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

FOOD AND ENERGY CONSUMPTION

With all the discussion of food and energy it helps sometimes to look at the data and put things in perspective. One reason that the rise in food and energy is having a smaller impact than in the 1970s is that they now account for a much smaller share of consumption. Food and energy fell from 30% of nominal consumption at the peak in 1980 to only 18% at the bottom in 2001. They still only accounted for 20.1%, of consumption in the fourth quarter, compared to 27.1% at the bottom in 1973. So the adjustment to higher food and energy prices still does not have to be as large as in the 1970s.

Second, the rise in energy’s share of consumption has been much more gradual this cycle as it rose from 4.2% of consumption in 2002 to 6.4% last quarter. From 1978 to 1980 energy’s share jumped two percentage points in two years compared to the five years it has taken this cycle. In the two 1970s cycles the rise in food prices was concurrent with the rise in energy prices. But this cycle, food costs are just now starting to squeeze the consumer as food’s share was still at near record lows at the end of 2007.
As this chart shows one of the ways consumers adjust to higher food and energy prices is putting off purchasing new cars and parts. We are seeing this adjustment this cycle just as we did in the 1970s. But again, it is being much more gradual. In 1970s cycles auto spending fell two percentage points in one year in 1974 and two years in 1978-80. So far auto sales have fallen just sort of two percentage points this cycle, but it has been spread out over six years since 2001.

This much more gradual emergence of the consumer squeeze is one of the reasons that we are not seeing a sharp jump in involuntary inventory accumulation this time and why higher energy and food prices are not generating a major recession as in the 1970s. A major recession may still emerge, but the situation this cycle is sufficiently different from the 1970s that one can not simply use the 1970s as a good guide of what to expect.

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Commodities and rates

Stormy earlier discussed the Frankel thesis that low rates leads to higher commodity prices.
I can see the argument, but I do not buy it. Rather I have alway looked at it the other way and viewed commodity prices as a leading indicator of interest rates. Rising commodity prices are a sign of strong worldwide economic growth that generally trail a period of low rates. Strong, above trend growth causes both commodity prices and rates to rise.


Moreover, if you divide commodity prices by initial unemployment claims what you get is a leading index for the Taylor Rule. Generally, but not always rising commodity prices lead overall inflation that in turn leads interest rates.

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INCOME INEQUALITY

More interesting information on income inequality

CBO released a new issue brief on increasing disparities in life expectancy. Here I provide a brief summary of the brief (yes, I recognize the irony in that phrasing):

* Life expectancy has been steadily increasing in the United States for the past several decades. Recent gains in life expectancy have not, however, been shared equally across socioeconomic groups. Although the gaps between women and men and between whites and African Americans have narrowed somewhat, differences by educational attainment and income have been growing. In other words, socioeconomic status has become an increasingly important determinant of life expectancy.
o In 1980, life expectancy at birth was 2.8 years longer for the highest economic group than for the lowest economic group. By 2000, this gap had increased to 4.5 years. The change in the gap of 1.7 years is more than half of the increase in average life expectancy at birth between 1980 and 2000.
o In 1980, the difference in life expectancy at age 65 between the highest and lowest economic groups was 0.3 years; by 2000, the difference had increased to 1.6 years. This increase in the gap is more than 80 percent of the increase in average life expectancy at age 65 over this period.

Source:http://cboblog.cbo.gov/
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Core CPI

In a low to moderate inflation world there is a very strong tendency for firms to raise prices once a year. As a consequence over half of the annual increase in the not seasonally adjusted core CPI occurs in the first quarter. It averages 54% in the 1st Q, 9% in the 2nd Q, 25% in the 3rd Q and 12% in the 4th Q. The third quarter budge consist largely of housing, education and autos.

Moreover, if the first quarter gain is less than(or greater than) the prior years’ first quarter increase then the annual change is generally less than(or greater than) in the prior year. There have only been a couple of exception to this rule over the last 20 years.

The first quarter data sends a strong message that core inflation is moderating, not accelerating

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Small Town Southern Republicans

Maybe if people actually read what rural and/or small town republicans were actually saying to each other the debate about voting against your own interest or being bitter would take a different slant.

I have several e-mail expressing what small town southern republicans say to each other that I have decided to post just to see what the reaction will be.

To Be White

Someone finally said it.
How many are actually paying attention to this?
There are African Americans,
Mexican Americans,
Asian Americans,
Arab Americans,
Native Americans, etc.
…And then there are just –
Americans.
You pass me on the street
And sneer in my direction.
You Call me “White boy,”
“Cracker,” “Honkey,”
“Whitey,” “Caveman,”
… And that’s OK.
But when I call you Nigger,
Kike, Towel head,
Sand-nigger, Camel Jockey,
Beaner, Gook, or Chink
… You call me a racist.
You say that whites commit a lot
Of violence against you,
So why are the ghettos the most
Dangerous places to live?
You have the United Negro College Fund.
You have Martin Luther King Day.
You have Black History Month.
You have Cesar Chavez Day.
You have Ma’uled Al-Nabi.
You have the NAACP.
And you have BET.
If we had WET
(White Entertainment Television)
… We’d be racists.
If we had a White Pride Day
… You would call us racists.
If we had White History Month
… We’d be racists.
If we had any organization for only whites
To “advance” OUR lives
… We’d be racists.
We have a Hispanic Chamber of Commerce,
A Black Chamber of Commerce,
And then we just have the plain
Chamber of Commerce.
Wonder who pays for that?
If we had a college fund that only gave
White students scholarships
… You know we’d be racists.
There are over 60 openly-proclaimed
Black-only Colleges in the US ,
Yet if there were “White-only Colleges”
… THAT would be a racist college.
In the Million Man March,
You believed that you were
Marching for your race and rights.
If we marched for our race and rights,
… You would call us racists.
You are proud to be black,
Brown, yellow and orange,
And you’re not afraid to announce it.
But when we announce our white pride
… You call us racists.
You rob us,
Carjack us,
And shoot at us.
But, when a white police officer
Shoots a black gang member
Or beats up a black drug-dealer
Who is running from the LAW and
Posing a threat to ALL of society
… You call him a racist.
I am proud.
… But, you call me a racist.
Why is it that only
Whites
Can be racists?
There is nothing improper about this e-mail.
Let’s see which of you
Are proud enough to send it on.

What I’ve observed is that these small town southern republicans see their tax money going to support blacks and poor white trash who the republicans believe are just as capable as they are of working and earning a living without federal support. Their resentment over their taxes being spent in this way may be the real issue that no one really addresses.

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Iraq and Iran

… President Bush reiterated yesterday that if Iran continues to help militias in Iraq, “then we’ll deal with them,” saying in an interview with ABC News that “we’re learning more about their habits and learning more about their routes” for infiltrating or sending equipment.

But he also reaffirmed that he has no desire to go to war with Tehran. Saying that his job is to “solve these issues diplomatically,” Bush suggested heightened interest in reaching a solution with other countries. “You can’t solve these problems unilaterally. You’re going to need a multilateral forum.” .

We use to have a great defense against the influence of Tehran in Iraq — it was Saddam. In the 1980s the Vice President actually helped to implement this policy that in retrospect seemed to have worked pretty well.

Isn’t this a great example of unintended consequences?

Or is it just another example of how Team Bush has done such a great job of increasing the influence of America’s enemies while reducing the influence of the US?
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Quality Spreads and Capacity Utilization

K. Harris had a nice comment about the direction of causal relationship in my last blog.

Care to discuss the direction of cause and effect in this chart of quality spreads and capacity utilization.

Is the current quality spread a measure of the bond market forecast of economic activity?

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Social Science Research Insights

Surprising insights from the social sciences

By Kevin Lewis

April 6, 2008

Do conservative values and conservative economics go hand in hand? A sociologist looked at broad surveys of Americans to find out whether conservative Protestants – the 25 percent of the population belonging to churches that emphasize a literal reading of the Bible, personal conversion, and social activism – accumulated more wealth than other people. The data indicated that conservative Protestants actually accumulated less wealth during their lives; their estimated median net worth was less than half of what it was for the general population. Conservative Protestants do give more of their income to church, but they are also less likely to pursue higher education, they are more likely to have earlier and bigger families, and women are less likely to work. It may be that religious differences can explain a significant portion of economic inequality in the United States, the author says.

Keister, L., “Conservative Protestants and Wealth: How Religion Perpetuates Asset Poverty,” American Journal of Sociology (March 2008)
Boston Globe 6 April 2008
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Imported Inflation ?

The NY Times had a very good article on inflationary pressure from Asia this morning.

The article was titled Asian Inflation Begins to Sting US Shoppers. It did a very good job of giving information about how inflationary pressures were driving prices higher in Asia and correctly
pointed out that it was showing up in US import prices.

Of course we know that from the data on import prices shown in this chart.

But it looks to me like they should have taken the reporting one more step. Because if you look at retail prices what you see is no sign that the higher import prices are being passed through to
consumers. Rather, it looks like so far that retail stores are absorbing the increase in retail prices. Consequently, the rise in import prices appears to be showing up in weaker profits rather then higher inflation.

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Employment report

Even with the drop in employment the new data really does not add much new information to what we knew a month ago.

Interestingly hours worked rose this month. But the first quarter average is 107.4 as compared to 107.7 last quarter. This gives you about a 1.1% quarterly drop–seasonally adjusted annual rate — for the first quarter, or what I said it should be last month. Depending on productivity this implies that first quarter real GDP growth will between -1.0% and 0.0%.

One of the little noticed developments is that nominal income growth is slowing sharply — from
both the drop in hours worked and the slowing of wage growth. Nominal income growth is a very good good leading indicator of inflation and implies that the worries about inflation are overblown. However, the slowing of inflation will trail the slowing of real growth and employment.


As far as I am concerned this data leave us in the never-never land of stagnation and close to a recession but not really in a recession — a widespread and extended fall in output, consumption and income.

Maybe the most critical thing to watch is that an inventory problem appears to be emerging in technology.

PS. edited to correct charts.

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