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The Scariest Graphic I Made All Week, or, Still More on Excess Reserves and "Money"

One of the nice things about the Kauffman Foundation’s Blogger Conference is the time to let the mind wander and look at data after having your brain scoured.

One of the worst things is realizing too late that you’ve got a Really Ugly Graphic, and most of the people who could help with it are gone.

Four hours ago at dinner, I was sitting between Brad DeLong and Tim Duy (who pointed out some good contemporary performers of Real Country Music), but I didn’t have this graphic with me. Now Tim is on a plane and Brad is teaching students, and my best option is to ask the AB commentariat if the following graphic scares them as much as it does me.

Even given my hobby-horse attitude toward Excess Reserve (i.e., the Sheer Unmitigated Contempt with which I treat the idea that reserves in general—let alone Excess Reserves—should “earn” interest), the dropping-off-a-cliff impression (and the overall downward trend, even keeping in mind that we do not Seasonally Adjust Excess Reserves, and therefore Seasonal Effects are clear) almost seems to explain why the 32nd month of the “recovery” feels as if it’s just possibly starting something.

To be fair—and a hearty “thank you” to Jeff Miller of A Dash of Insight for reminding me that most people believe the Fed concentrates on M2, not M1—the broader index shows an upward trend (again, discounting the recent decline as a Seasonal Effect):

Otoh, an overall ca. 5% increase in “Net M2,” as it were, over a year in which the dollar has increasingly appeared to be the only reasonable “Safe Haven” doesn’t seem all that large either.

I’ve yet to play with the data beyond this, so I leave it to the AB comentariat:

  1. Do you believe there is something here?
  2. If so, any guesses what it is? Or anything you want to know about it?
  3. If not, what else should we be looking at where Excess Reserves may/should/will (depending upon your degree of certainty) affect the value of the data and/or Real Economic Growth?

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Private-Sector Employment in Jobless Recoveries

I still think Obama is toast—a result of his own making, since he’s really the apotheosis of a government-hating Republican who never tries to do anything because he’s afraid it would succeed.  He’s basically Jon Huntsman, economic policy and all, with a slightly better social policy—or at least a willingness not to try to compete globally in the 21st century using employment policies that were outdated in the 19th. (Short version: you might be able, in general, to exclude 55% of your potential workforce—women and gay men—if you have the population of an India or a China. You can’t do it when you have 1/3 or less of their population; you need a market that is open to everyone, which means you need social policies to match.)

But there are way in which he is a Bad Republican (traditional definition—think Gerald Ford’s Presidency), and those, as much as anything else,are what has destroyed his re-election chances.  Not to mention U.S. employment data.

I’d like to think I’m wrong, but let’s look at the data, comparing the last three recessions: the ones with so-called “jobless recoveries.”  In the grand tradition of Mitt Romney, let’s look at job growth over the following 24 months.*  First, the Private Sector:

joblessrecoveries001Private

The first thing we notice is that The George W. Bush-Mankiw-Hubbard “Recovery” Really Massively Sucked for U.S. Private Sector Employment.** Two-thirds of those post-recession months were negative, and the negatives were more than 1/3 again worse than the gains.  Even the 24 months that follow the 1980 recession—half of which were the first 3/4 of the 1982 recession—show a net positive gain in Private Sector Employment.

But the second thing is that the Obama Administration really isn’t doing that poorly in Private Sector Employment. It’s rather similar to the George H. W. Bush Administration.***  The loss months are slightly more severe than the gain months (about 5%), but there are 2 gain-months for every loss-month.  It’s still a “jobless recovery”—as was the post-1991 era—in that producing slightly over 1,000,000 jobs in a 24 month period is falling behind the growth in available workers, but it’s not a disaster, if the criterion is the recovery of private-sector hiring.

Sadly for BarryO—again, I consider this what the tennis-playing Brad DeLong calls an “unforced error,” a direct result of the errors of his priors—there is also employment in the non-private sector.  Which both Bushes knew that, the “small government Democrat” appears not to:

joblessrecoveries002Public

On a proportionate basis, George H. W. Bush oversaw as large a post-recession expansion of Government workers as Barack H. Obama has overseen a reduction in those workers.  This is even before one considers that at least three of those six positive months—a figured dwarfed by W’s 15 months of public-sector worker increase, let alone his father’s 19 months—are due to temporary hiring of U.S. Census workers. March, April, and May of 2010 show net gains because of Federal hiring that is more than completely reversed by September.  Great “Recovery Summer,” that was!

But if we really want to be fair to Barack Obama, we would have to break this down further.  After all,while the data is national, the breakdowns are not always so:

joblessrecoveries003PublicBreakdown

Federal government employment—now including the ever-expanding Department of Homeland Security, and with a military that continues to fight (at least) three wars—has been essentially flat during the “recovery”period.  The damage has been done extensively at the State and, especially, Local levels.

Part of this is simply that the 2007-2009 recession was longer and deeper than the other two (18 months long v. 8 for each of the previous two; more than 7.5 million private-sector jobs compared to just over 1 million in 1991 and just under 2 million in 2001).  That’s a lot more time and a lot less money flowing into taxes and budget-balancing requirements.

But if I were Barack H. Obama, and if I really wanted to be re-elected, the speech I would be giving tonight wouldn’t be about extending tax credits or capital amortization credits—with or without the idiocy of budgetary offsets—but direct state aid. Billions of dollars of it.  Without offsets. The speech would run something like this:

The latest few years have been difficult for you.  Almost every state in the Union has to balance their budgets, and with record levels of unemployment and job losses, that’s not easy to do.  So they made decisions that affected you, your children, and your friends. They laid off police officers, firefighters, teachers, librarians, surveyors, road repair personnel, and trash collectors. They’ve cut back hours at the DMV, Social Security, and Employment Offices.  They’ve made it more difficult to get an appointment to get health insurance for your children, support to buy healthy food for you and your children.  Your classrooms are more crowded, your property taxes are higher, and you’re getting less for your money while you have to put in more effort.

The Federal Government doesn’t have to balance its budget, and the bond market has given us a rare opportunity to borrow money for less than it will cost us.  I plan to take full advantage of that now, so that your children will have food, your streets will be safer, your opportunities for education will be greater, and the services for which you pay will be more available.

The private sector is rebuilding and restaffing, but that will—as it has in the past, as it almost always does—take time.  But they cannot rebuild if there is no demand, and you cannot demand things if you cannot pay for them. So, along with $1T in infrastructure improvements to be made over the next 15 years, I will tomorrow send a bill to Congress to triple the total of the two previous grants-in-aid to the States that were made as part of the ARRA.

Now you have heard many people—and to my shame, I am one of them—who live in fear of deficits. They pretend that the government “has to be like a family”—a family that never takes out a mortgage, never borrows to buy a car, never needs a loan to pay for schooling or training, and never uses a credit card.  I’ve seen families like that. They live on the streets of Honolulu and New York City and Chicago and Washington, D.C., and Richmond, Virginia, and Cincinnati, Ohio, and Detroit, Michigan, and Paint Creek, Texas.  They’re impoverished.

The United States is not impoverished, and I will not allow it to become so. We will rebuild opportunity now and build our superhighways—information and otherwise—for life in the 21st and 22nd Centuries.  The bankers—grateful for the bailouts that have been heaped upon them by my predecessor and myself—are willing to loan us money for less than the cost of inflation. We would be foolish not to borrow.  Even as those of you who can are refinancing your houses, the U.S. government will—as families do and should—borrow now to make a better life for our children and their children.

We have a unique opportunity. We have massive unemployment because the states do not have the money to employ and hire workers—workers who help keep our streets and homes safe, who keep our roads in good condition, who educate our children, who find us opportunities for work and ways to keep us healthy so that we can do that work.  And the bankers are telling us, “We will give you that money for free!”  And some people are telling you that we should not take that money.

We have given the bankers enough.  Now, they are willing to Pay It Forward, to give some small portion of that money back to us for less than it will cost them to do it. I intend to take that money and use it to make a better present—and the chance for a better future—for the American family.

Yeah, I want a pony, too.

*All data following derived from FRED(R).
**Let us leave aside whether this was a feature or a bug of that Administration
***It is left as an exercise that GHWB was a one-term president.

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Texas Again: Which Rick Does More Harm?

That Rick Perry is a clueless candidate and skilled campaigner is something for Barack Obama’s minions to suffer.* That Perry’s curiosity goes no further than “Where’s My Next Corndog?” cannot be held against him; he only became what they made him, just as his predecessor did, though with a poorer transcript and lack of his father’s Rolodex. A real Horatio Alger story.

So we need to pay attention to who tells him things. And that appears to be people such as Richard Fisher, who recently went to W’s “home town” and bragged about the local economy. He starts by making any sane human being worry:

I, along with the 11 other Federal Reserve Bank presidents, operate the business of the Federal Reserve as efficiently as any bank in the private sector.

I’m certain that is true. Then he spreads the Usual Lie:

[W]e make money for the U.S. taxpayer: We returned over $125 billion to the U.S. Treasury in 2009 and 2010. You are looking at one of the few public servants that make money from its operations, rather than just spending taxpayer money.

English translation: We took money from the Treasury, and our Accounting looks nice because we don’t count the overpaying for “assets” or the free money on “excess reserves” as part of our losses. We can even make a fool out of Allan Sloan.

Oh, and by the way, we don’t “just spend taxpayer money,” like those evil people who run police departments, fire departments, and schools; or make roads, or ensure food and water safety; or do fundamental scientific research, to name a few, do.

Then he tries to tell his constituents that Texas is great, and that he will put “a heavy focus on the data,” which is supposed to explain (“connect the dots”) on why he “dissented from the consensus at the last meeting of the Federal Open Market Committee (FOMC).”

So the data should, at least, show an “I got mine, Jack” aspect, no? Let’s see below the fold if it does.

First he presents a graphic showing non-Agricultural Employment Growth baselined at 1990. Now, I might consider this a bit of cheating: in 1990, Texas was in the midst of its self-created S&L crisis. If it didn’t recover from them compared to the rest of the United States, I would assume (contra Brad DeLong [link updated]) that people realised there was no water table and therefore no opportunity for long-term growth (as opposed to the already-well-developed Greater NYC area and the San Francisco Fed areas** to which he contrasts Dallas).

Suffice it to say, you don’t get quite so dominant a picture if you start in mid-1992.

But let’s ignore that it’s easier to build if there’s Nothing There, and easier to expand if there are natural resources even if the rest of the area is a Vast Wasteland or Lubbock (but I repeat myself***). And let’s just look at what good all those jobs have done, with a heavy focus on, well, FRB Dallas data (from the start of their data):

Hmmm, not exactly consistent manufacturing productivity, even before the (recent) recession. Indeed, I might suspect that Texas since around early 2006 has been dependent on moving Services jobs there, not growth in the local economy. But I’m not a Fed Governor:

Now, let’s look at job creation in Texas since June 2009, the date that the National Bureau of Economic Research (or NBER, the body that “officially” dates when a recession starts and ends) declared the recent economic recession to have ended….[I]t is reasonable to assume Texas has accounted for a significant amount of the nation’s employment growth both over the past 20 years and since the recession officially ended.

Let us give him credit for admitting that the 49.9% number is major b*llsh*t. And half-credit for admitting that, if you drop the states that are still heavily negative, the number is below 30%. So things must be looking up in Texas, right?

Hmmm, a nice recovery—rather similar to the 1991-1992 gain—followed by some drop-off, water-treading, and another peak early this year that suggests seasonality, even though the data is Seasonally Adjusted.**** Difficult to argue an upward trend (see most recent footnote), but maybe stable.

Then again, I’m still not a Fed Governor. But let’s give him some credit for admitting this self-inconsistent point:

The most jobs have been created in the educational and health services sector, which accounts for 13.5 percent of Texas’ employment.

The education sector? Really? Can you say “stimulus monies“? People in Dallas sure can. Who is “just spending taxpayer money” now?

And credit Fisher for being fair enough to note the elephant in the Texas room:

I should point out that in 2010, 9.5 percent of hourly workers in Texas earned at or below the federal minimum wage, a share that exceeds the national average of 6 percent. California’s share was 2 percent and New York’s was 6.5 percent.

And for not thinking that the Fed’s dual mandate needs to prioritize nonexistent “inflation threats.”

It might be noted by the press here today that although I am constantly preoccupied with price stability―in the aviary of central bankers, I am known as a “hawk” on inflation―I did not voice concern for the prospect of inflationary pressures in the foreseeable future….My concern is not with immediate inflationary pressures.

Well, that’s good. And since the other half of the dual mandate is full employment, you’ll be expecting something positive from businesses, then, eh?

Importantly, from a business operator’s perspective, nothing was clarified, except that there will be undefined change in taxes, spending and subsidies and other fiscal incentives or disincentives. The message was simply that some combination of revenue enhancement and spending growth cutbacks will take place. The particulars are left to one’s imagination and the outcome of deliberations among 12 members of the Legislature.

Ma nishta ha-laili ha-zeh? But Fisher digs deeper:

On the revenue side, you have yet to see a robust recovery in demand; growing your top-line revenue is vexing. You have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency. You have money in your pocket or a banker increasingly willing to give you credit if and when you decide to expand. But you have no idea where the government will be cutting back on spending, what measures will be taken on the taxation front and how all this will affect your cost structure or customer base.

Huh? I thought government was mean and evil and just spends taxpayer money. Shows what I know; I listened to a Fed Governor, one who tells me that businesses “have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency.” Really should see some nice Production numbers in the past six months, then, no?

No. So when Richard Fisher later says:

[The business owner] might now say to yourself, “I understand from the Federal Reserve that I don’t have to worry about the cost of borrowing for another two years. Given that I don’t know how I am going to be hit by whatever new initiatives the Congress will come up with, but I do know that credit will remain cheap through the next election, what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”

There are two answers. The first is the obvious: the Fed only controls short-term rates for risk-free investment. They don’t control lending rates, and they don’t control long-term rates, which are what I’m interested in if I’m “going to hire new workers or build a new plant.” Now, QE2 made it marginally easier for me to borrow in the long-term, but that’s gone now. So unless I’m stupid enough to pretend I’m a bank—if I borrow short-term and create long-term liabilities, I better be damned sure someone will refinance me until the project is finished—the Fed guaranteeing that the short-term Government borrowing rate is going to stay low for a while doesn’t mean much to me.

The second is more interesting: if I believe in competitive advantage, I want my new products on the shelf before my competitor has hers there. I cannot sell what you cannot see. So I want my plant started now—while I can still get the best available workers before my competitor does, while I can still pick a prime location (less of an issue in a Vast Wasteland, but not insignificant if you’re Dallas- or Houston-area), and while I can negotiate a deal with someone who needs me in their space more than I need to be there.

But that is only true if Richard Fisher has been telling the truth about how well I’m running my Texas-based business. And that, not to put too fine a point on it, appears to be—to coin a Texas phrase—bullshit.

I know the reality of Rick Pery: it’s a hermetic, incurious one in which women are property, you read what they tell you, and you get to take credit for a win, even if it’s your handlers doing all the work, including telling you what to do later. It’s not a world of which I approve, but my lack of approval doesn’t mean I believe it doesn’t exist.

I don’t know what reality Richard Fisher inhabits; it is certainly not one in which there is “a heavy focus on the data.” At least not data that is related to the Fed’s dual mandate, or how nonfinancial businesses make long-term decisions, or how to attain a competitive advantage.

Rick Perry speaks to his true believers. Richard Fisher expects you to believe him. Currently, only one of them is trying to do national harm to the economy, and it’s not the (soon-to-be) 45th President of the United States.

*And the rest of the United States when Bachmann-Perry Overdrive starts on 20 January 2013, but that’s tangential.

**Fairness requires me to note that much of the state of California is a desert, though not so bad a one as most of West Texas. Accordingly, growth in those areas would, pari passu be similar to that of Texas, save that there is no not enough***** oil in Central California. But never let it be said that we would expect an FRB official to understand geography.

***And let us always remember that Lubbock gave us the greatest white rock musician of all time.

****Good thing I left out the pre-2006 data, so we don’t have to note that the peaks post-Great Recession are close to the ca. 2006 troughs.

*****Correction by dilbert dogbert in comments noted.

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Sheer Idiocy, European (and American) Style

It’s rare to see theft described so directly:

Proposals made in July by the Basel Committee on Banking Supervision should be redrafted to allow banks to use so-called contingent capital to meet the obligations, the European Banking Federation said in a letter seen by Bloomberg News. They should also be changed so lenders that can’t meet the requirements don’t immediately face restrictions on their ability to pay dividends and bonuses, the EBF said.

Stringing up a few EBF bankers is seeming more and more like a calm, rational approach to solving their issues. Especially when even investors are calling out their lies:

“European banks are in the deepest hole of all. Over the past five years, the European financial sector has shed 900 billion euros in capitalisation and two thirds of its value,” said Jacques Chahine, chairman of European investment firm J.Chahine Capital.

“Although the sector has raised 450 billion euros in capital over the same period, this has clearly been inadequate to cover increased risk on sovereign debt. We believe banks will have to be recapitalised by an additional 450 billion euros to cover that risk,” he said.

The response from the European Banking Authority is less than encouraging:

“The stress test recently conducted by the EBA showed that EU banks have significantly strengthened their capital positions and are able to withstand adverse macroeconomic scenarios, a view not changed by the additional disclosure of sovereign exposures,” it said….



“The main EU banks have significantly strengthened their liquidity buffers, lengthened the maturity profile of their liabilities and covered most of their funding needs for 2011. However, going forward it will be important that normal access to medium and long-term funding markets is restored,” the EBA said. [emphasis mine]

Well, so long as it’s not an immediate crisis, everything is hunky-dory. Ignore that woman running the IMF.

Lest you think I’m only bashing Europeans—a role usually left to Rebecca, who uses their data, not their words—let’s also look at the glories of U.S. corporations. I’m taking the more delicate quotes here, just so you don’t think I’ve gone all Mish:

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That’s a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data “underline the poor state of the U.S. private sector’s balance sheets,” reports financial analyst Andrew Smithers, who’s also the author of “Wall Street Revalued: Imperfect Markets and Inept Central Bankers,” and chairman of Smithers & Co. in London.

“While this is generally recognized for households,” he said, “it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials’ corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels.”

By Smithers’ analysis, net leverage is nearly 50% of corporate net worth, a modern record. [emphasis mine]

This should come as no surprise. The lie coming out of KocherlakotaLand in early 2008 was that since companies drawing down on previously-unneeded-and-therefore-unused lines of credit was evidence that we were not in a recession [warning: PDF the reading of which will damage your brain; superstitious Christians should note the Working Paper Number].

Now, those same borrowings, along with capital market moves, are being used to show that companies have “record cash holdings.”

Borrowing money without having a use for it is good in two circumstances: (1) if you are paying down higher-cost debt [oops, that’s a use] and (2) if the carry is positive (that is, if you can earn more than you are being charged in interest–oops, that’s a use, too).

If families worked like European banks, we would all be taking vacations and spending like there is no tomorrow. If they worked like American corporations, they would be borrowing money and boasting about how much cash they have on hand.

Can we now stuff the sh*t about how “governments have to work like families”? Corporations—and most especially financial services intermediaries—certainly do not.

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Kudlow’s Komedy Kapers (Cross-post)

Brad DeLong asked a few days ago who he should be reading on a daily basis. Following is a cross-post from my nominee, The Hunting of the Snark:

Kudlow’s Komedy Kapers

Larry Kudlow is worried that Obama is ruining the economy.

Larry Kudlow
August 5, 2011 4:30 P.M.

More Obama Spending Won’t Do It
And stocks know it.

There he goes again.

Because quoting Reagan is cool.

Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won’t do it, Mr. President.

Yes, when the private sector doesn’t provide jobs, don’t look to the government to provide jobs. That just won’t do it, Obama. That just…won’t….do!

He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.

It’s also borrowed from Roosevelt, but we all know how he secretly created the Depression by spending money.

He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.

I want to bronze that comment and turn it into an ashtray. Numerous studies have show that UI is associated with high unemployment! Obviously, the only solution is to stop handing out UI, and then we’ll have no more unemployment.

And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending — not real tax relief.

How the rich suffer so from their high taxes.

Earlier this week, when he signed the debt-ceiling bill, the president ranted on about the need to raise tax rates on successful earners, investors, and small businesses. He’s trying to bring back tax hikes as part of the phase-two special committee seeking additional deficit reduction, even though his own party rebuffed him on this in the late stages of the debt talks. All this is a prescription to grow government, not the economy.

Reagan actually raised taxes when it was necessary while Obama is just talking about raising taxes, but as we all know, the Reagan years were a bit of a blur for Kudlow.

What the economy needs, Mr. President, is a strong dose of new incentives, with pro-growth tax reform that flattens marginal rates and broadens the base for individuals and businesses. This includes moving to territorial taxation that ends the double tax on foreign earnings of U.S. companies. Plus, we desperately need a complete moratorium on federal regulations. As Sen. Barrasso recently noted, the government put out 379 new rules on business in July alone, amounting to $9.5 billion in additional costs.

Because US companies pay far, far too much in taxes. Just ask the Center On Budget and Policy Priorities (CBPP).

The U.S. corporate tax burden is smaller than average for developed countries.[1] Corporations in 19 of the member states of the Organization for Economic Co-operation and Development paid 16.1 percent of their profits in taxes between 2000 and 2005, on average, while corporations in the United States paid 13.4 percent.

Nevertheless, some have argued that U.S. corporate tax rates unduly burden U.S. companies by pointing to the country’s top statutory tax rate, which is 35 percent. For example, a recent Wall Street Journal editorial calling for corporate tax cuts noted that this is the second highest top statutory tax rate among developed countries.[2] While true, this gives the false impression that the corporate tax burden is greater here than in other developed countries. Because the U.S. tax code offers so many deductions, credits, and other mechanisms by which corporations can reduce their taxes, the actual percentage of profits that U.S. corporations pay in taxes — or what analysts refer to as their effective tax rate — is not high, compared to other developed countries.

Because the average U.S. corporate tax burden is low, many economists believe a revenue-neutral corporate tax reform that reduces statutory corporate tax rates, while broadening the tax base by eliminating costly tax breaks, could improve economic efficiency and likely benefit the U.S. economy.

Kudlow:

None of these pro-growth reforms are in sight. So the stock market is going through a nasty 10 percent correction over fears of another recession (and European debt default).

That’s definitely not a recession reading.

Yes, you read that right. Kudlow says we are not in a recession. From an earlier post

No Recession

Strong profits, easy money, and Tea Party gains argue against it.

Stocks and bond yields are sinking as Wall Street disses the debt deal and instead focuses on a likely double-dip recession.

Everyone is gloomy. But is this pessimism getting a little overbaked?

Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.

And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.

The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now.

Back to the present:

But at least we got some good news on jobs. The July jobs report came in stronger than expected. It’s not great. But at least nonfarm payrolls increased 117,000 — as the prior two months were revised upward by 56,000 — while private payrolls gained 154,000.

That’s definitely not a recession reading. But neither is it a strong performance. If the economy were really rebounding, we would be creating 300,000 new jobs a month.

In the report, the unemployment rate slipped to 9.1 percent from 9.2 percent. But that’s mostly because nearly 200,000 workers left the civilian labor force. Another negative is the household employment survey, which fell 38,000 in July after dropping nearly half a million in June. That survey measures job creation among small owner-operated businesses or the lack thereof.

Yet when looking at the new jobs report, along with reasonable gains in chain-store sales and car sales, plus the ISM Purchasing Managers reports (which stayed above the 50 percent line), I repeat my thought that we are not headed for a double-dip recession.

The US New and World Report begs to differ.

According to the latest figures, the U.S. economy created 117,000 new jobs, causing the unemployment rate to drop slightly, from 9.2 percent in June to 9.1 percent in July. But, as Jeff Cox writes over at CNBC, “there is far more than meets the eye” to this bit of economic good news, which is certainly nothing to cheer about.

The U.S. Bureau of Labor Statistics breakdown says there were 139,296,000 people working in July, compared to 139,334,000 the month before, or a drop of 38,000. That’s because, as a number of labor economists point out, the disparity is the result of something the government calls “discouraged workers”—people who don’t have jobs but were not looking for work during the reporting period.”

This is where the numbers showed a really big spike—up from 982,000 to 1.119 million, a difference of 137,000 or a 14 percent increase. These folks are generally not included in the government’s various job measures,” Cox wrote, adding that if you count those people as part of the workforce, the job creation and drop in unemployment disappear.

Other signs of continued weakness in the recovery include that the percentage of long-term unemployed remained unchanged in July and that the labor force participation rate has continued its downward trend since the beginning of the recession, dropping 0.2 percentage point to 63.9 percent in July. This is, the Congressional Joint Economic Committee reports, “the lowest labor participation rate in the United States since January 1984.” [See a collection of political cartoons on the economy.]

Addressing the weak numbers, the White House continues to point fingers almost everywhere except at itself—which is where the blame belongs. President Barack Obama, who, along with congressional Democratic leaders, promised that unemployment would not exceed 8 percent as long as the stimulus package was approved, has yet to explain how he could have been so tragically wrong.

The great thing about being a conservative is that no matter what it happening, it proves that their economic theories are correct. Kudlow:

Over two years of so-called economic recovery, growth has averaged about 2.5 percent. It fell to less than 1 percent in the first half of this year, largely from a commodity-price shock that included oil-, gasoline-, and food-price spikes. That price shock resulted mainly from the Fed’s QE2 depreciation of the dollar — a big mistake. It eroded real consumer incomes and spending.

Let’s ask Economist Online what it thinks about the dollar.

Put dollar depreciation in historical perspective

It’s a brand new year. I thought I’d have some big-picture review of what’s going on in the world economy today. Here is my first piece on US dollar.

The graph below will scare you a lot…in fact, the dollar index fall from 115 in 2002 to mid 70s at the end of 2007, that equals a 33% drop.

Hmmm, a sharp drop, isn’t it? But wait a minute, have we witnessed the similar happened before? Let’s look at the following graph and have some historical perspective. From 1985 to 1989, the trade-weighted dollar index actually had a bigger fall, from 145 to 90, almost down 38%, and it fell even further until 1995.

Holy Dollar Depreciation, Batman! It fell even more under Reagan than it did during Obama!

Kudlow:

Lately, the dollar has stabilized and energy prices have come down quite a bit. That will reduce inflation and support better consumer spending. Businesses are already highly profitable and cash-rich. They are investing some of that, but not nearly enough to create sufficient new jobs. Who would, with all these Washington policies?

It’s not lack of demand, it’s politics!

Finally, the Fed remains ultra-easy with excess liquidity and a zero interest rate.

So it looks to me like we will return to the sub-par 2.5 percent growth trend rather than dip back into recession. However, at this pace, unemployment may hover around 9 percent right up to election time next year.

More spending won’t do it Mr. President. Tax and regulatory incentives will.

Cut taxes and regulations and watch the economy boom–for the very rich. Who are doing quite well now as it is.

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Following the Taylor Rule would have led to President Kerry

The Reserve Bank of New Zealand released a paper by Nicolas Groshenny last month—I’m behind on planning for Chanukkah; that I got to a paper from New Zealand about U.S. monetary policy this soon is, er, probably one of the reasons why—in which he evaluates the counterfactual of following the “Taylor Rule” from 2002 to 2006.

Groshenny finds (link is PDF):

[T]his paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1 – 2006:Q4. The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.

Several obvious questions:

  1. The period in question includes Alan Greenspan’s last hurrah as Chair of the FRB. If he had followed the Taylor Rule then, would his legacy be so fondly remembered by his champions?
  2. If the Taylor Rule would have done that much damage then, why is it getting such vehement advocacy now (with only Scott Sumner—whose model has the virtue of being consistent—throwing out cautionary notes from the conservative side)?*
  3. Is the NAIRU for post-2001 U.S. U-3 closer to 8% than anyone in their right mind currently believes?
  4. Most of the period covered by the paper is when we had a, uh, relatively inexperienced crony capitalist running the U.S. Treasury Department. How much cover should that give to the FRB?

I’m certain there are other, better questions. Feel free to mention them below. And, while we’re at it, let’s see if we can answer the question of why 8% unemployment with less than a 1% inflation rate was unaccepted to the Bush-Cheney Administration but is perfectly fine with the Summers/Geithner “Rubinites“-with-Obama crowd.

*I’m still trying to figure out if Andy Harless is on Sumner’s side or playing both sides against a middle that may not exist, but I suspect he should be included in Sumner’s camp.

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Are you better off than you were a year ago? 28 States Say No.

The WSJ Economics Blog, discussing June 2010 unemployment rates by state, uses the headline “Most Regions Show Improvement“*

I suppose we should be encouraged by the headline and not look at the text:

Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively.

Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops. [emphasis mine]

Less money is being paid in a majority of states. The clearest explanation, then, remains that the “decline” in U-3 reflects people dropping out of the work force, not being employed.

It gets more interesting if you look at the Year-on-Year Change. There, 28 of the 50 states show a U-3 unemployment rate that is higher than or equal to last year’s. (The District of Columbia’s U-3 rate declined by 0.1% over that time, so it is only 10.0% now.)

And the improvements are, lest we forget, from a high plateau. The 14 states with the greatest drop in their unemployment rate year-on-year have an average current rate of 8.4%—and a median rate of 8.95%, the average being skewed by the above-mentioned North Dakota, with it’s 9.3 people per square mile and total population under 650,000, 37% of which are not of working age.

Dropping North Dakota from the “biggest YoY winners” moves the median current unemployment rate to 10.0%, while the average is slightly above 8.75%.

If this is a recovery, then my December 2009 prediction that this will turn out to be a “cursive-zed” recession may turn out to be optimism.

*Also, “Jobless Rates Drop in Most States.”

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