Relevant and even prescient commentary on news, politics and the economy.

France is Stuck in the Mud

by Rebecca Wilder

According to the Eurostat flash estimate, Euro area GDP fell by 0.2% in both the euro area and the EU27 in the second quarter of 2012. In the first quarter of 2012, growth rates were 0.0% in both zones. On balance, the Euro area is very likely in recession despite the fact that the region successfully skirted the “two negative quarters of growth” rule of recession dating having stagnated in Q1 2012 following a 0.3% contraction in Q4 2011.

The underlying country GDP estimates for Q2, released by the various statistical agencies, do illustrate a deep divide among the growth prospects across the 17-country Euro area in Q2 2012. Here is a select list of reported growth results (all for Q2 2012 in % Q/Q not annualized):

Germany, +0.3%
France , +0.0%
Netherlands, +0.2%
Spain, -0.4%
Italy, -0.7%
Portugal, -1.2%

The French flash release, in particular, caught my eye: “No growth for the third consecutive quarter” is what INSEE titled its publication. The French economy has effectively stalled. Using Eurostat data, the economy has grown just 0.09% (the unrevised numbers) since July 2011. And since Q2 2011, the economy grew just 0.3%. In all, the economy is not technically in recession but it certainly isn’t expanding. To me, the question is, will it go up or down from here?

Compared to history, the current expansion in France has been nothing short of pathetic. Stuck in the mud.

Note: In the chart above, the French dating of business cycles is taken from the OECD, which is available through the FRED database. In the legend, those dates with a (2) indicate short recoveries with an ensuing recession (1 recession and 1 expansion with the same number of quarters as the 2009-2012 expansion). Therefore, the graphs are truncated when the next recession started over the period.

Rebecca Wilder

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Ratings Matter for the Euro Area

As you all have heard, Friday was (again) S&P’s day in the limelight. The rating agency downgraded over half of the 16 Euro area countries put on credit watch negative in December 2011. A quick look at my feed shows several takes on S&P’s action: the Economist’s Free Exchange comments on the now soft-core country, France; Michael Schuman hammers out the implications of the EA policy makers’ ‘misguided’ approach; Bruce Crumley (h/t Schuman) sees problems for Sarkozy; and as always, one of my favorite authors, Edward Hugh, eloquently characterizes the downgrades in the context of the real economy.

However, there’s one curt take on the downgrade that I disagree with. Barkley Rosser at EconoSpeak (h/t Angry Bear) compares the downgrade of France and Austria from AAA to AA+ as the same as a downgrade to the US or Japan. Furthermore, his title implies that these downgrades are irrelevant. I wholly disagree. There is one simple reason for this: France and Austria are subject to high rollover risk, while the US and Japan are not. Why? Because France and Austria do not have monetary autonomy over the currency in which their debt is issued (euros, to which the ECB holds the right to supply), so all debt issued can be treated as foreign-currency debt. Debt issued by the US and Japan is primarily local-currency debt.

A bit of background on ratings. When S&P, for example, changes its rating for a country, the rating that market participants (and the press) usually discuss is the foreign-currency rating. There’s another rating, the local-currency rating, that is used to quantify the risk associated with bonds denominated in the currency issued by the monetary authority. Now, for countries like the US and Japan, where the lion’s share of its debt issuance is denominated in its local currency, foreign-currency ratings are largely meaningless. The central banks in the US and Japan can always monetize debt issuance when needed. However, for any country in the Euro area (even Germany), debt is issued in a currency over which it has no effective control. Therefore, the foreign-currency rating is the one that matters.

For foreign-currency ratings, external indebtedness and leverage trajectories are key metrics. The next couple of quarters are likely to show either an improvement or deterioration in these metrics. If the real economy has not stabilized – the ECB desperately hopes it has – and turns downward in coming months and quarters, creditors in euros will favor the markets with the higher credit metrics, Germany, Netherlands, and Finland relative to those with lower metrics, France and Austria. Better put: if the growth trajectory is worse than expected – the 63 respondents to the ECB’s Q4 Survey of Professional Forecasters expect +0.8% GDP growth in 2012 – spreads to German bunds only remaining AAA with a stable outlook, as rated by S&P) will rise.

Ratings do matter for the EA countries. S&P’s action is a harbinger of bad economic and political things to come, not lower rates.

This post was originally published on my Roubini Global EconoMonitor blog, The Wilder View.

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Weak consumer confidence and real wage growth portend weak consumer spending

Yesterday the Conference Board released its measure of consumer confidence, which dropped to 44.5 in August. This brings the Conference Board measure of confidence in line with the Reuters/University of Michigan measure of consumer sentiment. Bloomberg summarizes the Conference Board results.

Confidence is important, since consumer spending accounts for the lion’s-share of aggregate spending. Consumer confidence measures are highly correlated with the annual growth in real personal consumption expenditures – the correlation coefficients are 75% and 67% for the University of Michigan Sentiment index and the Conference Board’s Confidence index, respectively.

(Chart axis identifcation amended…rdan)

Ultimately, though, it’s all about jobs and personal incomes.


To date, while July real wages and salaries (deflated using the CPI) fell on the month, the 3-month average continues its ascent. Clearly the sluggish climb in real wages and salaries is not enough to spark a surge in confidence and spending. Neither will consumers draw down saving, as was the case over the last decade amid debt-financed consumption. In fact, saving is more likely to rise as a share of income than fall as the balance sheet repair process furthers.

Jobs and incomes will drive consumption.

To be sure, measures of confidence are “better” predictors of economic activity when the economy is fragile. We know that the economy is now much more fragile than previously thought. Weak confidence plus meager real wage and salary growth is, unfortunately, a harbinger of further ‘weak’ economic activity.

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US economy in August: moving sideways

With the (roughly) 11% decline in US equities year-to-date, talk of a US recession has resurfaced. Through mid August, the high frequency economic indicators point to further weakness, rather than a double dip.

In my view, whether or not the US is IN a recession – defined as the coincident variables followed by the NBER (.xls) are turning downward – is really a moot point for a good chunk of the working-aged population. It probably ‘feels’ like the economy never exited recession to many.

As an aside, it would be difficult for the US economy to actually ENTER a contractionary phase right now, since the cyclical forces that normally drag the US into recession – inventories, auto sales, and housing – are at severely depressed levels. Confidence (or lack thereof) can reduce domestic spending and investment – it’s in this respect that the losses in equity equity markets are important. It takes time for shocks to work their way into the economic data. Nevertheless, high frequency indicators do not point to recession…for now.

Claims are elevated but ticked up last week. If claims do not fall back in coming weeks, the unemployment rate will rise again. This could indicate the outset of a contracting economy.

Weekly diesel production shows an increase in transportation activity (please see this post for an explanation of the data).

Read More After the Jump!

The demand for diesel (in real barrels per day) recovered, rising at a rate of roughly 15% annually for each of the weeks of July 29 and August 05. Annual growth declined to -3% in the week of August 12; but this series (even in annual growth rates) is highly volatile, and the 4 week moving average of annual growth decelerated only mildly, from 7% to 6%.

Finally, daily Treasury tax receipts are slowing but growth remains positive.

The chart illustrates the annual growth rate of the 30-day rolling sum of daily withholding receipts for income and employment tax payments. This series proxies the health of the labor market. Spanning the last three months, the annual growth rate decelerated to 4% (May 18 through August 18 this year compared to the same period last year) from 4.6% in the three months previous. There’s no indication of a contraction in tax receipt activity, but a further trend downward in the pace of tax receipt gains would turn some heads.

Nothing to indicate a contraction in the high-frequency data; but the deceleration is worrisome, given that consumers must ‘earn’ their consumption rather than ‘borrow’ for consumption. I don’t feel particularly positive about the state of the US economy. Neither does Mark Thoma.

Rebecca Wilder

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Endogenous business cycle spending + tax receipts at record lows = deficit hysteria for the wrong reasons

Readers here will know more about the US federal government income statement than I. However, given the near ubiquitous deficit hysteria, I wanted to illustrate the truth about the budget deficit. The truth is, that deficit hysteria has been set in motion by A surge in government spending on items like unemployment compensation, food stamps, and other types of ‘support payments to persons for whom no current service is rendered’ AND low tax receipts. Yes, long-term reform is needed; but my general conclusion is that the deficit hysteria is sorely misplaced.

First things first, the fiscal deficit – receipts minus net outlays as a % of GDP – is big. In June 2011, the 12-month rolling sum of net receipts (the budget deficit) was roughly 8.5% of a rolling average of GDP. This is down from its 10.6% peak in February 2010, but the level of deficit spending clearly makes some nervous.

Why should they be nervous about the ‘level’ of the deficit? I don’t know, since recent ‘excess’ deficits are cyclically endogenous. The chart below illustrates the spending and tax receipt components of the US Treasury’s net borrowing (see Table 9 of the Monthly Treasury Statement). Weak tax receipts and big spending are driving the federal deficits (spending, as we will see below, has surged on items directly related to the business cycle).


In June, the 12-month rolling sum of tax receipts – mostly corporate and individual income taxes and social insurance and retirement receipts – was 15.6%, which is up from its 14.5% cyclical low in January 2010. On the spending side, net outlays in June 2010 were a large 24.2% of GDP and down just slightly from the 25.3% peak in February 2010.

Deficit hysteria should be more appropriately placed as “lack of jobs and tax receipts hysteria”. At this point, the budget could just as easily worsen as it could improve, given the fragile state of the US economy (see Tim Duy’s recent post at Economist’s View).

Why the wrong hysteria?

Reason 1. Taxes. Some would love to increase taxes – but the fact of the matter is, that tax receipts remain well below their long-term average of 18% of GDP. Tax receipts will not improve without new jobs since individual income taxes account for near 50% of total receipts.

Reason 2. The spending has been on cyclical items.

The best time to ‘worry’ about government spending is NOT when the economy is barely moving.

The chart below illustrates the big ticket items of the monthly outlays – roughly 87% of total outlays. The broad spending components are listed in Table 9 of the Monthly Treasury Statement. The long-term average shares of total spending are indicated in the legend.

The items health, medicare, and income security (inc security) are all above their respective long-term averages. But spending on income security outlays is the only spending component to have broken its trend, i.e., surge. According to the GAO’s budget glossary (link here, .pdf), this item includes the following cyclical spending:

Support payments (including associated administrative expenses) to persons for whom no current service is rendered. Includes retirement, disability, unemployment, welfare, and similar programs, except for Social Security and income security for veterans, which are in other functions. Also includes the Food Stamp, Special Milk, and Child Nutrition programs (whether the benefits are in cash or in kind); both federal and trust fund unemployment compensation and workers’ compensation; public assistance cash payments; benefits to the elderly and to coal miners; and low- and moderate-income housing benefits.

It’s spending on unemployment and food stamps that’s driving spending at the margin.

The same deal exists with the ‘smaller ticket items’. Of these

OK – so deficit hysteria is about, but it’s misplaced. One could argue for more, not less, spending to get the jobs growth, hence tax receipts, up.

Rebecca Wilder

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Global PMIs and Fed Policy: they’re linked

Today a host of global purchasing managers indices (PMIs) reiterated that the global economy is slowing….quickly.

Within 24 hours, China, the US, and the euro area all reported July PMIs falling toward the feared 50 (below which the manufacturing industry is contracting) – 50.7, 50.9, and 50.4, respectively. The UK PMI fell below 50 to 49.1 in July.

I would posit (and I believe that others have, too, like Edward Hugh) that this is directly related to Fed policy, specifically that of quantitative easing (QE).

The chart above illustrates the stated PMIs alongside the dates of a shift in the Federal Reserve’s QE policy. The shorter bars indicate those dates when the Fed ended QE and announced that it would reinvest maturing proceeds. On the other hand, the full bars illustrate the outset of QE.

Falling PMIs correlate with the end of QE. New QE correlates with a rebound in global PMIs. Given this correlation and the latest GDP release, I expect that talk of QE anew to surface.

Rebecca Wilder

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The Q2 US GDP report – just terrible

Bureau of Economic Analysis today reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This (newly revised – see below) acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases – GDP minus net exports – was weaker than the headline, increasing 0.7% on the quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing – remember these are annualized rates, not q.q rates.

Below the hood, the pace of personal consumption expenditures slowed markedly, +0.1% in the second quarter compared to +2.1% in the first. Some of the drag to consumption will bounce back in the third quarter, as auto sales and the supply chain disruptions dissipate – durable goods decreased 4.4% over the quarter. On the bright side, real nonresidential fixed investment picked up 6.3% in the second quarter and tripling the pace seen in the first. Real net exports contributed a large 0.58% to the headline growth number, as real exports maintained a healthy pace and imports decelerated over the quarter.

Overall, I think that the story is pretty consistent with the details of the labor market: the economy is improving, but domestic demand is very weak.The US economy is increasingly likely to enter a ‘growth recession’ – sub-potential growth – in 2011. And as David Altig highlights, a growth recession is generally associated with an economic contraction.

On the revisions

The drop in Q1 2011 growth to 0.4% was certainly not expected. Much of it was due to a reclassification of domestic inventory build (adds to GDP) to imports (subtracts from GDP). But there’s a lot more.

Today’s estimates reflect the annual revisions of the US national accounts. The revisions date back to 2003, which show a deeper recession and a quicker rebound. We now know that GDP bottomed in the second quarter of 2009, after having fallen 5.1% since the fourth quarter of 2007. Previously, the cumulative drop in GDP was 4.1%. The recovery through Q1 2011 was slightly faster, 4.9% in the pre-revised data compared to 4.64% in the revised series. (Rdan….4.9% is correct figure)

(Rdan: revised chart to correct calculation error…8/1)

Broadly speaking, though, the revisions show that economic momentum is petering out on a 6-month/6-month annualized basis. In sum, nominal spending on consumption goods and services was revised downward by 307.8 billion dollars spanning the years 2008-2010, and nominal fixed investment spending dropped by 83.9 billion dollars compared to previous estimates. Government spending is proving to be less of a drag than previously thought (in nominal terms), having been revised 5 billion dollars higher compared to previous estimates over the same period.

On balance, the expected 2011 growth trajectory will struggle to top 2%, as a rather positive 2H 2011 of 3.0% and 3.5% in Q3 and Q4, respectively, would imply a 1.9% Y/Y pace for 2011 as a while. I seriously doubt we’ll get that trajectory in H2 2011 – we’ll have to see what economists now forecast – but the downside risk to the economy is pervasive. It’s not just Japan.

Rebecca Wilder

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The US economy: July’s not looking any better

Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion.

Economists have put their ‘hope’ into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we’re talking about jobs and the welfare of American families here.

I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving.

First, the bellwether of the state of the US labor market – weekly initial unemployment claims – continues to disappoint. In the week ending July 16, seasonally adjusted initial claims increased 10,000 to 408,000. The 4-week moving average was 421,250, which is just 19,000 below its May peak of 440,250. This week’s report fell on the BLS’ survey week, so the July employment report is likely to be another weak one (weak is of course a euphemism for the June report).

The chart below illustrates the annual growth rate of the non-seasonally adjusted 4-week moving average of initial unemployment claims. I use this for comparison to the second series, diesel consumption, which is not seasonally adjusted. I include the recession bars for association with the business cycle. Claims really are more of a coincident indicator – but the frequency is helpful for gauging the state of the real economy.

The weekly claims are not indicating a recession – they are contracting on an annual basis. However, the contraction in claims is slowing, -8.4% Y/Y, which is much slower than the average -13% annual drop in claims during the first quarter of 2011. Unless claims start to fall more precipitously, the labor market will continue to be stuck in neutral – not good.

Second, the US Energy Information Administration releases weekly estimates of distillate fuel oil supplied to the end user in thousands of barrels per day (real). This is important because roughly 90% of this number is comprised of diesel fuel.

Given that diesel fuel is a primary input to construction and commercial
and industrial trucking, the weekly series serves as a high-frequency
indicator of domestic demand for goods that are transported across the
country. There are seasonalities to this data , but the message is clear:
demand for diesel fuel suggests that wholesale demand is inherently weakening.

Unlike diesel prices, which can be impacted by number of factors including taxes, refining capacity, and most recently by IEA’s petroleum release, consumption measures absolute demand.

The chart below illustrates the same representation of demand for distillate fuel (primarily diesel) as the annual growth rate of the 4-week moving average. The latest data point is July 15. The annual decline was a bit less severe in the week of July 15 – but this series is quite a bit more volatile, and the downward trend in fuel consumption has been established.

As of last week, these two high frequency indicators demonstrate no marked improvement in domestic demand through July.

Rebecca Wilder

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The current labor market expansion: third poorest performer 24 months after the recession’s end since 1948

It’s now two years after the end of the Great Recession, and the unemployment rate has ticked downward just 9 pps (percentage points) since its 10.1% peak. Pundits call this an expansion since GDP has fully retraced its recession losses; but the unemployment rate tells a very different story.

(click to enlarge)

The chart illustrates the unemployment rate after 24 months since each recession’s end spanning 1948 to June 2011. The business cycle dates are set by the National Bureau of Economic Research. The rates are indexed to the first month of each cyclical recovery for comparison, and the raw data are referenced in the table at the end of this post.


Spanning the business cycles since 1948, the average decline in the unemployment rate is 20 pps from its peak to 24 months after the recession’s end. In the ’07-’09 ‘expansion’, the unemployment rate has fallen by less than half the average, -9 pps since the first month of recovery, July 2009.

In terms of relative labor market performance 24 months into the recovery/expansion, this cycle is the fourth worst – really the third worst since 24 months into the 1980 recovery is the 1981-1982 recession.

Technically, we’re not seeing a jobless recovery, since the unemployment rate peaked early on in the recovery (month 4); but it might as well be. Sticking with the household survey, employment (as opposed to the nonfarm payroll) is down by near 7 million since the economic peak and down 644 thousand since the recession’s trough. Yes, employment is net down since the recession ended. These numbers are affected by the annual population controls, but the trend (or lack thereof) is loud and clear.

The labor market is festering – we need a real policy response now.

Rebecca Wilder

Chart data (before index construction)

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The US unemployment rate: European levels without the European safety net

Jobs growth is a lagging indicator of economic activity, so the June report confirms that the US economy has been in a deep rut (Marshall Auerback calls it a ‘fully-fledged New York City style pot hole’). Yes, the US economy is growing; but sub-2% really ‘feels’ like stagnation, if not recession for many. As always, Spencer provides a fantastic summary of the employment report here on AB: ‘bad news’, he says.

I call it abysmal, both relative to history and on a cross section. The chart below illustrates the unemployment rates across the G7 spanning 1995 to 2011.

Across the G7 economies, the level of the US unemployment rate is second only to France. This is true on a harmonized basis as well.

The speed at which the US unemployment rate reached European levels was abrupt. Only the UK has seen such a swift deterioration in labor market conditions.

The chart above illustrates the same time series as in the first unemployment chart, but the rates are indexed to 2005 for comparability. France’s high level of unemployment is structural. In contrast, the US level of unemployment is NOT, not even close.

The chart above illustrates the components of the OECD’s indicators of employment protection. Also, see a short note by the Dallas Fed highlighting the differences between the French and US labor markets (and the 1994 OECD jobs study).

The French labor market is quite rigid, which leads to a structurally elevated unemployment rate and expansive unemployment compensation (see this follow up to the OECD 1994 jobs strategy report). The US Labor markets is much more fluid, which is why the unemployment rate has surged relative to comparable economies in Europe (see second chart).

European levels of unemployment without the European safety net.

The chart illustrates the maximum number of months that a worker can claim unemployment insurance for the year 2007. In normal times, French workers can collect benefits for up to 23 months by law, where the US worker collects for just 6 months. The tax and benefit policies data are updated infrequently, and listed on the OECD’s website (excel file link).

Seriously, shouldn’t Congress be focused on the depressed state of the US labor market, rather than a ‘scaled back’ version of deficit cutting? Addressing one will clearly impact the other – it goes both ways. Unfortunately, the government’s pushing in the wrong direction (cutting deficits brings further unemployment rather reducing unemployment drops the deficits).

Rebecca Wilder

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