Archive for November, 2010

Autarchy in the US

23 November 2010

(No, this is not a call for protectionism.)

The third-quarter GDP growth numbers are better than originally reported, as today the Commerce Department revised them from their 2.0% initial estimate up to 2.5%.  As many commentators have no doubt noted, that’s still short of the 3.0% thought to be necessary to reduce the unemployment rates.  But we should not stop there.  The more I look at the quarterly GDP figures, especially in the Commerce Department’s full report, which includes a table that breaks down the contribution to percent change in real GDP from each of the main components, i.e., consumption, business investment, government purchases, and net exports, the more it looks like a real recovery is underway.

Looking over those GDP breakdowns over time, a couple patterns emerge.  First, as is often noted, fluctuations in business investment tend to be the key to recessions and recoveries.  Investment is highly volatile, more so than consumption, and it tends to lead the business cycle.  Second, net exports are even more volatile and, unlike investment, don’t have much of a cyclical pattern. They seem to be mildly countercyclical (in a recession that hits the whole world evenly, our imports would fall more than our exports would, simply because we our imports are much larger than our exports to begin with), but whatever cyclical pattern exists seems to be swamped by other fluctuations: just eyeballing the numbers, the GDP contribution of net exports looks like one of those “random walks.”  Consider net exports’ percent contribution to real GDP over the past five quarters (i.e., since recovery officially began, or 2009:III-2010:III):

-1.37 1.90 -0.31 -3.50 -1.76

Not much of a trend there –close to -1.5% in the first quarter of the recovery, sharply positive in the second, near zero in the third, huge and negative in the fourth, back around -1.5% in the fifth.  These big fluctuations can drive the quarterly real GDP changes, masking what’s happening in the domestic economy.  Officially, real GDP over the past five quarters grew by the following amounts (seasonally adjusted at an annual rate:)

1.6 5.0 3.7 1.7 2.5

Again a lot of fluctuation, with the strongest readings coming the two times when net exports’ contribution was either positive or near zero. If we omit net exports to get a closer look at actual domestic spending (i.e., C+I+G, or “domestic absorption,” as development economists call it), the growth of the rest of real GDP over the same span looks like this:

3.0 3.1
4.0 5.2 4.3

A much clearer picture:  GDP grew slowly in the first two quarters of the recovery, and thereafter at a much faster clip, about 4%-5%.  It looks to me like the domestic U.S. economy has been recovering a respectable pace in 2010.  While net exports may continue to be a drag on the economy in the future, especially as our European trading partners opt for the bloodletting approach to their economies, their extreme fluctuation makes me leery of making a definite prediction about net exports. I feel safer in saying that consumption and investment seem to be leading the U.S. recovery and that investment will hopefully pick up further as more businesses come to believe that a genuine recovery is underway.

Green shoots and leaves

18 November 2010

The Conference Board’s index of leading economic indicators is up again, by 0.5%, for each of the last two months.  This is very good news, yet it was hardly reported at all.

That wasn’t all of today’s good news, either.  Jobless claims (i.e., unemployment insurance claims) were at about the same level as last week’s two-year low.  And the Philadelphia Federal Reserve district, which had been very weak, showed astounding improvement in today’s report, with its general business conditions index jumping from near-zero to 22.5, way ahead of the consensus forecast range of 4.o to 9.6.  Bloomberg summed up the Philly Fed news as follows:

“Philly Fed data have been lagging regional and national data but not in November. The report’s November index on general business conditions jumped from a zero-flat trend to a prodigious 22.5 to indicate very sharp month-to-month growth. New orders rose more than 15 points to 10.4. Shipments also rose more than 15 points, to 16.8. The region’s manufacturers are showing commitment by adding to their workforces as the jobs index rose more than 10 points to 13.3. . .

“This report points to accelerating strength for what is already solid growth for the national manufacturing sector. Interestingly, these results contrast with Monday’s weak Empire State report from the New York Fed, a report that had been significantly stronger than Philly’s. Month-to-month swings in regional data shouldn’t cloud what is generally a positive outlook and continued leadership for the nation’s manufacturing sector.”

A genuine recovery really does seem to be underway.  It’s still not nearly fast enough, but the pace could easily pick up, and these indicators suggest it will.  I have other reasons for my current optimism, but I’ll get to those later.


Monetary policy IS currency manipulation

13 November 2010

Everyone from the Chinese to Alan Greenspan is slamming the Fed’s new round of longer-term bond purchases (QE2) as a back-door plot to weaken the dollar. The logic is that the bond purchases should lower interest rates, thereby lowering the demand for dollars and causing the dollar’s price to fall, thereby raising U.S. net exports. That much is true, but it leaves one thing out:

That’s exactly how expansionary monetary policy is supposed to work!

It’s even in a lot of macroeconomics principles textbooks:  When the Fed lowers interest rates, the lower rates are supposed to raise GDP by spurring household consumption and business investment (that much is in every principles textbook) and secondarily by lowering the demand for U.S. bonds, thus lowering the demand for dollars and weakening the dollar, thus raising U.S. exports and lowering our imports.  This effect is sketchier than the effects on consumption and investment, since net exports are very volatile and do not respond quickly to changes in exchange rates, but it is there.

So why exactly is it currency manipulation when it’s part of QE2 (which is only expected to reduce interest rates by about 20 basis points and so far has actually seemed to raise them a bit, due to inflationary expectations and the Fed’s surprise decision to concentrate its purchases on medium- rather than long-term bonds) but not when it’s part of the Fed’s zero-federal-funds-rate policy?  I’m thinking the selective outrage might have something to do with President Obama’s meetings with Asian and G-20 leaders this week.  The Chinese are happy to grasp at this new straw in order to deflect attention from their more blatant attempts to keep the yuan low, the Europeans are seeking some company for their draconian budget-slashing misery, and Greenspan is bandwagon-jumping as usual.

P.S.  Although I think this particular criticism of QE2 is bogus, I am against QE2 for a host of other reasons, which I’ll get to in another post sometime.

Why is the Fed still paying interest on reserves?

12 November 2010

Matt Yglesias, channeling Scott Sumner and Louis Woodhill, makes a good case that the interest rate on bank reserves, which was 0% up until just a couple years ago, should be lowered from its current 0.25%.  He suggests lowering it to 0.15%; I’d go lower, to 0.10% if going back to zero is out of the question.

Paying interest on reserves made some sense back in 2008 when the Fed was flooding the system with reserves in order to prevent a deflationary catastrophe.  The fear then was that when the economy picked up, banks would start loaning those reserves out and unleash a huge inflation; to prevent that, the Fed put an interest rate on reserves that could be raised whenever it became necessary to “soak up” those reserves.  But nothing like that is happening now — instead we have a banking system with about $1 trillion in reserves that they’re not loaning out, and the amount is likely to grow as the Fed makes its monthly $75 billion purchases of longer-term bonds under QE2.  The string the Fed is pushing on ought to move a little more if the interest rate on reserves were closer to zero.  0.25% might not sound like much, but it’s more than the federal funds rate on any given day and more than the short-term Treasury bill rate.  If banks could only earn 0.10% on reserves, I think they’d be more likely to loan them out, i.e., monetary policy would be more likely to work.

When the recovery finally shifts into high gear (and it could be sooner than most of us think, considering all the “green shoots” among leading indicators at present) and banks start loaning out those reserves, then the Fed can raise the interest rate on reserves.  But keeping it this high now gives preemption a bad name.

Keep on working

8 November 2010

Some thoughts on last Friday’s BLS employment report, otherwise known as “the good one”:

The employment report is pretty good news indeed, especially as regards job creation in the private sector.  151,000 jobs were created overall (in the private and government sectors combined), about twice as many as market analysts had projected.  The increases in the length of the workweek and in overtime hours are also welcome news, as these are considered leading economic indicators.  (This is because companies often cut the hours of their workers during a recession and extend the hours of their workers in the early stages of a recovery rather than take on the overhead costs of hiring new workers.  As the recovery gains steam, they’ll actually hire new workers.)

Alas, the increase in employment, though much larger than expected, is still not large enough to reduce the unemployment rate, still at 9.6%.  The increase in employment was offset by new entrants into the labor force, not all of whom found work. All of this happened without any big changes in the labor force participation rate or the more comprehensive U-6 unemployment rate, which is still around 17%.

The increase in weekly paychecks is particularly good news, as Chris Isidore of CNN/Money notes.  Isidore points out that the increase comes not so much from higher hourly wages as from longer workweeks.  He mentions that 318,000 fewer workers are involuntarily working part-time instead of full-time jobs, compared with last month, and that is a big positive deal for a lot of people.

However, the increase in average weekly hours is not all that big; 318,000 is not that big a number compared with total employment (131 million).  The 1.8% month-to-month increase in average weekly hours was the largest in 26 years, as Isidore notes, but that too is less of a big deal than it might seem.  It’s an increase from 33.7 hours to 34.3 hours.  If you’re rounding to whole numbers, as I like to do to keep things less “statsy,” you’d miss the increase entirely.

A number worth trumpeting, as Isidore does, is the 3.5% year-to-year increase in average weekly wages, from September 2009 to September 2010. That’s especially good considering that inflation over the same span was about 1%, which means a 2.5% increase in real weekly wages.  A real wage increase of that magnitude was normal once upon a time (1947-72 and the second half of the 1990s), but for most of the past 40 years real wages have grown very slowly or hardly at all.  We’ll take it.