Echo

More "food for thought" on wages

Thursday, April 30, 2009

More evidence that wage growth is nearing the red zone. From the Bureau of Labor Statistics:

Total compensation costs for civilian workers increased 0.3 percent from December 2008 to March 2009, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This follows a 0.6 percent increase for the September to December 2008 period. In March 2009, wages and salaries also rose 0.3 percent, while benefits rose 0.5 percent.The Employment Cost Index (ECI), a product of the National Compensation Survey, measures changes in compensation costs for civilian workers (nonfarm private industry and state and local government workers).
The employment cost index is rather new, dating back to 2001. However, spanning 2001-Q12009, which includes the Greenspan era of record productivity growth, the ECI continues to hit new lows, slowing to 2.1% over the year. I expect that we will see further weakness in this measure of compensation, as the job loss mounts further and the economic slack builds.

Wages are not yet falling, the Q1 ECI grew at a 0.3% pace, but they growth in wages is slowing quickly. This fits the "deflation is a bigger threat" story (see my post yesterday for a similar take on wages and inflation).

Rebecca Wilder

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World economic reports (April 23-30): the good, the bad, and the ugly

The 2009 global economy is still contracting quickly, as shown by key Q1 GDP reports. However, there are some glimmers of hope that are emerging, like industrial production in Japan got a bump in March and German and U.S. survey reports show some signs of relief. However, the light at the end of the tunnel is still very dim - even the positive indicators remain very much in negative territory.

The good: Japan's Industrial Production rose 1.6% in March

The chart illustrates the preliminary figures for Japanese Industrial Production through March 2009. The 1.5% bump is certainly a relief; however, production levels remain down over 35% since last year. Baby steps, I suppose.

More good: Survey reports in Germany and the U.S. rebound

The chart illustrates the Germany Ifo business climate survey and the Conference Board's consumer confidence survey through April. The German Ifo survey rose to its highest level in 5 months. However, businesses contend that inventory liquidation is imminent, and therefore, new production is not. Likewise, the U.S. consumer confidence surve surged in April, consistent with yesterday's reported 2.2% gain in consumer spending. However, it is prudent to note that this survey is still very low, and so too is consumer demand.

The bad: Annual export growth remains on red alert

The chart illustrates annual export growth through March for Switzerland and Thailand, and through February for the Philippines. The noteworthy observation here is: that annual export growth slowed in Switzerland and the Philippines, which is luke warm news at best, given that their growth rates are double digit negative.

The ugly: GDP falling precipitously in Q1 2009

The chart illustrates GDP growth in Q1 2009 (on a year over year basis, which means Q1 2008 to Q1 2009, not quarter over quarter, or Q4 2008 to Q1 2009...easier to compare) in South Korea, the U.S., and the U.K. The figure speaks for itself: the economic contraction worsened in Q1 2009. Each economy is setting records, especially in Korea.

Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.

Rebecca Wilder

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A policy faux pas

Wednesday, April 29, 2009

Isn’t this a little like shooting yourself in the policy foot? According to The Independent, Bank of England Monetary Policy Committee (MPC) member Kate Barker said the following:

[lenders] "are right to be extra careful today in light of future
uncertainties, with unemployment and repossessions continuing to rise."
The central bank uses the credit markets to stimulate the economy; and half of that equation is the supply side, i.e., lending. For the central bank to tell lenders that they are “right” to be cautious is more likely to get banks not to lend rather than to lend.

To be sure, Barker is right, and don't bankers know it! However, to pat banks on the back for being tight with the loanable funds seems like a central banker mistake to me.

Rebecca Wilder

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Got wages?

The common theme among the following articles is: wage cuts.


Tentative Nod to a Pay Cut at The Times:
The Newspaper Guild, the union that represents newsroom and certain other employees of The New York Times, tentatively agreed Tuesday to a 5 percent salary cut that had been proposed by management. The pay cut, which has already been imposed on nonunion employees of the newspaper, will go to a full vote of the union membership next week. The pay reduction, which began for nonunion workers on April 1, would end on Dec. 31, 2009, the union said.
More Job Reductions Planned at Sotheby’s:
Salaries will be reduced for top employees, too, and the company plans unpaid furloughs as well as a reduction in pension contributions for those working in the United States.
NC governor cuts pay of state employees, teachers:
North Carolina Gov. Beverly Perdue on Tuesday ordered a pay cut for all state workers in May and June equal to a half-percent of their annual salary as worsening tax collections force her to find about $1 billion more in savings before the end of the budget year in June. (Note: many states are cutting pay to accommodate record revenue loss)
Hundreds of Danvers employees accept salary freeze:
The employees make up seven of the town's 12 labor unions. Their agreement to forgo an approximate 3 percent raise in the coming fiscal year means no layoffs in their respective collective bargaining units as Town Manager Wayne Marquis scrambles to close a $900,000 budget shortfall.
And in Singapore, Layoffs remain companies' cut of last resort:
This time around, even before the National Wages Council (NWC) released revised guidelines in January, many employers had already moved to reduce their wage bills, and staved off (or maybe delayed) the need to wield the jobs guillotine.
The unemployment rate was 8.5% in March, up 3.4% since just last year (when the U.S. was already in a recession). Workers are desperate and willing to accept the salary freezes and/or wage cuts. As costs (wages) come down, firms are better able to reduce final goods prices in order to sell their product as demand for their product falls. But then, as prices fall workers are willing to accept lower wages. This is the infamous wage-price spiral.

Anecdotal evidence suggests that wages and salaries are either falling or frozen - at least mine was in 2009 - but certainly not rising. Although the chart above shows that average hourly earnings are not falling yet, the annual rate of growth is certainly slowing. Wages: just another signal that prices are going down.

Rebecca Wilder

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Treasury's supplementary financing program is here to stay..at least until 09/2009

Tuesday, April 28, 2009

In September 2008, the Treasury and the Fed announced a new and temporary Treasury Supplemental Financing (SFP) account to aid in the Fed's quickly expanding liquidity facilities by sterilizing some of the flows. Since then, one must look closely to see the story developments around the SFP.

In November 2008, the Treasury announced that it would be unwinding the SFP account "in coming weeks".

In February 2009, the Treasury announced that it expected to borrow $165 billion of marketable debt for the April-June 2009 quarter. This did not include funds to replenish the SFP account, as the program was deemed temporary.

In April 2009, the Treasury announced that its April-June 2009 actual borrowing was $196 billion greater than its February estimate of $165 billion, due in part to the unannounced continuation of the SFP account.

In April
2009 (same statement as above), the Treasury announced an expected $515 billion in borrowing for the July-September 2009 quarter, with an explicit $200 billion borrowing to fund the SFP account.

I assumed that the Treasury would have unwound the SFP account completely by now; but instead, it is issuing new debt to keep the account funded. Perhaps the Fed will use this account (at some point) as a method to soak up reserve balances when it wants to unwind the liquidity. But one thing is for sure, this temporary program is set to last at least until September 2009.


Rebecca Wilder

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The feedback loop: segregation and education in the last 30 years

A study shows that clustering of income classes indicates that the U.S. is increasingly segregated now compared to previous decades. This is problematic, as a positive feedback loop develops, and the segregation spreads. One example is present in the Census data released on education: educational attainment by race, has improved only slightly since 1969; a wedge is still quite evident at the bottom and top tails of the distributions.

A visible pattern of income-class clustering (living in groups) emerged. From the WSJ's Real Time Economics blog (Mark Thom provides an excerpt of the paper here):
America is a more segregated society today than it was in 1970 — when one looks at the tendency of rich, poor and middle class to cluster together, says economist Tara Williams, who studied 216 cities and finds that the bulk of this new segregation occurred during the 1980s at the same time as the gap between the incomes of rich and poor widened substantially.

...

“As inequality increases, it becomes less likely that rich and poor households are willing” — or able — “to pay similar amounts for a given set of neighborhood amenities,” she says. “As income inequality rises, the rich will be more likely to outbid the poor for high-quality neighborhoods and the rich and the poor will be less likely to live in close proximity.”

RW: A tendency for income classes to cluster could magnify the segregation across the economy, affecting, earnings, job availability, mobility, and overall welfare. And a report by the Census Bureau shows just that: educational attainment by race, has improved slightly; however, a wedge is still quite evident at the bottom and top end of the distributions.

Education
by race in
1969
As always, click to enlarge

The chart illustrates the percentage of the White and Non-white non-institutional population that achieved each level of education in 1969. The White population achieved a higher level of education across all categories of higher education.

The disparity across race is especially evident at the bottom and top end of the distributions. In the Non-white population, 39% achieved just an elementary school level of education, and 12% attained at least some college education, with 5% receiving a college degree. On the other hand, a lower 25% of the White population achieved just an elementary school level of education, while 20% attained at least some level of college education, with 9% (almost double the Non-white) receiving a college degree.



Education by race in
2008. Note: since the 1969 report breaks down race into 2 categories, White and Non-white, I present the 2008 data in the same manner. However, the Census now follows four categories of race.

The chart above shows that in 2008 a similar pattern to that in 1969. There is a larger share of the Non-white population that achieved less than a high-school education (1st-11th grade), 25% Non-White versus 9% Non-Hispanic White, and a smaller share that attained a Bachelor, Master's or Professional, or Doctorate level of education, 20% total Non-white versus >30% total Non-Hispanic White.

According to the Census report,
"workers with a high school degree earned an average of $31,286 in 2007, while those with a bachelor’s degree earned an average of $57,181."
That's a $26k premium on earnings if a worker has a B.A. Hmm....

To be sure, the size of the 2008 non-white population has increased substantially since 1969; and furthermore, the 1969 data includes data on the population aged 14 yrs and older, while the 2008 statistics consist of the population aged 18 yrs and older. However, the trend is clear: there are potentially harmful feedback loops between income inequality and education by race.

The negativepositive feedback loop: income inequality - disparate education opportunities - diverging relative earnings - income inequality.

Rebecca Wilder

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The CBO gets a bit Doomier

Monday, April 27, 2009

Nouriel Roubini, self-proclaimed Dr. Realist, on the U.S. outlook in an interview with the Washington Post...:

Next year, I believe that the growth rate is going to be low -- 0.5 percent
for the U.S., compared to the consensus view of [plus] 2 percent. I believe the
unemployment rate this year is going to go well above 10 percent and will be
well above 11 percent next year, so even if we are technically out of a
recession, we are going to feel like we are in a recession.
...now sits on the Congressional Budget Office's Panel of Economic Advisers. I don't know why, but he was not listed directly in the WSJ Real Time Economics blog's commentary of the members.

Rebecca Wilder

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Reader links for the day

Several readers are kind enough to send me links to interesting material all over the web, which I decided to share.

Ronald is concerned about the next shoe to drop in the credit market, commercial real estate. From the Economist:

But its [GENERAL GROWTH PROPERTIES (GGP)] failure still sends two shock waves. First, by including several properties that back commercial mortgage-backed securities (CMBS) in its Chapter 11 filing, GGP has unnerved investors who expect such assets to be ringfenced in a bankruptcy.

The second shock wave is that GGP’s bankruptcy underlines a pervasive refinancing risk for the industry. Foresight Analytics, a research firm, reckons that $594 billion of commercial mortgages will mature in America alone between 2009 and 2011. Many of these borrowers will have a big problem when their loans mature.


Steve notes that the Fed expanded the TALF program to include commercial mortgages. From Bloomberg:
The Federal Reserve expanded its $1 trillion program to finance the purchase of assets clogging bank balance sheets to include securities backed by commercial mortgages last month. Spreads on the debt have narrowed 3.63 percentage points since the Fed said it would include the debt.
RW: The govenrment has alluded to expanding the program, but that has not become official. The most recent Fed TALF Terms and Conditions sheet indicates that the program is still related to ABS backed by student, auto, and credit card loans. With TALF's anemic start, investors expect CMBS to be included in the TALF program soon and likely the reason why the market is shifting.

Steve also provides an nice article about the IMF. From The Atlantic:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

ECr at the Trading Well and Living blog sent me a descriptive testimony about the [past] excesses on Wall Street. From The Independent:
It was pretty clear what The Market didn’t like. It didn’t like being closely watched. It didn’t like rules that governed its behaviour. It didn’t like goods produced in First-World countries or workers who made high wages, with the notable exception of financial sector employees. This last point bothered me especially.
James McCusker at the HeraldNet describes a ponzi scheme in his article Ponzi schemes can be elusive:
The schemes are named after Charles Ponzi, who immigrated to America and brought with him an irrepressible dream -- first, of getting rich, then of getting rich quick. His financial scam, launched from a Boston office in 1920, operated on a grand scale -- seeking and receiving immense amounts of media coverage that made him a celebrity. Offering a return of 50 percent in 90 days, he accepted funds from investors who believed they were participating in arbitrage transactions -- swapping international reply coupons for postage stamps.
Happy Reading. Rebecca Wilder

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A weekend of German banking news

Sunday, April 26, 2009

As we anxiously await the results of the infamous stress test, there are equally ominous goings-on across the Atlantic. First, on Friday, the Hypo Real Estate Group's Management Board and Supervisory Board announced a new German government push for a 90% controlling stake. According to the press release:
The Financial Markets Stabilisation Fund (SoFFin) intends to subscribe to new shares to the extent necessary to acquire a 90% majority stake in the Company's capital and voting rights. The new shares are proposed to be issued at the lowest price.
RW: The existing offer of € 1.39 per share expires on May 4, and through this offer the government acquired a roughly 10% stake in the company. Now, Hypo Real Estate is planning to increase the number of shares until the government owns a 90% stake, effectively nationalizing the firm, which is also subject to vote. What is the government going to do with its new financial company? Will it run the bank? Replace top executives? Break up the bank? There are still a lot of questions.

In a related event, a stress-test-like list was leaked to the press revealing the value of toxic assets being held on the books of the German banking system. From Deutsche Welle:
A German newspaper has published a leaked list from the BaFin financial oversight group that shows German banks are weighed down under 816 billion euros in toxic assets. The list from the federal financial supervisory authority BaFin, which details the scope of toxic assets held by German banks, was made public by the Sueddeutsche Zeitung daily.

According to the list, the banks with the worst credit and asset problems include Hypo Real Estate,
Commerzbank and several state banks. Commerzbank's share of the toxic assets amounts to 101 billion euros, with 49 billion of those coming from the recently acquired Dresdner Bank. Hypo Real Estate, which is looking at a likely 90-percent takeover by the German government, has 268 billion euros in toxic assets on its books.
...
At issue are two potential solutions for the toxic asset crisis. The first involves revaluing the bad assets through a neutral third party, and the other involves collecting the bad assets and giving banks a guarantee against the debt on their balance sheets.

These assets would be backed by the German government, and are reported to be favored by the state banks.
RW: Looks like the German government is weighing its options: guarantee, bad bank, nationalization, etc. Surely, there is more news to come on this front. 816 billion euros is roughly 33% of German GDP...ouch!

Update: Edward Harrison at Credit Writedowns has a nice article on this subject.

Rebecca Wilder

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Holy Bankruptcy!

From the U.S. courts on bankruptcy filings in 2008:

Bankruptcy filings in the federal courts rose 31 percent in calendar year 2008, according to data released today by the Administrative Office of the U.S. Courts. The number of bankruptcies filed in the twelve-month period ending December 31, 2008, totaled 1,117,771, up from 850,912 bankruptcies filed in CY 2007. Filings have grown since CY 2006 when bankruptcy filings totaled 617,660, in the first full 12-month period after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. An historic high in the number of bankruptcy filings was seen in calendar year 2005, when over 2 million bankruptcies were filed.
The chart above illustrates the annual growth in bankruptcy filings through the fourth quarter of 2008. As indicated by the bankruptcy release, this data is subject to discrete shifts in response to new legislation (like in 2005 and 2006). However, the trend is clear: bankruptcies - business and consumer - are surging, 33% over the year in Q4 2008.

The chart illustrates the 2008 trend in bankruptcy filings by type, chapter 7, 11, 12, and 13 (you can see a discussion of the different bankruptcies here). Bankruptcies are up across the board, and the biggest share of bankruptcy filings, Chapter 7, is surging at an annual rate of 47%.

Bankruptcies lag recessions (circles in the first chart). And given the magnitude of this recession, there is still a lot of default and bankruptcy in the pipeline. No wonder Q&A articles on filing for bankruptcy are big news these days.

Rebecca Wilder

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Fed measures killed the yield on household saving

Saturday, April 25, 2009

A reader of this blog expressed concern about the effects of the Fed's massive expansionary efforts on the value of household saving. Specifically, the Fed slashed its fed funds target 510 bps from 5.25% in September 2007 to 0%-0.25% in December 2008, which has likewise driven down saving yields. Tom Petruno at the LA Times wrote a piece to this effect:

Who's really bailing out the banks?

Taxpayers, for sure. But the largely unsung victims of the financial system rescue are loyal bank depositors -- especially older people who have relied on interest income from savings certificates to live.


To save the banks from soaring loan losses, the Federal Reserve did what it always does when the industry gets into trouble: Policymakers hacked their benchmark short-term interest rate, which in turn pulled down all other short-term rates, including on savings vehicles.


But this time the Fed went to rock-bottom on rates. In December, the central bank declared that it would allow its benchmark rate to fall as low as zero.


Savers still are paying the price for that gift to the banks. Average rates on certificates of deposit nationwide have continued to slide this year, according to rate tracker
Informa Research Services in Calabasas.

The average yield on a six-month CD fell to 1.27% this week, down from 1.86% on Jan. 1 and 2.24% a year ago. Anyone who has a CD maturing soon should be prepared for serious sticker shock.


Banks have been able to continue whittling down savings yields because the industry overall is flush with cash -- not just from the Fed's efforts to pump unprecedented sums into the financial system, but also because the events of the last year have left many people too afraid to keep their money in anything but a federally insured bank account. At least you know your principal is guaranteed.


Even as short-term interest rates have dived since the financial crisis exploded in September, the total sum in
CDs under $100,000, as well as savings deposits and checking accounts, has soared by $507 billion, to $6.07 trillion, according to data compiled by the Fed.
RW: In spite of the rock bottom rates on saving accounts, CDs, and money market mutual funds, households continue to flock to the safety of these insured funds. And in response to increasing demand for saving instruments - the personal saving rate rose from 0.3% in February 2008 to 4.2% one year later - banks will draw down yields further.

Buy what Tom doesn't' say is that rock-bottom rates are here to stay. According to the FOMC statement:
"economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
And how long is that? Well, recently the Bank of Canada, whose interest rate policy tends to move in sync with the Fed's, released its monetary policy statmement. The BoC cut its overnight rate target to 0.25%; but more importantly, it made a definitive statement of how long might be an extended period:
"Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
It looks like saving rates will be low for a while, folks. The massive economic contraction is dragging down prices, and the IMF is forecasting U.S. deflation throughout 2010 (see Table A5 in the World Economic Update). Using the BoC's statement as a proxy for extended period, the near-zero federal funds target will hold saving yields low until June 2010, fourteen more months from now.

Disclaimer: To me, deflation remains to be a mechanism to clear markets rather than a macroeconomic hindrance. And furthermore, the IMF's outlook is very gloomy. Clearly, with 0% growth in 2010 for both the U.S. and the sum of advanced economies, the IMF expects an onslaught of defaults that are already in the pipeline, defaults that are not currently priced into market activity. We will see, though. The World Bank is projecting 2% U.S. growth in 2010.

Rebecca Wilder

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Monetary policy and the lower bound in Japan's banking survey

Friday, April 24, 2009

The Bank of Japan released the results of its Senior Loan Officer Opinion Survey on Bank Lending Practices. I find this survey interesting because it reiterates the mechanism by which monetary policy works, and likewise, the limits.

The chart above illustrates the net-demand for loans by Japanese households, firms, and local governments reported in the BoJ's survey. Demand continued to weaken in the first quarter of 2009 relative to the fourth quarter of 2009, although somewhat less quickly. For households, 18% of survey respondents reported moderately weaker demand, 74% were unchanged, and just 6% reported moderately stronger demand (not shown, but listed in the second table of the release).

Demand for loans is an important monetary policy; central banks use the credit market as a conduit to raise or fall aggregate demand (C + I + G + NX). For example, the central bank will cut short-term rates in order to drop longer term rates, like auto rates, corporate rates, mortgages, etc., which usually increases consumption and investment. However, if a drop in short-term rates toward zero does not stimulate aggregate demand - corporate spreads remain elevated or consumers are actively saving - then the central bank faces Keynes' liquidity trap.

According to the bank loan survey, Japan is essentially in a liquidity trap. And monetary policy is not passing through to consumer and firm spending.

The table above lists the reasons for which 6% of banks surveyed reported household demand for loans increased. Lower interest rates - the monetary mechanism - were only "somewhat important" for housing loans and "not important" for consumer loans.

This report confirms that the Bank of Japan has again reached a liquidity trap; lowering interest rates won't stimulate demand. Even for those that reported increased demand, only a portion of it was in response to the monetary policy channel, interest rates; and furthermore, none of that would go into aggregate consumption (consumer loans). Japanese households are famously frugal savers, but they (consumption) are still the biggest share of aggregate demand, 56.5%.

The chart compares Japanese GDP shares to those in the U.S. Consumers are relatively more important in the U.S., at 70.5% of GDP in the fourth quarter of 2007 (I used 2007 to get a better measure of less recessionary shares, and also because the easy-to-download BEA data only goes back that far). However, the Japanese consumer is nevertheless important, an important conduit to growth that has been severed from monetary policy stimulus.

Rebecca Wilder

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Asset purchase programs Update

Thursday, April 23, 2009

The Fed has been busy these last few weeks, acquiring its promised agency MBS in large quantities and jumpstarting its Treasury purchase program. By my calculations, total government asset accumulation totals $572 billion to date.

  • The Fed purchased $381 billion in agency MBS at roughly $30 billion a week (since the announcement to purchase an extra $750 billion in agency-backed MBS on March 18). At this rate, the Fed will buy the announced $1.25 trillion by December 2009.
  • The Fed acquired $65.2 billion in Treasuries bonds and notes, and $1.5 billion in TIPS since March. The Fed is buying the full length of the yield curve, maturity dates from 2009-2039. Interestingly, the Fed purchased TIPS last week. To me, further acquisition of TIPS would signal the Fed’s upward inflation bias – pulling out later than earlier.
  • The Treasury continues its smaller but still active MBS purchase program, holding $124.3 billion as of March 2009. The Treasury’s flow of MBS is reported only monthly and at a lag, so it may be holding more.
The Fed and Treasury efforts are translating into lower mortgage rates; the 30-yr conventional mortgage rate fell 0.43% to 4.82% since February. However, the downward momentum was discrete, occurring fully in the wake of the Fed’s announcement to buy Treasuries. Furthermore, prices fell 0.1% in March, offsetting some of the downward momentum on real mortgage rates. Price declines are likely to catch up and even surpass nominal mortgage declines, leaving real mortgage rates unchanged, perhaps even up.



In reality, the deflationary (disinflationary) scenario that is typical of a recession of this magnitude makes the > $1.55 trillion Fed and Treasury asset purchase programs (MBS and Treasuries) more like insurance against rising real rates than true stimulus in the housing market, and fiscal measures are key. It seems that the fiscal stimulus will provide a floor under the economy, so that with stable real mortgage rates and record price declines, home sales have a real chance of bottoming in a few months, if they have not already.

Rebecca Wilder

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World economic reports (April 16-23): expected to slide through 2009

Today's weekly reports are slightly more positive than last week. However, I avoided the trade reports all together, which undoubtedly would have dragged down the sentiment. Although there are a growing number of positive reports out there, global economies are still very much in the red zone, -1.3% in 2009 according to the IMF.

China's retail sales rebound in March

China's retail sales grew 14.7% in March 2009. Much of the draw on retail sales, measured in current prices, has been driven down by the slowing - now negative - rate of inflation (see next chart); however, weak demand surely played its part as well. The March rebound is one of the numerous pointing to a bottom in the Chinese recession.

Inflation continues to fall; some areas go negative


Inflation around the world is low and going negative in some areas (China). This is primarily an energy story, since core inflation, growth in all prices except food and energy, in Canada and the Eurozone are still rising at a 2% and 1.5%, respectively. However, prices move at a lag, and eventually weak demand will drag down core inflation as well.

According to some measures, home value in the UK and US are stabilizing

In April, UK home values grew for the third consecutive month, slowing the annual rate of decline to -7.3%. In another report across the Atlantic, February US home values grew for the second consecutive month, slowing the annual decline to -6.5%. Amazingly, this gain in US home prices was not widely reported in the media. I'll take this as good news, but this is just two data points; and there are lots of reasons to think that home values will fall further (like the inventory of existing homes is still very elevated).

The FHFA index (this week's report) shows price movements on homes tied to conforming loans guaranteed by Fannie Mae and Freddie Mac. Therefore, it is missing much of the market tied to non-conforming loans; the S&P Case-Shiller index is thought to capture better the housing market as a whole since it includes homes tied to non-conforming loans. See this WSJ article for a broad description of the two indices. I imagine the true price is somewhere in betweeen the two.

The Bank of Canada reaches its "effective" lower bound

The Bank of Canada lowered its policy rate (the overnight rate) to just 0.25%, joining the near-zero lower bound club. The policy announcement reported that "the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual." The Wall Street Journal discusses the Bank of Canada's unprecedented statement that "the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

Policy, Policy, Policy. That is what this cycle is all about. From China to the U.S., and everywhere in between, central banks are pushing hard and governments are spending. However, in spite of the positive policy shifts, the IMF released this week its World Economic Outlook, where world growth, measured using purchasing-power parity (PPP) weights, is expected to contract 1.3% in 2009. If I had to choose, I'd go with the World Bank's forecast, which is -0.6% in 2009 on a PPP basis.

Rebecca Wilder

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Who's buying what? Well it's not risk!

Wednesday, April 22, 2009

I've been looking at the Treasury International Capital System (TIC) data to asses who's buying what? Or more specifically, who has bought what? February marked the second month of net capital outflow, -$244 billion total, driven primarily by a $268 billion outflow of change in banks' own net-dollar denominated liabilities. But on the upside, the net-acquisition of high-quality longer term assets (Treasuries, corporate bonds, agencies, and corporate equities) grew $22 billion, only its second increase since September 2008 when foreigners started fleeing U.S. risk.

I will not assess the February TIC data - that's Brad Sester's arena - rather look at the trends in net long-term acquisitions of U.S. assets since 2000. Overall, I see the following trends:

  • Private foreign investors dumped all risky assets, including agencies (which only recently became "risky"). A relatively large bubble in corporate bonds formed.
  • The U.K. still buys agencies; perhaps a floor under equities and corporates has been found.
  • Japan has become a net-seller of agencies.
  • China bought agencies, corporates, and even some equities; it has been selling off agencies for Treasuries since the middle of 2008.
Private foreign investors have been unloading all risk.

The chart illustrates the 12-month rolling sum of net private TIC flows (lines 4-8 on the release) through February 2009. The trend is clear: news of the subprime mortgage crisis resulted in private foreign investors fleeing everything but Treasuries. Perhaps an appetite for risk may re-emerge, as private investors were net buyers of agencies, $4.6 billion, and corporate bonds, $3 billion, in February. Still a no go on equities, -$5.3 billion.

Japan switched up Treasuries for a slightly higher spread on agencies, but became a net annual seller of agencies in January 2009.

Note: All country-level data represents net-foreign purchases of long-term assets by both private and official agents. You can find the data here. Each graph illustrates the net flows over a year as a 12-month rolling sum.

Japan started to buy U.S. equities in 2008, but generally it buys riskless assets, where since 2005, that has been agencies. In November, Japan started to ramp up its Treasury purchases, accumulating a huge $26 billion in February.

The U.K. buys agencies. Has a bottom been found for the U.K. net acquisition of U.S. corporate bonds?

Among the three economies listed in this post, Japan, the U.K., and China, the U.K. was the only one to buy agencies in February, $4.6 billion. Also of note, was the chunk of corporate debt purchased by U.K. private investors, $7.5 billion.

China generally does not purchase U.S. equities - only bonds and agencies.

China saw agencies and Treasuries as substitutes in 2007 and 2008; this can be seen by the sharp drop in Treasury accumulation in 2007 and the contemporaneous surge in agencies holdings. Now all bets are off: China wants only Treasuries, although annual accumulation slowed since August 2008, selling off $0.96 billion in February. China is now buying short term assets rather than long term.

So I guess the question at this point is this: how long until foreigners return to riskier long-term purchases? I will spend some time thinking about that; but eventually, foreign portfolio managers will seek out higher yields than the short-term assets that are paying near-zero income.

Rebecca Wilder

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Of course bank lending is stalling; home equity lines of credit pose a risk to consumer spending

Tuesday, April 21, 2009

The Wall Street Journal ran a story about reduced bank lending originating from those banks that received TARP monies. Frankly, I don't know what kind of response the WSJ was going for, but I know what mine was: of course bank lending is stalling. Amid the precipitous economic decline, loan origination would likely be much worse had the banks not received capital injections. And in looking at the data, I noticed that another shoe might drop on consumer spending: home equity lines of credit are surging.

The credit crunch is now very evident in the data.

The chart illustrates total commercial bank lending growth since 1950. Lending has stalled at a 2.2% annual growth rate in March 2009, falling 2.3% since its peak in October 2008. The unemployment rate is at 8.5% and expected to rise further, GDP is about to post its third consecutive decline, and the health of the banking system is still in question. It is very likely that annual lending growth would be negative by now and probably well below growth rates seen in previous credit crunch (circles in chart).

TARP monies and bank lending according to the WSJ:

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.

The Journal's analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline.
The Treasury reports bank lending here (the WSJ's reference above), saying this about residential real estate lending in February:
Lending levels increased from January primarily in residential mortgage lending which was driven by attractive mortgage rates.
The Treasury data is outdated. Since the shadow banking system is all but dead right now, any loan origination is likely going through the commercial banking system, which is reported by the Fed here through March. The Fed's data tells a similar story as the Treasury report, that loan origination is down.

However, there is one exception: as of March, real estate lending is still rising slightly, but only because households are drawing on existing home equity lines of credit. I see this as another shoe to drop on consumer spending.

Credit crunch: firm lending is down

The chart illustrates monthly commercial and industrial lending by the commercial banks. Loan origination has decreased, and the annual growth rate slowed, substantially.

Credit crunch: consumer lending - revolving and non revolving - is dropping.

The chart illustrates monthly consumer lending. Consumers are reducing debt load by paying off credit cards and new loan origination (auto, student) is falling.

Next shoe to drop: households are increasingly drawing on revolving home equity lines of credit.

The chart illustrates lending on revolving home equity lines of credit (HELOC). Lending (blue line) is still rising through March at a 20% annual rate. Households are using these lines of credit (presumably) to finance consumption needs, and a 20% annual growth rate is likely unsustainable.

Eventually, the lines of credit will run dry; and households will be forced to cut back on spending, taking another leg down. Not shown here is non-revolving real estate lending, which is down 1.3% in March since its peak in January 2008.

The credit crunch is in full swing, and the TARP monies no doubt kept lending in positive territory for a while. Amid surging unemployment, ongoing economic uncertainty, and a banking crisis that has yet to be resolved, the growth in bank lending is, in my opinion, rather remarkable.

Rebecca Wilder

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Housing bubble?

Monday, April 20, 2009

Looking at this chart from Gallup, one could ask why there ever was a housing bubble at all?


Note to self: take survey results with grain of salt.

Rebecca Wilder

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ECB is totally behind the curve

Led by Trichet, the ECB remains to be behind the curve on all things monetary; but there is growing divide among the ECB governors:

Policy makers on the ECB’s 22-member council are divided over the best way to stem the euro region’s worst recession since World War II. Germany’s Axel Weber has ruled out cutting the ECB’s key interest rate below 1 percent and said he doesn’t want to buy debt securities. Greece’s George Provopoulos and Athanasios Orphanides of Cyprus want to keep open the option of deeper rate reductions and asset purchases to fight the risk of deflation.

Trichet said there was no split among the Governing Council. He declined to comment on any possible non-standard measures the bank may decide at its May 7 meeting.


We will have to wait until May 7 to see if the ECB will engage in QE policy. But don't hold your breath: if it took this long for the divide to surface, I imagine it will take longer to redefine the majority. Therefore, nothing of interest is likely to come on May 7 other than another 25 bps cut in its refi rate and likewise downward momentum in alternative policy rates.



The ECB is behind the times. The chart (above) illustrates annual real money supply growth through February 2009 in the U.K., the Eurozone, and Japan, and through March 2009 in the U.S. The ECB is facing a two-month decline in its annual real money growth rate. If this continues, the effects will be restrictive on the economy. Interestingly, the U.S. is still struggling against a falling historically low money multiplier amid its quantitative easing measures as its annual growth rate bounces around 9.5%-10%.



The 6-month annualized real money supply growth illustrates better recent monetary policy shifts (graph to right). Clearly, the U.K. and the U.S. are actively engaged in QE; and to a lesser degree, I believe that the Bank of Japan is as well. However, it is obvious that the ECB is not; its 6-month annualized growth rate is just barely breaking trend since January 2007.



And finally, nominal money growth in the first three months of 2009 paints a similarly dark picture for the Eurozone.



The U.K. and the ECB have not recorded their March aggregates yet, but the trend is likely to follow this one: the ECB is lagging, allowing its money supply growth rate to fall in spite of the February bounce. This is dangerous. Falling nominal money will eventually drop prices, even core prices.



Perhaps the ECB wants relative prices to change - all QE economy prices rise or at least fall less quickly compared to those in the Eurozone - in order to stimulate exports. I don't know, seems rather masochistic, don't you think?



Rebecca Wilder

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Adding to Altig's consumer spending dispute

Saturday, April 18, 2009

David Altig, senior vice president and research director at the Atlanta Fed, argues (hat tip, Mark Thoma) that a piece written in Economix on Tuesday (NY Times economics blog) is not, as David calls it, "that tight". Specifically, the sole purpose of the article was to highlight that the sustained retrenchment in consumer spending is a "historical oddity". And as David argues, it is not an oddity at all.

I agree with David: this Economix piece has its flaws and is definitely outdated (see last paragraph). In contrast, I don't agree with David's measure of cumulative PCE loss, which understates the impact of the shocks to consumer spending in the current cycle. Each indicator has its own cycle within the overall economic cycle; and the best measure of cumulative PCE loss is using the peak to trough of PCE, rather than the economic peak (the NBER dated peak, which David uses) to the PCE trough.

The chart illustrates the cumulative PCE loss using monthly data, as measured by the economic peak to PCE trough (blue) and by the peak and trough of PCE itself (red) over the last eight cycles (including this one). Normally, the different measures present almost identical results. With the exception of the current cycle, the biggest difference occurred in the 73-75 recession, a -0.2% differential.

However, this time it matters by a -0.6% differential. The cumulative PCE loss using the peak to trough PCE measure is -2.5% compared to that using the economic peak to PCE trough measure, -1.9%. PCE was rising through May 2008, five months after the peak of economic activity as defined by the NBER.

The PCE peak to trough paints a darker picture; one that puts this cycle on par with one of the bigger recessions, 1973-1975 (Note: I disagree with David's calculation of the 73-75 PCE loss; it appears to be too little).

One last thing: the Economix article is behind the times, even in the comment that the "sustained" consumer spending decline is an oddity. Consumers are proving to be much more resilient than previously expected. Currently, this PCE cycle is unlikely to set any records, not even that of the first time that PCE contracted for three consecutive quarters since 1947. By my estimates, March real PCE (to be released on April 30) needs to fall by more than $74.6 billion in order to post a third consecutive quarterly decline; that is unlikely.

Rebecca Wilder

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Company economist cartoon

Friday, April 17, 2009

From Dilbert:


Rebecca Wilder

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Canada: survey reports showing some silver linings

The Bank of Canada released two quarterly surveys this week: the Business Outlook Survey and the Senior Loan Officer Survey. Together, the two surveys relay information on trends in firm sales, investment, employment, and bank lending standards.

The reports suggest that economic uncertainty remains high and current conditions are weak and expected to weaken further. However, there is a silver lining: a growing share of survey respondents expect sales, investment, labor, and banking conditions to improve over the next year.

The Canadian economy, like the rest of the world, is contracting quickly.

The chart illustrates quarterly real economic growth and the unemployment rate in Canada since 1976. Economic conditions have decreased substantially: GDP fell 0.8% in Q4 2008 and the unemployment rate rose to 7.6% in Q1 2009, and both are expect to fall further.

Consistent with the drop in Q4 2008 GDP and Q1 2009 employment, the Bank of Canada's Business Outlook Survey indicates that past and/or prospective sales growth, investment, and employment continue to deteriorate into Q1 2009.

Expected sales growth is still negative in net, but a growing share of firms report an increase in past sales and an rising expected sales.

The chart illustrates the net share of firms that reported an increase in sales over past 12 months (Q1 2008 to Q1 2009), and those that reported an expected increase in sales over the next 12 months (Q1 2009 to Q1 2010). Overall, sales prospects continue to deteriorate. However, a larger share of firms reported increasing sales volumes over the last year in Q1 2009 compared to the previous quarter; and furthermore, a growing share of firms expect sales to improve over the next year.

Investment and employment prospects are still negative; however, a growing share of firms report improved conditions going forward.

This chart illustrates a similar story as does the sales chart: investment and employment prospects continue to decline in net; however, a growing number of firms are more optimistic about future conditions. Furthermore, there share of survey respondents that expect labor conditions to improve is almost equal to that of respondents that expect labor conditions to weaken.

Finally, according to the Bank of Canada's Senior Loan Officer survey, Q1 2009 bank lending remains tight, having tightened further since Q4 2008. However, the net new tightening was less widespread, meaning that more banks reported either not tightening or actually easing (the survey does not tell).

Together, the reports suggest further economic decline and tightening of lending standards is in the pipeline for Canada. The Bank of Montreal forecasts that the economy will contract another annualized 6.5% in Q1 2009 (roughly 1.6% on a quarterly basis), exceeding the 3.4% annualized (0.8% on a quarterly basis) contraction in Q4 2008.

The economic uncertainty is still strong, but the survey results suggest that a sliver of the anxiety is wearing off. Firms and banks may turn a corner if the uncertainty ebbs.

Rebecca Wilder

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Weekly unemployment claims and the boy who cried wolf

Thursday, April 16, 2009

According to the Department of Labor today, weekly claims fell by 53,000 to their lowest level in almost three months, adding to the list of reports that beat expectations as the consensus expected a rise to 660,000. Here is what the Wall Street Journal's Real Time Economics blog has to say:

Forecasters love tracking jobless claims because they’re a timely read on the labor market, but also because they have historically been a great way to determine when declines in economic activity are nearing an end.

Robert J. Gordon, an economics professor at Northwestern University who sits on the committee tasked with dating recessions, is one who finds enormous value in this series. Going back to the late 1960s, he has found that the four-week average of new claims peaks about a month before the declared end of recessions with remarkable accuracy.

As of right now, the four-week average claims series peaked at a level of 659,500 in the week ended April 4. If that number holds, based on the series’ past performance it would mean the recession ended somewhere between late March and early May – a far more optimistic read on the economy than any consensus forecast (the latest WSJ survey of economists shows on average they expect the recession to end in September). “The end of the tunnel may only be weeks away,” says Mr. Gordon.

Of course, that’s a pretty big “if.” First of all, the current recession – which began in December 2007 – has been longer and by many measures more severe than any other postwar recession, so it remains to be seen whether jobless claims will have the same predictive power they’ve shown in the past. Secondly, the weekly series is volatile and could well keep rising as the nation’s unemployment rate, now 8.5%, heads towards the double-digits many expect.

“A clear down-turn in claims would be a strong signal of a turn in the broad economy, but we think that is still a few months off,” said Ian Shepherdson, an economist with High Frequency Economics, in a note following the release.

RW: As the chart suggests, I would take this reading with a grain of salt; because at the time, a peak in the 4-week moving average would have been apparent in December 2008, or even in March 2009. Frankly, nobody will really know, or be able to say with certainty, that claims peaked until well after they had already done so. Nevertheless, it is one of the the most current economic information out there, and this week's report was if nothing else "not bad".

Rebecca Wilder

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US forecast cartoon


From Slate.com

Rebecca Wilder

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Port activity may be slowly coming to a bottom.....

Commercial and industrial vacancy rates are surging amid the precipitous decline in economic activity and tight credit conditions. The chart illustrates vacancy rates for commercial (office space) and industrial activity since the last recession; both have surged since the beginning of 2008.

The surging vacancy rates incorporate partly the stalled port activity due to the sharp retrenchment in global trade. But some encouraging signs are emerging: port activity may have seen its bottom. From the LA Times:

Port officials are hoping they have seen the worst.

"One month isn't much of a benchmark for us, especially a month like March when things are historically slow," said Laurie Kellman, spokeswoman for the Port of Los Angeles. "But the numbers were up compared to last month, and that is an encouraging sign."

But observers are still chronicling a lot of distressing numbers.

According to AXS Alphaliner, the Paris-based maritime consultant that tracks the world's largest shipping lines, about 10% of the world's container ship fleet was idle as of this week because the ships had no cargo. While the number represented a slight improvement over recent weeks, it was still more than twice as high as the industry's last slump in 2002.

Another maritime industry think tank, London-based Drewry Shipping Consultants, noted that four container lines failed in late 2008 and predicted that 2009 probably would bring more business collapses. Drewry said the industry would have to cut capacity sharply to shore up freight rates, including canceling some of the biggest new ships on order, even if it meant losing prestige and substantial down payments.

In the U.S., some of that tracking is done by Waltham, Mass.-based IHS Global Insight, which follows traffic at the largest seaports in North America on behalf of the National Retail Federation. IHS Global Insight said Wednesday that traffic at those ports was expected to be 21% lower during the first half of 2009 than it was in the first half of 2008, which had come in as the slowest cargo year since 2004.

"The good news is that we've already seen the bottom for the year, and month-to-month numbers are already starting to climb," National Retail Federation Vice President Jonathan Gold said. "We're still going to see double-digit declines compared with last year, but the size of the gap is starting to narrow."
VP Gold's statement (in bold) is rather strong, given the tenuous state of both the US and our major trading partners' economies. But nevertheless, the good news must to come from the bottom up: port activity, then revenues, then jobs or investment...something like that.

Growth in port activity would signal that trade is slowly emerging from the depths. And as the article highlights, the most direct impact will be felt by workers, as a bottom in the decline in port activity would likely pass through as a slowdown in the rate of job loss.

However, based on the Fed's Beige Book assessment on nonresidential activity, these vacancy rates are expected to rise.

Rebecca Wilder

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