Friday, July 31, 2009

The US saving rate: before and after 8:30 am today

It would be criminal of me not to post this chart. The BEA has "found" that households have been in fact saving roughly 1% more of their disposable income per quarter since 1995, 0.9% per quarter in 2008.

The chart illustrates the bi-decade event that is the BEA's comprehensive revisions to the national income accounts (yes, nerdy me downloaded the saving rate series here in anticipation of the release). It is almost a rule that the saving rate is revised upward, and this time is no different. The saving rate has been revised to show a steady increase from an average of 1.7% in 2007 to 2.7% in 2008, and a surge to 4.6% in the first half of 2009. This looks large compared to the previous 2007-2009Q1 averages of 0.6%, 1.8%, and 4.3%, respectively.

Households have been "delevering" for a longer time period than previously thought - as recent as 2008 Q1, the saving rate that was reported to be essentially zero, 0.2%, is now 1.2%.

Rebecca Wilder

Thursday, July 30, 2009

ECB says that net tightening of lending standards "halved"

If you asked me, this constitutes good(ish) news: according to the European Central Bank's Q2 2009 bank lending survey (data here), the number of banks tightening standards is falling across all loan types. The credit crisis in Europe has likely passed...

From Q1 2009 to Q2 2009, the diffusion of banks tightening standards dropped off, while demand for lending remains generally quite weak (given the starting point (Q1 2009), green is good news, orange is marginally good news, and red is not so good).
  • 79% of banks told the ECB that credit standards on firm lending went unchanged in Q2 2009, up from just 57% in Q1 and 34% in Q4 2008. 21% tightened their standards further, but mostly just "somewhat". No banks eased their lending standards.
  • 75% of banks told the ECB that credit standards on mortgage lending went unchanged in Q2 2009, which is relatively unchanged from the 72% in Q1. 23% tightened their standards further, but mostly just "somewhat". One bank eased its standards "somewhat".
  • A similar story to the previous bullet point for consumer credit standards (credit cards and other consumer loans: auto, student, etc.).
  • The evidence on demand for firm credit is still quite weak. The percentage of banks indicating that demand for loans declined in Q2 is still rather high, 42/100.
  • Alternatively, the evidence for homebuyers is quite shocking: in net, 4% of banks reported an increase in the demand for mortgage lending. This number has not been positive since Q2 2006. Of course, standards are still tightening, so it is tough to get the loans.
  • Demand for consumer credit is still declining in net.
Overall, it looks like the worst of the credit crunch has passed across the Eurozone. But with the unemployment rate rising, and expected to rise for some time, these standards will likely stay tight....but normal "business cycle tight" rather than "credit crisis tight".

Rebecca Wilder

Wednesday, July 29, 2009

Durable goods orders: not horrible at all!

According to the Census Bureau:
New orders for manufactured durable goods in June decreased $4.1 billion or 2.5 percent to $158.6 billion, the U.S. Census Bureau announced today. This decrease followed two consecutive monthly increases including a 1.3 percent May increase. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders decreased 0.7 percent.
But don't get hung up on the headline number -2.5%. Here is what Dean Maki told Bloomberg:
"The manufacturing recovery is happening now,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who predicted a gain in orders excluding transportation. Shipments of durable goods “are likely to grow in the third quarter, and that’s an important reason why we expect the overall economy will begin to grow.”
And here is why he is so upbeat on the report: real shipment growth, which goes into GDP if it is produced domestically, is slowly moving to the upper right-hand side of the chart; and real core capital orders, are already trending upward. (Note: calculate the real numbers by deflating the nominal durable goods report by the capital equipment PPI).

I'd say this is a rather strong report, compared to previous ones - of course.

Rebecca Wilder

Tuesday, July 28, 2009

On the (forgotten) autonomy of the Fed

Today, I see that Tom Petruno (LA Times) is reporting that just 30% of the respondents to a Gallup poll ranked the Federal Reserve Bank's performance as "good" or "excellent", which is below the IRS. Here is an excerpt from the article:
The Gallup Poll found that just 30% of respondents rated the Fed’s performance either "good" or "excellent." Thirty-five percent rated the central bank’s performance "only fair" and 22% gave the Fed a "poor" rating. (The rest, 13%, were honest enough to say they had no opinion.)

The eight other U.S. agencies tracked by the poll all received higher combined good/excellent ratings than the Fed. No. 1 on the list: the Centers for Disease Control and Prevention, which 61% of respondents said was doing a good or excellent job.

The Fed even was outranked by Homeland Security, which got a 46% good/excellent rating, and by the IRS, at 40%.
The problem is: that it is highly likely that survey respondents, i.e., the public, are misrepresenting the Treasury's actions for the Fed's actions (or vice versa). Tom Petruno indicates this in the article:
The Fed’s negative rating also may reflect that the Treasury wasn’t included in the Gallup Poll, which surveyed 1,018 adults July 10-12. People may have been grading the Fed as a proxy for the Treasury.
To be sure, the Fed is purchasing Treasury debt, but the Fed remains autonomous from Congress' ever-growing deficit. Fiscal policy versus monetary policy: even Market Watch got it wrong. Watch this video, where they attribute the stimulus bill and Congressional deficit to Helicopter Ben.

The video is funny, but completely off key. The Fed and the Treasury are separate entities: the Treasury's deficits are not equal to the Fed's excessive easing measures. One could argue that the Fed is paying for the government deficits (i.e., monetizing the debt), and it technically is since the Fed is targeting lower Treasury rates through its buyback program. However, that is just $300 billion of the Fed's $trillion in liquidity measures and asset purchase programs, all of which can be "taken back" (hence, the Fed's exit strategy). The Treasury must "take its measures back" too, but that requires paying down a deficit - completely different. The Fed is working on its own, and is not "in bed" with the Treasury.

In fact, the Fed must reiterate this over and over in order to maintain its credibility with financial markets. At least that is what Bernanke was trying to do last night in front of a group in Kansas City (see video below). I did notice, however, that speaking "layman" is not one of Bernanke's fortes.

The public's confusion as to what constitutes monetary and fiscal policy is not helped by these incomplete polls and videos (the Market Watch video).

Rebecca Wilder

Monday, July 27, 2009

An update on investment-grade corporates

Investment-grade corporate bond spreads are back to the previous recession's wides.

The chart illustrates the Barclays Capital corporate bond index. It suggests that the spreads are an average of 272 bps above comparable Treasuries. As corporate bond issuance tightens slightly, this allows businesses to finance new investment at more reasonable, non credit crisis, rates.

But notice that they are still wide, and there is likely still some tightening left to go. However, with default rates still rising, it is unlikely that this index reaches its historic lows of 98 bps spanning 2004-2007 anytime soon. Happy days in the bond market are over for a while, especially with government debt on the rise.

As a further note, notice how spreads continued to widen following the 2001 recession. And in contrast, spreads tightened before the end of the 1990-1991 recession. Every cycle is different.

Rebecca Wilder

Sunday, July 26, 2009

My faves for the day (July 26, 2009)

Should Bernanke Be Reappointed? (Mark Thoma at Economist's View blog)

The Human Toll: Farmer Suicides on the Rise (WSJ Real Time Economics blog)

Paul Krugman - Why markets can’t cure healthcare
Greg Mankiw - Trust
Tyler Cowen - Examples of free market health care

In Pictures: 14 Ways You're Getting Ripped Off (Forbes) - I like movie theater food...oh, and cable.

Lifelines for Those ‘Underwater’ (The New York Times)

Migrants to get bonus if they live in Scotland (The Guardian)

How We're Doing: A Composite Index of Global and National Trends (Brookings)

Rebecca Wilder

Global Insight on Cash for Clunkers

They expect the overall impact to be very limited, 250,000 autos in total (not the marginal impact). Furthermore, they note that so few passenger cars meet the eligibility requirements so mostly light trucks will be scrapped.

US vs. Canada in charts: the velocity of money

I have received a lot of requests to visit the velocity of money -the rate at which money changes hands. And I thought that it would be instructive to compare the US velocity to another non-QE G7 economy. And since I have a lot of Canadian readers, I chose Canada. The velocity has seriously slipped in both economies.

The chart above (or to the left, depending on your browser) illustrates the monthly MZM and M2 measures of velocity for the US. The quantity theory of money specifies that the velocity of money = nominal GDP/money supply, but I use personal income rather than nominal GDP, as the BEA reports this on a monthly basis. Given a level of money supply, the recent drop in economic activity, i.e., personal income falls, dragged the velocity of money down quickly. It has started to stabilize since March 2009.

Same in Canada: the money supply dropped sharply in Q1 2009 (velocity = nominal GDP/broad money).

Notice that the velocity in Canada has been on a downward trend spanning 1973-2009, however, the negative slope is falling. I am not too familiar with Canada's velocity (perhaps some of my readers may be more so), but usually a declining velocity of money is associated with a drop in GDP or inflation. I would have to look into this further, but Canada did experience a term of disinflation from the early 80's to mid 90's.

Rebecca Wilder

Friday, July 24, 2009

World Economic Reports for the week of July 17-24

This week, a compilation of indicators shows that the recovery is tentative at best - more likely, a global bottom has not yet been found. The leading indicators are stronger in some countries; exports are still declining at an annual pace of 20+ percent but stabilizing; and volatile retail sales growth rates are, well, quirky. Must wait for a trend - the US stock market(s) certainly see one coming!

In June, offset by the housing component, the Canadian leading indicator index slides for the second month. In contrast, the US leading indicator took its third consecutive bump. The leading indicator index is more like a coincident index, as many of the components are already known. According to the Conference Board (US), the bump was widespread:
Seven of the ten indicators that make up The Conference Board LEI for the U.S. increased in June. The positive contributors – beginning with the largest positive contributor – were interest rate spread, building permits, stock prices, weekly initial claims (inverted), average weekly manufacturing hours, index of supplier deliveries (vendor performance), and manufacturers' new orders for consumer goods and materials*. The negative contributors – beginning with the largest negative contributor – were real money supply*, manufacturers' new orders for nondefense capital goods*, and index of consumer expectations.
The real money supply is slightly worrisome - the Fed is letting it slip.

Export growth stabilizing in Asia and Europe - the EU (16) (i.e., the Eurozone), ran a surplus in May. On the surface that is great news - exports drive much of the growth in big EU countries (i.e., Germany). But below the surface and on a seasonally adjusted basis (page 5 of the EU's trade report release), the May surplus was driven by a drop in imports rather than an increase in exports. Over the year, exports are stabilizing, but this report shows that global trade with Europe is still very, very weak.

Discounts on food and clothing drove retail sales in the UK up 2.8% over the year in June (see jka economics blog for a nice take on the report). Obviously, though, UK consumers have been quite fickle, as this series has proven to be very volatile in 2009. Same for Italy and Canada - a trend, i.e., at least three consecutive months of data, should be formed before any conclusions can be made.
And finally, the crash of energy prices has brought global inflation into negative territory. Stephen Gordon's take of the Canadian report is good:
"Happily, the good people at Statistics Canada went to great lengths to point out exactly how and why the y/y headline number was negative, so - with the notable exception of the Globe and Mail - journalists were able to put together stories that weren't teeth-grindingly stupid."
And that's all (well, some of) what she wrote, folks.

Rebecca Wilder

Thursday, July 23, 2009

This has absolutely nothing to do with economics but I couldn't help myself

An excerpt the BBC article, Giving up my iPod for a Walkman:
It took me three days to figure out that there was another side to the tape. That was not the only naive mistake that I made; I mistook the metal/normal switch on the Walkman for a genre-specific equaliser, but later I discovered that it was in fact used to switch between two different types of cassette.

Another notable feature that the iPod has and the Walkman doesn't is "shuffle", where the player selects random tracks to play. Its a function that, on the face of it, the Walkman lacks. But I managed to create an impromptu shuffle feature simply by holding down "rewind" and releasing it randomly - effective, if a little laboured.

I told my dad about my clever idea. His words of warning brought home the difference between the portable music players of today, which don't have moving parts, and the mechanical playback of old. In his words, "Walkmans eat tapes". So my clumsy clicking could have ended up ruining my favourite tape, leaving me music-less for the rest of the day.
Rebecca Wilder

My faves for the day (July 23, 2009)

For Whom The Bell Tolls, Part 10 (Christopher E. Hall at Boom2Bust blog)

China's Balancing Act (Jake at Econompic blog)

First Tripartite Governors’ Meeting among PBC, BOJ and BOK; Held in Shenzhen, China

Germans must get their head out of sand on banks (Edward Harrison at CreditWritedowns blog)

TARP cover up (Prieur du Plessis at Investment Postcards from Cape Town blog)

Space business has yet to take off (LA Times)

I was sick yesterday and missed Alice's take on the MPC report: MPC admits "inflation has been surprisingly high over a number of months" (Alice Cooke, UK Bubble blog)

Would it be giving away too much if I told you that this is quite appealing to me? Does the trailer for Tim Burton's Alice in Wonderland make you want to go down the rabbit hole? (The Guardian)

Striking charts: Singapore GDP; G7 unemployment

The thing about a global turning point is: some economic indicators will increasingly improve, while others will continue to worsen.

Singapore experienced a large 20.4% annualized jump in GDP.

Statistics Singapore notes that the surge in GDP was significantly influenced by a spike in biomedical manufacturing that drove the contraction in manufacturing output up from -24.3% annualized in Q1 2009 to just -1.5% annualized in Q2 2009. This is unsustainable, but still welcomed first-derivative news. Finance and tourism needs to bounce back.

On the other hand, G7 unemployment rates continue to surge causing havoc on final domestic demand.

The G7 unemployment rates will likely rise for months (quarters) to come. Eventually, though, massive monetary and various fiscal stimulus packages will halt the surge. Already, Germany and US are seeing their unemployment rates stabilize on a Yr-Yr (annual change) basis.

When do you believe that the global economic recession will end?

Q2 2009
Q3 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010

Rebecca Wilder

Tuesday, July 21, 2009

Shape of the recovery: pathetic

On the recovery:
  • Roubini on CNBC (with video, found on Calculated Risk):"The recovery is going to be subpar," Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."
  • Dennis Lockhart (from Bloomberg): “The economy is stabilizing and recovery will begin in the second half,” Lockhart said in the text of remarks in Nashville, Tennessee. “The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved."
  • From the Federal Reserve Bank of San Francisco (via Economist's View): "In our view, the recovery will be painfully gradual, with the economy expanding below potential for several quarters."
I could go on (but don't have time this morning). The point is: the consensus view is for a more gradual recovery compared to previous recessions. So what is "gradual"?

By the way, I am also looking for statements by economists that are calling for a V-shaped recovery - please pass along links to those articles.

The chart illustrates GDP in levels (indexed to the end of the recession at 100) during the recession and recovery (the 2 years following the recession, except for 1980, which is 1.5) for all post-war recession that dropped GDP 2% or more, the Biggies. Note: the recession dates are set by the NBER.
  • The '73-'75 recovery is often classified as U-shaped.
  • The '81-'82 recovery is the typical V-shaped.
  • 1980 was headed toward the V, but then the economy "dipped" back into recession - the so-called W-shaped.
  • Notice that the recovery for 07-09 (provided the recession ends in Q2 09) is nothing short of pathetic. The 07-09 A recovery uses Wells Fargo's publicly posted forecast, and is likely the L-shaped if growth rates do not surge in 2011. Even when I simulate the recovery for 3.5% annualized growth starting in Q3 2009 (07-09 B) which is above potential growth, the recovery remains very weak.
This is what they mean when they say it's going to feel like recession, even when the economy is expanding again. The early stages of the recovery are unlikely to produce growth rates that are strong enough to bring down the unemployment rate until well into 2010. Oh man.

Rebecca Wilder

My faves for the day (July 21, 2009)

Why Toxic Assets Are So Hard to Clean Up (Kenneth Scott and John Taylor at the Wall Street Journal)

Macroeconomic Models for Monetary Policy: Conference Summary (Federal Reserve Bank of San Francisco)

Broken Okun (Robert Waldmann, Angry Bear blog)

Wikipedia Teaches NIH Scientists Wiki Culture (Wired Science)

Eclipse of the Century Live Online Tonight (Wired Science)

A Nuclear Power Plant With a View (Slate Magazine)

Sky’s the Limit? National and Global Implications of China’s Reserve Accumulation (Eswar Prasad, Brookings)

Monday, July 20, 2009

My faves for the day (July 20, 2009)

Depressionary bust in Ireland is echoed in California (James Harrison at Credit Writedowns blog)

Quiz: Some Surprising Trends in Global Aging (Kelly Evans at the Real Time Economics blog)

Bank lending to business down 8 percent (Alice Cook at the UK Bubble blog)

Falling dollar attracts Italians to properties in US (Financial Times)

Honestly, this reads like a middle-of-the-road view of the economy. But since a voting member of the FOMC says it, I guess that is different? Fed's Lockhart sees Weak Recovery, Exit Strategy not needed for "some time" (Calculated Risk)

Rebecca Wilder

House price indices: not necessarily the same story

I compare three competing monthly home price indices: the S&P Case-Shiller Composite 20, the FHFA purchase-only index, and the LoanPerformance HPI. Over the year, the stabilization in home values is evident across the board. However, on a 3-month annualized basis, the majority vote shows a stark second-derivative improvement in home values.

The differences between the S&P Case Shiller Composite 20 and the FHFA (formerly OFHEO) purchase-only index are well known. The FHFA tracks home values of mortgages guaranteed by Fannie Mae and Freddie Mac (conforming mortgages only). The S&P Case Shiller Composite 20 does not discriminate and includes home valuwes tied to jumbo mortgages (non-conforming mortgages) as well. On the other hand, the monthly FHFA covers a broader geographic region, including all of the census regions, while the S&P Case Shiller Composite 20 covers just 20 metropolitan areas.

The monthly LoanPerformance HPI claims to be both geographically superior, building its index up from the bottom at the zip-code level. It covers all 50 states, including D.C. (see its methodology at the bottom of the page), and tracks home values of all loan types. This is the HPI used by the Fed to calculate the value of real estate assets in the Flow of Funds accounts.

The chart above illustrates the annual growth rate of each home price index, where each index is showing stabilization in home values on a Yr/Yr basis. However, over the last three months, it is a very different story.

Thi chart illustrates the 3-month annualized growth rate of each home price index. The annualized growth rate is the implied growth rate over the next year if the next 3 quarters saw the same growth rate as the latest quarter (February '09 through April '09, the latest data point).

Here, the stories diverge. The S&P Case-Shiller Composite 20 is still falling at a very quick rate, -18% annualized. However, the FHFA and LoanPerformance HPI are showing stark improvements over the last 3 months, -5% and -3% annualized growth.

If this was a majority vote, FHFA and LoanPerformance would win, and the monthly growth in home values is not as dire as suggested by the S&P Case Shiller Composite 20. There has been significant second-derivative improvement in the last three months.

Rebecca Wilder

Saturday, July 18, 2009

My faves for the day (July 18, 2009)

FRBSF: The Current Economy and the Economic Outlook (Mark Thoma at Economist's View)

Where the foreclosures are (James at Bubble Meter)

The first public healthcare program (The Economic History blog)

Video-o-rama: Goldman Sachs ad nauseam Econ-related videos as well, Shiller, Roubini, Ritholz, to name a few! (Prieur du Plessis at Investment Postcards from Cape Town blog)

The June CPI release: Deflation isn't here, and the chances that it will arrive are receding (Stephen Gordon at Worthwhile Canadian Initiatives blog)

The Pre-election Blues in Japan (Floyd Norris at the NY Times)

Rebecca Wilder

Update on the MBS purchase programs

The Fed owns roughly 12% of the stock of GSE-guaranteed mortgage-backed securities (MBS). Tack on the purchase program at the Treasury, and the government owns roughly 15% of the MBS stock. Try unwinding that quickly.

A note on data sources: To approximate the stock of MBS, I add the recent recorded net-acquisitions by the Fed and the Treasury to the stock of MBS at the end of Q1 2009 (don't know the private acquisitions), as recorded in the Fed Flow of Funds tables (table L.125 here). Total Fed net-purchase must be calculated by tallying up the NY Fed's weekly purchases here. And the Treasury acquisitions are released in its monthly statement.

Rebecca Wilder

Friday, July 17, 2009

Quote for the day

I am a little late in reading this article, but it is good. And here is my favorite quote:
"By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and excons carrying five bucks and a Snickers bar."
-- Matt Taibbi, author of The Great American Bubble Machine

Economic charts to come.... Rebecca Wilder

Thursday, July 16, 2009

Big spenders

The top 5 big spenders in my sample of 26/30 OECD countries for the year 2006...consumers that is:
  • Greece
  • USA
  • Turkey
  • Portugal
  • UK
This is the share of C (private consumptions spending on durables, nondurables, and services) out of Y = C + I + G + NX. I chose 2006 to view pre-recession saving and consumption trends, but it will be interesting to see how these figures change five years down the road!

Note: The source data is the OECD's Main Economic Indicator database

Rebecca Wilder

Wednesday, July 15, 2009

Canada's "normal" recession turning into a "normal" recovery

I have been pretty "positive" about Canada. Compared to the U.S., the Canadian economy simply sits on a firmer (financial) foundation: housing fundamentals were stronger going into this mess; unemployment created a migration pattern toward work; saving rates are rising as in the US, but on a smaller wealth effect; and the overall GDP loss in the current cycle is expected to fall short of a recent time-series of Canada's recession.

But the standard policy response, lowering the policy target to stimulate consumption and investment, has been the same: the Bank of Canada (BoC) lowered its policy rate, the overnight rate, to 0.25%. It did not (correctly) engage in quantitative easing measures - and I believe that it has not officially announced that such measures have been taken off the table - because it is becoming evident that the economy is responding to the massive monetary stimulus already in place.

And Merrill Lynch's new chief strategist and economist for Canada, Sheryl King, criticized the BoC for being too aggressive. From the Globe and Mail:
In her report, Ms. King actually upgraded Mr. Wolf's Canadian gross domestic product forecast for 2009 (she's now calling for a decline of 2 per cent versus 2.7 per cent in the old forecast) and 2010 (growth of 2.7 per cent versus 2.3 per cent). She also suggested that the improved growth prospects over the next 18 months are policy makers' own doing – the flood of fiscal and monetary stimulus “will produce growth.”

And she warned that the Bank of Canada “overreacted to the downside risks” and may have positioned itself to do the same on the upside. She fears that the short-term growth fuelled by policy-driven economic stimulation could artificially boost inflation and output, fooling the bank into tightening its policy too soon.

“It's hard to get monetary policy right at the best of times,” she said. “The probability that [the Bank of Canada's current policy] is exactly the right tonic for the economy is so infinitely small, it's laughable.”
She might be right. Canada doesn't have the strong productivity growth to offset inflation pressures coming from the demand side. And it is becoming quite clear, especially in the housing market, that low interest rates are stimulating some economic activity.

The Canadian Real Estate Association reported a surge in Q2 existing home sales:
National resale housing market activity bounced back strongly in the second quarter of 2009 above levels reported for the same period last year. Demand continues to rebound sharply in some of the most expensive markets in the country, skewing the national average price upward.

According to statistics released by The Canadian Real Estate Association (CREA), actual (not seasonally adjusted) home sales, via the Multiple Listing Service® (MLS®) of Canadian real estate boards, totaled 147,351 units in the second quarter of 2009 – the fourth strongest quarterly sales figure ever. Up 1.4 per cent from the second quarter of 2008, this marks the first year-over-year increase in quarterly activity since the fourth quarter of 2007.
The national average home price also scaled new heights on a monthly basis, climbing 3.6 per cent year-overyear to $326,613 in June 2009. However, only 13 local markets posted new average price records in June, less than a handful of which are among the most active or expensive. The strong rebound in sales activity, not price, in Canada’s most expensive markets is skewing average prices upward nationally and in some provinces, just as a sharp decline in activity in these markets skewed the average lower in late 2008.
Although the re-sale market is really heating up, especially in the high income bracket, new home prices are still falling, -3.1% over the year in May 2009. From Statistics Canada:
Contractors selling prices decreased 0.1% in May following a 0.6% decline in April.

Between April and May, prices declined the most in Saskatoon (-1.2%) followed by Hamilton (-1.1%) and Edmonton (-0.9%). In Saskatoon, a number of builders reported reduced material and labour costs while other builders have lowered their prices to be more competitive and to encourage sales.
And building permits are growing in the single-family home sector, rising for three consecutive months in May. This is usually a leading indicator of new construction in the residential space.

And other types of big-ticket items are likely responding to low financing rates. Auto sales, driven by a surge in truck sales, are stabilizing and actually grew in May. However, preliminary reports indicate a drop in June.

Overall, the economy is stabilizing on the heels of big monetary and fiscal stimulus. And unlike in the US, we are starting to see first-derivative signs of growth. The housing market will (and always) plays a significant role in the early stages of an economic recovery.

When the recovery starts to firm a bit more (Q3 growth is projected to be weak, 0.0% by the Bank of Montreal), we will see if King is right - whether or not the BoC was indeed too aggressive. I wouldn't be surprised if they were.

Rebecca Wilder

Tuesday, July 14, 2009

My faves for the day (July 15, 2009)

15 Ways to Fix the World (The Atlantic)

Too good to last (Garth Turner at the Greater Fool blog); note this is about Canada's housing market.

Chinese Reserves: Boiling Over Again (Rachel Ziemba at Brad Sester: Follow the Money blog)

And a related Upward pressure on the yuan returns (Economist Free exchange blog)

Declaration of Independence (Andrew Cassel at the Data Points: The Dismal Scientist blog)

Mixed Signals (Mehrsa Baradaran at The Conglomerate blog); It is not a surprise that markets are mixed - the US has not experienced this level of financial uncertainty since the 1930's.

Helicopter Wen? (Macro Man blog)

Job Hunting Tips for Those over Age 50 (Tim Manni at HSH Associates blog)

Is a value-added tax in your future?
(Yyves Smith at Naked Capitalism blog)

SPACE PHOTOS THIS WEEK: Lightening, Star Twins, and More (National Geographic News)

Rebecca Wilder

An attempt to offset some of the frictional unemployment

We all know this chart: the "death of the labor market" represented by the surging unemployment rate. This recession has so far driven the unemployment rate, currently 9.5%, to nearly double the Congressional Budget Office's (CBO) estimate of the natural rate of unemployment, 4.8%.

(see a description of nonaccelerating inflation rate of unemployment, NAIRU, or the natural rate of unemployment here, a list of available data at the CBO here, and the direct link to the data here)

In this environment, frictional employment - the lag in employment that results from job searching (not related to cyclical activity) - exists. Frictional unemployment should not be affected by the business cycle, but it's nevertheless conceptually amazing that it remains in times like these.

On the demand side, one would think that workers are willing to accept anything; and that reserve characteristics of a job, i.e., wage, environment, job description, somehow become less important. And on the supply side, there is a whole slew of potential candidates to choose from.

But frictional unemployment does exist. Finding the open positions and workers available is a large factor in frictional unemployment, even in this Great Recession. Perhaps frictional unemployment will fall with further measures like these. From the LA Times:
Several Fortune 500 companies are banding together to create a free new job board that will give users access to all their jobs with just one application.

The website is called United We Work and launched Monday with sponsorship from Sears Holdings Corp., AT&T Inc., Automatic Data Processing Inc., Allstate Corp., Hewitt Associates, Global Hyatt Corp., Office Depot, 7-Eleven Inc. and Starbucks Coffee Co. The site is free for up to a year for other companies seeking to post positions and will always be free for job seekers.
Kerr said that the site had about 350,000 jobs in its database and that he hoped to increase the listings to 500,000 by the end of the week. He said the jobs are culled only from corporate websites to help ensure their legitimacy.
Here's how it worked: Sears might get 100 applications for a single job posting. Once it filled the slot, it could pass along the other 99 applications to other companies in the network. Sears could also access other companies' leftover applications to search for qualified people.
I have looked for jobs on and other such job search-engines; it's frustrating, and that didn't go far. This is a cool website because it forwards applications from filled job openings to (presumably) related positions at alternate job openings. This may reduce some of the friction associated with finding the next potential position (or the next applicant).

Rebecca Wilder

Monday, July 13, 2009

My faves for the day (July 13, 2009)

Here is a shortened version of my faves for the day (no commentary included). But everyday I read articles, especially at blogs that are not as "well known" (some also well known) as the ones that we all read, that are definitely worth a mention.

Daily Source 7/13 (Freude Bud at open source geopolitics blog - great medley of international affairs)

The national debt road trip (Prieur du Plessis at Investment Postcards from Cape Town blog)

Studies in Agglomeration (Ryan Avent at the Bellows blog)

The Ascent of Money (Kevin Press at the Today's economy blog)

Gov't Spending Spike and 15% Less Revenue = Lots of Red (Jake at Econompicdata blog)

Top 10 Scientific Music Videos - yup, They Might Be Giants is listed....unfortunately, not "Flood", though, because that is not about science.

Rebecca Wilder

Counterfeit euros up

From Deutsche Welle:
The European Central Bank, ECB, has reported a 17 percent jump in the number of seized counterfeit euro notes. It marks the highest rate since the EU currency was introduced in 2002.
Twenty and fifty euro notes made up almost fifty percent of the total number largely recovered from across the 16 nations which use the common currency.
Update (for commenter Pablo below): According to the ECB, the increase in counterfeiting is "due entirely to existing counterfeit classes being distributed more widely than before."

Simply put: the use of already printed counterfeit currency is up. We will see if this story goes any further.


Is the Fed really pumping out the money? Exit strategy?

The Fed is expected to lay out its exit strategy when Ben Bernanke reports to Congress next week in his Monetary Policy Report to the Congress (Humphrey Hawkins). From Bloomberg:
The Fed pumped $1 trillion into the banking system over the past year through bond purchases and emergency loans, doubling assets on its balance sheet. Reassuring investors that inflation won’t exceed forecasts once the recession ends will give the Fed more credibility, said Dean Maki, chief U.S. economist at Barclays Capital Inc. While policy makers have spoken about specific tools they may use, they haven’t laid out a strategy.

“Now is the time to articulate the exit strategy,” said Vincent Reinhart, former monetary-affairs director at the Fed and now resident scholar at the American Enterprise Institute in Washington. “The Federal Reserve doesn’t speak with one voice and the testimony is an opportunity to present the consensus view."
But according to Cactus at Angry Bear - we differ on our views of Ben Bernanke as a central bank Chair - the Fed has already begun implicitly not raising its balance sheet since December.
As is often the case, what we all know is false. Wrong. Bull$#%&. The Fed has not been pumping money into the economy lately, at least if you define lately as being “since December” and going through May, the last date for which data is publicly available in FRED, the Federal Reserve Economic Database maintained by the St. Louis Fed. Check out the following graph from FRED, which shows M1, the narrowest of the monetary aggregates, and the one most perfectly controlled by the Fed (see the chart on his post)
So during one of the lowest points for the US economy in decades, only the North Korean counterfeiting machine was doing anything to keep the money supply loose.
Point: the Fed is no longer pumping out the money. It obviously views financial markets as stable enough, but that leaves so many questions unanswered. What about toxic assets? Defaults? Credit? Regulation? We will see when Ben gets in the hot seat (once more) next week.

Rebecca Wilder

Central banks, housing, and asset bubbles

I am reading a great book by George Cooper, "The Origin of Financial Crises", which describes in detail his theses regarding central banks and their inherent reliance on the efficient market hypothesis. He criticizes central bank policy for being too lax as the economy heats up, and only aggressive as the economy enters recession. I haven't finished the book yet, but I believe that general conclusion will be that the Fed should use its powers to target asset price bubbles to offset the failure of the efficient market hypothesis and irrational investor behavior. Interesting.

In the book, he gives an example of the problem faced by central bankers reacting to "irrational" investor behavior. The following is an excerpt from a speech made by Jean Claude Trichet at the Mas Lecture in Singapore on June 8, 2005, "Asset price bubbles and monetary policy":
There is no consensus about the existence of asset price bubbles in the economics profession. Well reputed economists claim that even the most famous historical bubbles – e.g. the Dutch Tulip Mania from 1634 to 1637, the French Mississippi Bubble in 1719-20, the South Sea Bubble in the United Kingdom in 1720 as well as the worldwide new economy boom in the 1990s[2] – can be explained by fundamentally justified expectations about future returns on the respective underlying assets (or tulip bulbs). Thus, according to some authors, the observed price developments during the episodes that I have just mentioned – although exhibiting extremely large cycles – should not be classified as being excessive or irrational. For example, with regard to the new economy boom of the late 1990s it has been argued that uncertainty about future earnings prospects increases the share value of a company, especially in times of low risk premia.[3] This claim can be derived in a standard stock valuation model, where the price-dividend ratio is a convex function of the mean dividend growth rate. The mean dividend growth rate in turn depends obviously on future expected earnings of the company. Heightened uncertainty about future earnings will increase the price-dividend ratio. It has further been claimed that assuming apparently reasonable parameter values with regard to the discount rate, expected earnings growth and most importantly the variance of expected earnings growth, one can reproduce the NASDAQ valuation of the late 1990s and its volatility. There would thus be no reason to refer to a dotcom bubble. I do not mention this example because I believe the NASDAQ valuation of the late 1990s was not excessive. However, if one takes the narrow definition of a bubble very often used by these economic researchers,[4] there is a fundamental difficulty in calling an observed asset price boom a bubble: it must be proved that given the information available at the time of the boom, investors processed this information irrationally.
In order to target asset bubbles using monetary policy, one must be able to prove that the market participants were no way the wiser, given market information at the time, and acting irrationally. To me, this is exactly why targeting asset prices is difficult for the Federal Reserve, whose mandate is to promote a healthy economy through maximum sustainable employment, stable prices, and moderate long-term interest rates.

When targeting asset prices, the Fed must know that the underlying economic fundamentals have changed. All else equal, maximum sustainable employment and stable prices are no longer possible. One runs into the quintessential problem with macroeconomic data: heavy revisions.

A paper by James Kahn at the Federal Reserve Bank of New York argues that the housing market is not an asset bubble, i.e., households and market participants acted rationally rather than irrationally. Households and bankers could not have known that productivity growth had markedly slowed toward its trend in the 2004-2007 years, and taking with it, expected income levels. Here is an excerpt from the conclusion (although the short read is worth a look):
Housing market participants were slow to perceive the most recent decline in the rate of productivity growth because the data released through mid-2007 gave little indication of it. Subsequent revisions of the data made it clear that productivity had in fact begun to decelerate in 2004. Nevertheless, given the information available through much of the current decade, borrowers and lenders might reasonably have inferred that productivity growth remained strong—an inference that would encourage optimism about income prospects and hence higher expenditures on housing.

These findings, together with the previous discussion of the relationship between productivity growth, income, and housing prices, suggest the following scenario for the most recent housing cycle: With the resurgence in productivity that began in 1995, market participants began to see stronger income growth—not from working longer hours or having a second household income, but on a per hour basis. As individuals became more aware that this stronger growth was attributable to technological progress and that it might be sustainable, they grew more optimistic about their future income, and this optimism directly infl uenced their willingness to pay for housing. Such optimism would likely have been shared by lenders, who viewed mortgages as less risky insofar as income and house prices were growing more rapidly than before.

A decade later, however, signs emerged that the new period of high productivity growth would not be as long-lived as the post– World War II episode, which had lasted more than twenty-five years. As buyers and lenders began to recognize this, the same process that caused prices to rise and credit conditions to ease began to work in reverse. The expected income growth did not materialize and new buyers entering the market were less willing to pay high prices; thus, prices of houses purchased in recent years failed to grow as expected. Foreclosures began to increase as early as 2005, and lenders became more cautious.
Basically, household expected income had changed without the knowledge of the household. Therefore, it could be argued that there was no economic fundamental basis for which the central bank would have known that an asset bubble was forming. To be sure, lending standards and underwriting methods should have been regulated. The Fed could not have known that households would later be deemed irrational, and that economic fundamentals had slipped out from under the economy until well after the bubble formed due to heavy revisions in the data.

Interesting stuff. Here is what Bernanke said in a similarly titled speech to Trichet's, "Asset-Price "Bubbles" and Monetary Policy" on October 15, 2002:
So the problem of a bubble popping Fed is much tougher than just deciding whether or not a bubble exists; to follow this strategy, the Fed must also assess the portion of the increase in asset prices that is justified by fundamentals and the part that is not. In my view, somehow preventing the boom in stock prices between 1995 and 2000, if it could have been done, would have throttled a great deal of technological progress and sustainable growth in productivity and output.
It seems pretty clear, that it would take a rather robust methodology to change the Federal Reserve Act in order to mandate the targeting of asset prices. But who knows. It does seem hard to argue that homebuilding, hence real economic activity, was not bubble-ish. Starts remained around the 2 million mark between 2003-2006, while the Fed's incremental rate hikes did not commence until June 2004 (from 1%).

Rebecca Wilder

Sunday, July 12, 2009

Some world stats

According to the IMF, out of 182 countries for the year 2007:
  • 66 ran current account surpluses
  • 116 ran current account deficits
In levels,
  • China ran the largest current account surplus at $371.8 billion US
  • The US ran the largest current account surplus at -$731.2 billion US (Spain was the second biggest debtor at -$145. billion US)
As a % of GDP,
  • _____ ran the largest current account surplus
  • _____ ran the largest current account deficit
You tell me.

And closely tied to current account imbalances, here is an interesting post: David Beckworth at Macro and Other Market Musings proposes that there be a regulator of global nominal spending. Worth a look:
First, the IMF should be monitoring global nominal spending given its objectives for global financial stability. Second, the Federal Reserve should also be closely monitoring global nominal spending because (1) it is a monetary superpower and can currently shape to some degree global nominal spending and (2) it has also an enhanced mandate for financial stability. Stabilizing global nominal spending will not eliminate all financial risk, but it will go along way in preventing the buildup of economic imbalances.
Rebecca Wilder

Monthly foreclosure rate 8% higher than last year; homeowner's strategically walking away

This may not come as a surprise: the LA Times reports that 26% of home mortgage defaults are strategic, with 22% of homeowners holding negative equity (current home value smaller than the mortgage obligation). But the numbers are quite staggering. From the LA Times:
The study found that 26% of the record numbers of home mortgage defaults across the country are "strategic" -- that is, calculated economic decisions to bail out of loans by owners who actually have the money to make the payments but can't handle the negative equity they're carrying caused by local property value declines.
Among the study's sobering findings:

Moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Fully 81% of household heads said they believed intentional defaults on mortgages to be "morally wrong." But that high percentage begins to crumble as negative equity grows increasingly larger.

When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they'd walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
Homeowners are simply weighing the costs associated with foreclosure alongside the benefits of holding the home on balance; and in many cases, the costs are winning out. And as more and more homeowners foreclose, the banks will be faced with new losses. All else equal, this reduces the available (i.e., willingness and ability to lend) credit to potential homeowners/consumers, which then depresses potential sales. It is a vicious cycle. relates the percentage of homes that go into foreclosure each month across state and metro areas here. Nationally, 0.07% of all homes were foreclosed upon in the month ending 4/30/2009. If that rate holds over the next year, then roughly 1 foreclosures would be added to over the next year based on the Census' 2007 127.9 million estimated stock of homes. The bad news is: the monthly foreclosure rate is 8% higher than it was last year. The good(ish) news is: that the monthly foreclosure rate is 9% lower than it was the month before.

The chart illustrates the monthly foreclosure rate of single-family homes by state (x-axis) and the growth in that rate since last year (y-axis). Arizona, Nevada, and California have the highest foreclosure rates, but the monthly pace is down since last year. The bubble is working its way through. Going forward, though, the monthly foreclosure rate is likely to grow in some economies, like those seen in Connecticut and Hawaii, as recessionary pressures of rising unemployment and falling income pass through to the housing market.

Oh man. It's bad out there.

Rebecca Wilder