Echo

Wealth effect channels: up and down

Friday, May 29, 2009

All signs point to a continued draw on home values, as foreclosures drive the markets and inventories start to creep back up. In contrast, equity markets have experienced a significant boom since January, but a struggling Treasury market harps its tune of economic uncertainty.

The question is: has enough wealth been recovered in equity markets to offset the losses in the Treasury and housing markets in order to stabilize consumption?

We will have to wait and see the exact Q1 wealth measure until the Fed's flow of funds realease on June 11. But for now, the chart illustrates a crude measure of the wealth effect on a monthly basis as the ratio of asset prices across two asset classes, tangible (housing) and financial (equity), to disposable personal income spanning October 2008 through March 2009.

Two tales are forming: equities are rising relative to income and housing maintains its descent relative to income. The diverging paths of the different asset holdings imply opposite wealth effects on consumption: rising equity values may possibly stabilize consumption, while reduced home values imply further consumption destruction.

Wealth is not the only determinant of consumption, but financial wealth is over 60% of the the households balance sheet (anywhere from pensions to 401k holdings to direct equity holdings), and its recovery will likely be important in consumption behavior going foward, especially in the upper income classes (see the B.100 household balance sheet). However, one cannot discount the ongoing negative effects on consumption coming from sharp declines of the remaining 38% of household assets, housing, and the very large effects from reduced home equity extraction.

To be sure, consumption grew an annualized 1.5% in Q1 2009; however, retail sales suggest otherwise for Q2 (April sales fell 0.4%). Likewise, the adverse wealth effects will only harm the economy further if wealth destruction causes households to reduce consumption further, raising the saving rate above the 4.4% in Q1 2009. I suspect that the saving rate still has a little upward momentum left in the pipeline.

Rebecca Wilder

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Links on Freitag

Some interesting articles:

Drew Gilpin Faust and the Incredible Shrinking Harvard, The Boston Magazine

Is China recession proof?, McKinsey Quarterly

Banks find results in lending less for more, The Globe and Mail

Fed Holds Steady as Rates Rise in Market, The Wall Street Journal

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Global surveys tell similar stories: confidence is improving

Wednesday, May 27, 2009

Taken separately, one can find many reasons not to rely on survey results, especially those from consumers. But put them together, and global survey results indicate that economic stabilization is afoot.

The chart illustrates consumer and business climate survey results through April 2009 for Japan and the Eurozone and through May 2009 for Germany and the US. The indices are normalized to 1995 for comparison. Except for the Eurozone, which saw its first improvement in economic sentiment since May 2007, the indices have been improving for several months now, with the US showing a sizable increase in May. Here are some highlights:

From the US Conference Board's measure of consumer confidence:
Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months.
From the European Commission's Economic Sentiment results:
The rebound in the ESI resulted from a clear improvement in sentiment in industry and among consumers, which in both regions rose by the same amount (3 points), and a smaller increase in services (+1 point in both regions).
From the German Ifo Business Climate survey:
Although the firms have again assessed their current business situation more unfavourably than in the previous month, they have given clearly fewer poor assessments of their six-month business outlook. This points to a gradual stabilisation of economic output at a low level.
Green shoots, yellow weeds, of course there is a plethora of economic issues with which to worry. However, the business cycle is likely approaching a trough in key economies.

Rebecca Wilder

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Mass layoffs declining in private sector; heating up in public sector

Tuesday, May 26, 2009

I missed this because I was travelling to Germany, but initial claims filed under mass layoff events declined 9.4% in April, its first decline since November 2008. This is the latest in the line of labor market reports suggesting that a slowdown in its rate of decline is underway. However, the report also indicates that the public sector is just getting started: state and local mass firings surged in April. From the Bureau of Labor Statistics:

Employers took 2,712 mass layoff actions in April that resulted in the separation of 271,226 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Each action involved at least 50 persons from a single employer. The number of mass layoff events in April decreased by 221 from the prior month, and the number of associated initial claims decreased by 28,162. Compared to last year, the number of mass layoff events and associated initial claims more than doubled.
The chart illustrates (click to enlarge) the number of initial claims filed under mass layoffs in April - a mass layoff is an event of 50 or more workers being laid off in a given month by a single employer - as a percentage of the payroll since 1995 (the first data point).

Clearly, a one month drop in mass layoffs does not dictate a trend. However, it is consistent with other labor market indicators (see Credit Writedowns' post on the peak in initial and continuing unemployment claims): that the hurricane in the labor market seems to be dissipating a bit.

However, I will note (again) that the state and local governments are still firing in bulk in April.

The chart illustrates the number of initial claims due to mass layoffs from state-level government jobs not adjusted for seasonal variations in April. Across the full public sector (federal + state + local, not shown in chart), state level mass firings saw the biggest surge, a 53% bump in initial claims (probably in California), which was followed by local governments, 49%, and federal mass layoffs declined 1.9% (you can see this data in Table 3 of the mass layoff release).

I expect that the government mass layoffs will rise going forward, as state and local governments fire workers in order to trim budget deficits. However, in aggregate, it does appear that the worst of the labor decline is now behind.

Rebecca Wilder

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In Germany - posting will be thin

Monday, May 25, 2009

I am in Germany for the week. I will try to keep up with posting, but it may be thinner than normal. And furthermore, my graphs will likely be slightly different - learning the new Excel 2007 in a foreign language is not fun, I guarantee it.

Rebecca Wilder

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What new products will come out of this recession?

The pratically universal question during a recession is: which industry(ies) will grow us out of this one? Well, who knows, maybe it will be a surge in iTie production. From the LA Times:

They might never get as big as chocolate-chip cookies, which supposedly were invented during the Great Depression, but most of these inventions came about because the people behind them were laid off during this economic downturn.
And the top 3 of the list of 9 recession-inventions:
* The iTie. Joe Sale of Tampa, Fla., invented it after he was laid off from his sales job. It holds iPods, credit cards and bills in a pocket in the back of the tie. It can also be attached to your shirt so it doesn't whip around in the wind.
*
Dream to Destiny kit. After getting out of the real estate market, Phoenix housewife Dina Beauvais created a DVD and booklet instructing people on how to achieve their dreams. The kit also comes with a pendant.
* Meals to Go. After years of packing lunches for her kids, Beauvais also invented an airtight, watertight container for meals that maintains temperature with hot and cold packs.
There are some positives that can come out of recessions, like homemade cooking (see an older Chicago Sun Times article on cooking during the Great Depression). And likewise, an NBER paper by Michael Burda and Daniel S. Hamermesh argues that people spend their free time (forced time off from work, unemployment) not in leisure activities, but in productive non-market activities:
In areas where unemployment has suddenly risen, however, the average resident spends less time in market work, but offsets most of this decline by an increase in time spent in household production rather than leisure or personal maintenance.
This study is consistent with the LA Time story: people generally do not substitute their hours from work into leisure, rather into production activities that mostly go unmeasured by GDP....interesting. Perhaps eventually some of the production will cease to be unmeasured, with inventions of sorts making their way onto the broader markets.

Rebecca Wilder

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How long will this glut continue? Signals suggest a while

Sunday, May 24, 2009

Unwinding the large current account imbalance between the US and China will likely take time. China is buying up dollar assets again; and also, accoring to the IMF, China will hold a lion's share of world capital exports into 2010, with the biggest offsetting importer being the US.

But as to why such imbalances exist, there are generally two reasons, which are essentially two sides of the same coin: the 'saving glut' and the 'money glut' (see Economist's View and Macro and Other Market Musings for starting points to the debate).

On one side of the coin, China argues that it has been forced to increase its dollar holdings through growing US import demand stemming from lax monetary policy. On the other side, the US argues that China's inherent desire to save has resulted in massive current account surpluses, and that its targeted growth strategy is the cause of China's hefty dollar holdings. There is a nice article on the issue by Martin Wolf (A little old, but pretty much sums up the issue).

Well, push is coming to shove, and China's buying term dollar assets again. The trade-weighted US dollar against is illustrated above. Since early March 2009, the US dollar has taken a hit, depreciating over 7%; and for those countries with massive US-dollar portfolios (China), the value of the dollar is apparently worth defending. From the Financial Times:

China’s official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse, according to officials and analysts.

Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that US policies could lead to a collapse in the dollar and global inflation.

But Chinese and western officials in Beijing said China was caught in a “dollar trap” and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.

In March alone, China’s direct holdings of US Treasury securities rose $23.7bn to reach a new record of $768bn, according to preliminary US data, allowing China to retain its title as the biggest creditor of the US government.
There is no easy solution to this international issue: reining in huge current account imbalances between major trading partners (i.e., the US and China). But one thing is for sure, the IMF sees China as maintaining a dominant and growing share of world capital exports through 2010.

The chart illustrates the share of total current account surplus (sum of international saving) held by the top six creditor countries and that of the rest of world. This is a recreation of figure 1 but for 2010 on page 161 from the IMF's Global Financial Stability Report (released in April 2009). The source data is from the World Economic Outlook database.

According to the IMF forecast, China will hold a 48% share of global capital exports by 2010, which is double its share from 2008, 24.2%. This is rather remarkable; and in this situation, it would seem that China will still have "little choice" but to continue its purchase of US assets. I say "little choice" because of course China has a choice: for one, it could drop its export growth model and spend domestically.

But that would get you right back to the beginning of the story, the quandary of holding a large surplus of assets denominated in a currency that in equilibrium will depreciate (China's dollar trap). And note the IMF's forecast of global capital imports for 2010.

Accordingly, China's current account flows are likely to end up in US capital markets. This makes sense, as the US is expected to be one of the forces to pull the globe out of recession through renewed import demand for global exports in the wake of massive fiscal and monetary policy. Eventually, though, push will have to come to shove when it comes to the US-China current account imbalance. The only question is when!

Rebecca Wilder

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World Economic Reports (May 14-21): still bad, but flood of shocking reports ebbs

Thursday, May 21, 2009

This week was a little light on global data. Given that the trade data is looking "better" in some areas (which really means not falling as quickly in some cases, see this post and this post), it is likely that Q1 will be the worse quarter for many Asian economies who rely heavily on exports for growth. It's bad, though, with Japan, Taiwan, and Singapore all falling 9% or more over the year! Inflation is slowing substantially in some areas, negative in others. And finally, it looks like US capital markets got a small bump in March, as foreigners returned to risk. Overall, the global economic reports remain in the red, but the shockingly bad reports are fading.

GDP in Asia: waiting to exhale

The chart illustrate annual GDP growth through Q1 2009 for Hong Kong, Japan, Taiwan, Indonesia, and Singapore. Looks bad, but Indonesia is showing some resilience, although GDP is now growing at its slowest pace since January 2004.


More scary inflation charts: Disinflationary pressures strong - deflation in some

The chart illustrates annual inflation across key economies through April 2009. The UK is an interesting case: the British pound has been taking a beating and pressuring prices, and the consumer price index is holding on (can't say the same for the retail price index) better than in other economies (US inflation now negative for two consecutive months). Today, though, S&P downgraded the UK outlook to negative, and the sterling took a hit; wonder what that will do to prices?

Amid a calm developing in capital markets, foreign investors returning to U.S.-denominated risk

The chart illustrates the 12-month rolling sum of net capital inflows through March 2009, as reported by the Treasury International Capital data (TIC). Good thing for the Treasury, which is planning on running $trillion deficits in coming years, that foreigners might buy their notes. In March, foreigners showed a slight shift toward risk, with net long-term flows growing for the first time over the year since the end of 2008 (second time over the month).

Auf Wiedersehen, Rebecca Wilder

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Growth and Equities in the G7: scary or encouraging?

Wednesday, May 20, 2009

Today is my birthday - can you guess during which recession I was conceived? In lieu of waking up early to blog a lengthy commentary, I chose to construct two charts.

G7 Growth: Going down hard

The chart illustrates quarterly growth rates on an annualized basis. Canada has not released Q1 GDP yet; the -6.5% represents the Bank of Montreal's forecast.

The G7 ex the US release their GDP growth rates on a q/q basis, not annualized. This chart compares the growth rates on an annualized basis ((Q1 2009/Q4 2008)^4-1)*100 = annualized growth for the comparison to the BEA's release. Clearly, the G7 is deep in the red.

G7 Equities: Moving on up

The chart illustrates equity indices for the G7 economies, normalized to 1994. A rebound is afoot - is it sustainable?

Rebecca Wilder

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Did you know that the unemployment rate is 8.9%?

Tuesday, May 19, 2009

Here is an interesting bit from the Pew Research Center. Survey participants were asked what was the unemployment rate and level of the Dow in March.

Perhaps the 18% of survey participants that quoted a 16% unemployment rate were thinking of the U-6 measure of unemployment, which hit 15.6% in March. The U-6 measure is the broadest measure of unemployment that includes total unemployed from the household survey plus marginally attached workers plus part-time workers (for economic reasons).

Rebecca Wilder

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Fed vs. ECB in charts, part II

I wasn't able to get this out before the housing starts report, but that report simply adds ballast to this story: the central bank (Fed) has facilitated the still imminent stabilization of the US economy. The Census Bureau reported that housing starts dropped 13% in April to an annualized 458,000 - below its previous low in January 2009. But within the report, single family starts grew almost 3%, their third consecutive month of "not declining".

If you asked me, that's certainly much better news than the headline number would suggest. New single-family building adds a lot of extra spending to the economy. And furthermore, it does bolster the argument that the stabilization in housing is afoot, as the single-family market represents the fundamental trend in the residential housing market.

In my opinion, we have the massive Fed policy to thank for that. This post revisits the Fed vs. ECB on balance. The Fed is moving forward; the ECB says that it will but still looks the same on balance.

The chart is one in which you are familiar - it lists the Fed's asset holdings on balance (excluding the TSLF program, which is an off balance program). As of week end, May 13, the Fed's balance sheet totaled $2.1 trillion.

The obvious shift occurred when the Fed amped up its outright purchase programs of MBS and Treasuries. That is in full swing now, as illustrated by the sharp upward move of "securities held outright" (blue section). This has helped to keep mortgage rates under 5%.

And recently Trichet caved to pressure, announcing his "plan" to purchase covered bonds. From Forbes:

At a press conference to announce the ECB's cut in interest rates to 1.0%, Trichet said that the ECB had agreed in principle to purchase covered bonds, a type of private-sector bond which has additional "cover" because it is not held off-balance-sheet and the default risk is not transferred entirely to investors. Covered bonds were promoted by the United States Treasury as an alternative source of mortgage financing after the subprime-mortgage crisis hit in late 2007.

Trichet refused to go into any of the technicalities surrounding the planned purchase of covered bonds until the next planned meeting in June. It is likely to be a tricky balancing act, given the euro zone's 16 different member economies, as well as the fact that covered bonds are a German invention and still have their heartland in the German bond market.
If you are curious about covered bonds, here is a nice discussion by Ryan Avent at Portfolio.com. It seems that the ECB's balance sheet, which hasn't shown any real shifts (beyond the massive liquidity facilities put in place as it cut the refi rate to 1%), will soon to show some action.

The chart illustrates the asset side of the ECB's balance sheet (similar to the Fed's above). Under the covered bond purchase program, the section "securities on euro area residents denominated in euro" would presumably rise (purple) would presumably grow.

We will have to wait, though, until June at the ECB's next monetary policy meeting.

Rebecca Wilder

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Wherever the Fed goes, credit markets thaw

Monday, May 18, 2009

Credit markets are thawing. The headline items - LIBOR (London Interbank Lending Rates) and commercial paper - have improved substantially. But corporate bond spreads, although improved, are still wide. As such, there is a very strong correlation between Fed's asset purchases and the associated credit market's health. It is unlikely that credit markets could stand on their own without continued Fed support at this time.


LIBOR: Improving but still above trend

From Investment Postcards from Cape Town:
Lower interbank lending rates indicated reduced strains in the financial system, as seen from the three-month dollar, euro and sterling LIBOR rates declining to record lows. After having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to 0.83% on Friday. LIBOR is therefore trading at 58 basis points above the upper band of the Fed’s target range - a great improvement, but still high compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.
It should be noted that as of May 6, banks are sitting on $777 billion of excess reserves that are not being lent out, up roughly $775 billion since April 2008: that's massive federal funding of the interbank lending market.

Commercial Paper: Substantial Improvement

The commercial paper market is returning to "normal" across the financial (green) and non-financial (purple) sectors. The chart illustrates the term lending spread on commercial paper (the 90-day money market rate minus the 90-day T-bill). The spreads have dropped sharply, which is good news for firms wanting to roll over their debt.

The Fed is likely very proud of the outcome of its commercial paper funding facility; and in light of the commercial paper market's improved health, the Fed is unwinding its asset holdings. As of May 13, the Fed had $167 billion in commercial paper on balance, down from $350 billion in January. The commercial paper market can stand on its own now, but of course, one must remember the FDIC program - Temporary Liquidity Guarantee Program - that insures senior unsecured debt, including commercial paper.

Corporate spreads are coming in, but still wide

The chart illustrates the Barclay's corporate spread index of both investment grade credit and below investment grade credit (high yield). I like this index better than the Fed's corporate measures - the Moody's Baa and Aaa indices - for two reasons: (1) Baa and Aaa are both both investment grade indices, and (2) the Barclay's indices span a much broader range of sectors, including financials and utilities - as of 2001, the Moody's Aaa covers just the industrial sector.

The spreads have surely tightened, but remain elevated compared to their longer-term trends (average over entire sample, indicated by the horizontal lines), 601 bps for high yield and 170 bps for investment grade.

The Fed is not accumulating term corporate bonds, so any improvement is purely market driven.

The point of the story is: if the Fed is in the market, then that credit market appears to be functioning well; if the Fed is not in that market, then that market is likely still stressed. Furthermore, the Fed will probably maintain its massive balance sheet until it is certain that credit markets can fully function without its support. That time has not yet come.

Rebecca Wilder

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Housing bubbles around the world: looks pretty bad

Saturday, May 16, 2009

Housing bubbles around the world (click to enlarge):

The chart illustrates price-rent ratios for some of the most notorious housing bubbles - Ireland, Spain, the UK, and the US - indexed to 1997. The price-rent ratio can be compared to a price-earnings, or even better a price-dividend, ratio in finance. It measures the relative value of the asset: the price of the asset (purchase price of a home) divided by its flow of fundamental value (rental income earned or the value of having a roof over your head). As the price-rent ratio grows, the market value moves away from its fundamental value.

The bubbles have been extreme, and there is probably still some downward price momentum left in the pipeline for many of these markets. Ireland's housing market, while having experienced the biggest relative bubble, has seen its price-rent ratio rise since Q3 2008. Crashing economic fundamentals have driven down rents (the denominator), and likewise the relative value of owning a home.

I included the German price-rent ratio to show that housing bubbles are not uniformly the root cause of economic decline. The German housing market saw a bump early during the reunification years; but currently, it's falling exports brought on by anemic global demand (US demand to be sure) that caused the German economy to contract by 3.8% in Q1 2009. And for those of you who think in annualized terms (the European Commission releases the quarter on quarter growth rates), that's a 14.3% decline. Ouch!

Rebecca Wilder

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World Economic Reports (May 8-15): still heading down, but "not as fast" story gaining traction

Friday, May 15, 2009

This week, the hard economic data reminds us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation volatile on food and energy but still down over the year; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several the "green shoot" survey reports (see last week's World Economic Reports).

Industrial Production: Still heading down, but at a slower rate

The chart illustrates the industrial production index for Germany and the UK (seasonally adjusted), and the growth rate for Malaysia and India (to adjust for seasonal variations) through March 2009. The rate of decline is slowing in Germany - actually, Germany's index went unchanged over the month - and the UK, improving over the year in Malaysia, but still heading down in India. A stabilization in the industrial sector may be afoot: the cliff diving is likely complete.

Exports: Same as industrial production...stabilization?

The chart illustrates annual export growth through March for Canada, Germany, Malaysia, and the US, and through April for China. Although China, Malaysia, and Canada turned down on an annual basis, the precipitous decline seems to have passed. We look for a trend to show stabilization.

Retail Sales: Struggling

The chart illustrates annual retail sales growth through April for China and the US, and through March for Singapore. Retail sales are struggling to make way. We wait to see if the various stimulus packages will get consumers back to the stores and auto dealerships; but let's not hold our breath quite yet.

Inflation: Energy and food prices create some volatility

The chart illustrates annual inflation through April 2009. Clearly, the momentum is down on a sharp drawback in aggregate demand. However, the recent bump in energy and food is creating some volatility (some upward momentum against the downward pressure). Norway is experiencing stronger-than-expected inflation, as the economy fairs better than others; but don't worry, inflation will probably fall, too.

The headline of the day:
Eurozone economy took a dive in Q1

The chart compares Eurozone GDP to US GDP: ironic that the US is the epicenter of the global economic crisis,; was able to pass on the pain simply through trade flows; and now foreign economies take a sharper U-turn.

Overall, the global economic decline appears to be slowing; however, the recovery is still tentative.

Rebecca Wilder

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Banks serving as crack dens?

Thursday, May 14, 2009

Slate Magazine is funny sometimes. I was attracted to an article titled, Banks, RebornWhen banks become funeral homes, churches, and strip clubs. Immediately, I thought of many buildings around Boston that previously served as banks but have since been reformed into office space, or even residential housing. But this is what Slate sold:

Old bank buildings can accommodate all kinds of new activities. In Newark, N.J., for example, former banks have become crack dens and homeless shelters. In the South Bronx, N.Y., and Chicago, they have been reborn as funeral homes, stores, and community organization centers. In Detroit, many are now churches. In South Los Angeles, the Pacific National Bank became an office for the city's housing authority.
Yup, first on the list of "all kinds of new activities" is the fact that some are now crack dens. Classy.

Rebecca Wilder

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Brace for new layoffs

The job loss has tentatively seen a cyclical low when 741,000 jobs were cut in January 2009. This certainly doesn't mean that employers will start adding jobs, however, there are some reasons to believe that the rate of job loss will slow going forward.
  1. As of 5/13/09, the 4-week moving average of initial claims fell four consecutive weeks. But don't get excited, the level of claims rests at the 600k-level.
  2. My favorite measure of mass layoffs - which are bulk layoffs of 50 or more persons at one event - the Forbes layoff tracker (announced layoffs at 500 biggest US firms) has decreased of late.
In spite of points 1. and 2., the labor market is just awful; and really not showing any marked improvements. Already households are stressed, and the unemployment rate, 8.9% in April, is set to rise further.

However, the labor market is going to get a jolt downward, as GM and Chrysler announce the closure of > 2,600 dealerships. And although the GM and Chrysler plant closures are small compared to the hemorrhaging of jobs across all other sectors, it sure throws water on the flame of hope. From the LA Times:
With struggling automakers expected to announce the shutdown of thousands of dealerships starting today, cities are bracing for a wave of blight.

The closings will dump thousands of large, oddly configured parcels into an already reeling commercial real estate market. Many are likely to remain empty for a long time, monuments to the decline of the U.S. auto industry and the intensity of this recession.

Chrysler is expected to tell a Bankruptcy Court today that it will break its contracts with as many as 800 dealerships nationwide. General Motors Corp. will tell 1,000 to 1,200 dealers Friday that it will not renew their franchises. The automaker plans to eventually close a total of 2,600 operations.

In California, the moves will have far-reaching implications for dozens of cities, which depend on sales tax revenue from the dealerships to fund substantial portions of their budgets.
Mass layoffs were already setting records (see chart to the left, click to enlarge). The number of mass layoff claims (claims associated with firings of 50 workers or more) adjusted for the size of the payroll hit a new record in March.

This recession is now in its 17th month, but the labor market contraction will continue well after the economy has stabilized.

Rebecca Wilder

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Don't expect government jobs to hold on

Wednesday, May 13, 2009

Forbes is running an article on jobs in government, Government Jobs You Should Apply For Now. Accordingly, there is a lot of job growth in the federal job market - well, there may be. The Department of Labor is opening positions from Program Analyst to Contract Specialist to General Attorney (Labor). And the April employment report showed a record 72,000 jobs added by the government sector alone, which is massive compared to its +8,000 average over the last year.


However, "government" is federal, state, and local; and the federal payroll accounted for just 13% of all government jobs in April.

The chart illustrates job growth at the federal, state, and local levels since 1980 (indexed to 1980). During the 1990 and 2001 recessions, both state and local governments hired throughout the recession. However, this time, they are more likely to fire than hire, where job growth has already slowed to a small crawl.

State jobs are roughly 23% of the government's workforce, while local governments account for 64% of government jobs. And state budgets are going deeper into the red according to the Wall Street Journal's Real Time Economics blog:
Revenue declined in 45 of the 47 states that have reported first-quarter numbers (the exceptions were Iowa and South Dakota). Let’s remember that many states consider deficits to be those times when revenues don’t grow as fast as they’d hoped, an have no contingency plans for double-digit decreases. “If green shoots are sprouting in the overall economy, it’s still weeds and dust for state governments,” says Robert Ward, deputy director of the Rockefeller Institute.

Chart source: Real Time Economics

And amid such budget shortfalls, spending cuts are already underway. As an example (one of the states highlighted in the chart above that is experiencing a 15% drop in revenues over a year ago) is California, which according to the WSJ, is again accommodating the mound of budget red ink by another round of spending cuts:
The possibilities include cutting $3.6 billion from education, reducing the state's firefighting budget by 10%, and releasing 40,000 low-risk inmates to cut prison costs, Mr. Schwarzenegger said. The state also may have to borrow $2 billion from local governments, he said.
Jobs are certain to be slashed alongside the spending cuts. And unless the feds can offset the job loss at the state and local level, government is not the illustrious job maker portrayed by Forbes. The labor market - all sectors of it - is awful.

Rebecca Wilder

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Chinese trade: the rebalancing effect

Tuesday, May 12, 2009

China released its April trade numbers, where the sharp decline in export growth will take the spotlight. On the flip side, though, import growth surged. Now, this could be driven by several factors - anything that might affect the real exchange rate; however, it does suggest that domestic demand may be improving. Furthermore, and in normal times, greater access to imports is good for efficiency, productivity, and growth.

Here is the headline story. From the NY Times:

Exports from mainland China slumped 22.6 percent in April from a year earlier, official statistics showed – a decline that was not only larger than economists had expected, but was also worse than in March, when overseas shipments had declined 17.1 percent.


The data served as a sharp reminder that much of the global economy remains in the throes of a deep recession, and that a string of recent figures showing the pace of decline easing in parts of the world by no means heralded an actual marked turnaround.

RW: To be sure, reduced export income will drag Chinese economic growth over the near term. However, if Chinese producers continue to gain access to less costly inputs to production, efficiency gains will result. This reminds me of an article from the Economist; it reports the findings of a paper that estimates the effect of increased import access (through reduced trade barriers) on productivity gains in India. The findings from the Economist:
They found that about 66% of the growth in India’s imports of intermediate goods after liberalisation came from goods the country had simply not bought when its trade regime was more restrictive. These new inputs caused the price of intermediate goods to fall by 4.7% per year after 1989. And detailed data linking inputs to final goods showed that the imports led to an explosion in the variety of products made by Indian manufacturers; the average firm made 1.4 products before liberalisation, but by 2003, this had increased to 2.3.
Of course, this transition would not occur tomorrow; but eventually (and eventually could be a long time off), China will reduce trade barriers, relax price controls, or allow the yuan to appreciate against its basket of currencies, and imports will rise. But is that such a bad thing?

Perhaps this cycle will mark a small structural shift in Chinese economic development - a rebalancing effect from export-driven growth to that of domestic innovation and productivity gains.

Rebecca Wilder

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Canada's new home market is weakening

Monday, May 11, 2009

The weak conditions in the labor market - dragging demand for new homes and input prices for building - and commodity prices (inputs) is driving down the value of new homes in Canada. From The Daily:

Contractors selling prices decreased 0.5% in March compared with a 0.7% decline in February. This resulted in a New Housing Price Index of 154.6 (1997=100).

Between February and March, prices declined by 1.2% in Calgary and Edmonton, followed by Vancouver (-1.1%) and Victoria (-0.9%). In Calgary and Edmonton, declines were attributed to lower material and labour costs and lower lot prices from developers. In Vancouver and Victoria, builders reported lower prices due to competition and slow market conditions.
The chart illustrates new home prices in Canada and the US (average), both indexed to 1997. Although the market in Canada is turning weak, it is unlikely that it will fall as hard as the market in the US. The fundamentals are strikingly different.

The Canadian market is reacting to weak economic fundamentals, rather than an outright crash in the housing market stemming from overly-indebted households.

Rebecca Wilder

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Is conspicuous consumption dead?

In economics there is a wave of literature, pioneered by the likes of Thornstein Veblen, that attributes consumption patterns to one's level of income and wealth, but also to his "relative" standing in society. In short: households accumulate wealth in order to pay rent, buy a car, or purchase groceries, but also to to flaunt, or openly display, one's placement in the pecking order of society. This behavior is called "conspicuous consumption", or "keeping up with the Joneses". Did you ever:

  • Build a pool in your backyard because your neighbors all had one...even though you don't swim?
  • Buy a big Hummer to drive around the streets of Houston, Texas?
  • Buy the $300 cotton top at Saks rather than the $10 cotton top at Target?
The adverse effects of this recession on consumption behavior has been diffused across all classes of society. And as households save and delever (pay down debt), does this mean that the days of conspicuous consumption are over? At least for the time being? Well, the makers at Rolls Royce are worried and planning accordingly. From the Economist:
In these hair-shirt times, selling the ultimate statement of automotive luxury is tricky. Rolls-Royce’s customers can still afford the £300,000 ($450,000) asking price. The problem, as Mr Purves acknowledges, is that for some buyers, the “atmospherics” of splashing out on such a conspicuous symbol of wealth do not feel quite right. The firm has data going back to 1904 that suggest there is no link between Rolls-Royce sales and either stockmarkets or GDP, but there is with property prices. In 2007 Beverly Hills was Rolls’s best market, beating London, Dubai and Riyadh. But last year Beverly Hills was relegated to fourth place behind Beijing, with oil-rich Abu Dhabi claiming top spot. Mr Purves says that America accounts for about 40% of Rolls-Royce sales, and California was one of the first markets to soften.
I know that most of us are not in the market for a Rolls Royce. However, it is likely that "class" may play a lesser role on consumption behavior while households slowly pay down debt.

Rebecca Wilder

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Willy Wonka's chilling job market

Friday, May 8, 2009

This is what the labor market looks like to me:




The April employment report was nothing short of awful. The unemployment rate surged four-tenths of a percent to 8.9%, and the nonfarm payroll was reported to have shed another 539k jobs. In total, the unemployment rate almost doubled and the payroll slashed 5.7 million jobs since the cyclical peak, December 2007.

The chart below illustrates the payroll loss by sector for the big 3 recessions – those that lasted 16 months or more (April marked the 16th month of recession in the current cycle).



  • In the big 3, the current cycle is seeing record job in construction, manufacturing, trade, transportation and utilities, financial activities, professional and business services, leisure and hospitality, and other services.
  • The “last men standing” in this cycle – those industries that added jobs over the cycle – span just three industries mining and logging (<1% of the total payroll), education and health services, and government. Government is a risk, as the bulk of states and local governments are seeing budget shortfalls.
  • May 2009 is the 17th recession month in the current cycle, making it the longest recession since 1933. There is much job loss left in the pipeline; and although labor market is not expected to emulate that of the Great Depression, it does seem steal the spotlight from the 73-75 and 81-82 recessions.
The rate of job loss likely hit its peak, but the job destruction is still very troubling.

Rebecca Wilder

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Male and Female pay: the wedge

I get a lot of keyword searches for male and female pay. Well, the BLS reports median weekly earnings by gender on a quarterly basis :

Women who usually worked full time had median earnings of $649 per week, or
78.9 percent of the $823 median for men. The fe- male-to-male earnings ratios
were higher among blacks (93.9 per-cent) and Hispanics (88.4 percent) than among whites (77.9 per-cent) or Asians (81.3 percent).
The chart illustrates the annual average of quarterly real median weekly earnings for men and women 16 years and older roughly every 5 years since 1980. The real number extracts the effects of inflation on earnings. The eye-popping result is the wedge between male and female earnings, roughly 25% on average over the sample. Also, real median female earnings are growing on average, while male earnings are falling.

Here is what the BLS says about the earnings gap:
This article sheds some light on reasons for the gender earnings gap, focusing on the role that the share of women in an occupation plays. We utilize the methodology employed by George Johnson and Gary Solon to identify the sources of the relationship between wages and the share of women in an occupation.3 Johnson and Solon used Current Population Survey (CPS) data to estimate the relationship between wages and the concentration of females within occupations. They found that the relationship was negative, even after controlling for worker and job characteristics. Industry was found to have the largest effect on the relationship, primarily because predominately male industries, such as construction and manufacturing, pay higher wages.
I haven't read the paper, but this is how I read the conclusion: women hold a smaller share of jobs in the industries that pay more. Likewise, there is a big discrepancy between male and female executive pay, as documented by Fortune (with my take on it here).

I will leave it to you all to comment on the dichotomy of earnings across men and women. The earnings data are from the BLS' massive current population survey and exclude self-employment income.

Rebecca Wilder

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Small and medium firms are slashing most of the jobs

This week is labor week -and stress test week, but I will let you read about that here, here, here or here - the Fed's white paper)! In preparation of the BLS report, I wanted to talk a little bit about the almost-discredited ADP report. Although the ADP report touts a correlation of 0.96 with the BLS report, it seems to add little predictive power for the BLS nonfarm payroll report. Calculated Risk argues the correlation is strong only after revisions.


However, the ADP report does add value: it reports the job loss by firm size. This is different from the BLS breakdown, which is by industry.

The chart illustrates monthly contributions to total payroll growth by size of firm: large, medium, and small, which account for 17%, 39%, and 44% of the total private payroll, respectively. In the first quarter of 2008, large firms contributed the largest share to the payroll decline; however, since July 2008, it is the medium-sized firms (50-499 employees) that are contributing to the bulk of the payroll decline.

However, the announced layoffs are all at the large firms, which is tracked by Forbes:
But the ADP report suggests that this is only the tip of the iceberg: the hemorrhaging of jobs is occurring largely (no pun intended) across the small- and medium-sized firms.

Rebecca Wilder

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Google's googopoly

Thursday, May 7, 2009

This is kind of interesting. Last week, Edward Harrison at the Credit Writedowns blog "ranted" about the Feedburner's RSS Feed Service now owned by Google. Here is what he said about Google:

I could end my little blurb there, but I am REALLY frustrated with all of this and want to make this post a little rant about FeedBurner and the mother ship Google. You see, FeedBurner was a much more reliable and better tool before it was acquired by Google. I like Google’s services (News, Reader, Mail - they are all excellent. I especially like Google Checkout), but it is becoming increasingly evident that in many areas the company has too much power on the Internet with few reliable alternatives.
RW: This is a common theme around the internet: Google has too much power; I call this the googopoly. Well, it looks like the Department of Justice is looking into Google's market share. I imagine that it is difficult to define market share and anti-competitive behavior on the internet; but apparently, they are trying. From Fortune:
The Justice Department is taking a closer look at Google's settlement with authors and publishers over how material will be accounted for on Google's book search service. And the Federal Trade Commission is wondering whether the boards of Google (GOOG, Fortune 500) and Apple (AAPL, Fortune 500) are a bit too close.

It was bound to happen: Google couldn't get this dominant - with 76% of the search market - without attracting some attention in DC. The question is whether the company has played by the rules in gaining its status.

The last thing the "do no evil" company wants is a rehash of Microsoft's situation in the 1990s.

Google has a number of explanations for why it plays fair.

For one, the company likes to say its competition is "just one click away." In other words, there's nothing really preventing users from switching to another search engine - aside from sheer habit - if they want to find better results.

It doesn't sound like anything is going to come of this right away. But it is food for thought.



Rebecca Wilder

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World economic reports (May 1- 7): the economic decline abates

This week's peek at the global economy shows some economic calm. The signs of hope remain mostly in the soft data - US and China purchasing managers surveys posting consecutive monthly growth - while the hard data - export growth, inflation, and unemployment - continue to deteriorate. Going forward, the story that "economies are declining less quickly" is gaining some momentum. And for some, a turning point may be on the horizon.

GS (green shoot): Trend in China's purchasing manager survey probably saw a cyclical low

Source data courtesy of Sinolize.com

The chart illustrates China's manufacturing (MPMI) and non-manufacturing (NPMI) indices through April 2009. The manufacturing index marked its fifth consecutive month of growth, while the non-manufacturing index took its second consecutive bump. The two sectors continue to deteriorate - the MPMI and NMPMI indices remain below 50 - but at a slowing rate.

GS: Same story in the US

The chart illustrates the Institute for Supply Management's monthly surveys of activity in manufacturing (ISM pmi) and services (ISM Services) through April. The story has gone global (see a nice post here at Global Economy Matters): production is still contracting, but at a falling rate.

In the US, the ISM pmi index dates back to 1948 and tracks well recession activity. As long as it doesn't double dip, the ISM pmi is currently 40.1, then the economy and manufacturing will likely be expanding in coming months (values over 41.2 indicate overall economic expansion). I should stress that the uncertainty of the outcome in the auto sector makes double dipping a real possibility.

GS/Uh-oh: Export decline slows in South Korea, but quickens in India (click on chart to enlarge)

The chart illustrates export and import growth through April for South Korea and through March for India. Trade flows took a quick U-turn, as imports (signal of domestic economic conditions) and exports (signal of foreign economic conditions) cam crashing down. On the bright side, South Korea's export sector - export growth is highlighted in the chart: -33% and -19% over the year in India and South Korea, respectively - has tentatively stabilized since January 2009.

Uh-oh: the lagging indicator, unemployment, is surging across the board

The chart illustrates the annual change in the unemployment rate through March for Japan, Eurozone, and Germany, and through April for Australia (the current unemployment rates are listed in the legend). The evidence suggests rapid decline in labor conditions across the board. Germany is slow to get there (the harmonised measure), but the unemployment rate will rise further.

Uh-oh: another lagging indicator, prices, fall hard on energy

The chart illustrates the most recent inflation rate compared to the same rate just one year ago for Switzerland, Japan, Taiwan, South Korea, and Thailand. Prices are falling into the red for each economy except in South Korea, whose inflation rate slowed to its lowest level in 14 months.

These indicators are typical of a turning point. Some hard data (exports in Korea) show improvement, while others (prices and unemployment) are lagged to the economy and will continue to decline for some time.

Rebecca Wilder

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Personal saving rate is rising; the wealthy are rebuilding wealth....

Wednesday, May 6, 2009

CNNMoney comments on the results of a Fidelity study suggesting that "millionaires" are taking action to rebuild their wealth. From CNNMoney:

Who wants to be a millionaire when nearly half of them don't even feel rich, according to a survey released Wednesday.

Some 46% of the 1,012 participants in the annual Fidelity Investments study said they "do not feel wealthy and are taking action to reassess and rebuild their wealth."

That's a big change from last year, when only 19% said they didn't feel rich. Fidelity blamed the drop on the corresponding plunge in wealth, with an average 19% reduction in household income and investable assets, and a 28% plunge in real estate holdings.

Fidelity, a Boston-based financial services company, described the average respondent as having $3.5 million in assets and $306,000 in annual household income.

The millionaires reported various ways in which they're adjusting portfolios amid the recession. The bearish types are dumping more of their money into fixed-income securities, while the bulls are buying more stocks, according to Fidelity.

Millionaires feel less "rich" (a.k.a., wealth effect), and the personal saving rate surges. Ahem, they are consuming less, too.



Rebecca Wilder

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Prices during the recovery...

Today, the NY Times is running an article on the oncoming recovery, citing the typical mechanisms that jumpstart the economy: inventory replacement, population growth, or price declines (or slowing price increases). In spite of an economic recovery, key markets still have a "long way to go"; this is especially true with prices.

This labor cycle has been just awful, as the top chart shows. The private payroll slashed >600,000 jobs every month since October 2008. And the job declines are expected to continue.

The massive labor declines helped to push the employment cost index (ECI) growth down to 1.96% over the year, a record since the series was first measured in 2001. The chart below illustrates the relationship between the private ECI (total compensation measure, Table 1 here) and the private payroll (both measured in annual growth rates).

The sample size is small, as the ECI data are available on a quarterly basis since just 2001 (29 data points for the annual growth series); however, the relationship does show an R^2 of 0.33. Accordingly, as the labor market sheds more jobs, the ECI growth is expected to slow further.

Let's say that the payroll slashes another 1 million private jobs over the two months, then the relationship above suggests that the ECI growth will slow to just 1.3% over the year. However, as the lone Q1 2009 value shows, history is likely not the best predictor, since neither the ECI nor the payroll have seen these levels of losses over the sample period.

My point is that the slowing wage growth probably has some downward momentum left in the pipeline.

The chart illustrates the 6-month growth in prices (headline and core, which extracts the effects of energy an food prices) on an annualized basis. Over the last six months, energy prices have tumbled, dragging down headline inflation (deflation) to around -5% annualized in March. Illustrating inflation in this manner is convenient to quantify the price momentum over the recent past, rather than over the last year.

Based on the expectation that wages are expected to fall further, core prices, which are very much lagged to the economy and still growing at over a 1% annualized rate in the last six months, are set to fall. There's likely nothing that Bernanke can do about that.

Slowing wage growth is the mechanism by which the market clears its produced goods and services while aggregate demand is falling; however, eventually, it could become a problem.

Rebecca Wilder

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