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

Japan – GDP – exports – manufacturing – autos – Toyota

Forget the Eurozone for just a minute. Japan’s problems are big: Toyota is a major exporter/employer. Last year 48% of all new standard passenger vehicles sold in Japan were Toyota (or its Lexus brand). The WSJ article describes Toyota’s status in Japan as the following:

In short, Toyota is to Japan what General Motors Corp., in its heyday, was to America. And for a beleaguered country that has suffered a series of institutional blows in recent months—the collapse of the long-ruling political party, the bankruptcy of its champion national airline, a renewed bout of deflation— the global humiliation of Toyota may be the most psychologically damaging blow of all.

Psychological blow, what about an explicit economic blow! Toyota is certain to drag the only Asian G7 economy down due since auto exports are big in aggregate export income.

Japan’s single largest export category in December was, of course, manufacturing: 22% of total exports. And a huge 14% of the total value of exports in December came from motor vehicles (auto sales, that is – separate from parts).

The Japanese economy grew 1.14% in Q4 2009 with a huge 0.67% contribution from exports. The second major contributor was private consumption, which added 0.39%. Going forward, consumption and export contributions are likely to wane from the major Toyota recall campaign that is underway.

First the direct export channel will probably crumble as demand for Toyota cars derails. Second, there will be a lagged labor market effect. Sure, workers will be needed to address the recalls; but the the loss in hours stemming from a drop is sales is likely to be much larger, and the net jobs effect negative.

Toyota is a major employer in Japan that currently has 320,808 employees and has already shuttered doors (at least temporarily) in other countries. It’s only a matter of time before the effect hits the home labor market.

This is big. I wouldn’t be surprised if the IMF downgraded their forecast of Japan based solely on Toyota’s misstep.

Rebecca Wilder

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TIC tock; TIC tock; TIC tock

No, the US Treasury’s time is not running out. Where’s Brad Setser when you need him – and the media definitely needed him in reference to the December TIC report.

Okay, okay, we know: China dropped its share of Treasury holdings in December by $US 34.2 bn. China now holds just 20.9% of the total foreign-owned stock of Treasuries, second only to Japan (21.3%).

But China’s share is closer to its average, while Japan’s share is way off – there may be a reversion here, i.e., Japan will grow its stock of Treasuries relative to China (Please see my post yesterday). Except for the period of September 2008 through November 2009, Japan held a much larger share of Treasuries than did China for every month since 2000.

Is there a sinister plot developing? Is China selling off S-T T bills to retaliate against the Obama administration’s push on the renminbi? Or is China simply reallocating its portfolio toward risk?

Perhaps there is a (partial) retaliation scheme underway, as suggested by the 3-month accumulation of short-term US assets (mostly T bills agencies with a maturity of less than 1 year).

But isn’t it just slightly more plausible that the Chinese are – official + private – selling off zero-yielding (practically) Treasuries in exchange for longer-duration, higher-yielding, and riskier assets.

The first bit of the story is this: one should take care in not reading too much into the TIC report. It’s just one month’s worth of data; but more importantly, the data miss a critical component of the capital account, foreign direct investment.

The chart above illustrates China’s one-year rolling monthly flows of long-term, high quality asset purchases – Treasuries bonds/notes, agencies, stocks, and corporate bonds. The Chinese are accumulating stocks, primarily through private investors, but through official channels as well (see press release, lines 8 and 13). This suggests an increasing interest in equity, which could signal growing foreign direct investment flows (not shown in TIC).

Furthermore, the entire year’s shift in assets, long-term Treasury purchases, +$US 98.8 bn fully offsets the drop in short-term Treasuries, -$US 98.8. This suggests diversification.

Finally, everybody’s doing it, not just China – diversifying away from T bills, that is!

The chart above illustrates the 3-month rolling sum of all foreign net flows of ST US assets (mostly T bills). If you invest $US 1 million dollars today in a bill expiring in August 2010, you make about 900 bucks. Man, doesn’t that sound like a wonderful investment?

So the next question is: why do the Chinese care about return on their F/X holdings? Because they have a peg! Here is a great article for all of you who wanted to know about the costs of maintaining a peg. Accumulating FX reserves is a costly business, and T bills are unlikely to finance the type of sterilization that is needed by the PBoC.

Rebecca Wilder

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The Greek Squeeze

I feel like I am living in a “Choose Your Own Adventure” book. What global shock comes next? The air of uncertainty remains. This morning an imminent (but questionably so) bailout is across the news wires. From the WSJ:

Germany is considering a plan with its European Union partners to offer Greece and other troubled euro-zone members loan guarantees in an effort to calm fears of a government default and prevent a widening of the credit woes, people familiar with the matter said.

and later…

It is unclear how the debt guarantees under consideration might be structured, but with any aid, the EU will be walking a delicate line between forestalling a greater disaster and letting chronic overspenders like Greece off easy, which could further damage trust in the euro.

“As long as it is very clear that any support only comes with very, very stringent conditions attached, it would not affect the moral-hazard question,” said Fabian Zuleeg, chief economist at the European Policy Centre, a Brussels think tank. Still, he said, “It is a choice between two evils.”

Obviously, markets see this deal getting done, however, you know what they say about the fat lady… This morning 10-yr bond spreads over German bunds were down across all of the PIIGS countries, where Greek spreads dropped almost 100 bps over two days (76 bps now).

The moral hazard implications are clear. If Germany bails out the Greek government – the Greek government has a €53bn financing needs this year – then what next? Saving rates in Europe look a little bi-modal, with the big savers clustered at the top of the spectrum, Switzerland, Austria, Germany, and Finland, and the big dissavers at the bottom, Portugal, Greece, Italy, et al.

Spain and Italy account for 29% of 2008 Eurozone GDP and Greece just 2.5%. Spain’s debt metrics pale in comparison to Greece’s (see WSJ link), but remain well outside the Maastricht Treaty limits. Allowing Spain and Italy to fail is obviously “too big”.

Another question out there is future membership requirements. Bulgaria (not currently in ERM II)? Latvia? The benefits to joining the Eurozone are obvious (there are costs, too, like relinquishing monetary autonomy); notice how Greece’s borrowing costs plummeted following its 2001 venture into the Eurozone. S&P upgraded Greece’s rating from A- to A in March 2001.

Skepticism over the Eurozone will likely last for some time. Two days ago, the FT ran an article titled Traders make $8bn bet against euro – sentiment is very negative, and the EUR/USD is off around 9% from its 2009 peak (November). Although key economies, Germany, likely welcome a weaker euro, the region as a whole is certainly being tested.

Personally, I think that the IMF should be involved. But here’s a great piece over at the Baseline Scenario listing why that is not a possible/probably outcome. Hmmm, wonder how China and Japan will react to this news? Yup, buy dollars.

Added link: You all might find this article interesting.

Rebecca Wilder

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Consumers around the world are generally more upbeat, but not uniformly so

Last week the IMF released its World Economic Outlook Update for the October 2009 forecast. The global economy is expected to grow 3.9% in 2010, an 0.8% upward revision. In fact, the 2010 growth projections were generally upward with little offset in 2011 (often when you get a surprise and positive economic release, the current period forecast improves at the cost of growth later in the forecast):

  • The 2010 U.S. growth Update is 1.2%-points above the October level, now 2.7%.
  • The Eurozone GDP growth Updated to 1% pace in 2010, up 233% from October’s forecast (driven by the 400% surge of Germany’s GDP growth outlook, now 1.5% in 2010).
  • Canada’s GDP growth forecast got a slight bump, up 0.5%-points to 2.6%.
  • The UK is now expected to grow at a 1.3% annual pace in 2010.
  • Russia’s Update to GDP growth is 3.6% in 2010 (that’s off of a sharp 9% drop in 2009).
  • And the IMF envisages that China maintain 10% growth in 2010, up 1%-point from its forecast just 3 months ago.

The IMF has no crystal ball, but the story is compelling: banking crisis + global recession = weak recovery. However, it is improbable that the IMF is spot on. The short IMF press release stresses the divergent path of economic recovery across the advanced and developing world. In short, much of the emerging and developing world should recover smartly, while key advanced economies, burdened by debt and financial stress, are to see a more muted recovery.

Of note is the IMF’s listed upside risk to the growth forecast (thus inflation, trade, and other related variables):

On the upside, the reversal of the confidence crisis and the reduction in uncertainty may continue to foster a stronger-than-expected improvement in financial market sentiment and prompt a larger-than-expected rebound in capital flows, trade, and private demand.

Confidence, consumer, investor, and business, is key – let’s focus on the consumer. The one that accounts for roughly 17% of global GDP – i.e., the U.S. consumer – remains afflicted by excessive debt burden and record unemployment. In contrast, consumer confidence is rebounding smartly in other parts of the world, developed and developing.

Advanced consumers showing some confidence, but the U.S. consumer confidence index remains 39% below that during the onset of the recession.

The chart illustrates various measures of consumer confidence across a selection of advanced economies (you can see the exact sources here). Consumer confidence in the U.S., U.K., Germany, and Ireland remain well short of their Jan. 2008 levels. Notably, confidence in the U.S. has moved laterally since May 2009 despite recent gains in the fourth quarter of 2009.

Confidence in some emerging economies remains muted as well.

I chose a selection of monthly confidence indicators for select emerging markets. Clearly, some biggies are missing – India and South Korea being the first on the list – but data availability and/or frequency precludes a more thorough analysis.

Consumers in Indonesia are ostensibly more upbeat than those in other emerging economies. In China, consumer confidence hovers below its Jan 2008 level. And in spite of the bubbles and wealth talk in China, confidence hasn’t been this low since 2003. In Brazil, consumer confidence is back to peak levels before the onset of the U.S. recession.

I provided a snapshot of global consumer confidence. Generally consumers do portray the ongoing confidence struggle, especially in the U.S., that plays out in the IMF’s muted growth forecast.

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Inflation in China is not necessarily a bad thing

Yesterday, the release of key economic indicators in China produced headlines like this: China Targets Inflation as Economy Runs Hot. The table below lists the full release, including the consensus expectations (Bloomberg’s survey) for each statistic. (Here is the link for the actual data release.)

As you can see, the survey undershot the actual results across many of the releases, including that for GDP and inflation (CPI). The surge in the CPI, 1.9% y/y in December versus 1.4% y/y expected, attracted a lot of attention. According to the Economist, Helen Qiao and Yu Song at Goldman Sachs points out that prices may be on an (increasingly) upward trajectory:

The recent rise in inflation was caused mainly by higher food prices as a result of severe winter weather in northern China. In many cities, fresh-vegetable prices have more than doubled in the past two months. But Helen Qiao and Yu Song at Goldman Sachs argue that it is not just food prices that risk pushing up inflation: the economy is starting to exceed its speed limit. If, as China bears contend, the economy had massive overcapacity, there would be little to worry about: excess supply would hold down prices. But bottlenecks are already appearing. Some provinces report electricity shortages, and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.

The final sentence is very important – a tight labor market will lead to higher wages (the data on wages is 4 months old, so I will not plot it out). This suggests, completely by inference on my part, that prices pressures will be the wage-price spiral type – this can quickly get out of hand.

To be sure, the inflation surge was driven primarily by food prices, up 5.3% over the year; but with retail sales growing at a rate of 17.5% over the year and broad money growing at a 27.7% pace in 2009, prices hikes are bound to spread. We already saw inflation pressures building in the trade balance. Now I get to my chosen post-point: why is inflation in China necessarily a bad thing?

The inflation pop sparked a lot of market angst yesterday. Of course, this is just a single data point; but if inflation does build, and the government insists on maintaining its tight peg against the $US, then inflation will do what US consumers and Asian savers have not: reverse trade flows.

Specifically, and holding all else equal, sizable inflation in China would drive up the value of its real-exchange rate (REER), where the REER is the nominal exchange rate adjusted for relative prices in China versus its trading partners – faced by the Chinese.

As illustrated in the chart above, the REER has been on a downward trajectory throughout 2008, but remains elevated compared to its 2006 levels. The real exchange rate is the single-most important factor in determining trade flows. An inflation-driven growth in the real value of the Chinese yuan (REER) would effectively, and eventually, drop China’s export share with key trading partners.

Rebecca Wilder

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AB notes on the December Employment Situation

This article is roughly 24 hours late, but I do have additional points to the headline numbers. From the BLS:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

The monthly shift in the December nonfarm payroll is practically a mirror image of the month that initiated the cyclical downturn, January 2008 when the payroll fell 72k (after revisions). Not because of the similar level values, but because of the mix: it is the goods-sector employment that is dragging the aggregate number, whereas the service-sector is just barely below zero. Actually, the private sector services payroll, 80% of the total service payroll, hired 17,000 more workers in net in December.

The volatility over the last two months has been driven primarily by the service sector. As illustrated in the chart below, the first-difference of the goods-sector payroll is approaching the coveted “0” threshold level, but at a much slower pace that is its service counterpart.

The durable-goods jobs should turn up soon, at least the 64% of its payroll that is manufacturing. The ISM employment diffusion index has been above 50 for three consecutive months. And with a 78% correlation between the 3-month lead of the index and annual manufacturing jobs growth, there is hope for January 2010. However, look for ISM diffusion index values around 53 (the average ISM value that correlates with >=0% manufacturing jobs growth) to forecast positive annual jobs growth. We are just barely there.

It does seem that, as expected, the service sector (86% of December’s payroll) will pull the labor market back in positive territory in coming months.

From the Household Survey, the unemployment rate went unchanged in December at 10%. However, this is hardly good news; simple math says this rate will hover in the 9%-10% range throughout 2010 without a substantial pickup in the pace of employment growth. The reason is that the category “not in labor force” has grown by 3.4 million since May 2009.

If the number of unemployed persons falls each month over the next year by its 2005-2006 average, -48k, and just a quarter of the additional “not in labor force” persons since May (842k) re-enter at an average pace of 70k per month to find immediate employment, the unemployment rate will be 9.5% by December 2010. My point is: a serious growth momentum is needed to generate jobs, one that is not expected until initial unemployment claims drop significantly below their current 434k-level (week ending Jan. 2).

Of note, average hourly earnings rose 3 cents per hour in December to $18.80/hour. Ostensibly, this is good news for the price stability picture. However, the y/y numbers are strikingly low, just 2.2% growth in earnings since December 2008. By this measure, wage pressures are extremely muted, which is another reason that the Fed may not be too quick to exit.

The chart illustrates annual earnings growth and the unemployment rate. It wouldn’t be a stretch to expect wage growth to fall further, given the sharp upward trajectory of the unemployment rate.

There will likely be some volatility in coming months, specifically in April and May, when the Census hires temporary workers (6 weeks at $25/hour for 20 hours each week). Here is something I wrote about the Census hires some time ago.

Of note, the BLS is beefing up its report. Effective February 5, 2010 (the January 2010 employment release), the establishment survey will include more detail on hours and earnings, including those broken down by gender.

Rebecca Wilder

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Is the government actually forecasting a narrowing of the U.S. current account deficit?

This is a follow up to an article I wrote earlier this week, Older workers working longer; labor-force participation falling. In response to the article, which highlights the BLS employment and labor-force participation projections for 2008-2018, 2slugbaits (a loyal AB commenter) presented the following point:

The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).

Put another way, employment growth will be in nontradeable goods sectors, which suggests we might have to sell a lot of assets in order to pay for imports.

Is the government actually forecasting that Japan an China will finance the U.S. trade deficit for the next ten years? I assumed (silly of me) that any government (BLS) projection would be based on such international pledges as the U.S.-China Strategic and Economic Dialogue:

To this end, both countries [U.S. and China] will enhance communication and the exchange of information regarding macro-economic policy, and will work together to pursue policies of adjusting domestic demand and relative prices to lead to more sustainable and balanced trade and growth.

…and more specifically…

The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving.

The U.S. commitment: grow national saving as a share of GDP and significantly reduce the current account deficit. According to the BLS long-term forecast, the U.S. will make good on just one the these two pledges.

The table below extracts national saving and the current account from the BLS 2018 economic assumptions for the employment projections (Table 4.3).

Note: two identities are needed: (1) National Saving is Income minus Consumption minus Government Spending, and (2) the Current Account is National Saving minus Investment. The BLS projects GDP rather than GNP = GDP + net receipts from the rest of the world. In using GDP as the definition of “income”, net receipts from the rest of the world is zero, and the current account reduces to net-exports.

To be sure, the BLS does forecast that U.S. national saving rate will rise 67.5%, from 9.3% of GDP in 2008 to 10.2% in 2018. But domestic investment rises by more, +72.1%. Therefore, the current account deficit grows by 81.3%.

I’m not seeing any healthy reduction of the current account deficit by 2018. 2slugs is right: the BLS is essentially forecasting that China and Japan (among other perpetual savers) will finance a growing U.S. trade deficit. Oh man.

Rebecca Wilder

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Older workers working longer; labor-force participation falling

The BLS released its employment and labor force projections for the period 2008-2018. The report highlights a more diverse and slower growing labor force stemming from a falling labor-force participation rate. Some headline findings of the report are (bold font by yours truly):

Total employment is projected to increase by 15.3 million, or 10.1 percent, during the 2008-18 period, the U.S. Bureau of Labor Statistics reported today. The projections show an aging and more racially and ethnically diverse labor force, and employment growth in service-providing industries.


Projected employment growth is concentrated in the service-providing sector, continuing a long-term shift from the goods-producing sector of the economy. From 2008 to 2018, service-providing industries are projected to add 14.6 million jobs, or 96 percent of the increase in total employment. The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).


The largest decline among the detailed industries is expected to be in department stores, with a loss of 159,000 jobs, followed by manufacturers of semiconductors (-146,000) and motor vehicle parts (-101,000).

…and more…

Occupations that usually require a postsecondary degree or award are expected to account for nearly half of all new jobs from 2008 to 2018 and one-third of total job openings. Among the education and training categories, the fastest growth will occur in occupations requiring an associate degree.

The last part is very interesting. According to Table 9 of the employment projections, the growth rates of jobs requiring an associate degree or higher are generally in the double digits. In order to work in a top 10 wage and salary growth industries, one must attain a higher degree.

That little fact explains the projected trend in labor-force participation among those aged 16-24 years: down.

The chart illustrates the BLS’ projection of the labor-force participation rate (LFPR) by age group (Table 3.3). The LFPR is the percentage of the population that is either working or seeking employment. There are two important points here.

First, the 16-24 LFPR is expected to fall another 4-points to 54.5% by 2018. This furthers a downward trend that has been underway for some time.

Second, the population is growing older, but that is not the full LFPR story: older workers are working longer. The LFPR for those aged 65 and older is expected to jump 33% to 22.4% by 2018. This trend has emerged more recently, where just one decade ago the LFPR went essentially unchanged from the ten years prior to that.

In spite of their working longer, and with the downward trend in the 16-24 LFPR, the growing baby-boomer population (individuals born 1946-1964) is expected to drag the aggregate LFPR a point-and-a-half to 64.5% by 2018 (the aggregate LFPR is an average of all age groups).

It should be noted that this is a long-term projection. Therefore, the 2007-2009 recession affects primarily the rates of growth toward the long-run values rather than the levels of employment and the labor force per se. According to the forecast, the unemployment rate is 5.1% by 2018, and the average annual rate of GDP growth is 2.4% (slower productivity growth is expected to drag GDP growth).

Note: I will not be available to reply to comments until Friday, January 1. My apologies.

Rebecca Wilder

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This week’s Greek tragedy

This week, the single most important event in global bond markets was the S&P downgrade of Greece’s long-term debt obligations, A- to BBB+. Moody’s is the last of the major rating agencies to hold Greek debt in the A-category of investment grade (currently at A1); but a major decision from Moody’s could come within weeks. This would make Greece the lowest-rated country in the Eurozone, and the only one with 6-B status.

Since the beginning of the month, the Greek 5-Yr government bond jumped over 1% to 5% by Friday.

The chart illustrates comparable 5-yr government bonds across the Eurozone. Interestingly, the region (ex Greece) remained rather resilient to the news. However, Greece is not alone; and its growing government financing problems are in good Eurozone company.

According to the European Commission’s autumn 2009 Economic Forecast, only 5 of the 16 Eurozone countries are expected to remain below the 60% debt limits of the Treaty on European Union in 2010, while just 3 will satisfy the 3% deficit limits.The most imminent issue for Greece, with its new BBB+ status, is eligibility for ECB’s collateralized loans. In October 2008, the ECB dropped the minimum credit rating for eligible collateral on its credit facilities from A- to BBB-. However, Greece’s downgrade to the next tier of investment grade status (BBB+ by S&P) now makes it ineligible for the ECB’s credit programs if the temporary measure is repealed. Obviously, this is a problem for Greece; but it is a growing problem for the ECB as well.

I see two problems forming. First, the pressure to drop deficits and leverage will be overbearing in Europe, especially in the UK. Dropping debt levels will be important after the recovery is well underway; but before that, and a fledgling economic recovery may be cut short. Second, if investors do start to question the ability of governments to service debt (recently in Greece), financing costs in other struggling countries, like Spain, Portugal, or Italy (and some of the others circled above), could rise swiftly and pressure budgets further.

The Wall Street Journal wrote a nifty little article about the time spent trying to regain a higher rating after a downgrade occurred:

Sovereign upgrades, meanwhile, can take a long time: Greece’s rating took nine years to move one notch upward to triple-B in the 1990s; Australia lost its triple-A rating in 1986 and saw 17 years pass before it was restored.

Years, that’s how long it will likely take Greece to “implement a credible medium-term fiscal consolidation programme”. And it is very possible that Greece will see further downgrades before upgrades.

This is a problem for the ECB – it will be interesting to see the ECB push a credible exit with Greece’s credit rating squelching the expiration of the temporary collateral requirements. Fun times ahead!

Rebecca Wilder

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Household leverage: US vs. UK

Households in the US and the UK are members of the “most levered club”. But put their balance sheets side-by-side, and the outlook for the US economy looks a little brighter than that for the UK. Why? Both are dropping debt burden, but a qualitative analysis suggests that the UK household leverage (probably) should be falling at a more accelerated pace.

The chart illustrates leverage in the US and UK, or household debt (loans) as a percentage of disposable income (DPI) through Q3 2009 and Q2 2009, respectively (the UK releases Q3 Economic Accounts at the end of December). By Q2 2009, UK and US households dropped leverage rather coincidentally, -4.8% and -4.4%, respectively. However, the debt bubble was bigger in the UK than in the US, peaking at 160% of DPI compared to 131% in the US. Why isn’t leverage falling more quickly? Spending.

To be fair, UK Q3 statistics may paint a very different picture. However, that is unlikely, given that real retail sales continue to grow, 3.2% at an annualized rate in the three months ending in October.

Oh, it all makes sense now: UK retail sales remained firm in 2009, and real home values hit a (probably local rather than global) cyclical low much earlier than in the US.

This is an ominous sign for the UK economy. Households are kicking the can down the road: de-leveraging – paying down debt by dropping consumption and saving a relatively higher share of income – is inevitable.


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