Thursday, December 31, 2009

Thursday, December 24, 2009

Recession slammed domestic migration

Earlier this year, I compared US migration with that in Canada - one healthy, the other not so much. As a sequel to the story, the Census released its figures for migration into 2009, and the pattern in the US has worsened (you can download the data here).

The picture of American mobility is one of people/workers/households with essentially nowhere to go. Unemployment is ubiquitously high, and the housing market is lousy - can't sell your home, can't get a job. This Great Recession dragged net-domestic migration (moving within the US borders) down in all regions of the country.

Here are some of the headline results according to the Wall Street Journal:
The recession has had a profound effect on migration patterns in the U.S., reversing the flow of people to former housing-boom states such as Florida and Nevada, the latest data from the Census Bureau show.

In the year ending July 1, 2009, Florida -- once the top draw for Americans in search of work and warmer climes -- lost more than 31,000 residents to other states, the Census Bureau reported Wednesday. Nevada lost nearly 4,000. The numbers are small compared with the states' populations, but they reflect a significant change in direction: In the year ending July 2006, Florida and Nevada attracted net inflows 141,448 and 41,640 people, respectively.

There's no place to go. If you are in Michigan, for example, which state has the better prospects? And furthermore, homeowners are likely to find it very difficult to sell. It is worthwhile to compare the current experience with the cyclical downturn of 2001, when the unemployment rate increased for two years into 2003.

The chart below illustrates the net-domestic migration rate in 2003 and 2009 for each state, excluding the outliers which are listed in the text box. This is the state-level compliment of the first chart, which lists changes in migration patterns by region.

A 45-degree line is drawn: states above the line are seeing higher net-migration compared to 2003, while those below the line are posting lower net-migration than in 2003. Also, positive numbers indicate net-immigration (more people entering the state than leaving), while negative numbers indicate net-emigration (more people leaving the state than entering).

The first observation is that the "usual suspects", Nevada, Florida, and Arizona, are the outliers. Nevada, for example, saw its net-domestic immigration rate of roughly 20% in 2003 turn negative by 2009, -1.5%. And compared to the previous recovery, which saw rising unemployment through the middle of 2003, states like Colorado, Oklahoma, Louisiana, and Utah are experiencing increased migration into their states. However, a larger share of states are seeing migration patterns slowing or even turning negative. And finally D.C., home to the US government, is experiencing large migration inflows compared to the last recession, -17.8% to +7.5% in 2009. Best to be near the spending.

In the first chart, there is clearly a negative correlation between years in which the unemployment rate is rising (2003) and net-domestic migration across regions. But this time around, the magnitude is much larger - the labor market was hit harder and the housing market is in shambles.

A more flexible migration pattern would further the structural shift that is underway in the labor market (generally out of manufacturing and financial services and into alternate industries). It will take some time for the migration clog to free up, and the structural re-balancing of production and jobs will likely take some time. There's just no quick fix.

Rebecca Wilder

Tuesday, December 22, 2009

Gravity will drag the $US

The US dollar ($US) is on a roller coaster. And since S&P downgraded Greece to BBB+, the dollar has been on the rise. One can attribute the recent shift in the $US to many things - improving US economic conditions, return to risk, or relative weakness in other G7 countries, whatever. But what is clear, is that the dollar's gaining some strength, 4.7% since the beginning of December on a trade-weighted basis.

But this is not sustainable. As economic recoveries diverge (i.e., the G7 recovery is expected to be slower than that in key emerging markets), the dollar will likely fall. That's just gravity, and a necessary condition for sorting out global trade flows.

The chart illustrates the effective value of the $US, which is a composite index of the value of the $US against US trading partners (one source for this data is the Bank of England). As recently as November, the $US slid to its lowest value since March 2008. At that time - and really anytime the $US initiates a descent - Washington gets all worked up; but why? One of the necessary conditions for the re-balancing of trade flows between major trading partners is dollar depreciation.

Just look at the contribution to GDP growth from exports in 2006 and 2007, when not coincidentally the dollar was sliding.

The chart illustrates export growth and the contribution to GDP growth, as released by the Bureau of Economic Analysis. Note: an easy way to get this data is to simply download the excel file in the right sidebar of the release page.

A weak dollar can drive economic growth - especially as trade resumes, and emerging markets see a much quicker rebound than that expected for the G7. According to the Financial Times, its already happening - Asia ex-Japan is moving Japan's export market:
Japanese exports continued to increase in November because of robust demand from Asia, easing concerns about the strength of the country’s economic recovery.

Real exports were up by 0.6 per cent on October, according to Bank of Japan data. This was the eighth consecutive monthly rise, although the pace of increase was the slowest since exports began to recover in April.
A weaker dollar is a big part of the story for a re-balancing of trade flows. And its not just a US and China problem. According to the IMF, the 2007 US current account deficit was $731 billion, while the value of China's surplus was just half that, $372 billion. It's much of Asia and the Middle East that are likewise driving imbalances (of course, the US is not an innocent bystander here). The dollar will see weakness again on a trade-weighted basis; that's gravity.

Rebecca Wilder

Sunday, December 20, 2009

The 2010 Census: economic impact probably overrated

This year the US government is hiring for its 2010 Census. According to its job website, 2010 Census Jobs, "Hundreds of thousands of census takers are needed nationwide to help locate households and conduct brief personal interviews with residents". And in response, Rebecca Blank at the Department of Commerce (via the NY Times), expects the monthly unemployment rate to drop about 1/2 of a percent. As I discuss below, the Census is not the economic boon that some will have you believe.

The NY Times article refers to the 2010 Census hiring as a $2.3 billion "injection into the economy". Mark Zandi at Moody's says:
“It’s a form of stimulus. It’s like infrastructure spending, or W.P.A. in the Depression. It effectively does the same thing. It’s not on the same scale, but it is large enough, and it will make a difference.”
I disagree. The $2.3 billion figure is misleading; it is simply earned income (about 800,000 jobs X $25/hour X 20 hours/week X 6 weeks), rather than direct spending. A worker that earns temporary income from a six-week job is more apt to save the income rather than spend it - that's why rebates don't work. Not much stimulus there.

And don't forget the other side of the Census hiring story: the inevitable laying off of workers following the peak Census month.
The chart illustrates annual growth in government employment according to the establishment survey. Like clockwork, the Census survey grows government jobs to a peak 2.5%-4.5% annual pace in April or May of the census year. This means a peak impact of 800k-900k new jobs created in April or May 2010 (I use the average annual growth rate of 3.8% and a historical monthly average to forecast the payroll until April). All else equal, the unemployment rate will drop.

But consider this. It is likely that a very large share of the monthly 800,000 hires will simply be unemployed when the Census culminates - hence, the unemployment rate will rise in the early summer. And it's very possible that the increase in the unemployment rate will be larger than its decrease. If any discouraged workers - those who have not searched for employment recently and are counted as "not in the labor force" - are hired and do not secure new employment after the six-week job is over, then they will join the ranks of "unemployed".

We'll see; but the economic impact of the 2010 Census, to me, is questionable.

Rebecca Wilder

Saturday, December 19, 2009

This week's Greek tragedy

An article I wrote for Angry Bear: This week's Greek Tragedy


Market eye candy for the day

I just can't get over the run that the bond markets have had, especially in emerging and US high yield markets.

I indexed the four composites to 100 for comparability.


Sunday, December 13, 2009

US FDI, growth, and the capital stock abroad

The precipitous drop in world trade is well documented (see one of my previous posts for a look at nose-diving exports in Asia); but the adverse effects on FDI is overlooked, in my view.

Foreign direct investment (FDI) is an important conduit to economic growth in the US and abroad. As an example, let's look at what's going on in Alabama, according the local paper (bold font by yours truly):
BAY MINETTE, Ala. -- Things are quiet at a 3,000-acre industrial megasite northeast of town, but events in China are moving an eco-friendly auto plant closer to reality, a company executive and local economic recruiter said last week.

Charles Huang, vice chairman of Hybrid Kinetic Motors, said company leaders including Chairman Yung "Benjamin" Yeung, are finishing several agreements for design and production of components for the Alabama-built autos.

HK Motors announced in September that th
e $4.3 billion plant would employ about 5,800 at full capacity, producing 1 million vehicles annually by 2018.
If and when the HK Motors plant opens up, with the onset of production comes jobs, new income, and a growing capital stock (i.e., the machines and buildings). In the developing world, the effects are magnified since incomes and capital stocks start at a relatively low levels.

But this recession has dropped FDI markedly. According to the Q3 2009 Flow of Funds Accounts of the United States, outward FDI (US firms building plants in non-US economies) rebounded to a 3.8% annual pace, while inward FDI (foreign firms building plants in the US) slowed to a meager 1.7% rate.

In spite of the rebound in outward FDI, the growth rate of the stock of capital stemming from FDI is suffering.

The chart above illustrates the growth of the stock of capital resulting from FDI in and out of the US. The stock of capital is constructed using a simple dynamic equation, which includes investment each period (from the Flow of Funds Accounts, Table L.229) and the non-depreciated existing capital stock.

Since their peaks, capital formation stemming from outward FDI has slowed 40% to an 8.1% annual growth rate, while that stemming from inward FDI slowed 32% to a 9.2% annual rate. The global problem here is: even though US outward FDI rebounded in Q3, the production-generating FDI stock of capital growth is falling to its slowest annual pace since since 1995.

Going forward, the stock will depreciate further; and it will take new FDI to bring it back. This is critical for emerging markets that depend on FDI to foster economic growth.

Rebecca Wilder

Saturday, December 12, 2009

US Flow of Funds: wealth recovery fully underway, China?

This week the Federal Reserve reported the Q3 2009 Flow of Funds accounts. The headline indicators show household net worth improving and private debt burden falling.

The private sector - households and firms - is dropping leverage.

Update: This chart has been modified slightly - the leverage level data (highlighted in blue, red, and green) has been updated.
Either by default or by growing saving, the private sector is de-leveraging. According to the D.1 table, households and nonfinancial businesses dropped debt a further 2.6% q/q annualized, while financial sector debt fell another 9.3%. However, total debt (of the domestic nonfinancial sector) grew 2.8%, as the federal and state and local governments grew debt 20.1% and 5.1%, respectively.

Household wealth grew $2.7 billion trillion for a cumulative gain of $4.9 billion trillion since wealth hit a cyclical low in Q1 2009. To put this gain in perspective, household net-worth dropped $17.5 billion trillion from Q3 2007 to Q1 2009, 3.5 x the recent gain. Wealth to disposable income, a statistically significant factor of the personal saving rate, rests right around it long-term (1952-1007) average, 4.9.

The chart illustrates the wealth-effect as the ratio of net-worth to disposable income. The direct and adverse impact of the wealth loss on consumption probably peaked last quarter; however, the lagged effects are ongoing.

Notice that the ratio shifted discretely in the 1990's, not coincidentally when China's current account surplus took off.

Most likely, the wealth to personal income ratio has mean-reverted, and will not rise back to its 5.7 1997-2007 average. A necessary condition is that global portfolio flows rebalance - i.e., China saves less and the US saves more. However, this will not happen tomorrow - de-leveraging is a process that takes years. The increase in international saving (i.e., falling current account deficits) will take some time, and by definition includes the general government eventually dropping its debt burden. Not to mention the political rhetoric and growing trade barriers suggest that a long-term economic shift is a ways off.

Rebecca Wilder

Tuesday, December 8, 2009

India: fdi and saving are key....

India's in the headlines today.

From Bloomberg:
J. Kumar Infraprojects Ltd. plans to raise as much as 1.01 billion rupees selling 5.6 million shares to large investors, according to a share-sale document.
From Bloomberg:
GE Hitachi Nuclear Energy, which plans to build an atomic power plant in India, said as much as 70 percent of the components may be made locally to reduce costs and also exported to customers in Europe and the U.S.
From the Financial Times:
International power companies from Russia, France, the UK, the US and Canada are flocking to India seeking opportunities to help one of the world’s fastest-growing economies meet its energy demands. The contribution of nuclear energy in India is forecast to rise from 4,000MW to as much as 470,000MW over the next 40 years.
India's hot. And accordingly, multinationals around the world want to set up shop and produce directly in the world's second most populated country, 1.16 billion and growing (foreign direct investment, or FDI).

As is illustrated in the graph above, foreign domestic investment facilitates the growth of the capital stock that would be unattainable given its relatively lower domestic saving. FDI, or inward fixed investment, is one of the most important factors in facilitating growth for a developing economy (one whose investment growth is not subject to diminishing returns).

Recently, India has made much progress in attracting new FDI - its growth surged in 2009 in spite of the global economic recession.

The chart illustrates the inflow (not net) of foreign direct investment to Brazil, India, and Russia. Stemming partially from big FDI (hence capital investment), India grew quickly in 2009 - 3Q growth was reported to be a huge 7.9% y/y.

And the OECD recently hailed India for its efforts to lower barriers to entry:
The OECD’s Investment Policy Review of India says India has designed policies to encourage investment as part of market-oriented reforms since 1991 that have paved the way for improved prosperity.

“Restrictions on large-scale investment have been greatly relaxed. Many sectors formerly reserved to the public sector have been opened up to private enterprise. Import substitution and protectionism have been replaced by an open trade regime,” the OECD report notes.

But further reforms are needed. India’s policy framework for FDI still remains restrictive compared with most OECD countries. Meanwhile, its investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity.
Point: India recently made great headway in opening borders to direct investment, but more is needed. For example, India's foreign direct investment levels are similar to the other BRIC countries (ex China in the first chart), but per-capita income is by far the smallest.

Going forward, saving (including the government, which poses a very large risk, and for another post) and investment are critical to the outlook of the economy. It's up to policymakers in India to keep the economy on a sustainable growth path.

The Wall Street Journal posted a nice article today on the need to stimulate opportunistic entrepreneurs in India. Interesting stuff.

Rebecca Wilder

Sunday, December 6, 2009

Too efficient NOT to consolidate

Here’s yet another historical record broken in 2009:
“Only three insured institutions were chartered in the [third] quarter, the smallest quarterly total since World War II.”
This fact is from the FDIC’s latest Quarterly Banking Profile. There are probably non-economic reasons for this, i.e., the application process to qualify as a new charter institution (see the types of charters here) is likely much more stringent than in previous years; but nevertheless, this fact reiterates the trend in the number of banking institutions, most definitely down.

The FDIC is awash in problem institutions. The well reported number of bank failures jumped to 132 in 2009 (as of November 20, and you can find the data here). However, that’s just share of the much larger “problem”. According to the same quarterly profile, there are now 552 “Problem” institutions in the FDIC charter system holding $346 billion of assets on balance – that’s 2.4% of nominal GDP.

As such, it seems that consolidation is all but a foregone conclusion. But watch out, because the new 4-letter-style phrase, “too big to fail”, is heavy on the tongues of US policymakers. Senator Bernard Sanders (Vermont) introduced the “Too Big To Fail Is Too Big to Exist” bill last month, which defines such an institution as (see the bill here):
"any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance."
Ahem, so how big is that? Peter Boone and Simon Johnson at the Baseline Scenario define “too big to fail” as bank liabilities amounting to 2% of GDP (roughly):
"So to us, 2 percent of G.D.P. seems about right. This would mean every bank in our country would have no more than about $300 billion of liabilities.

A large American corporation would still be able to do all its transactions using several banks. They would even be better off — competition would ensure that margins are low and the banks give the corporates a good deal. This would help end the situation where banks take an ever-increasing share of profits from our successful nonfinancial corporations (as seen in the rising share of bank value added in G.D.P. in recent decades)."
But there are economic efficiencies, like scale economies, that need to be considered. David C. Wheelock and Paul W. Wilson at the St. Louis Fed find statistically significant increasing returns to scale (i.e., bigger banks, lower costs) in the US banking system. They use a non-parametric estimator to estimate a model of bank costs and find the following (link to paper, and bolded font by yours truly):
"The present paper adds to a growing body of evidence that banks face increasing returns over a large range of sizes. We use nonparametric local linear estimation to evaluate both ray-scale and expansion-path scale economies for a panel data set comprised of quarterly observations on all U.S. commercial banks during 1984-2006. Using either measure, we find that most U.S. banks operated under increasing returns to scale. The fact that most banks faced increasing returns as recently as 2006 suggests that the U.S. banking industry will continue to consolidate and the average size of U.S. banks is likely to continue to grow unless impeded by regulatory intervention. Our results thus indicate that while regulatory limits on the size of banks may be justified to ensure competitive markets or to limit the number of institutions deemed too-big-to-fail, preventing banks from attaining economies of scale is a potential cost of such intervention."
Better put: the cost of consumer and firm loans will be higher in the long run if too much intervention prevents the banking system from capturing scale economies. Furthermore, they suggest that even the largest institutions experience increasing returns (i.e., these).

As a note, David Wheelock wrote a very interesting piece a while back about the inefficiencies of mortgage foreclosure moratoria during the Great Depression …interesting stuff (paper link here).

Rebecca Wilder