Saturday, February 28, 2009

Cartoon for Saturday

This just never gets old.

Cartoon from

Friday, February 27, 2009

A modest proposal for the foreclosure crisis

Another one from my favorite guest blogger, The Opinionator.

I’m an economist. I’m trained to believe in the power of economic incentives, and in particular to anticipate that taxes will change people’s behavior. Higher marginal tax rates can reduce work effort, higher tobacco taxes reduce teen smoking, and higher energy taxes would be the surest route to greater energy efficiency.

Now we have a foreclosure crisis, with families being forced out of their homes, fire sales that drive down home prices, and further defaults and foreclosures as even more homeowners find themselves “under water” – with mortgages bigger than the market value of their houses. What to do?

If we want less of something, the most efficient way to get there is generally to tax it. In this case, we want fewer foreclosures, so let’s tax them. I propose that the federal government impose a 20% tax on the proceeds of sales of foreclosed property. This will reduce sharply the payoff to foreclosure, and induce lenders to make a much more intense effort to modify mortgages to keep homeowners paying. Writing down the mortgage principal by 20% will be a no-brainer for a start.

This tax should be strictly temporary, since the possibility of losing your home is supposed to keep people honest when they sign up for their mortgage. Right now it’s important to stop the rot, as each foreclosure makes things worse for everyone, but we don’t want to make life easy for deadbeats in the future. So I propose that this tax would apply only to mortgages written through 2008 – the precise date is arbitrary, but it would certainly not apply to new loans being made today.

Simpler is better, so my preference is that this is the end of the story. However, one could justify some exceptions, such as waiving the tax if the lender has already modified the mortgage by reducing the principal 20% or more. It might also be politically attractive to waive the tax where fraud by the borrower can be proved (though I suspect that fraudulent borrowing generally involved a co-conspirator on the lending side).

In any case, let’s apply the lessons of supply-side economics about the power of incentives. Tax foreclosures, send any revenue to the local government, and everyone wins except the most myopic lenders.

Next installment: what to do about the war on drugs...

The Opinionator

The Fed is shifting focus

It's been three months since the Fed announced its Term Asset-Backed Securities Loan Facility (TALF), and over two weeks since the Treasury announced its Financial Stability Plan, under which the size of the TALF was increased to $1 trillion. The size of the Fed balance sheet peaked at $2.3 trilliion on the week ending December 17, 2008, and has since then decreased by $354 billion (on 2/25/09).

The Fed is shifting focus. It awaits the start of its TALF program, where the Fed will lend against a wider range of collateral to a much broader base of firms (any U.S. company with eligible collateral can participate in TALF). Furthermore, the only programs that have increased in size are those to purchase directly alternative assets (MBS or CDOs, for example).

The table lists the Fed's assets and liabilities since the peak of its bank credit activity on December 17, 2008. It appears to me that the Fed has changed its tune away from traditional lending and toward direct purchase of assets, increasing only those programs that buy assets directly.

The top line, Reserve Bank Credit, is all credit extended to the commercial banking system and primary dealers; it has fallen by $353 billion since two months ago. The Fed's traditional method of targeting bank reserves is through the buying and selling of securities, and accepting a rather narrow range of collateral that was updated in 2006 (you can see the collateral that the Fed accepts for the TAF and discount window here).

The chart to the right comes from the Fed's new website; it lists the collateral pledged for $1.5 trillion in lending as of the middle of December. As you can see, the list is rather vague. It doesn't list what these assets are worth now (current market value), and the ABS accepted is probably not the bad stuff that firms are currently writing down.

Overall, I presume that the traditional lending programs have probably become less attractive, as the assets that banks want to get off their balance sheets (collateral) cannot be done under current programs. And furthermore, only banks can borrow in these programs.

So the Fed is gearing up for TALF - Repo loans have been unwound. Originally, the Fed started beefing up its Repo arrangements with primary dealers, as the collateral accepted under a Repo (primary dealer collateral, see here) is slightly wider than the collateral accepted by traditional open market operations (buying and selling Treasuries). I take this reduction in repo lending as a sign that the Fed has announced or introduced new programs - TALF (assets backed by consumer credit and small business loans) or MBS purchase - that either purchase the illiquid assets directly or will be accepted as collateral, making the back-door approach, repos, unnecessary.

The Fed has increased its holdings of CDO's and MBS via direc purchase from AIG and its subsidiaries and from the open market (in the case of MBS). On the open market, the Fed purchased $160 billion in MBS, but only $68.5 billion is showing on balance. That's almost $100b in assets that the Fed owns - nontraditional assets, I might add - that have yet to settle on balance.

To me, the Fed is moving away from traditional liquidity measures - extending bank credit in exchange for narrowly-defined collateral or a slightly extended version (Term Securities Lending Facility and the PDCF), and toward direct purchase of less-liquid assets, or accepting a wider range of collateral linked to consumer and small-business ABS for loans available to any U.S. firm that holds the collateral (TALF).

Rebecca Wilder

Thursday, February 26, 2009

Chilling economic charts: inflation

Gross domestic product across the Organisation for Economic Co-Operation and Development (OECD) countries fell 1.5% in the fourth quarter of 2008, following an 0.2% contraction in the third quarter of 2008. There are 30 member countries of the OECD, and according to the two consecutive quarters of negative economic growth definition, the OECD is in recession.

In continuing the series of really scary charts, which I have re-named chilling economic charts, I present what the world economic crash - of course, initiated here in the US of A - has done to global inflation rates. End result: the world recession is slashing inflation across the globe.

The West (or at least a proxy of it) is seeing disinflation (falling inflation) at alarming rates

This chart illustrates annual inflation rates across key Western economies through January 2009 if available. Across these economies (regions), annual inflation has been slashed an average of 1.6% in just one year to 1.3%, from December 2007 to December 2008.

Asia is not immune to the drag on inflation

This chart illustrates annual inflation rates across several Asian economies through January 2009. Annual inflation in these economies has been dragged down an average of 0.4% to 5.1% in one year, December 2007 to December 2008.

Emerging Europe is contracting and bringing inflation with it

This chart illustrates annual inflation rates across several several emerging European countries through January 2009 - all members of the European Union. On average the six economies experienced an average 2.4% drag on inflation to 6.1% in one year, December 2007 to December 2008.

Iceland is the opposite - inflation surged

This chart illustrates Iceland's annual inflation rate through February 2009. As you can see, inflation has surged almost 14% since 2007 to 17.6% in February. Iceland imports an average of 41% of its total GDP from other countries; and therefore, import prices drive the CPI. As a comparison, U.S. imports averaged around 18% of GDP over the last year.

In 2007 and into 2008, energy prices were rising quickly, driving import prices upward. But recently, Iceland's banking crisis has been coupled with a currency crisis. In January, Iceland's currency, the Krona, depreciated 71% over the year on a narrow trade-weighted basis. This had the undesirable effect of driving up import prices, and inflation spiked.

Statistics Iceland will not release its fourth quarter 2008 GDP report until March. However, the most likely catalyst of the disinflation, 1% from January to February, is a severe contraction in economic growth. Iceland's got a lot of economic problems on its horizon.

So there you have it. Around the world (mostly), GDP is falling precipitously and dragging with it, inflation rates. In the overly indebted economies (i.e., that of yours truly), this could present a real problem if deflation - falling prices - is persistent and broad-based, making servicing debt payments more difficult.

Wouldn't it be nice to see some positive economic news? If the answer to that question is yes, then you should visit this site, The Good News Economist.

Rebecca Wilder

Wednesday, February 25, 2009

Please don't let this be a microcosm of the labor market

The labor market is brutal, but it cannot be this brutal! From the Financial Times:
Throngs of unemployed New Yorkers braved sub-freezing temperatures on Tuesday in hopes of finding new work amid rising job cuts.

Wrapping around block of the Sheraton New York Hotel for hours, more than 5,000 people - many in business attire - waited in single-file lines for a chance to submit resumes and chat briefly with recruiters. There were 41 companies hiring, according to Women for Hire, who sponsored the job fair and allowed men to attend for the first time, with a total of 1,000 openings to be filled. At the last such event in November just 1,500 people attended.
RW: Please don't let this be a microcosm of what's to come.
  • 5,000 workers in the labor force (employed + unemployed)
  • 1,000 jobs, i.e., employed
  • 4,000 unemployed
Unemployment rate = 80%

Rebecca Wilder

Consumer confidence plummets, and so do expectations

The Conference Board released the results of its February Consumer Confidence survey. From the Washington Post Ticker: Consumer confidence in February hit another all-time low, as Americans struggled with layoffs and a recession.

It's bad out there, folks. To be sure, the February reading did set a record low since 1967, but the record is just one month old, as the January reading was the previous low. In fact, except for the November 2008 bump, each month has set a new record low since September 2008. The labor market is just brutal, and that is killing confidence. Consumers are getting gloomier and gloomier on an uncertain economic future.

Speaking of future, according to the Conference Board survey, consumers don't see light at the end of the economic tunnel for the next six months.

This chart, which illustrates consumer business expectations over the next six months, is particularly disconcerting for two reasons. First, the percentage of consumers surveyed that believe conditions will worsen surged by 9.4% to 40.5%. This is troublesome, since waning confidence in future conditions likely drives down current spending by increasing savings. Yes, this is a good thing over the long run, but it can further contract the macroeconomy hard in the near term.

Second, the number of consumers that claim conditions will not change in 6-months is falling quickly; or an increasing number of individuals are developing an opinion that the economy over next six months will corrode.

The percentage that believe that conditions will not change over the next six months is not listed, 50.8%, but it is simply 100% minus those that believe the economy will worsen, 40.5% in Feb., and those that believe the economy will improve, 8.7%. Notice how there is always a rather stable number of people that believe conditions will be the same over the next six months? Well that has changed abruptly. All the previously "same" people are falling into the "worsen" boat.

Overall, this is a terrible report. I imagine that confidence will increase when the fiscal stimulus money starts to roll out; but until then, there is really no reason to be positive right now.

Rebecca Wilder

Tuesday, February 24, 2009

McKinsey survey shows some silver linings

The McKinsey Quarterly released the results of its Economic Conditions survey, conducted January 27, 2009 - February 2, 2009. The survey is broad-based, where 1,820 executives were surveyed from around the world and across a large set of industries. The first notable finding of the survey is the following silver lining: 40% of executives believe that the economy will initiate recovery by the end of 2009.

From the McKinsey Quarterly (this is a free service, but you must register to read the article):
Three-quarters of all respondents, and more than 90 percent of those in the eurozone, expect their nations’ GDP to fall in 2009. This is an increase from November, when 59
percent of all respondents expected GDP to fall. Given that opinion, it’s not surprising that executives indicate that their nations’ economies are bad and that they have low expectations for the near term. Notably, however, those views have remained fairly stable between December and January, after falling markedly between November and December (Exhibit 1). This may indicate a belief that the economy has hit bottom and that even tens of thousands of layoffs and continued steep losses in shareholder value aren’t worsening the situation. Some 40 percent of respondents expect an upturn to begin by the end of this year.
At some point, the economy will stabilize. But that is unlikely to occur in the first quarter of 2009 (according to the chart above).

The survey also finds that 43% of executives believe that government actions made their domestic economic situation better than had the government not intervened. And furthermore, that over a quarter of the executives surveyed (27%) believe that government actions had no net effect on the economy (chart below).

I wonder if the term government actions includes government announcements. At least in the U.S., big government announcements that were not acted upon - buying Treasuries or forcing mortgage rates to 4.5% - shifted market expectations; and in my opinion, created more confusion and uncertainty.

And finally, a little blip at the end of the survey indicates that in response to the global recession:
More executives expect their companies to shrink than grow in 2009 in terms of profits and workforce size; however, most have not changed prices and don’t expect to.
A closer look at these results shows that 60% of respondents will not change prices, 20% expect to lower prices, and 11% would increase prices in the first quarter of 2009. I wonder in which country executives are planning to raise prices by March!

To date, most of the price declines (October 2008 - December 2008) in the U.S. have been energy-related. The survey response on pricing suggests that in the near term, executives would rather cut costs than change prices. Firms may see a more stable demand curve in expectation than the deflation story suggests, and that economic stabilization on the horizon.

There is probably still some contracting to go. Wachovia makes their monthly forecast publicly on the web; and they expect the U.S. economy to decline an annualized 6.7% in the Q1 2009 (first quarter), 1.9% in Q2 2009, and -0.4% in Q3 2009. This is roughly consistent with the global executive responses from the McKinsey survey of stabilization in 2009.

Rebecca Wilder

Monday, February 23, 2009

Germany's outlook is not good

This is a terrible outlook for battered Germany. From Deutsche Welle:
In an interview with the Bild newspaper on Monday, Feb. 23, Deutsche Bank's Chief Economist Norbert Walter said Germany had to be prepared for a dramatic decline in economic output as the global downturn batters exports, decimates companies' profits and raises the specter of large-scale job losses.

Walter said a five-percent contraction is actually a fairly optimistic forecast, all things considered.

"The German economy will shrink by five percent in 2009 only if we have a real upswing in the summer," Walter told the paper. "It cannot be ruled out that this upswing will not come. Therefore, a worse result than this (five-percent contraction) can no longer be excluded," he said.

His comments came as Germany's main stock index, the DAX, slipped to 3,936.45 at closing time in Frankfurt on Monday, the first time in four years that it has closed lower than 4,000. Since the beginning of the year, the top 30 German shares have lost an average 16 percent of their value.
RW: This is truly humbling. The German economy posted a record 8.2% annualized decline (2.1% over the quarter) in the fourth quarter of 2008. Here is one trajectory that would tally up to -5.1% growth in 2009 as a whole:
  • Q1 2009: -5.5% annualized GDP growth rate
  • Q2 2009: -5.0%
  • Q3 2009: -5.0%
  • Q4 2009: -3.0%
With that growth trajectory, total output loss would be 7.6% since just Q1 2008.

Rebecca Wilder

Fed balance sheet growing again; TALF to start soon

The Fed balance sheet is growing again; bank credit is up $76.9 billion for the week ending on Feb. 18 to $1.91 trillion, while reserve balances grew another $85.6 billion to $688.9 billion. The balance sheet is set to expand (much) further; the Fed is expected to announce the start date of its new Term Asset-Backed Securities Loan Facility (TALF) soon. The program is massive - up to $1 trillion - and could help consumer ABS markets, but questions still remain.

The chart illustrates the asset side of the Fed's balance sheet, including its credit easing policy measures - Commercial Paper Funding Facility (CPFF), its various non-commercial bank loans (Maiden Lane, Maiden Lane II, and Maiden Lane III), and listed under "securities held outright, the mortgage backed security purchase program (MBS), for example.

Over the last week, bank credit grew mainly due to the following: (1) a new $55.69 billion of the NY Fed's MBS purchase settled on balance, and (2) the Fed increased its Term Auction Facility (TAF) lending another $34.7 billion.

The Fed is purchasing MBS on a weekly basis, but the securities only settle on balance at a lag. To date, another $71.6 billion in MBS have already been purchased by the NY Fed that have not yet settled on balance. As for the TAF, the Fed still has 3 auctions scheduled through March 23 2009 for another $450 billion in lending. Unless the Fed wants to wind down this program (highly unlikely), which currently holds a 23% share of total bank credit extended by the FEd, further auctions will likely be scheduled soon.

TALF will raise Reserve bank credit by up to $1 trillion, or more than 50% of its current total.

The TALF program is expected to get underway soon - the NY Fed has been uploading a lot of technical information regarding the program. The TALF plan is simple. The NY Fed will lend to eligible borrowers (the requirements are much broader than the commercial banking system) at a fixed or floating interest rate against eligible collateral of various consumer and small business asset-backed securities (ABS).

The collateral eligible for the TALF loan includes the highest rated ABS backed by auto loans, credit card loans, student loans, and small business loans. Depending on what type of security is used as collateral, the Fed will lend up to 95% of the collateralized assets (haircut amounts range from 5%-16%). If the security is downgraded after the Fed assumes it as collateral, the Fed takes the hit. If the borrower defaults on the loan, the Fed sells off the ABS collateral.

The TALF program was extended - from $200 billion to $1 trillion - as part of the government's Financial Stability Plan . It is not certain exactly how effective will be the TALF on the ABS markets. For one thing, there is some question as to the incentives of the program: whether or not the haircut (5%-16%) plus interest payments will be sufficient to attract participants to the program. Another Fed program, the Money Market Investor Funding Facility, did not attract any eligible participants to borrow under the program (its lending on the Fed's balance sheet remains at $0).

Other questions remain. Here is an excerpt from the NY Times last week:
Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have.

For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans. That will not help banks sell junior bonds, which many investors have shunned because of fears that losses would rise as the economy worsened, said Thomas H. Atteberry, a partner at First Pacific Advisors, an investment firm based in Los Angeles.

“It’s probably a step forward but it may only be a baby step forward,” said Mr. Atteberry, who does not plan to use the TALF.

Jerry Marlatt, a partner at the law firm of Clifford Chance who specializes in securitization, said that lenders using the TALF would be willing to retain more of the risk associated with loans on their own books to get deals done. That should help ensure that lenders make better-quality loans in the future, because they will be liable for most of the losses.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more. “The TALF,” he said, “raises a lot of questions.”
Rebecca Wilder

Friday, February 20, 2009

When will the economic storm calm?

Paul Krugman writes a nice piece (hat tip, Mark Thoma) about how the U.S. economy will eventually emerge from its recessionary depths. However, it occurs to me that another question should be: when will the economy emerge from the depths? And unless one is prescient, nobody can truly answer that question. But key surveys on construction, sentiment, and manufacturing indicate that it may be a while. An excerpt from Paul Krugman's op-ed piece in the NY Times:
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.

Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
I couldn't agree more: that population growth and household formation will eventually force a recovery in durable goods sales (autos) and home contruction. But furthermore, small level changes can add a lot to GDP growth.

Think about it. New home construction in January was an anemic 466k (which is an annual rate), down a whopping 17% in just one month or 56.2% since one year ago. Impressively, residential construction was just 3.1% of GDP in the fourth quarter of 2008 (Q4 2008), but still snatched 0.85% from overall economic growth (the contribution to growth table here). Since residential construction is nearing zero, small level increases of new construction means big percentage changes and large contributions to GDP growth. Same for autos.

So as soon as homebuilders and automakers get going again, then GDP (domestic production) has a chance at stabilization. But when will that happen? When will the pain stop?

Unfortunately, the headline monthly reports - like housing starts, vehicle sales, inventories, trade, home values, personal income - are all lagged reports by at least one month. Out of the big monthly reports, the employment report is the first to be released; and by the time the release occurs (Feb. 6 for the January employment report), the data is really just a quasi-monthly report because the survey ends the week including the 12th day of the month. So the BLS payroll for January is really data for the December 15 through the week including January 12th. Not a lot of help there.

However, survey reports by managers, builders, or consumers are generally released during that month and can serve to lead sectoral stabilization before it actually occurs.

The National Association of Homebuilders conducts a monthly survey of homebuilding sentiment to construct the Housing Market Index (HMI). In February, the HMI increased by 1 point to 9 from its Jan. record low. An HMI above 50 implies that sales conditions are generally good, while an HMI below 50 indicates poor sales conditions; 9 is bad. Homebuilders are worried about imminent foreclosures, and the government's ability to stem the negative effects from the housing market. Not a lot of hope for new building in the near term.

Regional Fed indices on business sentiment indicate continued stress in manufacturing (auto sales obviously included here). The NY Fed and the Philly Fed have already released their February indices; both tumbled over the month. The NY Fed's regional manufacturers said that the 6-month outlook was grim, while the Philly Fed regional manufacturers are more optimistic about the 6-month outlook. I await the Chicago PMI release, but not a lot of hope for a near-term recovery in manufacturing.

The University of Michigan released the preliminary results of its consumer sentiment survey for February. The headline sentiment index dropped to a record low of 56.2. Consumers were probably a little gloomy about the recent bump in gas prices, and sentiment for the "months ahead" dropped to its lowest level since 1980. Some found some less-gloomy results of the survey, and highlight that consumers are liking the buying conditions in housing.

Unfortunately, I don't see a lot of hope in the near term, and neither do Calculated Risk nor Mark Thoma. And furthermore, once these indicators start to increase - unless the increase is more like a sharp surge - the omen will be more of a less quick contraction rather than a recovery.

It will be interesting to see the magnitude effect of the fiscal stimulus on the macroeconomy, because in reality nobody knows.

Rebecca Wilder

Thursday, February 19, 2009

Philly Fed manufacturing survey looks bad too

The Philadelphia Federal Reserve Bank released the February survey results of general business conditions in manufacturing for the Philly Fed region. Consistent with the Empire State survey results, the the report was bleak:
Conditions in the region’s manufacturing sector continued to deteriorate this month, according to firms polled for the February Business Outlook Survey. All of the survey’s broad indicators for current activity remained negative and fell from their already low levels in January.
The chart illustrates the survey results for the current and 6-month ahead business conditions across the Philly Fed's region since 1968. In February, current business conditions fell to -41.3 and has been negative for 14 out of the past 15 months. The manufacturing sector is suffering a severe contraction. These results suggest that the ISM national manufacturing survey will likely see a decline from its January bump, and that the contraction is ongoing.

On a brighter note, in net managers believe that business conditions will improve over the next six months for the second month. That means - if these managers are indeed prescient - that the manufacturing sector in the Philly Fed region will stabilize over the next five months!

On a more foreboding note, the survey included several additional questions that are pertinent to current market conditions:

1. Choose the statement that best characterizes your current inventory situation:
Too high and expected to decrease in first quarter 43.9%
About right for current economic conditions 43.9%
Too high and expected to increase in first quarter 6.1%

In net, managers understand that inventory levels are too high for market sales. This is just another sign that inventories will fall going forward, and that the inventory boost to Q4 GDP is all but a pipe dream for Q1 2009. Bad news.


Japan is taking a beating

Countries that depend on export growth to fuel overall economic growth are taking a beating, especially Japan. In the current global recession scenario, international labor markets, incomes, production, and profits are contemporaneously declining. Not good for any country that depends on foreign demand. But worse yet, the yen remains elevated, reducing foreign demand even further.

The Japanese economy is plummeting

The chart illustrates Japan's real GDP in levels (yen tr.) and in growth (% y/y) since 1995 (data here, if you are interested). In the fourth quarter of 2008, Japan posted its biggest decline since 1974 (see Bloomberg article). The economic retrenchment is bigger than throughout its entire "lost decade" (roughly the 1990's). A sharp drawback of global demand - especially from the U.S. - is dragging Japanes GDP down quickly.

GDP fell largely on exports, which account for an average of 17% of overall domestic production (GDP) in the last three years. In the fourth quarter of 2008, real exports fell 13.9% since Q3, which is a massive 45% annualized decline. Anemic global demand is killing Japan.

But it's also investors - the unwinding of the carry-trade (borrowing at low interest in Japan and buying at higher interest in, let's say, Europe) is appreciating the yen and causing exports to fall further.

A surging yen is killing export growth

The chart illustrates the trade-weighted yen on a weekly basis spanning the years Jan. 2003 to Feb. 2009. The yen has increased over 30% since just Aug. 2008.

Domestic industrial production is in free fall

The chart illustrates Japan's industrial production on a monthly basis spanning the years Jan. 2003 to Dec. 2008 (source data here). This is a rather humbling visual: industrial production - Japan's bread and butter - declined 20% since September 2008, or near a 50% annualized decline. In December 2008, Japan's industrial production sector was producing over 15% below its 2005 average rate of production. Against this backdrop, the 10% annual decline in U.S. industrial output looks like a benign report.

The unemployment rate is surging

The chart illustrates the unemployment rate in Japan spanning the years Feb. 1995 to December 2008. Over the last two months, the unemployment rate grew 0.7% to 4.4%. Temporary workers with no benefits represent the bulk of the layoffs, which will likely bring down average welfare.

The global recession is leaving no stone unturned.

Rebecca Wilder

Wednesday, February 18, 2009

Mayor Bloomberg to retrain NY's finest gamblers; office space empties in Manhattan

Hmm....I don't know about this one. The New York Times reports that Mayor Bloomberg plans to spend $45 million to retrain out-of-work investment bankers and attract foreign financial firms to the county. According to the NY Times:
Just as Michigan is scrambling to retrain laid-off auto workers, New York City officials have come up with a plan to find new work for the unemployed of its core industry: investment banking.

Under a program Mayor Michael R. Bloomberg unveiled on Wednesday, the city wants to invest $45 million in government money to retrain investment bankers, traders and others who have lost jobs on Wall Street, as well as provide seed capital and office space for new businesses those laid-off bankers might create.

The plan is intended to stem the exodus of talent from the rapidly collapsing financial services industry, which has been the city’s economic engine for decades, and speed the industry’s recovery, which may take years, officials said.

City officials also plan to try to lure big banks and financial companies from Asia and other parts of the world to set up operations in New York, filling some of the void created by the implosion of large American firms like Lehman Brothers and Bear Stearns. They hope to receive permission from the federal and state governments to use $30 million in federal money to attract those companies and other financial firms to Lower Manhattan.

Mr. Bloomberg said in a statement that he could not predict how the financial services sector would bounce back, but he said he was confident that it would (read the rest here).
Rebecca here. Mayor Bloomberg faces a contracting industry - finance - and a sharply declining tax revenue base. According to the BEA, in 2007 New York county claimed a total compensation base of $294.6 billion (cross-sectional comparison of total compensation in article here). And furthermore, offices are emptying at record rates in Manhattan. From the New York Times:
Just as office towers appreciated in value faster in Manhattan than elsewhere during the boom years, now their decline is outpacing the rest of the nation, brokers and analysts say.

Building values are dropping as unemployment worsens, offices empty, rents decline, credit remains tight and buyers expect higher rewards for taking on more risk.

“The outlook for New York is much worse than what we see outside New York,” said Sam Chandan, the president of Real Estate Economics, a research company in New York. Some people estimate that values in some cases have fallen as much as 50 percent (read the rest here)
It will be interesting to see what New York looks like when it emerges from this one.

Rebecca Wilder

Not to miss: FRONTLINE, "Inside the Meltdown"

"On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. "There was literally a pause in that room where the oxygen left," says Sen. Christopher Dodd (D-Conn.)."

Frontline goes "Inside the Meltdown"

Watch the video (if you haven't already.)

Just what we need: rising gas prices in the middle of a deep recession

Gas prices are on the rise again; and with the unemployment rate accelerating, already-strapped consumers will pull back even more. Not good. Eventually, though, the rising unemployment rate and slackening demand for gasoline will pass through to lower gas prices.
The chart illustrates monthly gasoline prices through the February 2009. National gas prices have declined precipitously since July 2008 amid the global recession. However, gas prices have been creeping upward since early January. According to Aysegul Sahin (hat tip, Mark Thoma), this recession is shaping up to be worse than the 1980's. Therefore, renewed pressure on gasoline prices will squeeze consumers and firms further, worsening an already-beaten economy.

The recent bump in gasoline prices seems counter-intuitive amid building crude inventories and falling crude prices, but it is simply a lagged supply effect. According to the Wall Street Journal:
Refiners saw profits sink as demand declined in mid-2008 and only began to curtail output after hopes for a rebound evaporated in the fall. In December, operators of large refining networks announced reductions in gasoline production and, as a whole, the U.S. is processing well below full capacity. The rise in prices, following a slump that began in July, when gasoline prices were above $4 a gallon, reflects refiners' success in catching up with slackened demand.
This analysis suggests refiners can only maintain the squeeze as long as demand suffices, and eventually, the rising unemployment rate will drag down gas prices later this year. But until then, consumers are likely to cut back on non-energy goods and services in order to accomodate the higher gasoline prices. Furthermore, rising energy prices will put upward pressure on the headline Consumer Price Index - the index used to measure inflation.

Rebecca Wilder

Tuesday, February 17, 2009

Regional manufacturing survey #1 plummets

The NY Fed released its regional manufacturing survey results (the first of a series of regional surveys on manufacturing). The index fell to a new low, -34.70, declining sharply since January 2009. From the NY Fed:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in February. The general business conditions index fell to a new low of -34.7. The new orders index also fell to a new low, the unfilled orders index stayed close to its recent record low, and the shipments index—despite a slight improvement—remained negative. The indexes for both prices paid and prices received held below zero, with the latter dropping sharply. Employment indexes remained deep in negative territory; the average workweek index slipped to a record low. The future general business conditions index was negative for a second consecutive month as many of the forward-looking indexes remained close to recent lows. The future index for number of employees fell particularly sharply, eclipsing last month’s record low.
This is bad news, especially when much of the silver lining argument is centered around a falling rate of decline in manufacturing, which is based on the Jan. bump in the ISM (Institute for Supply Management) national manufacturing survey. And furthermore, the 6-month outlook survey continues to decline.

I will be watching these regional Fed manufacturing surveys over the month, but the Empire State report does not paint a pretty picture for the national ISM manufacturing survey that will be released on March 2. Unfortunately, the bad news keeps on coming.

Rebecca Wilder

Good news for the economic outlook? There is bad news too.

Several leading indicators offer rays of hope; specifically, there are signs that manufacturing, industrial output, retail sales, credit, and housing are contracting less quickly (yup, that's the ray of hope). Unfortunately, there are Jekyll indicators, too, showing that the pain has yet to hit other sectors in full, including nonresidential investment and state and local spending. So as there are some silver linings in the data, the bigger picture is more ominous. From the New York Times:
Some negatives looked a little less negative. Consumer credit slid 3.1 percent in December, according to the Federal Reserve, a sign Americans were shunning their charge cards, but the drop was slightly less than November’s 5.1 percent slide.

And although the United States imported and exported 5.7 percent less in goods and services in December, the drop in trade volumes was a shade less breathtaking than November’s 9.4 percent.

Some have also seized on a recent upturn in the Baltic Dry Index, which measures the cost of shipping raw goods like copper, steel and iron. The index cratered last fall as global growth halted, and analysts smelled whiffs of renewed demand as the index more than doubled from its lows.

“It really suggests there’s some sort of supply-and-demand bounce that’s tightening up in commodities,” said James Paulsen, chief investment strategist at Wells Capital Management. “It could fade again, but it’s an encouraging sign.”
Credit markets are still fragile, but analysts say they have stepped back from the brink since October and November, when banks essentially stopped lending to each other and the financial system seemed on the verge of imploding.

Businesses with highly rated debt can again borrow on the bond market, and even companies with shakier ratings find lenders. The companies still have to pay high interest rates, but the premium over government debt has narrowed in recent weeks.

The three-month London interbank offered rate, which measures how much banks charge each other to borrow, has settled near 1.2 percent, down from 4.5 percent at the height of the crisis.

There are some cracks that are beginning to appear that are allowing some sunlight to come in,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But whether this foreshadows a turning point in the economy, that’s something no one knows."
It is important to understand that these indicators do not signal an imminent economic recovery. For example, the Institute for Supply Management (ISM) index for manufacturing bounced slightly to 35.6% in January (listed in article, but not quoted here); but since the index value remains below the 41.2% threshold level, the report suggests ongoing overall economic contraction. And furthermore, since the index value remains below 50%, manufacturing is still falling quickly.

Unfortunately, there should also be an article that states: Data hints that some pain has yet to come. Two inputs to GDP are expected to decline quickly: nonresidential construction and state and local spending.

First, non-residential construction is expected to decline with force

The chart to the left illustrates the ABI spanning the years Nov. 1995 (its first point) to December 2008. The American Institute of Architects Architecture Billings Index (ABI), which is said to lead non-residential construction by roughly 9-12 months, has declined precipitously over the last year, 34% to 36.4 in December 2008. This suggests that a sharp decline in non-residential construction is on the horizon.

Second, state and local spending cuts have only just begun

State and local spending, which is roughly 12% of GDP, is expected to contract soon. Rising unemployment will drag down state tax revenue further and tight credit conditions will continue to inhibit spending. States are jointly experiencing record budget deficits, serving as the ultimate nemesis (offset) to the federal stimulus package.

The federal relief to states will help, but....

Va. Budget Shortfall Reaches $3.7 Billion:
Virginia has begun eliminating thousands of jobs, slashing agency spending by 15 percent and trimming almost $1 billion from elementary and secondary education and Medicaid programs, which help cover medical needs for the indigent, elderly and disabled.
With no budget, California to cut 20,000 state jobs:
California, which is on the brink of running out of cash, will notify 20,000 state workers on Tuesday their jobs may be eliminated, a spokesman for Governor Arnold Schwarzenegger said on Monday.
RW: Yes, there is some less-bad news out there, and I certainly welcome good news in housing and manufacturing. But so far, the good news consists of temporary monthly bumps, which does not determine a trend; and unfortunately, a trend has not yet emerged. In fact, according to Wachovia's forecast, GDP is expected to decline through the third quarter of 2009.

Rebecca Wilder

Monday, February 16, 2009

Lending standards tight according to global loan officer surveys

Global lending standards are tight; and why shouldn't they be when the unemployment rate is surging in most G7 economies?

But a closer look at key central bank loan surveys reveals that standards are indeed becoming increasingly tight in England, the U.S.A., and Canada, but to my surprise, are still easing in Japan. However, there is a general decline in demand for lending, which is slightly disconcerting, and a signal that investment and/or aggregate demand will be anemic in these economies for some time.

The following are the general conclusions of the central bank loan officer surveys across the aforementioned economies for the change in lending standards and loan demand from the July-September 2008 period to the October-December 2008 period.

The Bank of England

The Bank of England credit conditions survey reveals that standards for consumer and corporate lending remain tight, while demand for mortgage loans is rising (almost easing in net).

The European Central Bank

The European Central Bank conducts a very broad euro area bank lending survey. The general conclusions of the survey (there is much more in this report) are: that standards remain at elevated levels over the last six months. A little more worrisome - in terms of a signal for aggregate spending - is the sharp drop off in loan demand. This signals a general decline in demand for investment spending and durable consumption.

The Federal Reserve

The Federal Reserve Bank's senior loan officer survey shows that lending remains at record-tight levels across all loan types: commercial and industrial (C&I), consumer, and mortgage. Please see this post for an in-depth discussion of lending.

This chart highlights the abrupt shift of C&I and consumer lending standards midway through 2007. It also confirms that demand for lending is starkly weak.

The Bank of Canada

The Bank of Canada's senior loan officer survey tells a very similar story: strict, stricter, and strictest lending standards. Furthermore, Canada's lending environment has worsened considerably in the last three months of 2008.

The Bank of Japan

The Bank of Japan's senior loan officer opinion survey on bank lending practices at large Japanese banks is surprising to say the least. Amid a 3.3% fourth quarter '08 decline in economic growth, lending standards are still easing in net for loans to consumers and small and medium-sized firms. Standards to large firms went unchanged in net.

The survey also tells a story of falling demand for consumer lending, and that demand for firm lending is showing signs of dropping off (not shown here, but page 1 of the survey). Again, this is a signal that domestic demand for durables and investment goods are likely to be anemic for the time being.

The general conclusion is that standards are almost uniformly tight across the G7 economies, and that demand is weak, too. Both factors signal battered credit conditions, but also may highlight an ongoing collapse in aggregate demand.

Rebecca Wilder

Sunday, February 15, 2009

Which central bank is the most transparent?

The Fed has been criticized of its lack of transparency in recent policy measures; specifically, it's not forthright with the details of its credit easing policy (similar to quantitative easing, but according to the Fed, it quite different) - raising the balance sheet through reserve creation in order to increase bank liquidity and support various asset classes.

The ECB defines transparency and why it is important explicitly
on their web page:
Transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner....Transparency helps the public to understand the ECB's monetary policy. Better public understanding makes the policy more credible and effective.
This idea of transparency made me ask myself: which central bank is the sneakiest with its policies?

I rank six central banks from sneakiest to least sneaky:
  1. People's Bank of China (PBoC)
  2. Bank of England (BoE)
  3. Bank of Japan (BoJ)
  4. Bank of Canada (BoC)
  5. Federal Reserve (Fed)
  6. European Central Bank (ECB)
Of course, each central bank is engaged in a different policy objective, and the ranking is highly subjective. But given that global central banks are jointly easing, and some central banks are engaged in non-traditional forms of easing - BoE, BoJ, BoC, and Fed - it is nice to know "what's going on". My criterion to judge transparency is simple: the publicly available central bank balance sheet.

1. The PBoC

Of course, the Chinese will be ranked the sneakiest. However, when I visited the
PBoC's website, I was shocked to see that the PBoC even makes a balance sheet available for the english-speaking public. Too bad it's from 2004; five years old, pretty sneaky!

2. The BoE

The BoE's website takes just a little getting used-to (for yours truly, of course), but most of the good stuff is in the
publications link. The BoE announces directly its non-traditional measures, including the new Asset Purchase Facility - the BoE will purchase £50 billion (about 14% of GDP) of various types of assets (commercial paper, corporate bonds, ABS, etc.) - and its currency swaps with the Fed.

Given that the BoE has these non-traditional policies in place, its one-page skeleton outline of a
balance sheet is a little disappointing. Since December 2007, the only new detail is listed under "short-term open market operations", and are the words "One week sterling", "Other maturity within-maintenance", and "period sterling" with no breakdown in the total value.

3. The BoJ

Again, it is a little difficult to find the balance sheet, but most everything that I ever want is under the
statistics link. Given that the BoJ was the first to engage in quantitative easing and is currently adding to that list of non-traditional policy, including currency swaps with the Fed and a new program to purchase corporate debt directly, its balance sheet should be more detailed. However, compared to the BoE, it is surprisingly descriptive.

4. The BoC

The BoC is very transparent, as it headlines new policy measures right on the
homepage. One can immediately see that the BoC is conducting non-traditional policy via the money market facility. The BoC balance sheet is extremely detailed, including a supplemental information link to describe its new lending facilities. However, the balance sheet is released just a one-month.

5. The Fed

I have argued that the Fed is being rather
sneaky, but now I realize that its balance sheet is exceptionally descriptive (although arcane to most) compared to other central banks' statements. One can find the Fed's balance sheet link right on its homepage (the H.4.1 link); and furthermore, the balane sheet is very comprehensive. The balance sheet is long (11 pages), including separate tables for each of its targeted non-banking loans.

The biggest drawback is that one must review each weekly release to find the associated announcement of the newly listed item. For example, only the
January 15th release includes information on the MBS purchase program. But overall, the Fed looks very transparent compared to the previous four central banks.

6. The ECB

The ECB gets the highest marks for one reason only: its
balance sheet is very detailed, especially since ECB policies have been traditional to date. Furthermore, the balance sheet is simple to locate; just go to the "press" tab, and there is the link, "weekly financial statements".

So there you have it: the Fed is comparatively forthright. And according to
Bernanke, a new website will emerge within weeks to improve the Fed's transparency.

Rebecca Wilder

Saturday, February 14, 2009

MBS program is helping; Fed meets two days until 2010

Two (other) things from the Fed this week.

First, the Fed bought $23.22 billion in mortgage-backed securities (MBS) this week for a total of $114.96 billion. The assets acquired through the MBS purchase program, except for $7.38 billion, have not settled on balance yet. Therefore, the asset-side of the Fed's balance sheet, currently $1.88 trillion and down $10.33 billion since last week, does not represent the Fed's assets in full.
The goal of the MBS program is to improve conditions in the home and mortgage markets. Nominal mortgage rates tend to move up and down with Treasuries; this is the spread. If the Fed program, which targets the mortgage market directly, was improving mortgage conditions, we would expect to see the following: (1) mortgage rates may fall, and (2) spreads against Treasuries should tighten.

Since the Fed's initial MBS purchase (the week of January 5), the rate on a 30-yr conventional mortgage has increased somewhat, 0.15%. However, spreads are tightening: 53 bps against the 10-yr Treasury, and 79 bps against the 30-yr Treasury.

This is a sign that the Fed's MBS purchase program is indeed improving conditions in the mortgage market. By the way, you can download the data from the Fed here (go to selected interest rates, H.15).

Second, the Federal Open Market Committee (FOMC) - the committee that sets the federal funds target - beefed up its schedule of meetings throughout January 2010. The next eight FOMC meetings are now scheduled to last two days instead of one.

This is kind of interesting. The federal funds target is near zero, and therefore, the FOMC in full doesn't have a lot to discuss on that front. In contrast, the Board of Governors - five members of the FOMC (should be 7) - do have a rather large agenda to converse/debate: the Fed's balance sheet and credit easing policy (basically raising the balance sheet through reserve creation in order to extend credit and purchase various types of assets). The 10 FOMC members (should be 12) will discuss Fed policy, but the ultimate policy decisions lie in the Board's hands.

Rebecca Wilder

Friday, February 13, 2009

Really scary economic charts: world unemployment and growth

This article highlights how the financial crisis has spread like a disease throughout the world. Unemployment rates are rising, growth rates are declining, and the economic pain is felt globally.

The Financial Ninja does a series called Really Scary Fed Charts (here is his latest), highlighting the Fed's balance sheet since it starting growing under the credit easing policy (you can see JKA for a short description of CEP). Hopefully he won't mind that I copied his title - it's just too catchy.

G7 Growth rates are falling flat - Canada is the last man standing.

The chart illustrates annual growth across the G7 economies through Q4 2008 for Italy, Germany, U.K., U.S., and France, and through Q3 2008 for Japan and Canada. Canadian growth is still positive over the year, +0.53%, but may lose its status as "last man standing" when Statistics Canada releases its Q4 2008 GDP report. Growth was negative in October, -0.1%, and November, -0.7%.

G7 unemployment is rising...quickly.

The chart illustrates the annual change in the unemployment rate across the G7 economies (ex Italy because its latest release was in September). The December 2008 surge in unemployment in Canada, the U.S., an the U.K. has surpassed those in 2001: +1.4%, +2.7%, and +1.2%, respectively in December. Germany is an aberration, where it's unemployment rate remains at historical lows, 7.2%. But given the previous chart (on G7 growth), even German firms will eventually be forced to fire - income is just too low.

Enough about the G7 - growth rates across a larger set of countries (50) look scary, too: two charts comparing growth in 2008 to that in 2001.

The chart illustrates annual GDP (gross domestic product - the aggregate measure of domestic production) growth for a set of 50 economies using the latest available release. Across the board, there is a diversity in growth; this is a consequence of country-specific economic circumstance.

However, 18 economies posted negative annual growth rates, ranging from Latvia, -10.5%, to the U.S., -0.2%, and average growth across all 50 economies is 1.67%. And there are a lot of developed economies in this category: U.S., Italy, Japan, Iceland, France, Denmark, Netherlands, Belgium, to name a few; actually, most of them are. The downside risk to World growth is very high, and the number of contracting economies will likely grow in coming quarters.

This chart illustrates annual GDP growth across the same 50 economies - ranked from biggest decline to biggest increase - at the end of the last U.S. recession, Q4 2001. In 2001, 10 countries posted negative economic growth, ranging from Argentina, -10.5% to Austria, -0.5%, and the average growth rate was higher, 1.88%. And only four of them are developed economies: Austria, Belgium, Japan, and Turkey.

The World recession is taking hold, and few economies will remain untouched throughout this cycle. The IMF is projecting 0.5% World growth in 2009, but I wouldn't be surprised if that is revised downward, and below zero.

Rebecca Wilder