Echo

Industrial production coming back, but....

Monday, August 31, 2009

Japan's industrial production "surged" 1.9% in June for its fifth monthly gain. From MarketWatch:

Japan's industrial production index rose a seasonally adjusted 1.9% on month in July, the Ministry of Economy, Trade and Industry said Monday. The result was above a 1.6% on-month gain expected by economists polled in a Dow Jones Newswires and Nikkei survey, though it was still 22.9% below the year-ago level.
Alongside Japan, many developed economies are showing some rebound in industrial production, a measure of physical output.

Wow, Japan is really experiencing a rebound in factory output. However, looking back a little farther back in time, one really sees how low is industrial output. At the trough (February 2009 for Japan), production fell back to levels not seen since:
  • 1998 in the US
  • 1992 in the UK
  • 1997 in Canada
  • 1999 in Germany
  • 1987 in Italy
  • 1983 in Japan
Yup, Japan's down hard. It's gonna take a huge push in demand to get production levels back.

Rebecca Wilder

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On Angry Bear, "Trends in home values: becoming murky"

Tuesday, August 25, 2009

Hello loyal News N Economics readers! I will be contributing to Angry Bear; and on those days that I do, I will not post here. However, I will link to the Angry Bear article...just like I am doing here.

Trends in home values: becoming murky

Rebecca Wilder

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Scrapping the worst of the worst, right?

Monday, August 24, 2009

The Cash For Clunkers program represented a new wave of American thinking: let's get the bottom tail of the fuel-efficient autos distribution off the road. Scrap the environmentally unfriendly clunkers. Although the program did get the auto inventory moving, did it really scrap the worst of the worst?

This is a sample of 6, but it seems to me that the car most worthy of scrapping did not get scrapped. Was it the objective of Congress to scrap the marginal clunkers? Well, if it was, then they succeeded (again, in this sample size of 6). According to CNNMoney, here is what the proud owner of 1983 GMC Vandura (11 mpg), pictured above, said about his/her experience:

My smoke-belching, fuel-guzzling diesel van doesn't qualify for Cash for Clunkers. I have insurance, current license plates, a safety-inspection sticker... but my van is one year too old to qualify. Is my 1983 van a classic, Congress?

Maybe they consider it too classy to be scrapped and think it should still be running up and down the highways. Well, that's what I do with it now, and I expect this old thing will be alive and kickin' for decades to come.
I don't know, seems a little off to me.

Rebecca Wilder

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Follow up on debt-fueled consumption growth

Sunday, August 23, 2009

Wow, this post got a lot of attention/criticism on the web (see comments on RGE Economonitor, Investment Postcards from Cape Town, and of course News N Economics). I guess it's hard to believe that the mortgage buildup over the last decade was financing health care rather than durable-goods consumption.

The chart illustrates annual real spending, as released by the BEA (see data here). The mortgage data comes from the Fed's Flow of Funds accounts. The BEA is smack in the middle of updating its history, following the comprehensive revisions, and some of the data is truncated at 1995.

I agree, but only to the point that the line dividing types of debt-fueled consumption growth is not clear - consumption was just growing. But I find this chart to be rather remarkable: notice how the trend term for durable-goods consumption growth peaks in the late 1990's, well before the run up in mortgage debt was established. Services got a bit of a push during the same period, but nothing like durables. And notice the positive correlation between some of the quicker rates of mortgage debt growth and the pace of health care spending.

Obviously this is not a quantitative study, rather a qualitative approach. But it does support the premise that the debt was going, at least in part, to finance health care spending. Frankly, I don't know why it is so hard to believe. Anecdotally, I have a friend that is just swimming in debt, all on an uninsured week at the hospital.

Rebecca Wilder

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The Fed balance sheet: it is a-growin'

I know that it's a bit cheesy relating the Fed balance sheet to Bob Dylan lyrics, but it just happened. The Fed's exit strategy is policy talk numero uno these days; but that's just it, talk. The balance sheet is still growing!

The annual Federal Reserve Bank of Kansas City Economic Policy Symposium is now over, with a list of top-tier talks addressing macroeconomic policy and financial stability. Carl Walsh says that the Fed must raise rates quickly...when the time is right. From the WSJ Real Time Economics blog (I will be looking for Walsh's paper, as it is not available at this time):

In a paper prepared for a two-day Fed conference here, Mr. Walsh argued that the U.S. must avoid the mistake of the Bank of Japan in lifting rates too soon. The way to do that is to keep rates low past the point at which the economy’s equilibrium, or natural, real rate of interest has risen above zero, he said.

However, once the Fed does start raising the federal-funds rate out of its current record-low range near zero, “it should be increased
quickly,” Mr. Walsh argued. “There is no support for raising rates at a gradual pace once the zero rate policy is ended.”
Well, raising rates (i.e., grow the fed funds target in order to target higher long-term rates) is the last thing on the Fed's plate right now with the reserve credit ex currency swaps trajectory still very much upward.

The chart illustrates the accumulated growth rate of reserve bank credit indexed to September 2008 (i.e., 2 implies that bank credit is double that what it was in September). On the surface, the Fed appears to be in a holding pattern, with reserve bank credit peaking in December 2008 and relatively flat since then (around $2 trillion). But the foreign currency swap lines of credit are masking the true trend in the balance sheet. At the beginning of the year, the Fed held $543 billion in assets related to currency swaps, and these holdings have dwindled to just $69 billion (see the Fed's current balance sheet here).

Ben Bernanke noted the importance of this program in Jackson Hole on Friday:
During this period, foreign commercial banks were a source of heavy demand for U.S. dollar funding, thereby putting additional strain on global bank funding markets, including U.S. markets, and further squeezing credit availability in the United States. To address this problem, the Federal Reserve expanded the temporary swap lines that had been established earlier with the European Central Bank (ECB) and the Swiss National Bank, and established new temporary swap lines with seven other central banks in September and five more in late October, including four in emerging market economies.6 In further coordinated action, on October 8, the Federal Reserve and five other major central banks simultaneously cut their policy rates by 50 basis points.
The Fed is still beefing up, rather than unwinding, its balance sheet. Discussing its exit is prudent, but far from a reality given that the recovery is still up for debate (see David Altig's post at Macroblog relating the speed of the recovery to the estimated output gap).

Rebecca Wilder

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Who's the best at targeting inflation?

Friday, August 21, 2009

The Bank of Canada, Bank of England, and European Central Bank set short-term rates in order to achieve a medium-term inflation target of around 2%: 1%-3% at the BoC, 2% at the BoE, and 2% at the ECB. The Fed, although it has no such target explicitly listed in as a policy objective (its mandate is to promote high employment, stable prices, and moderate long-term interest rates), has listed the “central tendency” of the FOMC’s inflation projection, i.e., what the Committee would deem a target; that central tendency is 1.7-2.0%. Sounds reasonable, right? Probably not, given its history.

The chart illustrates the annual inflation rate in the US, UK, Canada, and across the Eurozone 15 countries. The series are volatile, so I included a polynomial trend line for clarification.

In the last five years, the US annual inflation rate averaged 3.0%. And over a longer period, 1992-2008, the annual inflation rate averaged 2.5%. Accordingly, the Fed does not regularly meet this “target” (unless productivity dropped inflation, like it did in the early 2000’s). But the BoC and the UK are very good at targeting inflation, with average annual inflation equal to 1.86% and 1.96%, respectively, spanning the years 1992-2008. On the other hand, the EU (15) – admittedly, the data is truncated at 2006 but the ranking still holds if average rates are compared through 2006 – missed its target by 0.2% (2.2% average annual inflation rate).

So who's the best at targeting inflation? Here’s the ranking, with a tie for first place:

First: BoC and BoE
Second: ECB
(Distant) Third: Fed

Rebecca Wilder

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The misunderstanding of "debt-fueled consumption"

Wednesday, August 19, 2009

Today I plan to rant just a bit about consumption because I was reading Yves Smith’s article today, and she referred to “debt-fueled consumption” – the now pejorative phrase that just rolls off the tongue. She says:

“no where does the article [referenced WSJ article in her post on the consumption share] acknowledge that the consumption level was unsustainable and debt fueled.”
And this is where I get just slightly irked, because it seems to me that the phrase “debt-fueled consumption” strikes the following chord: every American household was loading up on home equity debt just to buy big ticket items like Hummers and large sofa sets with cup-holders galore from Jordan’s Furniture (a discount furniture shop in the Boston area – generically, every city has one).

I am sure that Yves Smith knows this, but the debt-fueled consumption was more likely paying surging health care bills than buying cute kitchenettes.

Myth 1: The years of debt-fueled consumption went into goods spending, jumping the consumption share of GDP to an excess of 70%.

Reality: The goods share of total consumption has been falling quite dramatically, while the service component surged. Therefore, it is more likely that the debt fueled consumption was going predominantly into the service component (paying service bills).

In Q2 2009, 25% of service spending went to health care – outpatient services (physician, drugs, dentist) or hospital and nursing home services - and 29% of service spending went to housing and utilities – rent, water, electricity, and trash. As such, over 50% of service consumption is more likely to remain stable, even rise faster, with the Boomers out there.

And as for the speculation that workers are postponing retirement due the drop-off in wealth, and consumption will be meager into the medium term, I simply don’t buy it. If anything, the aging population is going to fuel recovery – no matter when they choose to retire. Service sector consumption growth – much of it based on health care consumption - will simply become a larger share of GDP growth (cutting out autos, perhaps), and pick up some of the slack.

And here’s another thing. Myth 2: durables consumption – i.e., autos and furniture – are important contributors to the initial stages of the recovery. It helps, but service consumption is the biggie.


The chart lists the average contribution each GDP component during the initial year of recovery spanning the 1950-2007 (nine recoveries in total).

Reality: The average growth accumulated during the initial stages of recovery (1-yr following the recession’s end) following the last nine recessions is a remarkable 6.43% (consensus forecast for growth in 2010 is currently 2.3%). Only 0.47% of that came from durable goods. A huge 1.67% of that stemmed from the service component of consumption (again, health care and housing).

And as long as service spending rebounds, so too will the economy – even without a big pickup in autos. Inventories are almost a foregone conclusion, the residential construction sector is bound to pick up – 500-600k units is simply unsustainable for a US population that is growing at roughly 1% a year, and growth rates on such a small base can be large.

And here’s another link to jobs that has not been incorporated to many forecasts – growth in jobs means new health care insurance, means added spending on health care.

I could go on, but I won’t.

Rebecca Wilder

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Global Synchronization: then and now

Tuesday, August 18, 2009

Since the G7 have now reported Q2 2009 GDP, except for Canada who doesn't go through the excruciating process of multiple release dates for the same GDP report, I decided to update my really scary charts series (name stolen from the Financial Ninja) for G7 growth. And I see a high degree of synchronization during this Great Global Recession.

One would think that this is always what it's like during a global recession. This made me think of the IMF's April World Economic Report, which described global recessions in detail, as indicated in the IMF Survey report:

In addition to the current cycle, there were three other episodes of highly synchronized recessions: 1975, 1980, and 1992. These recessions were on average longer and deeper. Distinct from other episodes, the recoveries from these recessions feature much weaker export growth, especially if the United States is also in recession.
Yeah right, highly synchronized. Actually, this recession is redefining synchronized GDP growth. Look at the degree (or lack of) correlation among the same series, ex Germany, spanning the years 1980-1983. There is a 6-country dip in Q2 1980 (the IMF global recession). However, the rebound during the 1983 recovery - when the US (roughly 25% of global GDP) clawed its way back from 2 recessions in 3 years - appears to be more synchronized than the dip in 1980.

Yup, this one's been bad.

Rebecca Wilder

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June TIC data: returning to risk? Possibly, definitely Treasuries

Monday, August 17, 2009

I don’t know how Brad Sester did this every month. The Treasury International Capital System (TIC) is one of those reports where the headline number, a -$31.2 drop in foreign net accumulation of US assets in June, doesn’t give you a whole lot of information. One must dig and dig. Even the FT got it wrong

Foreign investors ramped up their purchases of US long-term securities in June, although China trimmed its holdings of US Treasury bonds during the month, according to data released by the Treasury on Monday.
As you will read below, China increased its holdings of longer-term Treasuries in June (i.e., bonds and notes), but dropped its T-bills. Overall, the June report is still all about risk aversion; but there are tentative signs that foreigners are slowly returning to risk (i.e., quality long-term assets).

Just for note, the data referenced in this post is found here (for the aggregate and country-level long-term flows), here (for the aggregate and country-level short term flows), and here (the press release).

The -$31.2 billion drop in net-US assets was dominated by a $71.3 billion accumulation of longer term assets ($90.7 billion of high quality Treasuries, bonds, agencies, and equities), a $19.5 billion drop in short-term dollar-denominated assets, and a massive $82.9 billion draw on cross-border banking flows. Over the quarter April-June, a grand total of -$136.8 billion in capital flowed out of the economy.

The $123.6 billion in long-term capital net-inflow was almost entirely focused on Treasury bonds and notes, $100.5 billion (T-Bills fell $11.3 billion in June). However, agencies, $5 billion, and equities, $19.1 billion, increased smartly, too. Core flows, net of the volatile banking series, grew $51.9 billion over the month.

The UK increased its holdings of long-term dollar-denominated securities by a large $49.4 billion over the month, almost all of it in longer-dated Treasuries, $45.7 billion, and a much smaller but rather sizeable $4.3 billion net purchase of US stock. The UK remains to be a net-monthly-buyer of agency debt, but increased its June holding by a small $500 million.

Japan grew its holding of US long-term dollar-denominated securities by $33 billion in June on a $32.8 billion purchase of Treasuries. It sold off agencies in June, and has been accumulating US stocks for some time, $24.4 billion in the last year.

China bought $25.7 billion in US longer term securities over the month, all in Treasuries, and dropped its holding of short-term T-bills by a huge $51.8 billion, its second monthly net-sale of T-bills in the last year.

Overall, bond foreign bond accumulation is still down over the year, while stocks are up. The agency sell-off continues, and Treasuries dominate. On the upside, though, the $23 billion June drop in accumulated short-term assets may be a harbinger of risk-taking in the future.

Rebecca Wilder

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The oncoming Q4 surge in home sales

Sunday, August 16, 2009

Are we going to see a surge in home sales at the end of the year? With the tax credit expiring, that is effectively an expected increase in the price of a home (all else equal). Hmm...I am a first time homebuyer (I personally am not, but let's use the abstract version of "I"), the news about the economy is "less dire more hopeful", and I see a subsidy expiring. What do I do? The LA Times is advising you to get on the ball, and buy that home before November 30:

Reporting from Washington - First-time home buyers had better get a move on if they hope to take advantage of the $8,000 federal tax credit. The window of opportunity is closing rapidly.

To qualify for the credit, any transaction involving a first-time buyer must close before midnight Nov. 30, when the valuable tax benefit expires. And because the buying and lending processes can be slow, you're going to need every bit of that time to close escrow.

Although the end of November might seem a long way off, Diane Dilzell, president of the New Jersey Assn. of Realtors, rightly points out that it takes weeks, if not months, to manage the logistics involved in a real estate transaction. It's also important to realize that any of a number of things can go haywire along the way.
Will we see a big surge in November existing home sales? Possibly - even likely - that certainly is not a "seasonal" thing.

Rebecca Wilder

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The firing is still very widespread

I wanted to get this out right around the labor report; but alas, life kind of "took over". I digress. The Bureau of Labor Statistics reported that the private payroll (total nonfarm payroll minus government jobs) shrank by just 254,000 jobs in July, the smallest drop since August 2008 (chart to left).

The news of 254k jobs lost in one month would be disastrous in any other period of time, except during a recession that claimed almost 7 million private jobs. So the trend is upward...good.

The BLS releases data about the spread of firings across 278 private industries and 84 manufacturing industries, the diffusion index (see the BLS handbook here for a description of the diffusion index). And although the firing of workers is definitely not as widespread as in January 2009, it's still broad.

The chart above extrapolates the net percentage of industries in private nonfarm payroll and in manufacturing that increased (+) or decreased (-) their workforce over the month according to the BLS' diffusion index spanning the period Jan. 1991 to July 2009. It basically measures how widespread is the current payroll trend. As you can see, it is still strong and to the downside, with 39.8% more private and 55.4% manufacturing industries firing workers than are hiring workers, respectively.

Notice that during the last jobless recovery, where the private payroll fell for 16/20 months following the end of the recession (November 2001 according to the NBER), the net-percentage of industries firing workers stabilized for about a half of a year (the red arrows). However, at the end of 2002, the firing started again. My point is: don't break out the champagne - we are not out of the woods yet.

But I stand by my previous conjecture: that the productivity gains (yes, gains) indicate that firms are firing much more coincidentally than in previous recessions. And as soon as demand resumes, private industries will have to hire in order to satisfy production. Of course, that has not happened yet.

Rebecca Wilder

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Economists: not the best recovery forecasters

Friday, August 14, 2009

I wrote an article some time back about the pathetic recovery expected by Economists. In that article, Spencer (of Angry Bear) gave the following comment (please read the entire comment, as Spencer's argument is not represented here in full):

Maybe this time will be different and we may actually have a weak recovery, but just remember that economist have a long and repeated history of underestimating the strength of recoveries.
I myself did not know that Economists have a very good track record of undershooting recoveries. However, I did a little digging through old files at work and found Blue Chip forecasts around the end of the 1981-1982, 1990-1991 recessions, and a DRI forecast (now known as Global Insight, couldn't get Blue Chip) at the end of the 2001 recession (recession end determined much later by the NBER). The forecast way undershot the actual growth rate for the first year of recovery in two of the last three recessions - by 2.3% in the 1983 recovery!

Ahem. Don't be too surprised if they mess it up again!

Rebecca Wilder

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Can firms simply add hours to recover output? No.

The RGE Monitor recently uploaded one of my articles on productivity. I believe that the corresponding comment deserves a public response; it refers to the tradeoff faced by employers between laying off workers or reducing hours worked (chart to left, where July hours worked remains at a historical low of 33.1 hours per job). Here’s the comment on the RGE (here):

Rather a slim thread. Many positions are now simply GONE. And where on earth is the basis for the assumption that corporations will quickly rehire, especially in the US? The work week can simply be brought back to 40+ hours from 33 and that by simple arithmetic is over a 20% increase in labor hours. That is a lot of economic expansion, ALOT!!! Where is this great consumer engine in the US?? I am not acquainted with many who believe ANY of these cheery fairy-tales. Corporate America has announced that outsourcing will continue with a vengeance.
His point, firms can simply increase hours and A LOT of growth will result, is only a partial point at best. Now, as readers will notice on the chart above, the average workweek has never been 40 hours – that is a myth. In fact, the average over the five years previous to the recession, 2002-2007, was just 33.78 hours/job.

Let’s do this arithmetically – will GDP grow A LOT if hours reverts to the previous 5-yr mean of 33.78 (a 2.05% increase from 33.1)?
  • Assume a simple production function in each period; Y1=A1*(L1^(2/3)) and Y2=A2*(L2^(2/3)) (cannot do better in blogger with no equation editor).
  • Assume that productivity stays the same: A1 = A2 = 1.
  • L1 and L2 are total hours worked = average weekly hours * employment (I use the private nonfarm payroll)
How much growth does the economy get? According to our assumptions:
  • Y1 = 23512.62
  • Y2 = 23833.16
dY/Y (percentage change in income from period 1 to period 2) = 1.36%. And in an alternate scenario, where average hours worked reverts back to its 10-yr average of 34.0 hours/job, the output gained is just 1.86%.

So, by increasing hours per job back to 33.78 hours/job gets the economy an added 1.36% of growth. GDP output has dropped 3.9% since its peak in Q2 2008; and in order to recover all of that lost output, GDP will have to grow 4.1% from where it is right now. Call me crazy, but simply replacing hours is not going to get us very far.

Rebecca Wilder

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June gloom: not in exports

Wednesday, August 12, 2009

Today’s trade report was a surprise: to the upside on exports and to the downside on imports. According to preliminary figures, the trade balance widened by $1 billion on a 2% surge in exports and a bigger 2.3% jump in imports. Overall, the momentum is snail-speed: the cliffdiving has likely ended, but strong recovery has not yet emerged.

On the import side, it appears that the only “import” out there is of the costly petroleum kind. To be sure, service-sector imports were up 1.4% (travel, travel fares, royalties and licensing fees, direct defense expenditures, and miscellaneous); but at 20% of total imports, it was the $4 billion surge in petroleum goods that took the cake.

Moving on to the upside surprise: exports grew across the goods and service sectors –a definite positive. June marks the first time since August 2008 (one year ago to date) that the 3-month moving average of exports grew. Exports are stabilizing, but still way down – almost 17% in real terms.


Rebeccca Wilder

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A staggering term of productivity growth

Tuesday, August 11, 2009

Usually productivity growth tumbles during a recession. Firms incorporate economic conditions at a lag, cut marginal costs (i.e., jobs), and the unemployment rises. Not this time.

The chart illustrates annual productivity growth per quarter since 1950. As you can see, productivity growth dropped below zero in six of the last ten recession (including this one). Even more remarkable is: that this cycle ranks number two - behind the 2001 recession (2.0%), which didn't even see negative annual GDP growth after recent revisions - as the recession with the highest trough in annual productivity growth, 1.9% in Q2 2009.

Why is this important? Well, it means that firms have fired at a rate inconsistent with previous cycles - much faster, in fact. Brad DeLong suggests that firms are not "hoarding labor" and predicts a jobless recovery due to the fact that the historical relationship between output and job loss is diverging from that seen in previous recessions. It seems to me, though, that firms fired at record rates; and therefore, they may hire at lightening speed as well. Robert Waldmann at Angry Bear suggests the same.

According to the Wall Street Journal, the drop in service sector employment implies a speedy labor recovery. Here is an excerpt from yesterday's article:

The rapid pace at which businesses shed jobs during the recession comes with a flip side: Workers will need to be hired back quickly as the economy improves.

So deep have companies cut jobs that Friday's employment report, which showed that the U.S. economy lost a quarter-million jobs in July, was seen as a relief. Since the recession began in December 2007, U.S. payrolls have fallen by 6.7 million, according to the Labor Department. That's a 4.8% decline, a level not seen since the late 1940s.

"Firms were unusually aggressive in cutting costs and cutting employment," said James O'Sullivan, an economist with UBS. "The flip side of that remains to be seen, but it could mean that companies will be quicker to bring back people because they were more aggressive about getting rid of them."
These productivity numbers suggest that there is a significant probability that a resumption in demand for end-production will drive a sharp recovery in the labor market.

Rebecca Wilder

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Failed banks list still surprises

Saturday, August 8, 2009

Friday the FDIC closed another three banks: Community First Bank in Prineville, OR, Community National Bank of Sarasota County in Venice, FL, and First State Bank in Sarasota, Fl. While the FDIC transfers the deposits and liquidates the assets, one must wonder how many more bank failures are to come? With 97 banking institutions having failed in 2008 and 2009, I can assure you the number is set to rise.

Not because the number is simply "small" compared to historical standards, but because of the share of the commercial banking system's aggregate balance sheet that is mortgage loans.

The chart illustrates the share of mortgage assets in the commercial banking system listed in the Federal Reserve's flow of funds accounts (see Table L.109 here). There is certainly an upward trend in the series - homeownership rates began to surge in 1995. However, spanning the years 1999 to 2007 banks held an increasing share of mortgages on balance, peaking at 33.2% in 2007.

AgainsUnder the pressure of mounting job losses, totalling 6.7 million to date and the unemployment rate rising to its current 9.4%, foreclosures are surging. There are the Big "6" foreclosure states - the chart to the left - according to RealtyTrac, which I define as as the 6 states that experienced either >150% growth in foreclosure filings during the first half of 2009 or >1.5% foreclosure rate. These states include Alabama, Hawaii, Nevada, Florida, Arizona, and California.

But across the US, foreclosures are growing at double-digit rates.

Data are from RealtyTrac

The lower left quadrant (marked by the green arrows) shows the states with the most benign foreclosure problems, where filings fell during the first half of the year (compared to the second half of 2008) and foreclosure rates are relatively low (the US average is 1.19%). Notably, though, most of the US is not in that quadrant.

Banks are writing down the foreclosures, where many of the loans are underwater (i.e., the loan amount exceeds the value of the home). Banks will increasingly be insolvent, as the value of the collateral (the home) is worth less than the mortgage itself. More banks will fail - I'm just surprised that the number is not greater than 97 to date.

Rebecca Wilder

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Why exactly did the unemployment rate fall?

Friday, August 7, 2009

Please correct me if I'm wrong.

But the labor force is really big, 154,503,000 (see Table A on the BLS news release).

Compared to that, the number of unemployed is really small, 14,462 (see the same table).

If the decline in number of unemployed, -267,000 was 63% the size of the decline in the labor force, -422, which shift is the dominant factor in the falling unemployment rate?

Unemployment rate = unemployed/labor force

I'd say the sizable shift in the really small numerator. Apparently, the AP does not think so:
One of the reasons the rate went down, however, was because hundreds
of thousands of people left the labor force
. Fewer people, though, did
report being unemployed.

I'm pretty sure that this should read: The main reason that the unemployment rate went down was due to the number of unemployed falling significantly as workers left the labor force.

Rebecca Wilder

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Treasury receipts still falling at a 13% annual rate

Thursday, August 6, 2009

As of August 4, 2009, the Daily Treasury Statement (DTS) shows that the 1-month cumulative sum of income tax receipts (withheld plus paid taxes) is dropping at a 13% annual pace. The severely weak labor market is cutting wages, which in turn, drags consumer spending.

Remember, though, that the reduced tax withholding also serves as an automatic stabilizer to workers - falling tax payments mitigates the recession's effect on disposable income and spending.

This is the most up-to-date macroeconomic information out there, as most of the reports are 1-2 months old at the time of release. And the implication of this DTS is: that personal income and spending, which just released this week for June (see Econompic's take on the BEA's report), are likely to be weak into July.

Rebecca Wilder

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The oddities of this recession

Wednesday, August 5, 2009

It is not a rule that the personal saving rate rises during a recession, just in this one. Take a look at the cumulative trajectory of the personal saving rate for this Great Recession compared to its predecessors, as represented by the "average recession" since 1960.

The chart illustrates the cumulative growth of the saving rate throughout the recession period and during the twenty-four months (of recovery) following the recession for the current cycle and the average over the latest 7 cycles. Note: convenience only, I call the end of the current cycle at point 0 or June 2009. I do not believe that the recession is actually over in June.

Recently, the average saving rate, which is estimated monthly by the Bureau of Economic Analysis, surged since the onset of the longest recession in the post-War era. Consequently, the sharp ascent of the marginal saving rate is wreaking havoc on personal consumption spending, and thus, GDP.

Interestingly, current saving trends mark opposing behavior relative to the "average" recession occurrence, which is the indexed trajectory of the average saving rate spanning the 7 recessions since 1959. The saving rate drops during the average recession, and stabilizes thereafter. So far, the saving rate has a -50% correlation with the saving trend during "average recession", and is moving against the broader historic trend. If saving continues its ascent, one can discount quite significantly the possibility of an "average recovery" to a recession this deep (i.e., V).

Rebecca Wilder

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This is why the ISM is an important indicator

Monday, August 3, 2009

Today's ISM number is just another clue that the recession is ending. From MarketWatch:

Conditions for the nation's manufacturers continued to get better in July, the Institute for Supply Management reported Monday. The ISM index rose to 48.9% in July from 44.8% in June. The July index is the strongest since September. The consensus forecast of estimates collected by MarketWatch was for the index to rise to 46.2%. Readings below 50 indicate contraction. Below the headline, the report was strong. The data is showing that the manufacturing downturn is coming to an end. Both production and new orders rose above 50%. The ISM index has been improving slowly since hitting a low of 32.9% in December. The index was last above 50% in January 2008.
Readings below 50 indicate that manufacturing is contracting, while the Institute for Supply Management states that the recession is ending, too:
"A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy."
The ISM has a fairly strong autoregressive process, or its trend is statistically robust. The ISM pmi has been above 41.2 percent for three months now, May through July - a trend that will likely continue. This serves as further evidence that positive GDP growth will resume in Q3 2009 because the ISM is a decent proxy of monthly GDP growth.

The chart illustrates the quarterly ISM index and GDP growth spanning the years 1975-2009. The R^2 is respectable, however, I'd say that's pretty strong for GDP growth; and notice how most of the positive GDP growth rates correspond to an ISM index greater than the revered 41.2 percent.

Just a little more evidence that the recession is finally ending.

Rebecca Wilder

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“The Berkshare”: anachronistic or wave of the future?

The U.S. is a single-currency nation, and the Fed has the sole authority to print the national currency, the U.S. dollar. It wasn't always that way, though. The National Banking Act established an effective national currency, but it would still be another 50 years until the birth of the Federal Reserve System (The Fed lists a snapshot of its history and the US dollar) to monitor the health of the banking system and regulate the money supply.

Anachronistic: I think of the mid 1800's when chartered banks were issuing their own notes when I see this video report of a region in Western Mass. that issues its own currency for trade, the "Berkshare".



Rebecca Wilder

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