Posted on July 4th, 2013 No comments
This one’s by Dr. William Dunkelberg, Chief Economist for NFIB
If you ever doubted that the Fed is driving the stock and bond markets, the events of the past few weeks should put your doubts to rest. For investors (to be distinguished from “traders”), times are confusing. The Fed’s artificial reduction in interest rates has artificially bloated equity prices. It has also sent bond prices to all-time highs, setting us up for potentially large “mark-to-market” changes in asset values when (not if) interest rates rise. Some refer to this as a “bond market bubble.” In the process, consumers’ net interest income has been cut by half a trillion dollars a year, not very supportive of spending.
The way monetary policy was supposed to work was that when stimulus was desired for the economy, the Fed bought Treasury securities from the private sector, creating liquidity, lowering interest rates and stimulating borrowing and spending. When the economy needed to be cooled, the Fed reversed its policies and raised interest rates to dampen spending by selling Treasury bonds to the private sector.
But now, the Fed forecast for the economy seems to anticipate slowing (the most optimistic of the FOMC forecasts were lower), yet it is talking about “tapering” its purchases of assets, the reverse of a policy one would think is needed for an economy that might be fading? And it is missing both its targets, unemployment is too high and inflation is too low, so is “tapering” the right policy posture? Both “misses” would seem to invite more QE, not less (although it seems odd to have the Fed trying to create inflation rather than fight it). There’s a lot of dancing around this issue now, with dissents from both ends of the policy spectrum.
Moving away from traditional views about how policy works, it has been argued that low rates may not be stimulating real investment spending, but have inflated wealth (stocks and house prices) and this causes people to spend more and this creates jobs. That suggests Fed policy is targeting asset prices per se. Reports of consumer net worth are disturbingly well above historical trends in spite of the devastation of the Great Recession. Asset values = P x Q, the asset price multiplied by the number of assets we hold. Are we valuing our assets at unrealistic prices? Debt loads are still heavy, and this is “net” worth, did we repay (or write off) a lot of it?
Interest rates are not the only determinant of spending decisions. Borrowed money must be invested profitably (so the loan can be repaid) and uncertainty about the course of the economy (especially in the small business sector) has been high and remains so. Washington is paralyzed and unable to deal with the problems we know we face. The case for the impact of continuous injections of liquidity when interest rates are “zero” is weak and muddled, not confidence-inspiring. And the sheer size of the Fed’s portfolio and its future disposition (and impact on asset prices) adds to the level of uncertainty.
Ah, for the good old days of “Fed Watching” when no disclosures were made. It’s not clear that we knew any less then than we know now with “communication.” There are a lot more words to puzzle over and the FOMC undoubtedly spends much more time “word-smithing” than it used to, hopefully to some benefit. But it is less than clear that we are better off with all this communication.
Posted on May 4th, 2013 No comments
This is a slide show used by Douglas W. Elmendorf, Director of the Congressional Budget Office, in a presentation to an economics class at Harvard University on April 26. It is excellent.
Posted on September 16th, 2012 No comments
Jim got quoted in USA Today several days ago. Sorry for the delay–things have been crazy around here! Oh, and by the way, the Fed did take action. –Linda
Economists see Fed action as likely, but with little benefit
By Tim Mullaney, Paul Davidson and Barbara Hansen, USA TODAY
For the third time in less than four years, the Federal Reserve this week will likely move to inject a sick economy with a B-12 shot. This time, however, the Fed’s medicine may be less potent and the criticism it’s certain to receive will be magnified in the glare of a tight presidential campaign in its final weeks.
Many economists say last week’s disappointing report on job growth in August means the Fed will likely announce Thursday that it will buy more Treasury or government-backed mortgage bonds to lower long-term interest rates and stimulate economic activity. Yet they warn that uncertainty among businesses and consumers over looming federal government tax increases and spending cuts on Jan. 1 is likely to limit the benefits of any stimulus.
Stock prices have risen recently in anticipation this week of a third round of Fed bond buying, known as quantitative easing, dubbed QE3. Economists disagree more on the timing of Fed action than on the degree of its impact.
In a USA TODAY survey of 36 economists on Friday, 22 predicted the Fed will announce further bond buying this week. But all but four said more Fed stimulus would give only “a little” or no help to the economy by early next year. The more optimistic quartet predicted it would help “some.”
“When the economy is running at less than 2% growth and there are so many domestic uncertainties and geopolitical risks we’re facing, … you’re not going to significantly increase hiring at this point,” says Bernard Baumohl, chief global economist at the Economic Outlook Group.
Friday’s jobs report for August seemed to underscore Baumohl’s view. Counting last month’s gains of 96,000 jobs, the economy has averaged 139,000 new jobs a month this year. That’s well below the average pace of 153,000 jobs a month for all of last year.
The unemployment rate dropped, from 8.3% to 8.1%, but that owed more to a sharp reduction in the labor force rather than more jobs. The percentage of adults working or looking for work fell to 63.5%, the lowest since 1981. The government counts 12.5 million unemployed people, 40% of them jobless for six months or more.
Fed Chairman Ben Bernanke has called the labor market’s stagnation “a grave concern” that could damage the U.S. economy for many years.
The minutes of the last Fed meeting, July 31-Aug. 1, show many Fed policymakers believed then the Fed would have to take further steps “fairly soon” unless new data pointed to “substantial and sustainable strengthening in the pace of the economic recovery.” That’s why many economists say Friday’s jobs report points to Fed action this week. “The Fed will act,” says Mesirow Financial chief economist Diane Swonk. “The preconditions have been met.”
Nigel Gault, IHS Global Insight’s chief U.S. economist, predicts the Fed this week will launch a bond-buying program worth $500 billion to $600 billion that will be concentrated in mortgage-backed securities. It’s also likely to extend its public guidance on how long it is likely to keep interest rates low from late 2014 out to mid-2015, he says. “We don’t think these measures will be very effective in boosting growth, but for the Fed, it’s a question of trying to do what it can,” Gault says.
Critics of the Fed’s efforts to put more money into the economy — including Republican presidential nominee Mitt Romney— say the Fed risks creating serious inflation in years to come, although inflation is low now. They also question whether further drops in interest rates from already historically low levels will do much good. The U.S. average for a 15-year fixed-rate mortgage is 2.86%, Freddie Mac says. That’s down from 5.64% in September 2008.
“Can you imagine a single consumer deciding to buy a house or a vehicle because financing costs might be even lower than they are now?” says economist James Smith of Parsec Financial.
Other economists say the Fed buying mortgage bonds could do some good for the still-weak housing market.
“The lower rates will fuel more home buying and refinancing,” says Mark Zandi, chief economist of Moody’s Analytics.
Just the prospect of another round of Fed stimulus is lifting stocks and therefore household wealth, Zandi says. But business uncertainty will undercut the impact of Fed action, he and others say.
Large companies are flush with cash and profits and they should be expanding and investing in new products or services to increase earnings, Zandi says. “It’s just not happening as fast,” he says. “They lack the animal spirits.”
While new Fed stimulus could inject $600 billion into the economy, the fiscal-cliff issues related to next year’s federal budget threaten to suction that much or more out of it, says Richard Moody, chief economist at Regions Bank in Birmingham, Ala.
The fiscal cliff refers to the scheduled expiration of the Bush tax cuts and the 2010 payroll-tax cut and $1.2 trillion in automatic spending cuts over 10 years starting in 2013.
The non-partisan Congressional Budget Office says the combination could cause a recession if they all go into effect in January.
Business investment cooling
Regions Bank is already hearing from businesses that they are hiring and investing less because they don’t know what Congress will do, Moody says.
There are more signs of the investment slowdown, too. Orders for core capital goods have declined for four months in a row, Moody says. Chipmaker Intel said Friday that it would miss analysts’ projections for third-quarter sales by about $1 billion because of slower growth in demand for personal computers.
Overall demand for technology is still growing but more slowly than had been expected, says Crawford Del Prete, chief research officer at industry research firm IDC. IDC will cut its forecast for technology-spending growth in 2012 to 6% on Monday, from slightly more than 7%, he says.
Even a compromise to the fiscal cliff, in which Congress lets some but not all tax increases go forward, could take as much as 2 percentage points off next year’s economic growth, Moody says.
Still, there are reasons to expect economic improvement next year, and they have little to do with politics. Individuals are nearly done with a six-year process of reducing their debt loads, positioning them to spend more next year, Moody says.
Improving markets for housing should lead to more home building next year, Swonk says.
Those forces will help the economy more than further Fed stimulus, Moody says. But Swonk argues that with so many Americans still unemployed, Washington can’t sit on the sidelines. “These are real lives here,” Swonk says. “This is not some fiscal game we are playing.”
Posted on September 3rd, 2012 No comments
The following guest post was written by William Dunkelberg, chief economist for the National Federation of Independent Business and professor of economics and former dean of the Fox School of Business, Temple University. It is copied from the Forbes website where it was posted on August 24.
In a May 8 editorial, Bloomberg editors proclaimed “The truth about uncertainty is that it’s (mostly) untrue.” Their concluding sentence: “You can blame Obama for many things, but uncertainty isn’t one of them.” Whatever the cause, “uncertainty” is certainly a major concern for America’s small business owners (who produce about half of the nation’s GDP and employ about half of the private sector workforce). The National Federation of Independent Business periodically polls a sample of its members to identify their concerns (Problems and Priorities available at NFIB.com/ppr). The survey offers 75 issues for owners to rank on a scale of 1 to 7 and then aggregates the responses to identify the top issues (3,856 owners responded).
No surprise, in the number one position (for the past 25 years) is rising health care costs. The health care legislation passed by the Democrats is in place and will be more fully implemented in the next two years. It contains over 20 new taxes and leaves the writing of much of the regulator detail to the Secretary of HHS. It will take a lot of effort just to become aware of all the applicable regulations much less complying with them. In the meantime, the cost of providing insurance to employees has continued to rise, with no end in sight. Plenty of “uncertainty” here regarding new regulations, reporting requirements, record keeping and figuring out the cost of a new employee.
In SECOND place, “uncertainty about the economy” (will there be another recession) and in FOURTH place, “uncertainty about government policy” (will we become Greece? That’s the fiscal path we are on). Uncertainty is great when two possible outcomes are very different and the chances that one or the other will occur are 50/50. In the upcoming election, the outcomes for policy are very different depending on whether Obama is re-elected or Romney prevails. A weather forecast of severe thunderstorms or sunny skies with a 50/50 chance will probably keep most picnickers home (vs. partly sunny or partly cloudy, not much difference). This 50/50 election has produced recession level optimism and hiring and capital spending plans. Owners are not going to bet their own money on such an uncertain proposition. Better to wait for a resolution, certainty is better than uncertainty. However, waiting means slow economic growth.
Energy costs took THIRD place, sensitive to the cost of gas and power at the time of the survey. But, prospects for lower energy costs aren’t good. Gas was under $2 a gallon 4 years ago, now almost at $4. Natural gas is cheaper but not widely used yet. A lot of the uncertainty about energy costs is related to regulatory decisions about drilling, pipelines, and EPA regulations as well as developments in the Middle East. It is hard to predict what will happen there. High energy costs are simply taxes collected by the owners of energy who are mostly foreign (although some feel that we can soon be fairly self-sufficient, producing most of the oil and gas we need domestically).
In FIFTH place, “unreasonable government regulations.” Many studies have documented the hours spent filling out forms, trying to learn about regulations, getting permits, making sure handrails are at the right height (perhaps an “urban legend”, one owner is said to have been forced to move the handrail to the other side of the stairway to “comply”, causing a number of falls to occur). Estimates of compliance costs put them at nearly 50 percent higher than the per worker cost at large firms. This dissipates valuable financial capital and perhaps most importantly, the time of the entrepreneur, the most valuable asset of a small company.
SIXTH, SEVENTH and EIGHTH were “federal taxes on business income” (the source of capital to finance growth in small firms), “tax complexity” and “frequent changes in the tax code.” The time required to deal with tax filing bleeds the owners time, diverting attention from the firm’s main task of providing good products and services and good jobs. And, taxes bleed the source of capital that most firms use to finance growth. Profits this year planned to be used to expand the next year can be significantly reduced by current period taxes.
Fourteen of the top 20 problems (excluding “cash flow” and “profits” which are not specific problems) are directly related to government taxes, regulations or actions. Dealing with government is a “regressive” tax on small firms who do not have the size to support specializations in their staffs to handle the regulatory burden. Each agency is an independent unit, not considering the impact of other agencies’ actions on the firms it targets. Administrative justice imposed by federal, state and local regulators (guilty until proven innocent when a citation is received) drains substantial amounts of capital and time.
In contrast, getting long and short term financing placed 56th and 58th respectively in spite of all the media attention this received. Only 3 percent report credit as a top problem.
Restoring the vitality of the private sector that has been the engine of growth and wealth creation will require the politicians to address the adverse impact of a growing government sector on its citizens. Government doesn’t create wealth or jobs, only the private sector can do this.
Posted on May 24th, 2012 No comments
The Xinhua News Agency is the official press agency for the People’s Republic of China. Jim was quoted by them in a response to the World Bank’s May 22 report, “Capturing New Sources of Growth.”
The article in which he is quoted appears on the English version of Xinhuanet.com and is titled, “WB report sees slower growth in East Asia, calls for shift.”
WB report sees slower growth in East Asia, calls for shift
English.news.cn 2012-05-23 13:33:47
by Matthew Rusling
WASHINGTON, May 22 (Xinhua) — The economic growth of East Asia remains robust but is losing steam, and the region should shift further from relying on exports to spurring domestic consumption, said a World Bank (WB) report released Tuesday.
This year, regional growth will hover around 7.6 percent, with slower expansion in China pulling down the regional aggregate, according to the report, entitled “Capturing New Sources of Growth.”
Developing countries in East Asia and the Pacific grew by 8.2 percent last year, marking a sharp fall from the previous year’s nearly 10 percent, found the report.
Last year’s stunted pace was largely due to lower-than-expected growth in manufacturing exports and supply disruptions sparked by the 2011 earthquake that rocked Japan and severe flooding in Thailand.
Domestic demand and investment were generally strong, aided by the loosening of monetary policy in some countries.
The global lender reiterated its frequent recommendation that the region reduce its reliance on exports and shift further toward internal consumption.
Such a shift, it said, is especially important as the eurozone stumbles and demand takes a hit amid the Greece-Spain twin crises.
The European Union, along with the United States and Japan, accounts for more than 40 percent of the region’s exports, and European banks provide one-third of trade and project finance in Asia.
“As external demand is likely to remain weak, countries in developing East Asia and Pacific need to rely less on exports and more on domestic demand to maintain high growth,” the report said.
“Already, many countries are moving in this direction, but there is further scope for rebalancing,” it added.
WB economist Bryce Quillin, lead author of the report, said that some countries will need to stimulate household consumption while some others should consider boosting investment, particularly in infrastructure.
“Governments would need to focus on accelerating the preparation of infrastructure projects,” he said.
James F. Smith, chief economist at Parsec Financial, a U.S. financial planning firm, said the challenge facing these countries has more to do with increasing trade with each other than purely raising domestic consumption.
“These countries should also attract growing foreign direct investment, assuming they have reasonably open economies and no restraints on capital flows,” he said.
However, he added that what he called the coming “financial implosion” of Japan will mark a huge challenge for Asia, much more than any difficulties stemming from Europe or North America.
ASIA’S RICH-POOR GULF WIDENING
Overall, the region is doing better than any other developing area worldwide.
In 2011, East Asian growth was about 2 percentage points higher than the developing country average, and poverty continues to fall, the WB report found, noting that the number of people living on less than 2 U.S. dollars a day is expected to decrease in 2012 by 24 million.
Still, about one-third of the people in the region, roughly half a billion men, women and children, still live in poverty, the report said.
Some economists fret that widening income gaps could spark discontent that could derail poverty reduction and slow growth.
“Asians today are richer, are healthier, more educated and have a better quality of life,” said Rajat M. Nag, managing director general at the Asian Development Bank during a press conference in Washington unrelated to the World Bank’s report. “However, there is the other Asia….which is not as shining.”
Indeed, two-thirds of the world’s poor are in Asia, around 700 million people lack access to clean water, and 83 million children in developing Asia are underweight, he said.
“It means 83 million people have already been doomed for life,” he said, adding that malnutrition at such an early age stunts intellectual growth.
Children from the poorest families are five times more likely to be out of school, compared to their wealthier peers, and 20 times less likely to attend university, he said.
“What inequality does, it starts to limit access to opportunity,” he said. “If you are not educated, you cannot participate in the growth process, which is generally… high tech, high skill.”
Editor: Chen Zhi
Posted on April 22nd, 2012 No comments
[Jim spoke this past week at the 28th Annual Crystal Ball forum here in Asheville. Here's the link to the article that appeared in the Asheville Citizen-Times]
Posted on March 14th, 2012 No comments
One very important aspect of the economy and certainly one that gets a huge amount of attention from the media, ordinary consumers and politicians is employment. Here the news has been quite good.
For example, on March 9 the Bureau of Labor Statistics (BLS) told us that there had been an increase of 233,000 private-sector nonfarm payroll jobs during February. After accounting for the loss of 6,000 government jobs, the net increase was 227,000 nonfarm payroll jobs on a seasonally adjusted basis. Click here to read the full post and comment (Insights subscribers) »
Posted on January 15th, 2012 No comments
On January 6 the BLS gave us the best news on employment growth we’ve had in years. They said that nonfarm payroll employment rose by 200,000 jobs on a seasonally adjusted basis from November to December. That brought the total gain in such jobs during 2011 to a total of 1,640,000.
This number will probably be revised upward when the data for January 2012 are released on February 3. That’s because those data will be revised in the annual benchmarking of the payroll data to the comprehensive job counts done every March.
On September 29, 2011, the BLS reported this revision for March 2011 was likely to be an increase of 192,000 jobs from what is currently shown. Some 140,000 of these were in the private sector, mostly in the “Trade, transportation and Utilities” and the “Professional and business services” categories. There was an increase of 52,000 jobs in the government sector.
Total employment grew by 1,570,000 people during the course of 2011. The unemployment rate was 9.1 percent (as revised) in January, June, July and August, all on a seasonally adjusted basis. That fell to 8.5 percent in December, the lowest since the 8.3 percent of February 2009.
The news was particularly good for college graduates age 25 and over. There were 47,131,000 of us in the civilian labor force in December, which gave us a labor force participation rate of 76.0 percent, far above the average of 64.0 percent.
A full 45,201,000 of us were employed and only 1,930,000 were unemployed. That resulted in an unemployment rate of 4.1 percent.
More good news from the BLS came in the JOLTS report of November, which was released on January 10. That showed there were 3.2 million job openings on a seasonally adjusted basis at the end of November.
For the 12 months ending in November, some 48.6 million hires were made. There were 47.2 million separations. Thus, there were 95.8 million hiring and separating decisions made to get a net increase of 1,400,000 nonfarm payroll jobs.
There has never been another labor market so dynamic as that of the United States. My expectation, as described in the article about my employment outlook in the December 7 issue of Business Week is that the pace of employment creation will pick up a lot in 2012.
We could easily see over 3.0 million net new nonfarm payroll jobs created this year. It should be fun to watch the employment news throughout 2012–a welcome change.
Posted on January 15th, 2012 No comments
On January 12 the Census Bureau gave us the preliminary (“Advance”) data for retail sales for December and the full year of 2011. They said total retail and food services sales were $4.7 trillion in 2011. That was a new record, up a big 7.7 percent from 2010.
Total retail sales alone were $4.2 trillion, up 7.9 percent from 2010. Every major category posted increases for 2011.
The largest growth was in sales at gasoline stations. They rose 17.7 percent to $533.6 billion. That was due to price increases, of course.
Nonstore retailers were in second place, up 12.5 percent to $397.0 billion. Motor vehicle and parts dealers had the third largest increase, up 9.9 percent to $817.9 billion.
Miscellaneous store retailers posted an increase of 8.1 percent to $121.1 billion, while food services and drinking places racked up sales of $494.2 billion in 2011, an increase of 6.1 percent. Clothing and clothing accessory stores saw sales hit $226.5 billion, a rise of 5.9 percent. Building materials and garden equipment and supply dealers were right behind with a 5.7 percent increase to $300.2 billion.
General merchandise stores did not do very well in 2011. Their sales rose only 3.5 percent to $630.9 billion.
Reflecting big declines in TV pricing, electronics and appliance stores saw sales eke out only a 0.4 percent gain in 2011. Their total was $100.9 billion.
Consumers may have been miserable in 2011, as reflected in every survey of consumer sentiment, but that sure didn’t stop them from spending. Rising employment and incomes in 2012 should guarantee another year of record retail sales and overall personal consumption expenditures.
Posted on October 30th, 2011 No comments
On October 27 BEA said that real GDP in the third quarter of 2011 was running at a SAAR of $13,352.8 billion. That finally exceeded the $13,326.0 billion set in the fourth quarter of 2007. Click here to read the full post and comment (Insights subscribers) »