Fed Watch: Professor Duy

I'll get to this soon!

I Have to Post Something About GDP

From the BEA:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis."

I'm excited about that 5.7%, I really am, but knowing that GDP growth due to real final demand was only 2.2% still has me a bit bearish on the market. Later in the BEA report you find:

"Real final sales of domestic product -- GDP less change in private inventories -- increased 2.2 percent in the fourth quarter, compared with an increase of 1.5 percent in the third."

So more than half of the 5.7% Q4 GDP growth is due to "change in private inventories." It's what economists have been talking about for quite some time. The increases in ISM PMI, capacity utilization, industrial production, etc. . . for the moment anyway, are mainly the result of an inventory bounce. That's why you've seen increases in these broad indexes without seeing any job creation, (and without the expectation of any job creation.) Firms clearly don't expect growth this high going forward, else they'd be hiring, but they're not. Last month the manufacturing sector lost 27,000 more jobs.

I'll highlight a couple of other things I found relatively interesting. Personal Consumption Expenditures (PCE) and Residential Investment (RI) are both growing, but at a slower pace than they were in Q3. This doesn't bode well for a quick recovery, which shouldn't be a surprise at this point. Calculated Risk has more:

"It is not a surprise that both key leading sectors are struggling. The personal saving rate increased slightly to 4.6% in Q4, and I expect the saving rate to increase over the next year or two to around 8% - as households repair their balance sheets - and that will be a constant drag on PCE.

And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed. In fact, based on recent reports of housing starts and new home sales, there is a good chance that residential investment will be a slight drag on GDP in Q1 2010."

Can't help but agree with the analysis in housing. There has been literally NO good news coming out of that sector in recent weeks. Home starts are down, months of supply is up, new home sales are down, existing home sales are down. Nothing looks particularly good here.

Check out this post on Calculated Risk for a more detailed overview of the Q4 GDP report.

Postive Durables, Negative Jobs

From Bloomberg:

"Orders for capital goods rose in December, and more Americans than anticipated filed claims for unemployment benefits last week, indicating business investment is making a comeback while the job market stagnates."

State of the Union Address

I watched the State of the Union yesterday, waiting to see a President who was unsure of himself, and unsure of the direction in which he wanted to take the country. I felt that President Obama hadn't spoken out enough in recent weeks regarding health care reform, Ben Bernanke's reappointment, the awful Supreme Court decision, or the increasing misuse of the filibuster. I expected to see someone who looked tired or broken in some way. I was wrong.

I think the speech he gave was nearly perfect. He addressed almost every issue, and did it well. He even paid tribute to Ronald Reagan by blaming America's current situation on the Carter, cough... Bush administration:

"At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion. (Applause.) By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program. On top of that, the effects of the recession put a $3 trillion hole in our budget. All this was before I walked in the door."

Believe or not, I think this was an important step. Much of Obama's decline in popularity is likely attributable to people forgetting the above facts. Politically, its important to remind people how we got here, and to not stand by idly as opponents rewrite history such that it better reflects on their own failed policies.

About health care:

"So, as temperatures cool, I want everyone to take another look at the plan we've proposed. There's a reason why many doctors, nurses, and health care experts who know our system best consider this approach a vast improvement over the status quo. But if anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance company abuses, let me know.

Here's what I ask Congress, though: Don't walk away from reform. Not now. Not when we are so close. Let us find a way to come together and finish the job for the American people. (Applause.)"

About the Supreme Court:

"With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests -- including foreign corporations -- to spend without limit in our elections. (Applause.) I don't think American elections should be bankrolled by America's most powerful interests, or worse, by foreign entities. (Applause.) They should be decided by the American people. And I'd urge Democrats and Republicans to pass a bill that helps to correct some of these problems."

About the filibuster:

"To Democrats, I would remind you that we still have the largest majority in decades, and the people expect us to solve problems, not run for the hills. (Applause.) And if the Republican leadership is going to insist that 60 votes in the Senate are required to do any business at all in this town -- a supermajority -- then the responsibility to govern is now yours as well. (Applause.) Just saying no to everything may be good short-term politics, but it's not leadership. We were sent here to serve our citizens, not our ambitions. (Applause.) So let's show the American people that we can do it together. (Applause.)"

In general, I thought it was an excellent speech. Though I'm still not necessarily a fan of the "spending freeze." It might be good politics, (this remains unseen), but its certainly not good policy. While the American people might appreciate the Federal government symbolically "tightening its belt," Brad DeLong and others sure don't:

"But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate."

If you want my reaction to the policy, check this previous blog post.

And one last thing. Is this really feasible...?

"Third, we need to export more of our goods. (Applause.) Because the more products we make and sell to other countries, the more jobs we support right here in America. (Applause.) So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. (Applause.) To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security. (Applause.)"

My first inclination is no, so I checked out the data:

Exports would have to increase by 1.6 trillion over a 5 year period in order to "double." The trend appears to be more exponential than linear, and the last double only took about 8 1/2 years, (2001-2009). The increase in free trade and overall globalization could explain the exponential trend. If that trend continues, doubling exports in a five year time frame might be entirely possible. Maybe this new "export initiative," will have some legs. However, if exports increase at the 01-09 rate, it will take nearly 12 years to double. I'll continue to be a naysayer here. I don't think this is going to happen, but the trend in the data gives me some hope. Still, kind of interesting that Obama is going Mercantilist on us right now. Paul Krugman and others have been pretty disappointed with regards to the spending freeze, but moving toward a positive balance of trade might make them happy.

More Data on Housing

From Calculated Risk:

"The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 342 thousand. This is a sharp decrease from the revised rate of 370 thousand in November (revised from 355 thousand)."

More bad news in housing, probably why the Fed failed to include language in the FOMC statement about a "housing recovery." The housing market currently holds roughly an 8.1 months supply, which is well below the all times high of 12.4 months, but still considerably greater than the average of around 6 months. In December a record low 23,000 new homes were sold. With foreclosures rising, home sales continuing to fall, and prices stagnating, an end to the country's housing woes might not come for quite some time.

FOMC Statement

Here's the link.

Nothing new here really. Calculated Risk pointed out that the language regarding a recovery in the housing sector has been removed. November and December statements made notes of the pickup in housing starts which have subsequently declined. The Fed continues to believe that economic conditions warrant an exceptionally low level of the fed funds rate for an "extended period." The only change is a "no" vote, from Thomas Hoenig, who for some reason believes there's some imminent threat of inflation. His concerns are, in my opinion, unfounded and delusional, but I've talked about that recently.

Obama's Spending Freeze

From yesterday's New York Times:

"President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday."

Is anyone else as unimpressed by this as I am? Brad Delong, Paul Krugman, and Mark Thoma to name a few. The "spending freeze" will stop growth of government discretionary spending through 2013, and will only allow for growth proportional to inflation after that. We're talking about $250 billion in savings over 10 years, compare that with the $9 trillion dollars or so the deficit is forecast to rise during that time and. . . I'm unimpressed. Administration officials contend that the spending freeze on the smaller, discretionary part of the budget will have symbolic value. In other words, the spending freeze is more of a political ploy to gain populist support than anything else.

But I feel the administration is misreading what the public is looking for. They don't want a political ploy disguised under the sheath of budget responsibility. They want some real action. They want unemployment numbers to come down. They're looking for a revival in the job markets. A spending freeze is the exact opposite of what needs to be done to lower unemployment. It shows a growing disconnect between the White House and the American public. I've been a strong Obama supporter for a while, but his wavering stance on health care, and now this, has got me rethinking the situation.

One more note on this issue... If the administration really wanted to do something about the budget deficit, they might want to think about real health care reform...

"It is the growth in the so-called entitlement programs — Medicare, Medicaid and Social Security — that is the major factor behind projections of unsustainably high deficits, because of rapidly rising health costs and an aging population." -NY Times

That is all.

Housing Starts Down, No Surprise

Via Calculated Risk:

"Sales in Dec 2009 (5.45 million SAAR) were 16.7% lower than last month, and were 15% higher than Dec 2008 (4.74 million SAAR)."

The 16.7% decrease month to month looks alarming at first but again, the first time home buyers tax incentive expired in November. Essentially, tax credits of this nature borrow demand from the future. People rush to buy houses before the credit expires in order to take advantage of the financial incentive. The Obama Administration recently announced another first time buyer credit, this time extended to include current homeowners. It likely won't be as effective this time around for the above reason...

Time Running Out for Big Ben?

Mr. Bernanke, Time Magazine's "man of the year," is hoping to be reappointed as Fed Chairman, but what was once a foregone conclusion is now in question.

"Our next Federal Reserve chairman must represent a clean break from the failed policies of the past," Boxer said. "It is time for Main Street to have a champion at the Fed." -CNBC.com

Main street meets Federal Reserve Chairman... What? I don't mean to sound elitist, but the GOP's definition of "main street" is kind of a turn off for me, especially when I think about "main street" conducting monetary policy. We don't need to replace our Ivy League educated officials with an everyday man from the bayou. Let's be honest, Bernanke was late to the party when it came to recognizing the financial crisis but since has done a pretty remarkable job. He at least deserves the right to see this thing through.

One thing most people haven't talked about here is central bank independence. I'd prefer our representatives not set the precedent of removing the Fed Chair every time unemployment ticks upward. Mixing politics with monetary policy is a dangerous game for a plethora of reasons that I won't delve into too much right now... Let's just say I'd rather not have congress be responsible, directly or indirectly, for maintaining a low inflation rate.

Supreme Blunder

So the Supreme Court voted 5-4 in favor of eliminating corporate spending limits on political campaigns, also making it legal to donate directly to candidates or run political advertisements. Make no mistake, this is an historically bad decision. I honestly don't understand it. It's hard to believe that the majority of persons heading the highest court in the world could make such a poor decision. I've been talking with friends lately about how America is becoming progressively more ungovernable, and the numbers don't lie. Paul Krugman elaborates:

"The political scientist Barbara Sinclair has done the math. In the 1960s, she finds, 'extended-debate-related problems' — threatened or actual filibusters — affected only 8 percent of major legislation. By the 1980s, that had risen to 27 percent. But after Democrats retook control of Congress in 2006 and Republicans found themselves in the minority, it soared to 70 percent."

And if you want a visual representation check out this chart:


It's clearly getting out of hand... Maybe part of it is these, "extraordinary times," but I'm just not buying it. When the republican minority attempts to filibuster a military spending bill, considering their collective stance on the issue just a year ago, something is wrong. The only republican agenda at this point is blocking progress, regardless of the issue.

Unfortunately, the problems we're already experiencing, (corporate lobbyists controlling Washington and blocking reform), are about to get much, much worse. A lobbyist can now literally tell a politician "you're either with us, or against us, and if you're against us, we will spend unlimited dollars to make sure you don't have a job next term." The Supreme Court has given corporate America the go ahead to buy votes. This might be the most irresponsible decision I've seen the GOP make since anointing Sarah Palin, which is why I guess I shouldn't be all that surprised.

China's Growing Inflation Woes

Via Bloomberg:

"Inflation accelerated to a more-than-forecast 1.9 percent in December and gross domestic product climbed 10.7 percent, the National Bureau of Statistics said in Beijing yesterday"

This is after a $586 billion stimulus package designed to help consumer purchases. With rising growth, inflation can become a potential risk. A fourth quarter survey of 50 Chinese cities showed that 46.8% of consumers said prices were "too high to accept." The response by Chinese government officials has been predictable. They're talking about raising interest rates and required reserve rates in order to trim the money supply and control liquidity. This policy may also have a minimal affect on Chinese GDP going forward. The spillover of this affect could be more significant abroad than it is in China because, as of now, the world is relying on Chinese growth to help it recover from a global recession. The good news is there's been talk of a possible appreciation of the yuan, a mild 3%, but something is better than nothing at this point. Any appreciation of the yuan will help international competitiveness and fuel international growth.

Regional Unemployment

From the BLS:

"In December, 43 states and the District of Columbia recorded over-the-month unemployment rate increases, 4 states registered decreases, and 3 states had no change."

and there's the story below:

"Real average hourly earnings fell 1.3 percent, seasonally adjusted, from December 2008 to December 2009. A 0.3-percent decline in average weekly hours combined with the decrease in real average hourly earnings resulted in a 1.6-percent decrease in real average weekly earnings during this period."

Nothing new really, just a few more reasons to be weary of joblessness during the "recovery."

Big Bank Limit Proposals

Here's the story from the BBC:

"The plans - the most far-reaching yet -include limits to the size of banks and restrictions on riskier trading. . . His proposals also include a ban on retail banks from using their own money in investments - known as proprietary trading. Instead, banks would be limited to investing their customers' funds."

In my opinion, this is going overboard. I think some fine-tuning to the system would be more productive than tearing it down with a sledge-hammer. Think of it like a modern day surgeon vs. an 1700's pharmacist. You can either directly fix the problem, or you can let blood and cut off limbs. I guess Barack and Volcker want blood.

I saw the financial system collapse. I understand, for the most part, the main factors that contributed to its demise. But I'm just not buying that the system is totally "broken," so much so that we need to revert back to a Glass-Steagall type regulatory policy. I think future regulation should seek to create a better framework within the current system. America's new understanding (and believe me, many understand all too well,) that real estate investments won't lead to outrageous financial return, and in fact that both commercial and residential property can decrease in value, has put things in perspective. The chance of another speculative credit fueled asset price bubble occurring again in the near future is minuscule.

Hindsight is 20/20. "Risky" bank activity in 2006 was not considered risky at the time. But now conventional wisdom says otherwise. With the information we have today, firms are simply less likely to participate in said "risky" activities. Especially when the credit ratings of sub-prime mortgage backed securities accurately reflect their true risk, (i.e. no more AAA credit ratings please) . The free-market system works fantastically when people have perfect information. And to guard against future housing bubbles and the like, maybe we should regulate at the foundation, where the problems actually start. Minimum credit scores for potential home buyers? Minimum down payments on mortgages maybe? I feel like doing either of those two things would severely limit the potential for systemic risk.

Sadly, we live on a political canvas right now, where putting restrictions on the public just isn't politically feasible. Imagine if Obama told the American people, "to be approved for a mortgage, you must have a reasonable possibility of paying off that mortgage. . ." The gall of such a man! Should Americans really have to pay for the things they purchase? Politically, the answer is no, which is why we have a problem, and why we get garbage regulation proposals like the one out today.

Nobel Prize Winners Watch South Park?

I realize this doesn't have much to do with economics but wow... Paul Krugman is officially my favorite economist after this post today. No offense to some of my UO professors, but how often do you see a Nobel Laureate use an apt South Park reference to make a point about social reform? Pretty good stuff.

Permits and Housing

Via Bloomberg:

"Building permits in the U.S. unexpectedly jumped in December, signaling gains in housing will be sustained into 2010 after winter weather depressed construction at the end of last year."

Permits were up 10.9% in fact, pointing to future growth in housing starts. Also of interest,

Construction of single-family houses decreased 6.9 percent to a 456,000 rate, while permits increased 8.3 percent last month. Work on multifamily homes, such as townhouses and apartment buildings, climbed 12 percent to an annual rate of 101,000, a six-month high.

Housing starts themselves were off 6.9%. Some experts point to the unusually cold weather of late as a reason for the decline. Maybe that has some merit. . . I don't know. The big news for me is the 12 percent climb in construction of multifamily homes. In my opinion, this signals the beginning of what might be a long term transition amongst American families from residential single family homes, to apartments and townhouses. The average consumer may have figured out that he/she can't afford a free standing home and must look elsewhere for housing opportunities. If multifamily homes continue growing at this rate, it might add yet another headwind to the recovery in housing. With high unemployment and rising home inventories, builders are already weary of undertaking new projects, this adds just one more thing for them to worry about. On the other hand, the increase in permits is definitely not something to be ignored, and displays if nothing else that conditions likely won't deteriorate further, at least in the near future, which can and should be interpreted as good news.

U.S. Stocks Fall

From Bloomberg:

"I'm concerned we might have a mild short-term correction," said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co. . . "Market optimism looks excessive, people are optimistic about fourth-quarter earnings which really haven't materialized. All of that complacency isn't good."

Not to toot my own horn or anything... But the fundamentals were telling us we needed a correction and I talked about it some in my week 1 posts, (which aren't actually on the blog because I didn't have a laptop at the time). Ready for some more fundamentals? The S&P 500 is valued at 25 times its companies' profits, which is the highest level since 2002. I'll be reflecting on what that means for a while...

Quick Notes on Today's News

Felt like getting one last post in this week before a leisurely weekend.
From the Fed via Calculated Risk:

"Industrial production increased 0.6 percent in December. The gain primarily resulted from an increase of 5.9 percent in electric and gas utilities due to unseasonably cold weather. Manufacturing production edged down 0.1 percent, while the output of mines rose 0.2 percent. The change in the overall index was revised up in October, but it was revised down in November; for the fourth quarter as a whole, total industrial production increased at an annual rate of 7.0 percent. At 100.3 percent of its 2002 average, output in December was 2.0 percent below its year-earlier level. Capacity utilization for total industry edged up to 72.0 percent in December, a rate 8.9 percentage points below its average for the period from 1972 to 2008."

I originally saw the 0.6 percent increase story on CNBC early this morning, (way too early in fact, my CNBC realtime app woke me up at 6:26AM), but no mention of unseasonably cold weather over there, at least not on the 6:20 version of the article, maybe its been updated since. Either way, an increase in industrial production is better than a decrease.

Also, the BLS released CPI and wage numbers today. The CPI was up .1%, hopefully alleviating some inflation worries. Real average hourly earnings were unchanged. Not a lot going on here other than more non-inflationary news. I'm going to have trouble calling this a real recovery until we get positive jobs information.

Taking Notes from my Professor... Fed Watch

I thought I would take this opportunity to do a little brown-nosing. Tim Duy had a pretty awesome post yesterday about the overall state of the U.S. economy and the likely pace of recovery. Since you're the only one likely reading this, I'm going to write this post as if I'm just talking to you, I hope that's acceptable.

I really liked point number 3 in your post, about retail activity. I used capacity utilization as one of my metrics in the project. So the chart you made about trends in retail sales was really interesting because it visually showed me how excess capacity develops, whether in consumer retail, or in manufacturing. I know we'd looked at similar charts in class, but we didn't explicitly make the connection to commercial real estate. The spread between the expected vs. actual trend makes a pretty compelling case for an excruciatingly slow recovery in commercial real estate. So when you say:

"Retail activity remains well below the trend expected in 2007. A forgotten piece of the puzzle, in my opinion."

I can't help but agree. I hadn't made that connection previously but it makes perfect sense.

I also have a question and I'm hoping you might comment on it. You talked a little bit about the Chinese raising interest rates and how many (including myself,) logically concluded that it might lead to an eventual appreciation of the yuan, which would probably help U.S. balance of trade, which would likely help job growth. I don't necessarily live by Paul Krugman's "back of the hand" calculations, but he seems to think that an appreciation of the yuan could lead to significant job creation in the United States. Anyway, you say you're skeptical because:

"I can also see Chinese authorities attempt to use the external sector to compensate for waning domestic stimulus."

I don't yet know enough about Chinese currency policy or the Chinese government. But could you explain to me what exactly you mean by the Chinese authorities using the "external sector" to compensate for "waning domestic stimulus." I guess I just don't follow the language?

Lastly, you talk about pent up demand in manufacturing and the inventory correction as being reasons for the V-shaped recovery in that sector, but you note that households remain "financially hobbled." So I did a little brainstorming and now I'm wondering about labor productivity numbers. I did a quick check on the BLS website and found this: "In manufacturing, productivity increased 13.4 percent while unit labor costs fell 6.1 percent." Here's a link to the Q3 report, it's over a month old but until the next one comes out, it's all I've got. A 13.4% increase in manufacturing labor productivity is probably not sustainable, but it does parallel December numbers in the ISM PMI, and capacity utilization. Given that, wouldn't we have expected December manufacturing employment to be up, rather than down 27,000? Manufacturing is clearly in, or is at least developing a trend representative of an expansion, so why aren't firms hiring? They can't keep meeting demand through productivity increases though that seems to be the goal right now. It seems manufacturers will have to start hiring in the near future, should they continue to see consistency in demand growth.

Your analysis, alluding to "pent up demand," as a cause for the accelerated growth in manufacturing makes me think that growth in the sector could possibly decelerate looking forward. As in, "pent up demand" has yielded a temporary positive shock. Also leading me to that conclusion is firms showing an unwillingness to hire. It's as though they're largely looking to avoid longer term labor costs as a hedge of sorts against the possibility of lower long term demand. It looks like a possible argument in favor of the "inventory bounce" theory, rather than an argument for a longer term trend toward recovery.

Let me know what you think if you have some time.

Strong Dollar and Taxes

So I found myself watching some CNBC this afternoon, and I got a chance to watch the Kudlow Report. Generally I like Larry Kudlow, he's a bit conservative for my taste, but the man has a passion for U.S. capitalism that few others can rival. He was talking about "king dollar" during one of the segments and then in another advocated extending the Bush tax cuts. This is the same Larry Kudlow that used the Budget Deficit and National Debt as a main reason to avoid health care reform, and the same Larry Kudlow that is abhorrently opposed to almost any increased spending measure. So naturally, I was confused. Part of achieving a strong dollar, by Kudlow's own admission, is lowering the national debt and knocking out the yearly budget deficits. But when it comes to increasing government revenue through taxes, he's unhappy.

I suppose it's all consistent with his laissez-faire view of government, but still... In the last decade, neither Repulicans nor Democrats have proved they can spend responsibly. So in the world we live in, where spending is going to happen no matter what, it would seem raising taxes to balance the budget might help strengthen the dollar, which might make Larry a little happier.

Markets are Mixed on Retail Sales

December retail numbers via bloomberg:

"The 0.3 percent decrease came after a 1.8 percent jump the prior month, Commerce Department figures showed today in Washington. Other reports showed inventories rose more than forecast in November and jobless claims climbed last week."

U.S. major stock indexes were up measurably today despite a rally in the bond markets. 2 year treasury yields lost 4 basis points to .92 and the 10 year was down 5 basis points to 3.74. The larger macroeconomic data continues to suggest some uneasiness in markets going forward. In the last 2 weeks we've had worse than expected retail numbers, worse than expected pending home sales numbers, worse than expected ISM exports, worse than expected jobs numbers, and 2-year treasury yields dropping 15 basis points in the last 10 days. It's interesting to see bond yields fall sharply as stocks rally.

I'm not entirely sure what's going on here but so far the story looks something like this. Bad news hits, bond investors rush to purchase treasuries, driving prices up, and yields down. Equity investors stare blankly at the macroeconomic data and bond markets, and marvel at the ability of S&P 100 companies to cut costs and maintain profits. In my opinion, larger institutions have been able to maintain profits through cutting inventory, cutting labor costs, and increasing labor productivity, the combination of which will not benefit long term economic growth. I don't think that's a big stretch. In the last month or so it looks as though business sales and inventories are increasing marginally. The only piece of good news I see here is the increase in business sales, that means somewhere out there the largely forgotten consumer is peaking his head out and driving revenue growth. I guess we'll keep taking what we can get at this point. Small victories are better than nothing.

Google and China

Today's big news was actually out yesterday... Google might leave China. While this might seem like a poor decision for Google's investors it seems like a good moral decision by the high-ups at Google. Apparently their company motto is "don't be evil." It's difficult to tell whether or not censoring some information can qualify as "evil," but it's certainly not in the best interest of Chinese citizens.

After a "sophisticated attack," on Google's networks, likely engineered (in my estimation,) by the Chinese government, Google has decided it will no longer censor searches on Google.cn. Google will meet with Chinese government officials over the next few weeks to discuss what the company's future in China might or might not entail. In a brilliant stroke of irony, the news of Google leaving China this morning because of its unwillingness to censor searches... was censored in China.

State of the U.S. Economy

Sorry about not blogging yesterday. I didn't find time to actually get anything written down, however, my search for 5 good economic indicators did get me reading. I figure I'll post this now and get to today's news after.

So I looked into a lot of different indicators, trying not to use the most typical choices everyone would expect. I didn't use GDP growth or CPI% change. I tried to get a little more creative, but still find information that would be most useful to explaining our current situation. I came up with the unemployment rate and talked about why it was important to get jobs under control. The chart on the left represents percent job losses in every post WWII recession. It's easier to see blown up. What you'll notice is a trend, starting in 1981, where it takes employment longer and longer to bounce back. At this point, a recovery like the one in 2001 or 1990 wouldn't feel very good for the average American. In that scenario, unemployment would likely remain above 8% for at least another 2 to 2 1/2 years. A poor jobs market isn't going to help consumer sentiment (another indicator I chose) and it won't help erode away excess capacity, (got that one too.) I keep hearing people referring to job numbers as a "lagging indicator." Why is it starting to feel like a self fulfilling prophecy? If the market expects jobs to be lagging for the foreseeable future, they will continue lagging! At some point I really feel like we're going to need another, more direct stimulus to get this thing moving again, that is unless we want to concede horrible employment numbers until 2013.

Now, a lot of people are going to scream foul here, yelling about the national debt and what not, but let me assure you; China does not own the United States. Yes, if they quit buying U.S. debt it would weaken the dollar. But would it be such a bad thing to have a weak dollar right now? In my mind it would only help U.S. competitiveness and help job creation.

The European Story

Paul Krugman today writes about European vs. U.S. economic and social prosperity:

"But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts."

Upon further investigation, many of the facts Krugman throws out to support his position seem rather to contradict it. For example, he talks about how European economies haven't lost their "dynamism," and then points to their 2.2% GDP growth, and 1.83% per Capita GDP growth. Someone remind me of a time in history where 2.2% GDP growth has been considered dynamic... Given U.S. GDP growth over the same period has been only 3%, it's not as though U.S. economic and political policy has vastly outpaced that of the Europeans. But 3% vs. 2.2% growth over a 30 year period can lead to pretty substantial differences.
Cue Greg Mankiw's assessment...

"Here is GDP per capita, adjusted for differences in price levels (PPP), from the IMF, for the United States and the five most populous countries in Western Europe:

United States 47,440
United Kingdom 36,358
Germany 35,539
France 34,205
Italy 30,631
Spain 30,589"

So yes, Krugman is correct in asserting that European political/economic policy 'works' and provides measurably better social care to its citizens than the United States. But he downplays the differences in economic prosperity enjoyed by the two systems. With every policy there is a trade-off. If you want universal health care, and you want better welfare programs, you will have higher taxes, and lower per capita GDP. Simple as that. I'm not saying one system is necessarily any better than the other, I'm just saying...

CMBS Delinquencies

First post, it's not that awesome, but with this I've officially started my blog, a truly momentous occasion.
From CalculatedRisk:

"Rising defaults among all property types led to a 42 basis point (bp) increase in U.S. CMBS delinquencies to close out 2009 at 4.71%, according to the latest Loan Delinquency Index results from Fitch Ratings."

The entry suggests CMBS delinquencies might not peak until 2012. Rising numbers of loans will come due in the next 2 years, leading to higher default rates. It's estimated delinquencies could peak near the 12% level in 2012.

This information parallels some other stories we've seen over the last few days in commercial real estate. The U.S. apartment vacancy rate is at a 30 year high, commercial office vacancy rates are at 15 year highs, hotel occupancy is at its lowest levels since the great depression, and mall vacancies are reaching record highs. The rising number of vacancies and subsequent falling rents make a 12% delinquency rate in early 2012 very possible.

Paul Krugman noted today that while much of the MBS disaster was concentrated in larger institutions, the CMBS story is more widespread among smaller banks. The fed needs to continue watching this story as it develops, further tightening of credit markets will be detrimental to the recovery. I can't imagine we'll see much hiring in the private sector while commercial real estate is having problems of this magnitude.