well, since last week, we’ve been over the fiscal cliff and back again…although the Senate passed a compromise bill negotiated by Joe Biden & Mitch McConnell late on Monday to roll back most of the year end tax increases, the House adjourned without voting on it, which meant until the House reluctantly approved the package late Tuesday, all of the new year’s cliff provisions had been in effect

the American Taxpayer Relief Act of 2012 (online scribd copy) is 157 pages, and much of it is difficult to interpret, since many of the one paragraph sections are no more than amendments making minor changes (such as changing the expiration date) to existing budget acts…but we are able to determine the resolution of each of the year end cliff components from the hundreds of news stories and blog posts on it, which amounted to nearly half the links on this week’s global glass onion

the Bush tax cuts have been made permanent for all taxpayers with household incomes below $450,000 and individuals below $400,000; those with incomes above those levels will see the portion of their income above those thresholds taxed at the Clinton era rate of 39.4%; the tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold, while it remains at 15% for everyone else; in addition, a limit has been imposed on exemptions for incomes over $250,000, and on deductions for households whose income exceeds $300,000…and the estate tax rate was increased to 40%, up from 35%, but the exemption has been raised to $5 million for an individual’s estate, & $10 million for couples, and the estate tax limit will be indexed for inflation, ie, a cost of living adjustment for the dead…and the Alternative Minimum Tax will also be indexed to inflation to avoid including middle income taxpayers, finally permanently fixing a piece of tax code which has been temporarily patched 19 times since it was written… but the payroll tax cut has been allowed to expire; this means all payroll income under $110,100 will be taxed 2% more as of the new year..and the tax credits for the poor, which includes the earned income tax credit, a $2,500 turition tax credit, and the $1000 child tax credit, will be extended for 5 years…for all these individual tax changes, the Tax Policy Center has run the numbers and produced a table that shows the total effect on average effective tax rates and after tax income by income level; to the right we have a chart from richard green which illustrates the effective increase across the income spectrum; if you click on it, you can see that all those making up to the payroll tax income cap of $110,100 will see a 2% tax hike, which doesnt affect income above that level; so the net effect of the “taxpayer relief act” is to save the rich with incomes between that $110K cap and approximately $600,000 from seeing as great a tax increase percentagewise as the poorest among us…

in addition to this Act’s impact on individual taxes, a whole raft of special interest tax breaks were also tacked on; including everything from a $9B off-shore financing loophole to a tax break for Goldman Sachs headquarters, a tax break for NASCAR, and a subsidy for hollywood films, as well as preserving less offensive business tax breaks such as the research and development tax credit and the wind energy tax credit…while the funding for health co-ops was eliminated (insurance companies dont want competition) and the CLASS Act (Community Living Assistance Services and Supports) expired, the 27.4% pay cuts scheduled for Medicare doctors were again postponed, to be offset by unspecified spending cuts elsewhere, and Federal unemployment rations have been extended another year, a $30 billion provision that wont be offset…and the milk cliff, which would have doubled the price of milk, has been punted by extending the 2008 farm bill for 9 months, coincidentally including big payments to agribusiness and a $1-per-gallon biodiesel tax credit…and included in this tax relief act was a one year extension of the mortgage debt relief act, saving those who would have otherwise seen their forgiven mortgage debt taxed as income…but even after negotiating all these elements of year end fiscal policy, a couple big elephants were left in the room that can still come back to stomp on us…on new years eve, even before the tax deal was passed, Tim Geithner informed congress that the Treasury had reached its $16.4 trillion debt limit, and that he was taking “extraordinary measures” to cook the books to keep the government running, setting up another hostage scenario for sometime in february, a debacle that could be worse than that of the summer of 2011, which resulted in the Debt Control Act and other elements of this recent fiscal fracas…and this package just delays the scheduled sequestered spending cuts that resulted from that deal for two months; with half of the delay offset by discretionary cuts, split between defense and non-defense, and half offset by revenue raised from the voluntary transfers of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over; some kind of resolution to the $1.2 trillion of spending cuts imposed by the budget control act has yet to be negotiated

the major economic release of the past week was the December employment report from the BLS; fairly much in line with expectations (“treading water” was a popular description for it), the establishment survey results showed that a seasonally adjusted 155,000 payroll jobs were added in December, roughly the same as the 153K average jobs added per month this year and over the past two years; according to the Jobs Gap calculator from the Hamilton Project, with job growth at these rates, we wont return to pre-recession employment rates until well after 2025; this report also saw November’s non-farm payrolls revised up, from 146,000 to 161,000 jobs added, while October’s report was clipped 1,000, to 137,000the industry sectors contributing the most to December’s job gains were health care, which added 45,000 jobs, of which 23,000 were in ambulatory care, restaurants & bars. which added 38,000 jobs, construction, which added 30,000 jobs (coming off a mufti-year low last month), and manufacturing, which added 25,000 jobs…meanwhile, jobs in retail fell a seasonally adjusted 11,300 in December, marked by a loss of 18,700 jobs with clothing retailers; as we noted November’s retail employment figures were inflated by a late reference week and an early thanksgiving (ie, BLS collected data closer to the holiday shopping season than normal), so this decrease in December retail jobs is likely just the unwinding of the aberrant November seasonal adjustment; except for local governments,which lost a seasonally adjusted 14,000 jobs, employment in other major industries, including mining, transportation and warehousing, financial activities, and professional and businesses services showed little change for the monththe average workweek for all employees on private payrolls edged up by 0.1 hour to 34.5 hours in December,equaling the workweek gain seen in November; the workweek for production and non-supervisory personnel was up by 0.1 hour to 33.8 hours,. while the average manufacturing workweek also saw a tenth of an hour gain to 40.7 hours…average hourly earning also saw a decent increase; the average for all employees rose by 7 cents to $23.73, while the average hourly earnings of production and nonsupervisory employees increased by 6 cents to $19.92; this brings the year over year pay increase to 2.1%, the first time in two years the annual pay increase has exceeded inflation…this is well illustrated by the above chart from Spencer at Angry Bear; it shows the 3 month average hourly earnings growth as a thin teal line, and the year over year average hourly earnings growth as a heavy brown line…

FRED Graph

the household employment survey from December isnt directly comparable to the establishment survey; the seasonally adjusted data was revised as it normally is each December, this time going back to January of 2008 (technical note pdf); the establishment survey data is normally revised in January; the month over month and year over year data within the household survey reflect this correction, hence, the unemployment rate for December was unchanged from November at 7.8 percent, but November’s rate was originally reported as 7.7%;  as revised, the seasonally adjusted civilian labor force grew 192,000 in December; there were 28,000 more employed than November and 164,000 more unemployed; the labor force participation rate was unchanged at 63.6% (shown in red), but the employed to population ratio decreased to 58.6% (shown in blue); the unemployment rate among adult men was unchanged at 7.2%, but the unemployment rate among adult women rose 0.3% to 7.3%, marking the first time in 6 years that the unemployment rate for men was lower than that for women; the unemployment rate among blacks rose 0.8%, from 13.2% in November to 14% in December; since the unemployment rate for blacks was reported as 14.5% in October, it suggests that November’s lower rate was an aberration; rates for other major demographic groups (whites at 6.9%, Hispanics at 9.6% and teenagers at 23.5%) showed little or no change from November…although the seasonally adjusted number of those working part time who wanted full time work declined from 8.029 million to 7.812 million, the U-6 measure of labor underutilization remained unchanged at 14.4%…one improvement we can see in the household survey data is the length of time that the unemployed are out of work appears to be shortening; the seasonally adjusted number unemployed 27 weeks or longer fell from 4,784,000 in November to 4,766,000 in December; the average duration of unemployment fell from 39.7 weeks to 38.1 weeks while the median number of weeks unemployed fell from 18.9 to 18.0; the caveat, as always with household survey data, is that those who stop looking for work are no longer counted as unemployed…

FRED Graph

the other major economic releases typically out during the first week of the month are the Institute for Supply Management’s reports on the manufacturing and non-manufacturing sectors…in the December Manufacturing ISM Report, the overall PMI (purchasing managers index) was at 50.7% in December, up from 49.5% in November, only the 3rd month of the last seven where the PMI was over the expansion threshold  of 50; the new orders index remained at 50.3 percent, the same rate as in November, which was the fourth consecutive month of growth in new orders, though not yet at a level that typically shows up in new factory orders from the commerce dept, which were reported virtually unchanged in November; the production index also continued to indicate growth, although it slowed from 53.7 in November to 52.6 in December…but the employment index reversed it’s November contraction, gaining 4.3% to read 52.7%, and supplier’s deliveries were faster, gaining 4.4% to 54.7%…and the rate of contraction in the backlog of orders slowed by 7.5%, as it’s index moved up from 41.0% to 48.5%…meanwhile, both the exports and imports Indexes moved out periods of contraction of six and four months and returned to growth, with both registering 51.5%..of the 18 manufacturing industries covered by the ISM, 7 reported growth in December, led by furniture, paper products, coal and oil products, and wood products; of the remainder reporting contraction. nonmetallic mineral products, chemical products, miscellaneous manufacturing and  plastics & rubber products were the worst off…the ISM manufacturing website includes growth rankings by each individual index for all 18 industries

the December 2012 Non-Manufacturing ISM Report showed growth in the service sector, which has created about 90% of the jobs this year, for the 36th consecutive month; the overall non-manufacturing index (NMI) registered 56.1% in December, up 1.4 percentage points from the 54.7% reading in November; the business activity index was at 60.3%, which was 0.9% below the 61.2 percent reported in November, while the new orders index increased 1.2 percentage points to 59.3% and the employment index was up by 6 percentage points to 56.3%…the prices index decreased 0.4 percentage point to 56.6%, which indicates that  prices increased at a slightly slower rate in December when compared to November; the backlog of orders slipped 4 points into contraction at 49.5%, but new export orders, contracting for 3 months, rose from 48.0% to 49.5%13 of the 18 non-manufacturing industries covered by the ISM reported growth in December, led by information, construction, retail trade, finance & insurance, and public administration, in that order; the five non-manufacturing industries that reported slowing conditions in December were accommodation & food services, scientific & technical Services; wholesale trade; educational services and management & support services…the above graph shows the two major indexes from the ISM; in red, we have the manufacturing PMI over 10 years; you can see it’s slumped to a near stagnant 50 over the last 7 months…in blue we have the NMI (non-manufacturing index), which ISM has only reported on for 5 years; obviously, it has shown growth (above 50) since early 2010..

(the above is my weekly commentary that accompanied my sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)