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.