Thursday, December 22, 2011

"Most Important Charts" of 2011

The most important charts of 2011 are popping up all over the web.  Here are some links to some interesting charts (a word of advice, don't take all charts at face value):
The Atlantic: from the business editor of the Atlantic
  • pay particular attention to one showing how net investment (investment adjusted for depreciation) as a percent of net GDP has declined from about 8-10% to about 3% recently.  If this continues, it implies future economic growth will be considerably slower than in the past (a new normal, not just a weak recovery)
  • there are lots of other charts, many related to the budget deficit
Washington Post: from economists, economic policymakers
  • two charts that stood out to me were numbers 11 and 14
  • chart 11 shows how long it will take to make up for the jobs lost during the Great Recession plus the expected growth in the labor force (the jobs gap); if the US adds 208,000 jobs a month, it will be 2024 before it eliminates the jobs gap
  • chart 14 shows how global investors mispriced risk in members of the eurozone over the last decade
Reuters: from Alpha now (Reuters' investment blog)
  • everything from Eurozone debt and Chinese monetary policy to crude oil production in OPEC countries
Real-Time Economics: from the economics blog of the WSJ
  • very interesting charts about the eurozone debt crisis
Facts about the budget: from the CBO
  • a visual guide to the US budget, deficit, and national debt

Extending the Payroll Tax Cut

The hottest political issue related to the economy right now is the extension of the payroll tax cut passed last year, which is scheduled to expire on Dec 31.  How did we get here and what is likely to happen without an extension?  One part of the Obama stimulus package was a tax cut of up to $400 per person or $800 per household for 2009 and 2010.  Instead of renewing that, a new tax cut was passed for 2011, reducing the employee share of the payroll (social security) tax from 6.2% to 4.2%.  Thus, the median household earning about $50,000 per year received a tax cut of $1000 instead of $800 (effectively a $200 tax cut beyond what they were already receiving).  The maximum tax cut under the new program was qbout $2120 (2% of the maximum amount of income subject to the tax).  If the tax isn't extended, all workers will face a tax increase equal to 2% of the earnings up to the first $110,000 ($1000 reduction in take-home pay for the median household, $2200 for high-income workers).

Did the 2011 payroll tax cut work?  Of course it's hard to "prove" what would have happened without it.  However, it's hard to imagine that a reduction in income of between $1000 and $2000 would not have affected consumer spending.  Given that consumer spending is 70% of the economy, it seems clear that there was a significant economic impact.  Given that the economy is still experiencing a sluggish recovery with weak income growth, allowing the tax to rise in 2012 will adversely affect consumer spending and thus economic growth, making a weak recovery even weaker.  Thus, most economists favor extension of the payroll tax cut.

Is this the best policy for the US economy right now?  Probably not.  Serious tax reform, both individual and corporate, would provide much more short-term and long-term benefit.  However, that's unlikely to occur until at least after the 2012 election.  The existing payroll tax cut is providing a temporary stimulus to demand without any long-term benefit.  A temporary reduction of the employer portion of the payroll tax would make hiring workers less expensive (as in Obama's proposal from earlier this year), but, given that it's temporary, would have little impact on hiring.  Of course there's the problem of the huge budget deficit, which limits policy options.  In the ideal world, tax reform that eliminates most deductions/loopholes and lowers tax rates would be the best policy, but given today's political environment, an extension of the payroll tax reduction is advisable to keep government policy from being a drag on an already sluggish recovery.

Tuesday, December 20, 2011

Interesting Year-End Reports

As 2011 comes to an end, many economic forecasters are either reflecting on the year that was or looking forward to the year to come.  Here are some interesting reads from around the web:
For more economic forecasts, check my economic forecast page, which contains links to the latest economic forecasts from many leading economic forecasters.

Friday, December 16, 2011

November Job Report for Florida

Florida's unemployment rate declined to 10% in November, the lowest since May 2009 (link to report).  Unlike nationally, the decline in Florida was not accompanied by a huge decline in the labor force (which only fell by 1000 people).  Florida added 8500 jobs in November, bringing the 12-month total to just over 98,000, an increase of 1.4% over the last 12 months.  Private-sector employment rose by just over 12,000 for the month and 110,000 since November 2010.  The strongest sector was retail trade, which added 8100 jobs (seasonally adjusted) while leisure and hospitality lost over 13,000 jobs (still up for the year).

Metro Orlando also experienced a decline in unemployment to 9.6% (not seasonally adjusted), down from 9.7% in October.  Nonfarm payrolls rose by 6500 in Central Florida, most of which seems to be seasonal jobs (seasonally adjusted data will be available later this month).  Over the last year, employment in Orlando has increased by 0.8% compared to 1.4% statewide.  While Orlando was outperforming the state in terms of job growth in 2010 and early 2011, it has lagged the state in the second half of 2011.

The Florida job market continues to slowly improve.  Given the leading role of retail trade, it'll be interesting to see whether this represents true employment growth or a change in seasonal hiring patterns not accounted for by the seasonal adjustments.  Regardless, it's nice to see job creation and declining unemployment.

Saturday, December 10, 2011

Another European Agreement

European leaders have agreed on a new plan to help deal with the sovereign debt crisis.  Much has been written elsewhere.  For example, Mohamed El-Arian presents his perspective in "Neither a Quick Nor Comprehensive European Fix."  Some of the details are discussed in a Bloomberg article, "Europe's New Budget Rigor, ECB's Challenge."

The main point of the agreement was the use of a fiscal rule, limiting the annual structural budget deficit to no more than 0.5% of GDP.  What does that mean?  A structural budget deficit is what the budget deficit would be if the economy was operating at full employment (for those who remember their economics, it's when the economy is operating at its potential).  When an economy is in recession, tax revenues decline due to declining income (and thus lower income tax revenue) and lower revenue from value-added taxes (similar to a sales tax; declining sales results in less tax revenue).  In addition, social welfare benefits rise as more people lose jobs and poverty rises.  Thus, budget deficits rise during recessions even without any new stimulus programs or change in policy.  The new budget rule would allow governments to run budget deficits, but limit them to the effects of the business cycle.  During good economic times, the government would need to balance the budget or even run a surplus, if the economy is exceptionally strong (resulting in rapid growth in tax revenues and less spending on social welfare).

Similar rules are already in place elsewhere (for example, Brazil and Chile) and is currently being phased in Germany (takes full effect in 2016).  Balancing the structural budget instead of the regular budget allows for some flexibility while keeping the budget deficit from getting too high.  Most economists oppose requiring annual balanced budgets since it would deeper recessions (imagine if the US government had to implement $1.3 trillion in tax increases and/or spending cuts immediately; the short-term economic effects would be very painful and would not achieve a balanced budget due to declining incomes and more people being pushed into poverty).  However, allowing budget deficits to get out of control clearly is not advisable.

One problem with balancing the structural budget is to determine what it is.  How much does tax revenue decline or spending increase due to a recession (as opposed to changes in economic policy)?  Countries with fiscal rules typically delegate the responsibility to estimate the structural budget to independent authorities to minimize political influence.  Thus European officials would need to choose an independent authority in order to implement their agreement.  Some critics would also say that it doesn't allow the government enough discretion to deal with recessions since stimulus programs (whether in the form of tax cuts or spending increases) would less likely unless the government had been running structural surpluses prior to the recession.  Recall that under the proposal, structural deficits are limited to 0.5% of GDP.  For example, if the government was running a structural surplus of 1% prior to the recession, it would be able to enact a stimulus of about 1.5% of GDP each year (the equivalent of $225 billion in the US economy today) and still satisfy the rule of no more than a 0.5% structural deficit.  If it was already running a structural deficit of 0.5%, there wouldn't be room for any special stimulus program.

Does this solve the problem in Europe?  Not even close.  If it does work, it provides a framework to reduce the likelihood of future sovereign debt crises, but does not directly address the current crisis.

Tuesday, December 6, 2011

S&P Puts Eurozone on Creditwatch

S&P put 15 of the 17 nations in the Eurozone on a negative creditwatch, indicating that they may be downgraded in the coming months.  A 16th nation was already on negative creditwatch, leaving one member of the Eurozone without a negative creditwatch from S&P.  Who was left off the list?  You'll need to keep reading to find out.

How did markets respond to potential downgrade?  The reaction was quite limited since it didn't contain that much new information (see previous post).  For example, yields on German bonds have already risen, reflecting increased perceived risk, so S&P is just catching up with the perceptions of global investors.  Yields on bonds of most countries in the Eurozone have retreated from the highs of a couple of weeks ago, indicating less immediate concern.  For example, the rates on 3-year government bonds for both Italy and Spain are down nearly 2 percentage points from their November highs.

Spanish and Italian sovereign bond yields

That said, the effects of the European Debt Crisis is beginning to be felt in Asia, though economic growth is still expected to be robust according to the Asian Development Bank.  Investors and policymakers will continue to closely watch what's happening in Europe, hoping that it just results in a European recession rather than a financial contagion.  So which Eurozone country is not on creditwatch?  Greece, the nation that started it all (because its credit rating is already very low).

Friday, December 2, 2011

Brief Update on Europe

After so much bad news from Europe in recent weeks (months, ...), there has been some improvements in the market for sovereign debt recently.  The significant decline in yields on Spanish and Italian bonds (see below) reflects some improvement in risk premiums and less short-term fear about the eurozone.  Obviously, the European Sovereign Debt Crisis is still alive and well, but policymakers have bought more time to develop a "solution" to the crisis.

Spanish and Italian sovereign bond yields

More Details on the November Employment Report

Why did earnings decline even though more jobs were created?  The top three industries with employment gains (seasonally adjusted) were (1) food service and drinking places (+32,700); (2) clothing stores (+26,700); and (3) temporary help services (+22,300).  Thus two-thirds of the job gains for November were in three relatively low-paying industries.  Thus, the economy is adding jobs, which is good news.  However, the quality of the jobs could be better.  It reinforces the view that the economic recovery continues, but remains sluggish.

November Jobs Report

At first glance, the November job report looks positive, but becomes somewhat mixed when one considers the details.  The number that will get the most attention is the decline in the uenmployment rate from 9% to 8.6% (the lowest since March 2009), which caught most people by surprise.  The decline reflects both a significant decline in the labor force, as 350,000 adult women stopped looking for work (while more men entered the job market), combined with a significant increase in employment as reported by the household survey.  Nonfarm payrolls rose by 120,000, led by an increase of 140,000 private sector jobs (with upward revisions for previous months).  On the downside, average hourly and weekly earnings declined, raising questions about the quality of jobs being created.

Unfortunately, the BLS website is having problems, so it's hard to get obtain the details.  Overall, there were modest gains in employment combined with a decline in the labor force, both reflecting a slow-growing economy.  More analysis coming once the BLS site is up and running.

Thursday, December 1, 2011

More on Europe and the Coordinated Response by Central Banks

As mentioned in a post yesterday, central banks implemented a coordinated response to the credit squeeze resulting from the European debt crisis.  What exactly did they do?  They reduce rates on currency swaps between central banks in order to improve liquidity?  What???  Here are some links that explain it more detail (see Jim Hamilton's explanation at Econbrowser, Mark Thoma's explanation via CBS News and an explanation provided by the Wall Street Journal).  For those who want to keep up to date on the crisis in Europe, the WSJ has created a crisis dashboard with all of the latest details.

Wednesday, November 30, 2011

Good News about the US economy

With all the turmoil in global financial markets, there have been positive signs about the US economy.  This morning, the ADP report indicated that the private sector added over 200,000 jobs.  Though the ADP report has not been a reliable predictor of the official employment report, it still reflects a hopeful trend.  In addition, the latest measure of consumer confidence showed significant improvement, though from an extremely weak level to a somewhat weak level.  Also, sales during Black Friday and Cyber Monday increased significantly compared to last year, though as discussed elsewhere, this may not mean that holiday sales will also rise at a similar rate.  Thus, there are some indications that the US economy is improving somewhat; not strong economic growth, but not teetering on a recession.  However, if the situation in Europe leads to global financial contagion, the US economy is clearly at risk.

Response of Central Banks to the European Crisis

Though there is a lot of economic news, the most important news still revolves around the European debt crisis.  As stress in the global financial system increase, major central banks around the world announced a coordinated response to ensure that there is enough liquidity in the financial system in order to avoid a repeat of 2008.  Optimists can be hopeful that policymakers are taking pre-emptive action to avoid a severe crisis.  Pessimists can worry that the situation is dire enough to require a coordinated global response.  Evidence of the seriousness of the situation include S&P's downgrade of major banks, lack of interbanking lending in Europe (reflecting lack of trusts in the European banking system), rising risk premiums throughout the eurozone (record high bond yields in Italy, Spain, etc.), a significant increase in German bond yields (what used to be considered the risk-free benchmark in Europe), high risk premiums on investment-grade corporate bonds in the US, etc.  For more details on how credit has tightened globally, check out the NY Times article, "Crisis in Europe Tightens Credit Across the Globe."  Meanwhile, leaders in Europe have recognized the need for an expanded role for the IMF and ECB to deal with the crisis.  In addition, Germany is pushing for stricter enforcement of budget rules for countries in the eurozone.

Meanwhile, the Chinese central bank announced a reduction in reserve requirements (the amount of despotsbanks need to maintain) for the first time in nearly 3 years in an attempt to bolster its economy.  Clearly, policymakers throughout the world are very concerned about another severe financial crisis and are being more pre-emptive to avoid a repeat of the financial and economic disaster that took place in late 2008 and early 2009.

Monday, November 28, 2011

Black Friday vs. Holiday Sales

Reports indicate that Black Friday sales increased significantly compared to last year, rising 6.6% according to Shopper Track.  What does that indicate about holiday sales and consumption for the fourth quarter of 2011?  Below is a chart showing the growth in Black Friday sales according to Shopper Track and the growth in Holiday Sales according to the National Retail Federation from 2006 to the present, both in nominal terms and adjusted for inflation using the PCE index (in parentheses).  The final column shows the growth in the consumption component of GDP for the fourth quarter:

Year
Black Friday
Holiday Sales
Consumption Q4
2011
+6.6% (+3.7%)
 ?
2010
+0.3% (-1.0%)
+5.2% (+3.9%)
+3.6%
2009
+0.5% (-1.0%)
-0.4% (-1.9%)
+0.4%
2008
+3% (+1.3%)
-2.8% (-4.5%)
-5.1%
2007
+8% (+4.5%)
+2.4% (-1.1%)
+1.2%
2006
+6% (+4.1%)
+4.6% (+2.7%)
+3.8%

Given the above, what do Black Friday sales tell us about holiday sales and consumer spending for the fourth quarter?  Not too much.  Strong Black Friday sales in 2006 were followed by reasonably strong holiday sales while weak Black Friday sales in 2009 were followed by weak holiday sales.  However, the growth in Black Friday sales were a poor predictor of holiday sales in 2007, 2008 and 2010; providing an overly optimistic forecast in 2007-2008 and overly pessimistic in 2010.  Do strong Black Friday sales mean that holiday sales and consumer spending will be strong in 2011?  Only time will tell.

Wednesday, November 23, 2011

Stress Tests for Banks, More Bad News from Europe, and Weakness in China

Income and Spending: Plenty of news this morning, much of it raising serious concerns, so let's start with "pretty good" news.  After declining for 3 straight months, disposable income adjusted for inflation rose in October.  However, growth in consumer spending slowed down to 0.1%, increasing the personal savings rate to 3.5% (still a very low rate).

Stress Test: Late yesterday, the Fed announced a new stress test for the 31 largest banks.  The test involves determining if the banks will be able to handle various severe economic and financial  situations including (1) a recession similar to 2008-2009 when economic growth shrank in excess of 8% for a quarter at an annualized rate with an overall decline of 5% before beginning a recovery; (2) a worsening of the European debt crisis; and (3) a 52% decline in stock prices over the next year.  Banks that don't pass the test will be required to boost their capital.  The Fed wants to ensure that US banks will be ready for any potential crisis so as to limit the damage to the economy and avoid a repear of 2008.

Europe: Speaking about Europe, add Germany to the list of countries having difficulty selling its bonds.  At an auction this morning, Germany had to pull just over one-third of its bond offering due to a lack of interest (rather than pay a significantly higher yield).  Given that Germany is supposed to be the risk-free benchmark in Europe, if investors perceive risk in Germany, the debt crisis is reaching a new stage.  Meanwhile, the aggregate purhcasing manager's index for Europe continued to indicate a contraction in European manufacturing.

China: Finally, China's purchasing manager's index came in at its lowest level since 2009 (48), indicating contraction in its manufacturing sector.  This raises concern as to whether China will experience a soft or hard landing in the months to come.  Given sluggishness in the US and extreme weakness in Europe, a significant slowdown in China would add to risks to the global economy.

Tuesday, November 22, 2011

Debt, Yields, and Ratings Agencies

With the failure of the Super Committee in terms of coming up with a deficit reduction proposal, there's some talk as to whether this will lead to a downgrade of the credit rating of the US.  Do investors rely on credit ratings agencies to make decisions as to where to invest?  The experience of the US and Europe help to provide an answer to that question.  When S&P downgraded the US in August, some feared that this would cause investors to shy away from US bonds, leading to a spike in interest rates, but it didn't happen.  Active participants in financial markets, particularly the bond market, do their research before investing.  Investors know that the US budget deficit is extremely high and the national debt is rising at an unsustainable rate.  The downgrade by S&P didn't contain any information that wasn't already widely understood and thus had little effect.

Similarly, the credit ratings of France and Ireland have not been changed recently, but yields on each nation's bonds have changed significantly.  In the case of Ireland, yields have declined quite a bit since the summer, indicating that financial markets are less pessimistic about Ireland's debt situation.  Meanwhile, yields on French bonds have risen considerably, reflecting increased concern about French debt (despite France still having a AAA credit rating).  Clearly, investors make decisions based on their research and don't wait for credit rating agencies to act.

Changes in credit ratings have an impact when they reveal new information about a country's or company's financial condition.  However, the more important issue is the bond market's perception as to the sustainability of a country's debt situation.  Though the US doesn't seem to be at risk in the near term, the debt situation becomes more unsustainable the longer it waits to deal with its deficit. 

Latest Report on GDP

This morning's GDP report surprised on the downside.  Instead of growth of 2.5% in Q3, it's now estimated to have grown by 2%.  The good news is that the primary reason for the downward revision was slower growth in inventories, which subtracted 1.5% from economic growth.  This suggests that firms are being cautious in terms of inventory management, reducing the likelihood of future cutbacks in production (and increasing the chance of slightly stronger growth in Q4).  Typically, one cause of recessions is companies having excess inventories that they need to reduce to get them back in line with sales.  Of course the weak growth in Q3 confirms that the economy was continuing to struggle heading into the end of the year.  After being propped up in Q1 by the payroll tax cut, disposable income adjusted for inflation has declined in Q2 and Q3.  If the payroll tax cut is not renewed for 2012 (resulting in a 2% tax hike for workers, averaging about $1000 per worker), disposable income and consumer spending will be hurt early in 2012, contributing to economic weakness.

Saturday, November 19, 2011

Links for November 19

Rather than discuss the implications of the economic news from this week, I'll point you to Bill McBride's summary for the week ending November 18 (Bill McBride maintains the site, calculated risk).  The news for the US economy was generally pretty good, indicating slightly faster economic growth and slightly lower inflation (a nice combination!).

When it comes to thoughtful analysis of the big picture, it's hard to beat Mohamed El-Erian of PIMCO.  He wrote an article for project syndicate yesterday that examines the "Anatomy of Global Economic Uncertainty."  He highlights the role of four interrelated dynamics (1) the need for many governments to get their balance sheets in order; (2) the need for structural reform to promote economic growth; (3) the need for inclusive growth that doesn't worsen income inequality; and (4) the lack of leadership in addressing the changing economic dynamics.

On a more lighthearted note, here's a link to a video from the Daily Show in which a Labor Economist from the University of Texas (Daniel Hamermesh) discusses his research on discrimination against ugly people (the link is from Greg Mankiw's blog).

Wednesday, November 16, 2011

All Eyes on Europe

There has been some reasonably good news about the US economy in recent weeks (for example, higher retail sales, increased industrial production, and fewer new claims for unemployment), but all eyes are on Europe.  Economists generally think much of the eurozone is or soon will be in recession. The size of the impact depends on how deep a recession takes place.  Economists at Wells Fargo have released a study examining the exposure of each state to the European economy.  More importantly, the debt crisis is beginning to spread, resulting in higher risk premiums for virtually the entire eurozone other than Germany.  MoneyWeek, a financial magazine based in the UK, provides nice charts of bond yields on European sovereign debt, updated several times day.  Not only have bond yields risen for the "hish-risk" countries (Greece and Portugal), but Italy and Spain have seen significant increases and now France is experiencing a spike in the spread of its bond yields relative to Germany, reflecting significant increases in perceived risk (see chart from Bloomberg below): 

One-Year Chart for FRENCH GERMAN 10-YR YIELD SPRE (.FRAGER10:IND)

The contagion is spreading.  High debt, weak economic growth, and rising yields are a lethal combination for an economy.  There's many more difficult decisions to make and much more pain to come in Europe and possibly elsewhere.

Thursday, November 10, 2011

All eyes on Italy

In recent years, the concern was for the debt crisis involving the three little pigs (Portugal, Ireland and Greece); little in terms of the relative size of the economies. A big fear was whether it would be spread to the larger economies of Spain and Italy. Now it's spread to Italy and action needs to take place quickly to limit the damage.

The European Debt Crisis spread to Italy a little fast than some anticipated.  Much has written about it elsewhere (for example, here's a Bloomberg story about the crisis and the impact on growth in Europe), but let's summarize the key issues.  Italy is the third largest economy in the eurozone (behind Germany and France), much larger than Greece and there aren't enough funds currently available to "bail" it out.  Though the Italian budget deficit is "only" about 4% (high by pre-crisis standards, not that high by current standards), it's national debt is about 120% of GDP (very high, second to Greece in the eurozone).  In addition, growth is expected to be very weak for years to come, limiting its ability to finance its debt.  Combine that with a lack of confidence in the Italian government to adequately address the problem (contain debt while promoting economic growth) and you have the next round of the debt crisis.  In recent days, interest rates on Italian debt soared passed the critical 7% threhold.  Each of the other pigs needed bailouts after yields on their bonds rose past 7%.  So what matters is the amount of debt, the cost of financing the debt, and the ability to finance the debt.

Reuters has a nice debt spiral calculator for Italian debt.  You can use it to estimate the policy response necessary to stabilize Italy's debt-GDP ratio given certain assumptions which you can adjust.  For example, if nominal GDP grows by 2.5%, current policy would stabilize debt at its current high level (120%) at an interest rate of 5.6%.  At an interest rate of 7%, it would need to make significantly more budget cuts just to keep the debt from rising (reduce spending on other items in order to pay the higher interest on the debt).

As of this morning, things have stabilized a little as the European Central Bank intervened in financial markets by purchasing existing Italian bonds (it's prohibited from buying new bonds), helping to push rates on some bonds to below 7% (one-year, five-year).  This doesn't solve the problem, but may help to buy a little more time to try to develop a solution.  Meanwhile, Italy was able to auction new one-year bonds at a rate of 6% (compared to market rates of 8% yesterday, but 3.5% at the previous action).  Also, the Italian government is putting approval of its budget on the fast track (try to approve it this weekend) and plans to follow its passage with the formation of a new government.  Unfortunately, this story is still unfolding.

Friday, November 4, 2011

Revisions to Employment Reports: From No Change to +104,000 in August

You may remember the news reports from a few months ago of no change in jobs for the month of August, the first time in more than 50 years.  However, that number has been revised twice and now shows an increase of 104,000 jobs! 

A change of 104,000 seems large, but the number actually estimated is total employment, which changed by less than 0.1%, which is a very small change.  However, since people pay attention to the change in employment, it looks like a big number (104,000).  Why are there revisions?  The numbers are based on a survey and like any survey, some responses come in late.  If the late responses differ significantly from earlier responses, the estimated amount of employment may change  (for example, the late responders show significantly more job growth than those that responded on time).  Also, there’s something called the birth-death model which is designed to capture the effect of new businesses being created and existing businesses disappearing.  They used to adjust the model once a year, but now adjust it quarterly, so revisions are incorporated more quickly.  Most significant revisions take place at turning points in the economy.  For example, at the beginning of the Great Recession, the existing birth-death model was overly optimistic, reflecting the pre-recession behavior of the economy. The revision for August was historically high (higher than just a handful of revisions outside of turning points).

So the numbers are subject to revision and a minor revision to overall employment (such as 0.07% in August) appears to be large when one looks at the change in employment.  For more information on revisions to employment data, click here.

October job report

There was some good news in this morning's job report despite the number of jobs created being below expectations (80,000 vs. a consensus expectation of 100,000).  Revisions added about 100,000 jobs to prior months with private sector employment in September now estimated to have risen by 191,000.  Beneath the surface, there is better news in October, though it only reversses weakening from recent months.  For example, those working part time for economic reasons declined significantly in October, but that just offset the increase in September. Also, those working full time has risen by about 900,000 in the last 3 months.  However, there has only been an increase of 3000 full-time jobs since March; thus the gain in recent months reversed the decline that took place in the Spring.  Similarly, the decline in the employment-population ratio that took place in the Spring has been reversed, but it still remains near a 30-year low of 58.4%.

The report seems to confirm what has been seen in other data.  The economy slowed down considerably earlier this year, causing not only a slowdown in job creation, but also a reduction in hours for many workers (a shift from full-time jobs to part-time jobs).  Since the summer, economic growth increased somewhat, leading to moderate growth in employment as well as restoring the number of hours worked that had previously been reduced.  the big picture is that the economy continues to experience a sluggish recovery with modest job creation and little change in the unemployment rate.  The good news is that the US has added 2.27 million jobs since February 2010.  The bad news is that there are still nearly 6.5 million fewer jobs than before the recession.

Thursday, November 3, 2011

Update on Greece and Europe

The situation in Europe is changing quickly today.  In the aftermath of yesterday's meeting with European leaders, Greece has now moved up the date of the proposed referendum on the bailout package to December 4.  As discussed in a post yesterday, the original date in January didn't make sense since Greece needs part of the bailout in December and, without agreeing to the plan, it probably wouldn't receive any funds.  However, it now appears that the Greek government is may fall, leading to new elections.  If this takes place, there won't be a referendum and things will be on hold until a new government is put in place.  Depending on who runs the next government, new negotiations may need to take place to revise the proposed bailout.

Meanwhile, there is increasing evidence that the eurozone economy is slowing down with more countries probably entering a recession.  In response, the European Central Bank (ECB) made a surprise cut in its benchmark interest rate.  This was the first meeting under the new chair, Mario Draghi, and may reflect a more balanced approach to monetary policy than that under his predecessor, Jean-Claude Trichet.  Whereas Trichet was rigid in his interpretation of the ECB's inflation mandate (keeping inflation close to 2%), Draghi appears to have a more flexible interpretation of the inflation mandate.  I will discuss the differences and how it relates to the Fed's approach to monetary policy in a future post.  In practical terms, the ECB is likely to implement more stimulus in the future as it tries to limit any downturn in the economy of the eurozone while also keeping inflation under control.

update: Greece has scrapped the referendum after the Prime Minister obtained the backing of the opposition party for the bailout proposal.  Next up is a vote of confidence in the government on Friday.

Wednesday, November 2, 2011

Fed's policy decision

The Fed didn't make any changes in policy; leaving in place Operation Twist, reinvestment of interest on US Treasury bonds into mortgage-backed securities, and reiterating that it expects economic conditions to warrant exceptionally low interest rates through mid-2013.  A couple of items of note in the FOMC statement are that economic growth did pick up somewhat in the third quarter, but that "there are significant downside risks including strains in global financial markets."  In other words, it's paying close attention to what's going on in Europe and how it's affecting the global financial system.  In addition to its statement, the Fed released its latest economic forecast (actually, the forecasts of the 12 regional Fed districts).  Economic growth is expected to pick up slightly in 2012 (2.5-2.9%) and increase further in 2013 (3-3.5%), resulting in a slight decline in the unemployment rate to 8.5-8.7% by the end of 2012 and 7.8-8.2% by late 2013.  Inflation is expected to moderate in the coming years, with both core and overall inflation coming in at 2% or less through at least 2014.

Is there any big news coming out of the meeting?  Not really.  The Fed's forecast is now inline with those of private forecasters (it updated its forecast months ago but didn't make it public until today).  If its forecast holds true, the Fed will probably continue its current policy, so QE3 or any other significant easing is unlikely, barring a surprise.  What could go wrong?  The Fed remains quite concerned with what's going on in Europe and is prepared to act in the event that the European debt crisis significantly hurts the US economy.

Greece - Now What??

Just a few days after agreeing to a deal, the Greek Prime Minister announced that he plans to hold a referendum on the deal, probably in January.  Other European leaders as well as financial markets were caught by surprise, leading to renewed concern about whether Greece would experience a disorderly default.  The latest estimates are that Greece needs funding by December, otherwise it may have difficulty making debt payments.  Obviously, delaying approval of the agreement until January poses a problem.  In addition, it is generally agreed that if the vote to approve the deal was held today, it would fail.  Prime Minister Papandreou is counting on convincing Greeks that this is the best deal possible and is essential to helping Greece make it through the next few years.  In the short term, two key events stand out.  European leaders are meeting today (Wednesday) to discuss the situation.  On Friday, the Greek parliament is going to have a vote of no confidence.  The Prime Minster's party holds a 2-seat majority and, if he loses the vote, the government will fall and elections for a new government will need to take place.  The likely result would be continued uncertainty until a new government is in place.  How will financial markets respond to such an event?

How risky is Greece?  The yield (interest rate) on one-year Greek government bonds is 227% (note: the yield on the one-year US government bond is 0.1%).  The question is whether there will be an orderly haircut or disorderly default by Greece and how will that affect the global financial system.

Friday, October 28, 2011

A Brief Note on the Limited Power of the Fed

Some people give the Fed too much credit while others give it too much blame.  As an example of the limits of the power of the Fed, consider the aftermath of Operation Twist.  Briefly, Operation Twist is the Fed's latest attempt to try to stimulate economic growth by selling short-term Treasury bills and buying medium-to-long-term Treasury notes and bonds.  By purchasing medium-to-long-term bonds, it hoped to reduce interest rates that would more directly affecting borrowing (consumers and businesses tend to borrow for long periods of time; 5-year auto loans, 30-year mortgages, etc.).  After declining to about 1.7%, the yield (interest rate) on ten-year Treasury bonds rose to 2.4% yesterday, despite the Fed's actions.  Financial markets are much bigger than the Fed and thus many other factors have a larger impact on interest rates.  In this case, reduced fear over the European debt crisis along with perceptions that the US economic growth is slightly stronger than previously expected reduced the attractiveness of US bonds, resulting in a significant increase in market-based interest rates. Though the Fed is powerful, its power is limited.

Report on Income and Spending

This morning's income report confirms what was released in the GDP report yesterday.  Disposable income adjusted for inflation (real disposable income) declined for the third straight month (July, August, September) while spending increased, resulting in a decline in the savings rate to 3.6%, the lowest since right before the recession (fourth quarter of 2007).  Total real disposable income is still about $150 billion below its peak in Spring 2008.  Unless incomes start growing more quickly, it's going to be hard for consumers to significantly increase their spending, thus limiting how quickly the economy can grow in 2012.

Update on the European Debt Crisis

Europe made another attempt at solving its debt crisis with its most comprehensive plan to date.  The initial reaction of financial markets was quite positive (for example, the German stock market was up over 6% on Thursday).  What is the plan and is the problem "solved"?  The basic elements include private investors in Greek debt taking a voluntary 50% haircut.  A 50% haircut means that those that purchased a 10,000 euro bond will receive only 5000 euros back (50% loss).  Private investors may be willing to accept this because it's better than receiving even less.  Greece likes it because it reduces thier debt load.  Why make it "voluntary"?  Since it's voluntary, Greece won't officially default on the debt so, among other things, credit default swaps won't be triggered (they can be seen as insurance against default, so without an official default, there's no need to pay the insurance.

In addition, Europe will modify and expand the European Financial Stability Facility (EFSF); a fund established in a previous solution to the crisis.  Under the new plan, the EFSF will be used to insure against the initial losses of future haircuts (reducing the risk of bonds somewhat since losses to investors will be reduced somewhat).  The hope is that this will keep interest rates relatively low by limiting the risk of bonds (normally need higher interest rates to compensate for higher perceived risk; so less risk results in lower interest rates).  The second change in the EFSF involves introducing new investment vehicles (i.e., bonds) that will be purchased by sovereign wealth funds (i.e., China, Brazil, etc.) that will provide more funds for future bailouts.  Ideally, if investors knew that there were funds available to bailout Greece, Portugal, and others, they will feel more secure about their investment and thus be more willing to buy bonds at a relatively low interest rate. 

The haircut is a good thing.  Private investors know that there's a risk of buying bonds and are compensated in the form of higher interest rates.  Greece cannot sustain their bond payments, so holders of Greek bonds should suffer a loss (they knew the risk when they bought the bonds).  For now, I'll side step the issue of whether the market determine the amount of the loss.  Regarding the new investment vehicles, will it raise enough funds to be successful?  Many think that China (and Brazil) will be willing to help finance it in exchange for more influence in multilateral organizations.(IMF, etc.).  In addition, will it raise enough funds to convince investors that there's enough funds in case of other countries needed haircuts (Portugal?  Italy?).

Finally, European banks are given to June to increase capital ratios to 9%. Among the ways they can do it are be issuing equity (investors buy new stock which provides the banks with more funds) or by tightening lending and holding onto more deposits. Most analysts expect banks to primarily follow the latter approach, which will mean credit will become harder to come by in Europe, contributing to the likelihood of a recession in Europe.

Did it solve the problem?  Probably not.  It gives Europe more time, but much more work needs to be done to get the debt problems under control.

Thursday, October 27, 2011

A First look at third quarter GDP

Today's GDP report came in as expected, with economic growth of 2.5% in the third quarter.  Business investment continues to be a strength, increasing at an annualized rate of 16.3% (both equipment investment and investment in structures performed well).  Consumer spending increasing at a slightly faster pace than in the second quarter (2.5%), led by a bounceback in purchases of durable goods.  Inventories grew more slowly, thus subtracting about a percent from economic growth (a good sign that companies are not likely to face a need to significantly reduce inventories in the coming quarters).  So far, it sounds like a pretty good report.  However, real disposable income declined at a 1.7% annual rate, following a 0.6% increase in the second quarter.  It was the first decline since 2009 and real income per capita is now slightly below what it was in Spring 2010.  Add it up and it points toward a continuation of a sluggish recovery as consumers remained constrained by stagnant income and high debt levels.

Monday, October 24, 2011

Spectator's Guide to the Euro Crisis

The NY Times has an interesting graphic, "A Spectator's Guide to the Euro Crisis" which includes information about the financial linkages between nations in Europe (as well as US bank exposure to the eurozone).  It also explores possible scenarios for how the crisis may evolve (best case, worst case, and likely scenarios).  Simon Johnson (former IMF economist, currently at MIT) provides comments about the graphic as well as an analysis of the European financial crisis (a policy brief from July 2011).

The guide does a nice job illustrating the interconnections of the global financial system and how problems in one country can reverberate around the world.

Saturday, October 22, 2011

Consumer Deleveraging

The Wall Street Journal has an article (subscribers only as of Saturday morning), "Americans Debt Cutting Hampers Growth," which states that "Household thrift sparked by the financial crisis three years ago has proved surprisingly persistent and is a key reason the recovery that began in 2009 has been so weak."  To economists who study the effect and aftermath of financial crises, this is not a surprise and is a major reason why they have forecasted a sluggish economy for years to come since the start of the crisis.  Consumers accumulated a large amount of debt leading up to the crisis and now must deleverage to get their debt under control.  What led to the accumulation of debt?  Most people know the story by now.  The housing bubble made people feel wealthy, encouraging people to tap into that wealth through home equity loans, 100% (or more) financing of homes, etc.  When the bubble burst, the wealth was gone but the debt remained.  It will take an extended period of time to get debt back in line with wealth, thus constraining economic growth for years to come.  Here is a chart that compares the growth of household debt during recoveries from recessions since 1950.  As you'll notice from the chart, this time was different.

Friday, October 21, 2011

State and Local Employment Report for September

Florida has something to cheer about today!  More jobs were created in Florida in September than any other state (net increase of 23,000 - seasonally adjusted); if you want to get picky, it was not the biggest in percentage terms (0.3% compared to Washington, D.C.'s 1.6%).  Here's a link to the BLS site, which contains all the details.

Florida has added 93,500 jobs over the past year (placing it fourth behind California, Texas, and NY), an increase of 1.3% (outpacing the nation, which experienced a 1.1% increase in employment since September 2010).  Most of the growth in employment has been due to two sectors: (1) leisure and hospitality, which added over 10,000 jobs in September and 58,500 in the last 12 months; and (2) education and health care, which added almost 8000 jobs last month and 33,000 in the last year.
The unemployment rate in Florida declined slightly to 10.6% (from 10.7% in August and 11.7% in September 2010).  Florida is tied with Mississippi for the fifth highest unemployment rate in the nation, behind Nevada (13.4%), California (11.9%), Michigan (11.1%), and South Carolina (11%).  North Dakota continues to shine with an unemployment rate of 3.5%.

What about Orlando?  The unemployment rate declined to 10.2% (not seasonally adjusted), down from 11.6% in September 2010.  Over the last year, Orlando has added 11,900 jobs, with one sector accounting for the increase - leisure and hospitality, which added 12,200 jobs over the last 12 months. Education and Health Care did add 3000 jobs while many other sectors experienced declines including construction; manufacturing; trade, transportation and public utilities; information; and financial activities.
Overall, it's still not a pretty picture, but it does represent some improvement compared to where we stood in 2010.

Jobless Recovery

I was asked yesterday about what's happened to private sector employment and government employment during the recovery.  The numbers below reflect the change in each type of employment from June 2009 to September 2011 (27 months):

Total employment: +841,000
Total private employment: 1,413,000
Total government employment: -572,000
Total federal government employment: +6,000
Total state & local government employment (education): -217,000
Total state & local government employment (not education): -360,000

Given the above figures, private employment has increased by just over 52,000 per month since the end of the recession.  The strongest growth in private employment took place between February 2010 (when employment bottomed) to April 2011, during which the private sector added over 2 million jobs, just over 150,000 jobs per month.  Since April, the economy has added about 100,000 jobs per month.  Most economists think that jobs growth should be well in excess of 200,000 coming out of a recession (it averaged almost 300,000 per month coming out of the 1981-82 recession, the last time the unemployment rate reached 10%).

Why has employment growth been so weak?  In order for the economy to generate a significant number of new jobs, economic growth needs to exceed the growth in productivityFor example, if output per worker rises by 1% and the US economy grows by 2%, the number of workers increases by the difference, 1%.  Why was there so many jobs created following the 1982 recession but not this time?  The number of jobs stopped declining in the first quarter of 2010.  Since then, the economy grew by 2.58%, output per worker grew by 0.62%, and employment grew by 1.95%.  During a comparable period following the 1982 recession, economic growth was 9.8%, output per worker rose by 3.3%,  resulting in employment growth of 6.33%.

Why aren't companies hiring workers?  The answer may sound too simplistic, but it's because economic growth (sales) is too weak.  Other issues may be playing a small role  in limiting job creation (uncertainty, regulation, cost of hiring workers, etc.), but it comes down to weakness in economic growth.  The best policy for job creation is one that results in sustainable economic growth.  Unfortunately, that's easier said than done following a financial crisis as consumers deleverage and the financial system heals. 

Friday, October 14, 2011

Some observations about declining incomes and rising income inequality

There have been many reports in recent weeks regarding declining incomes as well as rising income inequality.  For example, a report by Sentier Research shows the behavior of median real household income since 2000:


The significant drop since the end of the recession reveals the continuing effects of the Great Recession.  Why did it spike midway through the recession?  One reason was that there was deflation and the figures are inflation-adjusted (so deflation pushes real income up).

What about the distribution of income?  Menzie Chen (Econbrowser) provides a chart showing changes in the income share of the top 5% and top 1% of earners during the last century (based on data from Saez/Piketty). 


The peak in the income shares for both groups occurred immediately prior to the Great Depression, declined until about 1950 and then remained relatively flat until 1980.  They rose slightly until the mid-1980s before spiking up in the late 1980s, following the tax reform act of 1986, before leveling out for a few years.  They began a steady climb up beginning in 1993 until 2000, declined during the early 2000s before rising again.  Why did the income share of the top earners rise so much in recent decades?  Looking at the data (see table 7 from Saez/Piketty) , a major reason is the increasing role of entrepreneurial income in the earnings of top earners, rising from about 10% in the late 1970s to mid 1980s, to over 30% in recent years (entrepreneurial income includes profits from S-corporations, partnerships, and sole proprietorships).

Menzie Chen also provides a chart that illustrates estimates of changes in the distribution of wealth


Similar to income, the share of wealth of the top 1% peaked right before the Great Depression and declined until about 1950.  It stabilized for a period of time before beginning a new decline in the mid-1960s until 1980.  Though it rose in the early 1980s, it was relatively stable from 1985 to 2000 before rising again in the mid-2000s.  Wealth does not show as much of a rise in inequality as income (though wealth inequality appears to have risen somewhat in recent years).

A major increase in inequality is a serious concern, particularly during times of decling real incomes.  However, it's important to explore the sources of inequality as well as the costs/benefits of policies designed to address poverty or inequality.

Wednesday, October 12, 2011

China's manipulation of its currency

The Senate voted yesterday to punish China unless it stops controlling the value of its currency against the dollar.  Should the President support the action of the Senate?  China began controlling the value of its currency around the time of the Asian Financial Crisis in the 1990s.  The financial crisis was spreading from country to country in Asia, leading to major devaluations of exchange rates, beginning in Thailand before eventually stopping with China.  Most supported China's policy at that time.  Over time, as China became a top exporter, the policy became more controversial as other nations saw it as a way of ensuring China's exports were cheap (and thus a threat to producers in other countries).  In 2005, China began to allow its currency to gradually increase in value, resulting in a 30% increase in the value of the renminibi between 2005 and the present, pausing for a period of time during the global financial crisis before resuming the policy of gradual increases in 2010.  How does China control its exchange rate and how does it affect China and the rest of the world?

China's currency (known by two names, the yuan and renminbi) can be exchanged for other currencies, thus its value is determined in the foreign exchange market (supply and demand).  If China thinks its currency is increasing in value too quickly, it will sell yuan in the foreign exchange market and buy US dollars (or possibly some other currency).  Rather than just buying dollars, its central bank buys US government bonds (or recently, bonds of various European governments as well).  Selling yuan/buying dollars causes the exchange rate value of the yuan to be lower than it otherwise would be in terms of dollars.  Meanwhile, the Chinese central bank accumulates a large amount of US government bonds.  A significant impact of these bond purchases is that US interest rates are lower than they would have been had the Chinese central bank not have loaned the US government money (i.e., bought US bonds).  Thus the US economy benefits in terms of lower interest rates.

Most people think that the US buys goods from China, but China doesn't buy US goods.  However, China is the #3 destination for US exports, behind Canada and Mexico, with exports to China growing rapidly during the last 5 years (more than 20% per year other than the recession years of 2008-2009.  In fact, China buys more US exports than Japan and Germany combined (July 2011).  Of course US imports from China far exceed our exports to China, resulting in trade deficits with China typically in excess of $200 billion per year.  However, China tends to run trade deficits with the rest of the world (excluding the US).  Why does the US run trade deficits with China while the rest of the world does not?  Two reasons stand out; first, the US economy is very consumer-oriented while the Chinese economy is very producer/export oriented.  Second, the manipulation of the Chinese currency.  In the past China linked its currency only to the US dollar and, while it has modified that policy in recent years, it still links its currency primarily to the US dollar.  Thus the Chinese currency is undervalued in terms of the dollar more so than other currencies.  As a result, China's trade with the US is distorted more than its trade with other countries.

It's in China's interest to move towards a freer currency, reducing the amount of control that it exercises over time.  A stronger yuan would benefit Chinese consumers by increasing their global purchasing power while also re-orienting the Chinese economy away from an overdependence on the global economy and towards its growing domestic market.  In fact, the leaders of China have set this as one of their priorities in the coming years (one of the goals in its current 5-year plan is to increase domestic consumption).  As the Chinese central bank slowly shifts away from a policy of buying US bonds as a means of controlling its currency, the US government will need other sources of funds to finance its budget deficit or risk significantly higher interest rates (unless it enacts policy to get the budget deficit under control).

Should we risk a trade war with China (US puts sanctions on China and China retaliates) to try to stop it from controlling its currency?  It's never a good time for a trade war, but especially not now, given the fragile state of the US and global economy.  A change in China's exchange rate policy, resulting in a stronger yuan, seems likely, since it's in China's interest.  Though US exporters may benefit, higher interest rates in the US resulting from the change in policy will mean that there will be losers as well as winners in the US due to China reducing the manipulation of its currency.

Friday, October 7, 2011

One politician's plan to increase employment

A state representative from Melbourne, Florida is proposing legislation to lift the ban on "dwarf tossing" as a way to broaden job prospects for dwarfs.  No, I didn't make this one up; here's a link to the story.

A few comments on Europe and Credit Markets

Europe continues to be a major concern for the global economy.  Today, Fitch downgraded Italy and Spain while earlier in the week, Moody's downgraded Italy.  Meanwhile, the French and Belgian governments promisted earlier in the week to bailout and/or restructure Dexia (a bank with ties to both  governments).  European leaders have begun to discuss recapitalizing banks to prepare them for "restructuring" of Greek debt, which seems to be just a matter of time (November or December?).  This is an important step to limit the potential damage of a Greek default (prepare banks for losses on sovereign debt), but it should have taken place a long time ago, particularly when Europe conducted stress tests for its largest banks (you may recall that Europe conducted stress tests on banks earlier this summer, but neglected to account for a possible/likely default by Greece).

The global financial system is showing more stress than any time since the end of the financial crisis in 2009, as evidenced by increasing credit spreads for investment-grade debt globally as well as high-yield debt in the US.  Given the fragile financial environment, corporations have chosen to step back from issuing bonds, thus hindering investment plans and economic growth.  Clearly, the US and global economies are facing many headwinds, but resolving the European debt crisis is essential to restoring economic stability.

More thoughts on the employment report

Though the headline numbers indicate a relatively "good" employment report, there are some significant concerns beneath the surface.  As mentioned in a previous post, the U6 measure of unemployment rose to 16.5%, a 2011 high.  One reason is that the number of people working part-time for economic reasons rose to 9.2 million, the second highest level ever recorded (second only to September 2010).  Combine this with temp agencies adding about 20,000 jobs in each of the last 2 months and it indicates that, though jobs are being created, companies have become more cautious over the summer (increased reliance on temporary and part-time workers).  The cloudy economic outlook is making firms hesitant to commit to new full-time workers.  Meanwhile, average weekly earnings rose to $793, a 2.1% increase over the previous 12 months.  Unfortunately, inflation is currently 3.8%, so earnings adjusted for inflation have declined by 1.7% in the last year.

Today's job market report - first thoughts

At first glance, this morning's report looks OK - better than expected, but not strong.  The good news is 137,000 new private sector jobs were added in September, though that includes the 45,000 Verizon workers who returned to work after a strike (so it's a 92,000 net increase in jobs).  Also, August's numbers were revised upward to show a gain of 57,000 jobs (originally estimated at no change).  Temp agencies added about 20,000 jobs in each of the last two months.  An important gauge of the labor market, the index of aggregagte hours worked, rose in September, more than reversing a decline from August and is now higher for the third quarter.  Recent trends indicate that the economy is adding about 75,000 jobs a month.   Unemployment remained at 9.1%.  Both the employment-population ratio and labor force participation rate rose in August.  The bad news is that the broad measure of unemployment (U6) rose to 16.5% from 16.2% in August.  Add it up and it continues to point to a sluggish economy rather than a recession.  More later...

Thursday, October 6, 2011

Portion of households receiving government benefits?

According to Census data, nearly half of households received some form of government benefits in 2010.  Specifically, 48.5% received benefits in 2010 compared to 44.4% in 2008.  On the flip side, 46.4% of households did not pay income taxes in 2010 compared to 39.9% in 2007.  Many households that did not pay income taxes still paid payroll taxes (social security and medicare); 18.1% did not pay either income or payroll taxes.  Given nearly half of households don't owe income taxes and nearly half receive government benefits, it will prove quite difficult to reduce the growth of government benefits or raise income taxes in order to cut the budget deficit.  People are likely to think that they deserve the benefits they receive and only benefits received by others should be reduced.  Difficult decisions need to be made, but with such a high proportion of households receiving benefits, will the government (and voters) have the political courage to make the tough choices?

Friday, September 30, 2011

What is a recession and are we in one?

The National Bureau of Economic Research (NBER) is the group that determines when recessions begin and end.  But isn't a recession 2 or more consecutive quarters of declines in real GDP?  If so, why would we need a group to determine whether there's a recession?  Both the recession of 1980 and 2001 did not fit the commonly cited rule of thumb (i.e., real GDP did not decline for 2 consecutive quarter).  What does the NBER consider?  The three primary variables are real GDP, economy-wide employment, and real personal income (though they consider other variables as well).  According to a report released this morning (see table 5), real personal income less transfer payments (the measure used by the NBER) declined for the second consecutive month (down 0.1% in July and down 0.2% in August).  Payroll employment was flat in August while aggregate hours worked declined.  We won't get the first estimate for economic growth in the third quarter until the end of October, but most economists expect it to be small but positive, continuing the pattern of weak growth from the first half of 2011 during which the US economy grew at a 0.8% rate.  Add it up and it's a close call.  Since the declines in real income have only been for 2 months, payroll employment hasn't declined yet, and real GDP is still inching forward, it's still too soon to declare a recession.  Economists may debate whether we're on the verge of a recession, but for the average person, it still feels like one.

Recession forecast from Business Cycle Research Institute

Lakshman Achutan, COO of the Business Cycle Research Institute (BCRI) was on CNBC this morning and stated that the US economy is entering a recession.  He stated that it doesn't depend on further economic shocks from Europe and that it's not clear how deep the recession will be.  What's his track record?  The BCRI relies on a series of short-term, medium-term and long-term leading indicators of the economy.  They've correctly forecasted most of the recent recessions.  Recently, BCRI predicted that the current recession would end in the summer of 2009 (several months before it occurred) and dismissed the chance of a double-dip recession last year.  Both forecasts proved to be correct and show that they are not doomsday forecasters.  Here's a link to their report that discusses their recession forecast.

Thursday, September 29, 2011

Some "good" news, some concerns

There were a few pieces of somewhat good economic news released today; "somewhat good" means they point to slow growth as opposed to a recession.  Unemployment claims declined by quite a bit, to below 400,000, but this would need to continue in upcoming weeks to confirm that it was not a fluke (seasonal and technical factors played some role in the decline according to the Labor Dept.).  The BLS released preliminary estimates of revisions to employment data which indicated that there were 192,000 more jobs than originally estimated as of March 2011, 140,000 of which were in the private sector (revisions will be made official in Feb 2012).  That would still leave the economy down 6.7 million jobs since the start of the recession, but every little bit helps!  Finally, new estimates indicate that the economy grew at a 1.3% in the second quarter, slightly more than previously estimated.  Inventories increased at a slower rate than previously estimated while consumption was stronger than earlier estimates.

One piece of data that I follow closely is the risk premium for investment-grade corporations (Baa corporate bonds).  It reached a post-Depression record in late 2008 of just over 6% before declining to about 2.5% following the end of the financial crisis.  As of yesterday, it was back up to 3.39%, the highest for any non-recessionary period other than immediately after 9/11.  That suggests that there is significant stress in financial markets, most likely due to the poor economic outlook and risk aversion resulting from the European debt crisis.

Rick Perry vs. Ben Bernanke

Though I don't want to dwell on politics much in this blog, sometimes it's a hard subject to avoid.  Rick Perry renewed his attack on Ben Bernanke yesterday, stating "We would put someone in who actually believes that the private sector is how you stimulate the economy -- not by printing more money at the Fed."  Does Ben Bernanke think that printing money is the key to economic growth?  Here's part of Bernanke's speech in Cleveland last night (note: this is not the first time that he made these points):

"In a nearly half-hour prepared speech, given as part of the Clinic's "Ideas for Tomorrow" series, Bernanke talked about lessons that can be learned from emerging market economies such as China and Korea. Some of the common threads of success stories include low inflation, deregulation, privatization, fiscal discipline and the reduction of tariffs and the removal of other controls on exports and imports."

Low inflation, deregulation, privatization, fiscal discipline and freer trade - those sound like policies that conservatives would embrace; policies that seem to rely on the private sector for economic growth.  Bernanke added:

"Monetary policy can do a lot but it's not a panacea. It can't solve all of the problems..."

I don't think Operation Twist will be that effective and QE2 had a limited impact, but clearly Ben Bernanke recognizes that the private sector is the key to sustained economic growth.  However, he doesn't have a say on fiscal discipline, trade policy, or regulations that affect non-financial businesses.  It's disingenuous to blame him for budget deficits and other economic policies that are beyond his control.

Thursday, September 22, 2011

Latest income data for Florida

The Census Bureau released estimates for state/income data yesterday and, as expected, it paints a sad picture.  Median household income for Florida, adjusted for inflation, declined to $44,243 in 2010, a decline of 10.4% from its peak in 2006, reaching the lowest level sine 1997.  Preliminary results show that the percent of people living in poverty in Florida was 17% in 2010, above the national average of 15.1%.  Orlando saw its median household income decline to $38,098, a 17% decline from its peak in 2007, causing an increase in the poverty rate to 18%.  Given continued economic weakness in 2011, these numbers are likely to get worse before they get better.

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Wednesday, September 21, 2011

Operation Twist

As expected, the Fed announced that it's going to implement operation twist - selling $400 billion worth of short-term securities and buying $400 billion worth of longer-term securities.  In addition, the Fed plans to reinvest funds from mortgage-backed securities (MBS) into MBS rather than treasuries.  The goal is to reduce long-term interest rates in general and long-term mortgage rates in particular.  How much of a difference will it make?  Perhaps a little, but not too much.  Mortgage rates will probably decline somewhat, but that depends on other factors as well (whether new economic data indicates weakening of the economy, investors seeking safe-haven plays, etc.).  In addition, the Fed stated that there are significant downside risks to the economy, which is the primary reason it thought it needed to provide further stimulus.  The initial reaction of financial markets was a major decline in stocks and record-low yields on ten-year bonds.  In addition, the dollar strengthened against the yen, euro and pound.