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

Central bankers: slow to acknowledge the start; quick to declare the end

by Rebecca Wilder

There is always an agenda when a central banker declares the recession is over – and Bernanke is no different. The following facts remain: US GDP contracted at a 1% annualized pace in the second quarter of 2009 (its fourth consecutive drop), industrial output grew just two consecutive months after declining every month (except one) since January 2008, employment is still falling, retail sales are improving somewhat, and real personal income has formed no discernible upward trend.

In that light, the most accurate description of Bernanke’s declaration is that he “thinks” the recession is over, rather than it “is” over. His strategic announcement plays on market expectations to the upside, just as announcing that the recession is underway would play on expectations to the downside.

Are central bankers generally more apt to declare the end of a recession sooner that the beginning? I bet that they are. Will an AB reader do a little investigative reporting to find the first time that Bernanke acknowledged the onset of the 07-09 recession? My money’s on 12/08, the date when the NBER declared it as such and a year after it began.

To his credit, much of Bernanke’s Brookings address was spent highlighting the weak recovery that is expected. Bernanke is brilliant and surrounds himself with likewise brilliant economists – but data is data; and he sees what I see, which is a murky bottom and expected positive growth.

The charts below illustrate the key monthly macroeconomic variables used by the National Bureau of Economic Research to date the recession peak and trough by month: real income (I use personal income through July), employment (through August), industrial production (through August), and wholesale-retail sales (through August).

George Cooper is on to something in his book “The Origin of Financial Crises” (highly recommended). He criticizes central banking for adhering to efficient markets thinking, which leads to lax policy on the upside of the business cycle, i.e., allowing aggregate demand to outpace underlying fundamentals, and overly aggressive policy on the way down.

In this light, central bankers might be quicker to face the end of the recession and slower to conclude the onset of one. It is akin to policy mistakes being made on the way up and a triumph on the way down.

Rebecca Wilder

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A housing bubble illustration

by Rebecca

Yesterday’s post on the Australian economy sparked some discussion of its housing market. I agree – Australia’s bubble is large relative to that in the US (interestingly enough) and Canada.

The chart illustrates the price to rent ratio in Australia, Canada, France, Ireland, the UK, and the US, which measures the trade-off between owning and renting. Across country, the housing indices are not perfectly comparable – for example, Statistics Canada measures the value of new homes, while the S&P/Case-Shiller index measures repeat sales of existing homes. Furthermore, countries often measure the owner-equivalent rents differently. Nevertheless, the trends are meaningful.

Australia’s bubble was (is) big, and relative to rents, home values recently turned upward. According to Steve Keen (thank you reader VtCodger for the link), government subsidies provided households the incentive to leverage up their balance sheets while the private business sector deleveraged. Basically, the crash is yet to come.

The recent uptick in the Australian price-rent ratio, i.e., jump in housing prices relative to rents, is interesting. Notice the same is happening in the UK and Ireland; however in their cases, seriously weak economic conditions are dragging down the CPI housing index (the denominator). (In the UK, prices are likewise rising, but rents are falling faster.) As rents slide, so too will the relative attractiveness of home ownership.

I expect that the same will happen in the US. In Q2 2009, the S&P/Case-Shiller home price index grew 1.4%, faster than did the owner-occupied rents index in the CPI. Owner-occupied housing (see CPI table here) inflation slowed dramatically in Q2; and given the long lag on core price fluctuations, there is a very good chance that it turns negative.

Rebecca Wilder

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Australia…escaped a total meltdown, but still far from healthy

by Rebecca

Australia is another on the short list of countries that “escaped recession” (another is Poland, which I wrote about earlier). As much of the developed world struggles with job loss and weak economic groundwork, Australia managed to push through the global meltdown with just one quarter of negative growth, -2.8% annualized growth in the fourth quarter of 2008. Since then, GDP in the first and second quarters of 2009 grew at an annualized pace of 1.6% and 2.5%, respectively. (Note: the chart on the left illustrates growth over the year, rather than annualized.)

To what does Australia owe this honor? Net exports and policy. First, while most of the developed world saw export demand plummet – in the US, exports dropped at an annualized rate of 29.9% and 5.0% in the first and second quarters of 2009, respectively – Australia, with its high concentration of primary products exports (foods, fuels, minerals, etc.), benefited from positive real export growth of 8.2% and 3.9% (annualized rates) during the first and second quarters of 2009. Imports fell even faster, and net exports picked up the slack for the huge drag on GDP coming from inventories and investment.

In 2008, 14.6% of Australia’s exports went to China, whose economy, as we all know, is faring much better than previously expected. And in July, Australia’s exports remained strong to China, growing 4.6% over the month.

Likewise, the Australian government underpinned the economy with huge fiscal stimulus, around $42 billion AUD or 3.5% of GDP, and robust expansionary monetary policy, cutting its cash rate 400 bps to 3.0%. The stimulus firmed household spending’s contribution to GDP growth above zero.

Australia escaped the recession, but it is not immune. Last week, the OECD released its updated forecast, which includes estimate of potential GDP. Although stimulus and exports kept Australia afloat, production remains well below the OECD’s estimates of potential output. And well, so does the rest of the world.

Against this backdrop, Poland really does shine.

Rebecca Wilder

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Weekend charts: the destruction of the "goods-producing" payroll

Rebecca

The BLS establishment survey (nonfarm payroll) reports that the accumulated job loss since December 2007 is 5.02% (almost 7 million jobs), blowing the total job loss of the previous “biggie” recessions, the 73-75 and 81-82 recessions, out of the water by 2.5% and 2%, respectively. There’s no question that it has been bad, with almost every industry slashing payroll.

The chart illustrates the total accumulated job loss across the major industries spanning December 2007 to August 2009 (nonfarm payroll listed here). Assuming that the recession is over (the consensus and key indicators seem to indicate that a business cycle trough has been found), then there are just two men left standing (adding jobs over the cycle), education and health services and government (barely). Even the historical job anchors , other services, professional and business services, and financial activities, are down between 1.8 and 8%! The job loss is broad and deep.

However, the industry contributions to total job loss show that the job destruction is heavily weighted in manufacturing and construction, which account for roughly half of the total drop in nonfarm payroll (-2.5% of the total -5%). But manufacturing and construction hold just a 16% share of the entire payroll.

Productivity numbers, i.e., growing amid record output loss, would suggest (even manufacturing productivity saw growth in Q2 2009) that factories are running on skeleton crews, which is efficient given the drop in demand. And a resumption of aggregate demand may be partially satisfied by adding hours, but that will only go so far. Firms will need to hire, and hire soon after demand starts to grow again.

Rebecca Wilder

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The pre-labor report labor reports

Rebecca

Let’s investigate these pre-BLS reports.

There are many job reports out there, but here are some of the biggies that come out right before the official government BLS employment situation (not a coincidence).

  • Monster Employment Index (not seasonally adjusted) – an index geared toward online recruiting trends.
  • Challenger job cuts (not seasonally adjusted) – follows announced layoffs at large companies.
  • The ADP report (seasonally adjusted) – estimates private nonfarm payroll using their payroll data (very different from the BLS survey methodology).
  • WANTED Technologies report (no information on seasonal adjustments on the website, but it must be, right?) – estimates total nonfarm payroll (private plus public) using “hiring demand data” stemming from online job boards.

Well, they are all generally trending in the positive direction – i.e., the “it’s getting worse less quickly” story. This is consistent with the BLS report. The trend is about all that they can match, the level value seems more like a hit or miss to me. (Note: except for the Challenger cuts, all of this data has been revised). Correction: Just heard from Charles Thibault over at WANTED – he says: “We do not ‘revise’ forecasts ex-post like ADP”. Will update if that changes. RW: Maybe there’s something to this one.

But I am a skeptical as to the exact value added from these reports. Although the ADP report does not explicitly claim this, I imagine that they do like the idea that markets generally use their number as an indicator of the upcoming BLS report on Friday.

WANTED Technologies is explicit in their claim to forecast the BLS report more consistently than does the “consensus”. And furthermore, they present a root mean square error of their forecast (a measure of how close the forecast comes to the actual data) as something below that of the BLS (see Table at the bottom of their methodology page). I am not quite clear on how they calculate the error, since they revise their data as does the ADP (again, correction: according to WANTED, they do not revise their forecast ex post, and the MSE comparison may be quite meaningful).

This gets me back to my first point, what is the value added of these pre-labor labor reports? I always thought that the various reports should focus on what are their comparative advantages. For example, the ADP payroll figures likely have information on wages that cannot be ascertained from the BLS’ survey approach. Or WANTED uses online job applications – perhaps it can provide an earlier indication of labor prospects than can the survey as a whole.

We will see what happens tomorrow.

Rebecca Wilder

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G-20 to talk about ‘exit strategies’…

Rebecca Wilder

With the developed and developing economies printing money like it’s going out of style, the exit strategy – i.e., taking back the hundred percent increase in the monetary base (at least in the US) – is rumored to be the topic du jour at the G-20 summit later this month.

According to Reuters, the “G20 countries have agreed it is too soon to withdraw measures to end the global economic crisis and will discuss coordinating policy to wind up the trillions of dollars in support at talks in London this week.”

The article focuses on fiscal policy, but only a delinquent discussion of exit strategy leaves out the record monetary easing of late. However, I would most certainly agree that it is too soon.

The global labor market is plummeting.


And global sticky wages are consequently growing at snail-speed rates.

I’ve always been a big believer in the output-gap story. And until that unemployment rate starts to fall, I just don’t see how global inflation is going to be much of a problem.

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Not all of Europe is in free-fall

Rebecca Wilder

Poland: the bull of eastern and central Europe. While most of central and eastern Europe are either defending exchange rate pegs – this limits the ability to stimulate the economy through monetary policy – and/or running large current account deficits (see chart 2 here), Poland grew a remarkable 1.1% in the second quarter of 2009 compared to the same quarter last year. Given that its regional trading partners are falling precipitously, that is a real economic feat.

2009 is a great year NOT to be part of the ERM II, which requires a relatively inflexible exchange rate policy. And since Poland can allow its exchange rate to fluctuate a bit more, strong expansionary monetary policy (lowering its policy rate by almost half) has helped to cushion the blow to regional exports.

In the meantime, Poland’s relative immunity to the globally synchronous crash has kept the fiscal balance in check (relatively speaking).

Even though Poland’s fiscal deficit is expected to rise in 2009 (perhaps outside the share of GDP allowed by the Eurosystem), its more stable growth pattern will clearly “cost less” in terms of government spending and fiscal deficits, making it a strong candidate for euro conversion growing out of the crisis currently scheduled for 2012)

As the IMF article suggests, the re-emergence of regional trade is important for sustainable growth. However, Poland’s relatively flexible currency should keep it competitive.

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Consumer confidence: fluff or thrill

by Rebecca Wilder

Thrill. The Conference Board reported that the August consumer confidence index (CCI) jumped 14% in August to 54.06. In contrast, the August University of Michigan Consumer Sentiment index (CSI) fell; but the two generally trend together, and the CSI is subject to revisions reported tomorrow.

Confidence can be swayed by current political agenda or asset prices, but nevertheless, it is a coincident measure of the business cycle. And broken down into its two components – the present economic situation index and expectations index – the August report was quite positive (as positive as can be coming off of record lows).

The expectations index surged almost 16% in August to 73.48, its highest level since December 2007 and 2.7% over its previous high in May 2009. The current conditions index grew around 7%, but is hovering at low levels with no strong sign of improvement.

Clearly, the expectations index is making much more headway than the present situation index. And this is why that information is important: historically, the expectations index, rather than the current conditions index, is a good indicator of consumer spending growth.

The chart illustrates annual personal consumer spending growth and the two components of the CCI, with associated simple correlation coefficients. The correlation between the overall CCI and annual PCE spending growth spanning June 1977- June 2009 is 0.63. However, the biggest weight is coming off of the expectations component of the CCI, correlation = 0.69, rather than the present situation component of the CCI, correlation = 0.45.

On the other hand, the present-situation component of the CCI is a decent indicator of current labor market conditions.

The chart illustrates annual employment growth (measured by the nonfarm payroll), and the two components of the CCI. The simple correlation between the overall CCI and employment growth is 0.59 (noticeably smaller than the PCE correlation), which according to its correlation, is more heavily weighted by the present situation component of the CCI.

Based on this simple analysis, the CCI reading is consistent with an oncoming surge in spending growth over the next six months. Even in the recovery after the 1991 recession, when the expectations index improved quickly while spending growth was sluggish to rise, spending growth jumped from essentially 0% annual growth to almost 3.6% in just four months – after the surge in expectations index and before the bottom in the current conditions index.

Yes, there are plenty of credit-related issues why this might not happen. And there is an obvious economic link between employment, income, and spending. However, for those indicators that are critical to recovery, i.e., consumer spending (housing and inventories are important, too – see the second chart on this post), the expectations index is certainly a positive signal for spending events to come.

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Trends in home values: becoming murky

by Rebecca Wilder

Actually, murky is something of a good thing when referring to business cycle dynamics. It usually means that a bottom is forming.

In some sense, the key to recovery is the stabilization of home values. If home values would just “stop” declining – I understand that there is a market mechanism going on here that is pushing home values to (or even below) an equilibrium – then the banking system can get on with its solvency issues. (Naked Capitalism has a nice piece today on banks not foreclosing in order to avoid further writedowns.) Let’s see what’s going on in the US from the perspective of several indicators.

The S&P/Case-Shiller and the Federal Housing Finance Agency (FHFA) reported their quarterly house price indexes today. Interestingly enough, the two (Q2 2009)reports diverge.

The S&P/Case-Shiller marked a quarterly gain of about 1.4%, while the FHFA reported a quarterly loss of about 0.7%. Is this the start of an interesting story on the downside? On the upside, the Case-Shiller index showed a much larger bubble in home values relative to imputed rents. Will the FHFA show a deeper trough than the Case-Shiller?

The chart illustrates the price to imputed rent ratio for the two measures of national real estate values. This can be thought as the tangible asset equivalent to a corporate stock price to earnings, or price to dividend, ratio. It measures the value relative to the flow of ownership gains, as represented by the imputed rent series measured by the BLS (owner occupied rent in the CPI table).

It is unlikely that the quarterly FHFA index will depart from the positive trend for too much longer (if indeed, it has stabilized), as the monthly index is showing more consistent gains over the last three months.

This is kind of interesting – the Case-Shiller, which includes foreclosures, is likely catching the upswing in foreclosure demand, while the FHFA is grabbing more of the downward trend in the “average” mortgage. But the LoanPerformance home price index likewise includes subprime loans and foreclosures, and it is showing some life (see chart below). Below is the 3-month annualized growth rate over the last two years for a cross-section of home value indicators. (In most cases, the monthly indexes are a subset of the national index.)

One indicator to note is the LoanPerformance house price index (LPHPI), which is used by the Fed to estimate the value of real estate in the flow of funds accounts, and is growing at a 9.1% annualized rate. States seeing at least a 4% 3-month gain include Ohio, Wisconsin, New York, Virginia, South Carolina, Georgia.

Likewise, the median existing home price and new home values are reported. These series are not seasonally adjusted; and therefore, are not extremely helpful in this context. But the 3-month existing home values remain in positive territory, although at a slowing rate of improvement. It should be noted that the median home prices is a cruder measure of home values – the Case Shiller and FHFA were developed in order to overcome the limitations of thinking in terms of the “median”.

So it looks like there is a chance that home values stabilize before 2010. We will see, as a 1 quarter increase by the Case Shiller index, although positive, is far from a trend.

Rebecca Wilder

(Edited slightly for readability….rdan)

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Income distribution and GDP, it matters

I should title this: Yeah, it is just like 1929 you freak’n see, hear and speak no inequality monkeys.

I have this pile of income data sorted out from Saez’s work (the GDP is BEA). My thoughts regarding our economy is that income inequality (or equality) matters. It matters so much, that it is the all defining focus of government in a democracy. Every policy made should be judged against this goal of ever greater equality as we use the tool called “economy” for the betterment of our lives.

For most (even the tippy-top earners), the biggest share of income is not earned from money, but from labor, whether physical or cognitive. Because of this, there must be effort as reflected in our policy toward regulation and initiatives that continually work to equalize the share of income. I am confident, that just as Cactus showed there is a low and high to top marginal rates correlating with GDP growth rates, the same is true for share of income. That’s my thoughts.

I sorted out the share of income in dollars and percentages in the past and have posted them. This time I look at per capita income and compare them to GDP.

Starting at the low point for both groups in 1933, we see $6142/person (16.46% of the total personal income) for the top 1% and $315/person for the rest. The following chart shows the years of income and GDP doubling along with the top’s percentage share. I took the starting income and kept doubling it to find the year closest. A + or – means the actual income is before or after the year (between 2 years).

Income, GDP doubling chart

For the top, the number of years to double are: 9,19, 12, 7, 5, 11, 9
For the bottom 99 the number of years to double are: 8, 7, 17, 9, 7, 15,
For GDP the number of years to double are: 8, 5, 11, 11, 8, 7, 12, 13
The bold number is the last doubling before 1976.

If we look at 2005 incomes, it is clear the trend for years to income doubling was increasing for the 99%. For this group, 9 years past the last doubling, there has only been a 34.5% increase where as the top has doubled. It appears that the best income percentage for both the top and the rest is around 10 to 12%. Based on my prior posting, I will say with confidence that once the 1%’ers increase their share to 16% of the income we are screwed. That is because, it was as the 1%’ers passed through the 16% mark as their share declined (the income low point in 1933) that the post 1929 economy started its turn upward. On the other end of this time span, it was 1996 that the 1%’ers passed through the 16% point as their share increased. 1996is the year that the 99%ers income fell below the personal consumption line and has stayed there since. Can you say deficit spending? Another funny thing about the 30’s, the second recession, the top 1% hit 19.26% of the income in 1936. The WW2 turn around? The top 1%’ers share finally went below 16% in 1941 and never turned back.

However, here is the meat. Using 1976 as the center point of the range because it is the low point of the share of income for the top 1%, there are 5 times that GDP doubled for an average of 8.6 years per doubling. This during the time that income share was becoming more equal. As income became less equal over the next 32 years, there are only 3 doublings of GDP or once every 10.6 years. Also, the time between doubling is increasing to more than during the prior 43 years.

Now, for the class war aspect. In the first 43 years, the top 1% saw their income double only 3 times (1 every 14.3 yrs) compared to the bottom 99% seeing theirs double 4 times (1 every 10.75 yrs). During the next 32 years, the top 1% has experienced 4 doublings, one every 8 years compared to the 99% experiencing this only twice, one every 11 years.

Here is the graph that illustrates the relationship of shifting income share and GDP growth. Following Spencer’s past suggestion, the graph is a logarithmic scale.

Income per capita vs GDP graph 12-28-08

Basically, increasing of income was more equal and the economy grew more as the top was losing share. The post 1976 economic policy we have been following has quite frankly been killing our economy. Yeah, it sure benefited the top 1%, they got their’s. But, it could not last because, you can not have one group taking more out of the economic growth faster than it can grow. That, boy’s and girls is the lesson of the first 43 year compared to the last 32 years. For the first 43 years, GDP doubling was always ahead of the income. For the next 32 years, GDP growth was always behind the income which was do to the top 1%’s share. Their’s is the only income that increased faster than the economy. In chart form it looks like this:

First 43 years doubling: GDP 8.6 yrs,  99%’ers 10.75 yrs,  1%’ers 14.3 yrs.
Next 32 years doubling: GDP 10.6 yrs,  99%’ers 11 yrs,  1%’ers 8 yrs.

You know what else this is? It is the difference between reducing debt or increasing debt: Saving or spending tomorrow’s money. Unified budget (illegal) or general budget.

So, what should economic policy in a democracy strive to do? Promote more equality in the nation’s income which everyone helps to produce thus giving everybody a more equitable rise in their standard of living or promote the top 1%’s growth and the hell with all the rest? The rest being 99% of the population, the overall economic growth, the deficit, quality of life (retirement, health care, free time, better life for future generations) and just plain happier people who don’t find a need to fight with everyone else on the planet.

Personally, between this info and my post titled “It’s the big one honey, I know it…”, I think it’s rather clear exactly what needs to be promoted with policy. In case it’s not clear, there is this post “In the Beginning there was Income”.

Such policy if implemented will also act as the stop gap for this current downward trend better than anything proposed so far because it will be returning to the true purpose of an economy in a democracy like ours. Or, we can keep talking in quintiles hiding the truth and pretending that it’s just a housing bubble, and people spending to much, and a credit freeze and bad regulation and oil and lack of stimulus spending and it is not really like 1929 and…

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