder footing. He is emphasizing the removal of lead paint and other hazards in HUD housing, and has suspended the Obama-era scheduled cut in the FHA mortgage insurance premium. HUD is concerned about the number of FHA cash-out refinances, which have increased from 45% of refis to 60% in the last year. (As an aside, since rate / term refi opportunities are largely gone, so you would expect to see an increase in the percentage of cash-outs).

Why socially responsible investing sounds like a nice idea, but isn’t a free lunch. You can “do good” but you should be prepared to underperform.

27 Responses

  1. Good observation on the political moment:

    “But the conceptual fallacy is that politics is about getting to a place of agreement. The people who have an energetic base and are making demands and know what they stand for are doing pretty good. That was true in 2009–2010 and it is true now.”


    • Sure… And the same chattering class thought Eric Cantor’s loss to the TP movement would usher in a wave of small government types.

      So much for that theory…


      • No, but establishment Republicans haven’t been doing particularly well.


      • Well, government itself resists small government types, and seduces them into “big government is okay if you’re doing it” thinking.

        I imagine Ocasio-Cortez already believes in big government and lots of it, so she doesn’t have far to go there.


    • I read that the incumbent did not show up for the debate and obviously took the CD for granted while pursuing his own presumably loftier goals. In a season of discontent for voters with roots in Puerto Rico a pretty young PR face dressed like a banker or a lawyer about to go to federal court in a tasteful dark suit had to be taken more seriously in a largely PR rooted district. Her particular pablum of expanded welfare state may have been of no consequence under the circumstances. In any case, for many D primaries outside the NE or California hotbeds the eventual D nominees look a lot more like recent vets back from Afghanistan or Iraq, not like Bernie wannabes.


  2. From one of the leading lights in the Volokh constellation, Ilya Somin, a libertarian constitutional lawyer’s view of the damge done by Kennedy:

    A telling quote:

    “…during his time on the bench, he agreed with the Cato Institute more than any other justice did. Cato was the only organization in the country, for example, to file briefs supporting the side that got Kennedy’s vote in virtually all the big cases: District of Columbia v. Heller ( Second Amendment), Citizens United vs. Federal Election Commission ( campaign finance), Shelby County v. Holder ( voting rights), United States v. Windsor (Defense of Marriage Act), National Federation of Independent Business v. Sebelius ( Obamacare), Obergefell v. Hodges (same-sex marriage) and this term’s Masterpiece Cakeshop v. Colorado Civil Rights Commission ( free exercise clause ).

    But that didn’t make him any less frustrating to libertarians — at least those of us who care about the rule of law rather than simply achieving what we consider to be good policy results.”

    My personal comment in concurrence with Somin: as we have often agreed here, Kennedy’s reasoning was mystifying, regardless of what one thought of the result.


  3. What the left is planning on doing to get their agenda through:

    “It will be difficult, if not impossible, to enact and preserve highly ambitious policies—like the creation of a single-payer health care system, for instance—without ending the filibuster and possibly adding new states, in addition to packing the Supreme Court to insulate new legislation from conservative judicial challenges.”

    Presumably the new states will be DC, Puerto Rico, and splitting California into two or more states.


    • How are they going to pack the supreme court without taking the presidency, the house, and the senate? And even then, they would have to replace a lot of Democrats to get them to go along with the precedent of packing the court. And DC and Puerto Rico are probably possible, but splitting California into two or more states? I sense that would be a constant battle at the state level as folks tried to make gerrymandered, rather than practical, state lines. Not sure how excited the governor at the time would be about the idea.

      This seems like pinning the future on hopes, dreams, and vaporware. There isn’t a lot to indicate that they are going to be in a position to pack the court or do more than potentially get DC and Puerto Rico made into states (and even that will require they hold the reigns of power and either the presidency or a veto-proof majority).


      • Kev, on California: the Inland Empire would like to take back its water that Mulholland stole so many years ago. As soon as they have as many votes as Los Angeles County wake me up.

        The pipe dreams of pundits are beyond weird, but especially on the fringes. Of course, I never thought the US would unilaterally impose high tariffs on Canada and the EU while saving a Chinese Telcomm and sucking up to Putin.

        So fuck me.


        • True, we can always be surprised! Though I would have thought we would have seen improved relations with Russia (and, frankly, Cuba) earlier. Although I’m not sure we’re ever going to get as improved as I thought we would. Gotta admit, the tariffs in this day and age surprise me. I would have subsidized exports before tariffs.


  4. I’m at a meeting and I laughed out loud reading this comment.

    Unfortunately the Democratic party doesn’t have a 24/7 news propaganda on television like the GOP. We need to get pastors in temples and churches to LOUDLY be against everything Trump does as well
    Please log in or sign up to continue.
    scoffling June 28 · 01:04:23 PM


    • When we talk about unhinged . . . this is unhinged. I can actually get being in such a bubble of like-minded haterz that you don’t see the problem with holding up a mock-severed head of President Trump. Or if your easily gullible, seeing how you could just swallow the whole “Trump is ripping children from their parents with glee!” narrative on immigration.

      But how you can imagine the Democratic party doesn’t, for all practical purposes, own the country (except where some elements of the culture don’t consider them progressive enough, and may criticize them on that front) in terms of TV news, movies, books, sports media, social media, etc . . . What do they think CNN is? MSNBC? BloombergTV? And lets not get started on ABC, NBC and CBS.

      Then the part where they are asking for “pastors” in “temples and churches”. Amazeballs.


    • Second, there’s the McConnell Rule—no Supreme Court confirmations in an election year, not until the people have had a chance to decide the direction in which they want the country to go. With an essentially tied Senate, the argument is even more compelling.

      How cute. They think there’s a “rule” that Republicans will stick to.


      • Plus, he said POTUS election and it’s what that idiot Biden said, ie, the Biden rule.


        • And it doesn’t matter. It isn’t a rule. It’s just a thing McConnell and the GOP did and the Democrats will do if they have the majority in a similar circumstance. But that they wouldn’t do it to a Democratic president any more than McConnell is going to urge it be done to Trump. Especially ahead of a midterm, that’s just silly. 😉


    • Reading the other comments (which I only ever do because of you) . . .

      They need to be reminding folks that the 40-hour work week is also on the chopping block; overtime pay; paid vacation; safe working conditions; clean-ish water and air….all of the things that make us a first-world country are at risk. Remind those “economically anxious” folks just what is at stake in your everyday conversations with family, friends and neighbors.

      Really? Republicans are going to put an end to overtime pay paid vacation, working conditions, clean water and air . . .

      God, the hyprebole.


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