“Crowding Out”: Coming Soon to a Lender Near You

In a “closed economy,” savings is the source of all capital (textbook: “a country can invest no more than it saves”). With open economies, there is the possibility to tap the savings of other countries. It is the ability of the U.S. to borrow from the rest of the world that has permitted us to have solid growth in consumption as well as in investment (new homes construction, commercial construction, industrial equipment, etc.) which has amounted to around 15 percent of GDP while our savings had amounted to substantially less.

The economy imploded in the fourth quarter of 2008 when consumers decided to move their savings rate (out of disposable income) from near-zero levels to around 5 percent. (Sounds good but it’s nothing to brag about. In the late 1970s, the US savings rate was over 10 percent.) This meant that retail sales declined by hundreds of billions of dollars, starving the bloated number of strip malls, retailer outlets and restaurants built to feed our partying during the 2003-07 period. Click here to read the full post and comment (Insights subscribers) »

How to Get Banks to “Right-Size” Themselves

As a reminder, Dr. Dunkelberg serves as Chairman of the Board of Liberty Bell Bank.

Assuming that regulators decide that banks are indeed too large, how might a reduction in size be accomplished? There is already in place a limit on the share of domestic deposits a bank may have (although recent “resolutions” of troubled banks have resulted in these limits being exceeded). But banks were able to grow using foreign deposits (not insured by the FDIC) and by issuing bonds (guaranteed by the FDIC until recently). To be more effective, setting a minimum level for the ratio of core deposits to assets would limit growth funded by bank debt or foreign deposits and reduce leverage. For community banks, this ratio is very high since few issue bonds or have foreign deposits.

Capital requirements should also be increased with asset size. This will discourage growth since it lowers the return on capital unless increased size really produces the cost economies or extra revenues that supporters of big banks argue are present. Federal Reserve research suggests cost economies disappear at around $10 million in assets, but there is disagreement. By increasing capital requirements, banks won’t grow unless it really pays.

FDIC insurance charges should be applied to assets (less capital) instead of core domestic deposits. It is the assets that put the deposits at risk, so the insurance tax should be applied there, and should be raised as the assets carried on the balance sheet of the bank become more complex and opaque.

Off-balance sheet and “repo” activities should be more transparent and better monitored, making them more difficult to execute, and therefore rarer. These can’t be used by banks to avoid compliance (for example, by temporarily offloading those “troubling assets” that might violate regulations in a repo in exchange for wonderful cash or Treasury securities).

These regulatory changes would raise the cost of getting large, force the capital increases needed as risk rises, and force banks to actually realize the cost savings or benefits allegedly produced by “bigness” so that the return on investment will not be compromised. Regulators would not need to arbitrarily set limits on bank size since the regulations would compel banks to raise capital as needed and realize alleged scale economies to maintain a competitive return on investment. With regulations like these in place, very large banks would either prove to be profitable while being better capitalized and less risky or they would have to shrink, reduce leverage and opacity to earn a competitive return for shareholders. This is just what the “regulator doctor” ordered.

The US Economy Keeps Rolling Along

Yesterday, the BEA released the first (“Advance“) estimate of GDP for the first quarter of 2010. My forecast for 3.0 percent real GDP growth at a seasonally adjusted annual rate (SAAR) was very close to their published 3.2 percent. It’s always a good feeling to be so close to what the BEA gives us.

This is a far more sustainable pace than the 5.6 percent at a SAAR real GDP growth rate of the fourth quarter 2009. Most forecasters believe 3.2 percent is about the long-run potential growth rate for the US economy. Of course, we should be able to exceed that for two or three years as we make up all the slack in the economy caused by the 2007-2009 recession. Click here to read the full post and comment (Insights subscribers) »

Retail Sales Were Very Good in March and the First Quarter

The Census Bureau reported that total retail and food services sales in March were $363.2 billion on a seasonally adjusted basis. That was up 1.6 percent from February and a huge 7.6 percent from a year earlier. It was the best month for this very important part of the US economy since September 2008. That level was $365.9 billion. That was also the month when the collapse of Lehman Brothers pushed the entire world into a financial crisis. So, at least in nominal terms, retail sales are finally back.

Total retail and food services sales for the first quarter were $1.1 trillion. This was up 5.5 percent from the same period in 2009.

Every major category of retail posted higher sales this March than last. Only two major categories were lower in the first quarter than a year earlier. These were electronics and appliance stores (-1.6 percent) and building materials and garden equipment and supplies dealers (-3.1 percent). The former group probably had lower nominal sales because of the huge price decline in high-definition big screen television sets and other electronic equipment. The latter group continues to struggle with declining housing completions.

Gasoline stations posted a 26.7 percent increase from a year earlier in the first quarter. That reflects higher gasoline prices.

Nonstore retailers were up 12.3 percent for the quarter. That shows the continued popularity of catalogs and the internet.

Motor vehicle dealers saw an 8.8 percent rise in the first quarter. That came despite all the problems of Toyota.

Even furniture and home furnishings stores were up 0.9 percent for the quarter. That’s their first increase in a long time.

Since consumer spending accounts for 70.0 percent of total GDP, these robust results are very good news indeed. Get out there and keep shopping–the country needs the growth!

Inflation Is No Problem Now

On April 14, the BLS gave us the CPI data for March. A surge in the “Fresh Fruits and Vegetables” index lifted the total to 217.631 (1982-1984=100), up 2.3 percent from a year earlier.

However, the CPI-U less food and energy index was 221.059, up only 1.1 percent from a year earlier. Click here to read the full post and comment (Insights subscribers) »

Industrial Production Is Rebounding As Well

If you want to look for clear evidence of a V-shaped recovery, then the industrial production (IP) statistics are a great place to visit. On April 15, the Federal Reserve Board released the latest in a string of strong reports on this critical part of the US economy. Click here to read the full post and comment (Insights subscribers) »

Some Good Employment News at Last

The month of April has brought us three reports that indicate that growth in employment may finally have returned to the US in March. On April 2, the BLS released “The Employment Situation” for March and the first piece of good news was that nonfarm payroll employment rose by 162,000 jobs in March. This was the first statistically significant increase in this closely watched measure since December 2007, when the recession began. There were small increases in November 2009 and January 2010, but the net change has to be larger than 108,000 jobs to be statistically significant.

The second bit of good news was that the total number of people employed rose by 264,000 in March after an increase of 308,000 in February. We had not seen two consecutive months of growth in this measure, which directly influences the unemployment rate, since October and November 2007, just before the recession began. The unemployment rate held at 9.7 percent for the third straight month. That’s not wonderful news, but it sure beats continuing increases.

On April 6, the BLS released the JOLTS report for February. That report said there were 2.7 million job openings on the last business day of February.

For the first time, the BLS released a very interesting group of graphs with analytical information with that report. These showed that the number of job openings hit its recent peak of 4.8 million in March 2007, well before the recession started. It fell to 2.3 million openings in July 2009. Since then it has gradually moved up to 2.7 million.

The JOLTS report also showed that in February, for the first time since the recession began, the number of new hires was equal to the number of job separations. Both totaled 4.0 million in February.

For the twelve months ended in February 2010, there were 48.3 million people hired and 51.5 million people separated. That’s a net employment loss of 3.2 million, which is 2.2 million better than where we were in December 2009.

On April 16, the BLS released the state employment data for March. Following the good news from the national report, this release showed that 33 states and the District of Columbia had a seasonally adjusted increase in nonfarm payroll employment in March as compared to February. Three states (Alaska, New Hampshire and North Dakota) and the District of Columbia had increases from March 2009.

Only Alaska, North Dakota and the District of Columbia posted increases in nonfarm payroll employment since the recession began. Nevada has lost 13.7 percent of its jobs since then, followed by Arizona (-10.7 percent), Michigan (-9.9 percent), Florida (-9.7 percent), California (-8.8 percent), Oregon (-8.8 percent), Georgia (-8.3 percent) and Idaho (-8.1 percent).

In terms of total employment, only Texas (1.4 percent) and Alaska (0.1 percent) have shown increases since the recession began. That should change dramatically over the course of 2010.

Great News from Manufacturers

On April 1 the Institute for Supply Management (ISM) gave us wonderful news. They told us that their purchasing manager’s index (PMI) improved to 59.6 percent in March from an already high 56.5 percent in February.

That was the highest reading since July 2004. If the first quarter levels of the PMI were maintained for a year, the ISM said that would be consistent with real GDP growth of 5.4 percent. Wouldn’t we all love to see that?

There are 18 manufacturing industries included in the ISM survey. Every sector except one (plastics and rubber products) reported growth in March.

Even better news was in the inventories index, which was 55.3 percent. That meant March was the first time, after 46 consecutive months of decline, that manufacturing inventories have expanded. Some ten industries reported higher inventories.

The March employment index was 55.1 percent. There were 13 of the 18 manufacturing industries reporting increased employment last month.

All of these things are indicators of a growing economy. That’s terrific news for sure.

Jobless Claims Are Finally Encouraging Again

On April 1 the US Department of Labor told us that the number of people filing first-time claims for unemployment insurance fell to 439,000 for the week ended March 27. That matched the level for the week ended February 6.

Both of these were the lowest since the week ended August 23, 2008. That was before the September 15 collapse of Lehman Brothers set off a global collapse.

We probably need to see claims constantly below 400,000 a week to signal robust improvement in the employment numbers. That should come soon.

No Bottom-Line Responsibility = Financial Crisis

Cities, states and countries are now facing serious fiscal problems which arise from the simple fact that public managers face no bottom-line accountability. Managers, with horizons driven by election cycles, not the longer term interests of the “company,” too easily cave in to special interests and public pressure. When the garbage collectors go on strike, the pressure on city politicians to settle is strong indeed. Over the past few decades, government has grown in size and largess.

In California, prison guards and highway patrol officers earn up to $100,000 a year (with overtime) and can retire as early as age 50 with a benefit that can reach 90 percent of income [The Economist, February 27, 2010, page 38]. Even in small cities, pay and retirement packages for government workers far exceed comparable jobs in the private sector.

In Greece, the retirement age is 61 and the retirement benefit is 80 percent or more of the last pay earned for public and private workers (and they receive 14 “monthly” paychecks per year).[Financial Times, March 1, 2010, page 10]. These stories are replete in city after city, state after state and country after country. Private companies cannot survive such mismanagement. General Motors is a classic example.

Over the decades, the UAW, with pressure from government to avoid strikes and promises of protectionism, helped destroy the company. The bottom line was terrible, but politics trumped rationality, and GM is now a government-owned enterprise. Taxpayers will never recover their (involuntary) “investment” in GM which many feel should have been allowed to go through a structured bankruptcy that would have kept what was good and shed the units and contracts that guaranteed that GM would remain unprofitable in a competitive market. This administration has made clear its intent to support public and private unions in spite of these growing problems.

Add to this extended periods of cheap and easy credit which further lowers the cost of caving in to pressure and the stage is set for the fiscal disasters we face today. The larger the role of government in a country, the larger the potential for inefficiency and mismanagement, corruption and graft. Government entities avoid “bankruptcy” by taking an ever-rising share of private-sector income, but even this has it limits as we are about to discover (40 percent of tax filers don’t pay any tax).