global glass onion

reality is only those delusions that we have in common...

Friday, September 4, 2015

week ending Sept 5

(preview)

The Federal Reserve Needs To Raise Rates So That It Can Cut Rates! -  Confused? The Fed raising interest rates in order to be able to cut them at some point in the future is the rationale I am hearing on the business news! The reason is that if (when) the United States economy heads into another recession, the Fed will have ammunition available to be able to take proactive steps to address the problem (beyond QE4 of course)! Follow up: So let's get this straight...The Fed has kept interest rates at 0% for six or so years to aid the economy while at the same time increasing its balance sheet by trillions of dollars and yet the best the U.S. can muster is GDP growth rate of 2% or less? At the same time that the monetary spigot has be wide open, personal income has barely grown, job security is a thing of the past and the jobs that are being created from all of the easing are either part-time or lower salary. And further, while the rich have gotten richer (thanks to a skyrocketing stock market fueled by the aforementioned 0% interest rates), if you took a poll of Americans I would wager that a majority would tell you they feel as if we have never left recession after the financial crisis! Now the Federal Reserve needs to raise rates so that if we officially reenter a recession they will be able to lower them again? To tell you the honest truth at this point in time I would venture to say that few if any continue to have faith in how the Fed is managing its extremely important mandate! And as a bit of an economic primer, the Fed raises rates to cool off an overheating economy and to fight inflation. At the present time we have neither (although some would argue that inflation is in fact a problem) but even after the stabilization of the economy post-financial crisis, the Fed has decided that no time was the right time to begin normalizing interest rates!

If The Fed Is Always Wrong, How Can It's Policies Ever Be Right? - One of the most curiously persistent surrealisms of Washington, DC is the reflexive deference given the Federal Reserve System. The Washington elite tends to accord more infallibility to the Fed than do Catholics the Pope. Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui: “The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.” Even the government’s official budget forecasters are dubious of the Fed’s own forecast. This is a theme that Mui has touched on before. In 2013, she wrote Is the Fed’s crystal ball rose-colored?:The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized. In January 2011, Fed officials predicted that GDP would grow around 3.7 percent that year. It clocked in at 2 percent. In January 2012, they anticipated growth of about 2.5 percent. We ended up with 1.6 percent. Dr. Richard Rahn at the Washington Times last April crisply noted: The Federal Reserve had forecast the U.S. economy to grow about 4 percent near the beginning of each year for the last five years. But during each year, the Fed was forced to reduce its forecast until it got to the actual number of approximately 2 percent. (Other government agencies have been making equally bad forecasts.) These mammoth errors clearly show that the forecast models the official agencies use are mis-specified and contain incorrect assumptions.

Optimistic About Inflation, Stanley Fischer Suggests That Fed Will Stick to Plan on Rates - The Federal Reserve’s vice chairman, Stanley Fischer, said on Saturday that he saw “good reason” to expect that inflation would rebound to a healthier pace as the American economy continued to grow. The remarks, delivered at an annual conference hosted by the Federal Reserve Bank of Kansas City, reinforced other recent indications that the Fed remained on course to raise interest rates this year. Mr. Fischer said on Friday that the Fed’s policy-making committee would consider acting when it meets in September, adding that economic conditions in the United States were approaching the standards the Fed has said would be necessary for it to raise rates. His remarks on Saturday were highly anticipated after days of turmoil in financial markets that raised questions about whether the Fed’s plans had changed. Mr. Fischer, an important adviser to the Fed’s chairwoman, Janet L. Yellen, was also stepping into a void created by Ms. Yellen’s decision not to attend this year’s Jackson Hole meeting. The Fed said after its meeting in July that it wanted to see “some further improvement in the labor market” before raising rates. The next week, the Labor Department announced that the economy had added an estimated 215,000 jobs in July. “We now await the results of the August employment survey,” Mr. Fischer said on Saturday, “which are due to be published on Sept. 4.”A   s for inflation, the Fed has said repeatedly that it will act based not on observed inflation but instead on its expectations for future inflation. .The Fed’s preferred measure of inflation shows that prices rose 0.3 percent during the 12 months ending in July, well below the 2 percent annual pace the Fed considers healthy. A narrower measure excluding food and oil prices, which the Fed regards as more predictive, increased 1.2 percent over that same period.Inflation by both measures has stayed below 2 percent for more than three years.

Marking Beliefs to Market, Stan Fischer edition -- Brad DeLong Friday morning: I cannot help but note strong divergence between the near-consensus views of Fed Chair Janet [Yellen]‘s and Fed Vice-Chair Stan [Fischer]‘s still-academic colleagues and students that tightening now is grossly premature, financial markets’ agreement with the hippies as evidenced by the ten-year breakeven, commercial-banker and wingnut demands for immediate tightening, the extraordinarily awful performance since 2007 of not all but the average regional Fed president as revealed in the transcripts, and the Federal Reserve’s strong predisposition to an interest-rate liftoff soon. Prolix but accurate, and with the strong implication that Yellen and Fischer Know Better, but are constrained by their cohort. Stan Fischer, Saturday morning (via Mark Thoma, whose presentation is more accurate and informative):  [B]ecause monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening. As I said before—to the apparent dissatisfaction of those who want to be polite losers or believe that “well, they’re saying the right things now” is redemptive and not damning— who of the Sensible Technocrats is worth the trouble of paying attention to when they have a chance to do something in government and make a point of forgetting everything they have learned?

Fed Appears to Hold Line on Rate Plan - WSJ: .—Federal Reserve officials emerged from a week of head-spinning financial turbulence largely sticking to their plan to raise U.S. interest rates before the end of the year. During the Federal Reserve Bank of Kansas City’s annual economic symposium here, many policy makers signaled that stock-market volatility and China’s woes haven’t seriously dented their view that the U.S. job market is improving, and that domestic economic output is expanding at a steady, modest pace. Inflation might remain low for longer thanks to falling oil prices and a strong dollar. Officials will continue to keep a close watch on markets and China. But they hope U.S. consumer-price inflation will start inching toward their 2% annual target as the economy’s untapped capacity gets used up, leaving them in position to start raising rates after several months of forewarning. “There is good reason to believe that inflation will move higher as the forces holding inflation down—oil prices and import prices, particularly—dissipate further,” said Fed Vice Chairman Stanley Fischer in comments delivered to the conference, which ended Saturday. The Fed has said it will raise rates when it is reasonably confident the inflation rate will rise again to 2%. Mr. Fischer’s comments suggested he believed the economy is closer to that point, although he pointedly avoided sending a signal about whether the Fed will act at its next meeting.

Richmond Fed’s Lacker: Case For Rate Increase Strong - WSJ: The case is strong for the Federal Reserve to raise short-term interest rates, Federal Reserve Bank of Richmond President Jeffrey Lacker said, and he suggested he might cast a dissenting vote if the Fed keeps rates pinned near zero later this month. “I’m not arguing that this economy is perfect by any means, but nor is it on the ropes, requiring the stimulus of low monetary policy interest rates to get it back into the ring,” Mr. Lacker said Friday in a speech to the Retail Merchants Association in Richmond, Va. “It’s time to align our monetary policy with the significant economic progress that we have made.” He later told reporters he had not yet decided whether he would cast a dissenting vote at the Sept. 16-17 policy meeting if the Fed doesn’t raise rates. He didn't dissent in June. But “we’re not in the same situation we were in June, so my attitude towards waiting further is going to be different now,” he said. Fed officials have said they expect to begin raising the benchmark federal-funds rate, which has been held near zero since December 2008, sometime this year. But policy makers appear deeply split on whether to make the first move at their Sept. 16-17 policy meeting. Federal Reserve Bank of New York President William Dudley last week said raising rates in September had become “less compelling” amid worries about a slowdown in China and volatility in financial markets. But Federal Reserve Bank of Cleveland President Loretta Mester said market volatility “hasn’t so far changed my basic outlook that the U.S. economy is solid and it could support an increase in interest rates.”

IMF calls for Fed to delay rate rise - One of the major reasons why so much angst has been felt throughout global financial markets worldwide over the past month comes from the sudden end of the unusual calm of recent years. Volatility across all asset classes remained at unusually low levels while it looked like central banks had it all under control. But the most worrying aspect of the latest swings in asset prices and investors' increasingly frayed nerves is the fear that central banks don't have the answers any more if there is another disaster. That's one reason why volatility in the local sharemarket is now at its highest level in four years. The potential for markets to feed on themselves in a dangerous way is always a risk, and is one reason the US Federal Reserve may be forced to keep rates steady this month rather than raise them. Most economists think the Fed is going to hike rates by one quarter of a percentage point this month, but traders beg to differ. According to futures traders at the CME, it's just a 27 per cent chance of a move, with a hike in December seen as a 60 per cent chance. The International Monetary Fund has waded into the debate about the Fed moving rates and has warned that the risks around the world have increased to such a level that global growth forecasts might have to downgraded again.  Since the start of 2015 most major economies have slowed, with the United States being the major exception.

Artificial Unintelligence - Paul Krugman -- I feel an even deeper sense of despair — because people are still rolling out those same fallacies, even though in the interim those of us who remembered and understood Keynes/Hicks have been right about most things, and those lecturing us have been wrong about everything. So here’s William Cohan in the Times, declaring that the Fed should “show some spine” and raise rates even though there is no sign of accelerating inflation. His reasoning: The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.  Oh dear. Cohan’s theory of interest rates is basically the old notion of loanable funds: the interest rate is determined by the supply of and demand for credit. As Keynes and Hicks explained three generations ago, this is a completely inadequate story — because it misses the reality that the level of income isn’t fixed, and changes in income affect the supply and demand for funds. So loanable funds doesn’t determine the interest rate; all it does is define a relationship between interest rates and income, the IS curve of the IS-LM model:

Challenged on Left and Right, the Fed Faces a Decision on Rates - — Conservative activists who want the Federal Reserve to raise interest rates distributed chocolate coins in golden wrappers at the local airport last week as Fed officials arrived for their annual policy retreat.  Liberal activists in green “Whose Recovery?” T-shirts formed a receiving line at the resort hotel to personalize their argument that the Fed should wait.  Sometime soon — possibly as early as mid-September and probably no later than the end of the year — the Fed plans to raise its benchmark interest rate one-quarter of one percentage point, a mathematically minor move that has become a very big deal.Investors, who always pay attention to the Fed, are paying particular attention now. The central bank has held short-term rates near zero since December 2008; the impending end of that era is one cause of recent financial market turmoil.   But the Fed’s plans have also become the latest point of contention in a broader debate about the government’s management of the American economy, pitting liberals who see a need for more aggressive measures to bolster growth against conservatives concerned that Washington and the Fed are already doing much too much. And so, as Fed officials conferred with other central bankers and academics, the liberal activists held two days of “Fed Up” teach-ins in a room directly below the main conference, while the conservatives convened a “Jackson Hole Summit” at a nearby dude ranch.

Fed Watch: Does 25bp Make A Difference? --  I am often asked if 25bp really makes any difference? If not, why does it matter when the Fed makes its first move? The Fed would like you to believe that 25bp really isn't all that important. Indeed, they don't want us focused on the timing of the first move at all, reiterating that the path of rates is most important. Yet I have come to believe that the timing of the first rate hike is important for two reasons. First, it will help clarify the Fed's reaction function. Second, if the experience of Japan and others who have tried to hike rates in the current global macroeconomic environment is any example, the Fed will only get one shot at pulling the economy off the zero bound. They better get it right. On the first point, consider that there is no widespread agreement on the timing of the Fed's first move. Odds for September have been bouncing around 50%, lower after a couple of weeks of market turmoil, but bolstered by the Fed's "stay the course" message from Jackson Hole. I think you can contribute the lack of consensus to the conflicting signals send by the Fed's dual mandate. On one hand, labor markets are improving unequivocally. The economy is adding jobs and measures of both unemployment and underemployment continue to improve. The Fed has said that only "some" further progress is necessary to meet the employment portion of the dual mandate. I would argue the Fed Vice-Chair Stanley Fischer even was kind enough to define "some" while in Jackson Hole: In addition, the July announcement set a condition of requiring "some further improvement in the labor market." From May through July, non-farm payroll employment gains have averaged 235,000 per month. We now await the results of the August employment survey, which are due to be published on September 4.Nonfarm payroll growth was the only labor market indicator he put a number to. He clearly intended to tie that number to the Fed statement. Basically, he said "some" further improvement is simply another month of the same pattern.

The Bottom Line of this Jobs Report: The Fed Should Hold the Line and Let the Economy Continue to Recover --The official unemployment rate (the U3) is only one data point—one that doesn’t include workers who have left the labor force because of weak opportunities or workers who want to be working full-time but can only get part-time work. The fact is that the economy is still not adding jobs fast enough, and the recovery is not creating strong wage growth. The best advice is for the Federal Reserve to continue doing what they’re rightfully doing—keeping rates low to let the economy recovery. Many pundits have been quick to encourage the Federal Reserve to raise rates, but a close look at the data shows that the economy still needs time to grow.  Nonfarm payroll employment rose by only 173,000 in August. While it’s best not to read too much into one month’s data, this brings average monthly job growth down to 212,000 so far in 2015. 2014 saw faster jobs growth: an average of 260,000. By that measure alone, we aren’t seeing an accelerating recovery. In fact, at this slower rate of growth, a full jobs recovery is still two years away.

Discounting the Long Run - NY Fed  --  Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for extracting far in the future interest rate expectations from market rates, which can be used to discount the long run. We will illustrate our arguments by discussing the measurement of long-run discount rates for Social Security.

Will We See The Return of Quantitative Easing? -- A very interesting posting by Ray Dalio, Chairman and Chief Investment Officer at Bridgewater Associates, L.P. a hedge fund that manages $169 billion in global investments looks at what lies ahead for the Federal Reserve, now that global stock markets have shown a great deal of volatility.  With the Fed telegraphing that it would consider lifting-off interest rates sometime during the late third and early fourth quarter, the recent volatility in both commodities and stocks must be giving the world's most influential central bankers reason to ponder their decisions to both taper and lift-off.  In the minutes from the July 28 - 29, 2015 FOMC meeting, there are repeated references to inflationary pressures falling below the 2 percent threshold as we can see in these quotes:  "Inflation had continued to run below the Committee’s longer-run objective, but members expected it to rise gradually to- ward 2 percent over the medium term as the labor mar- ket improved further and the transitory effects of earlier declines in energy and import prices dissipated."  "However, core inflation on a year-over-year basis also was still below 2 percent. Moreover, some members continued to see downside risks to inflation from the possibility of further dollar appreciation and declines in commodity prices."  Keeping in mind that oil prices have done this over the past 12 months:  ...and that commodities as a whole have done this over the past 12 months: ...the Fed's concerns about low inflation/deflation are definitely not unfounded.

Central banks falling short of 2 pct. inflation target - — Is 2 percent inflation too high to reach? The Federal Reserve and European Central Bank have been striving to generate a small dose of inflation — around 2 percent annually, just enough to spur more spending and income but not so much that prices surge out of control. Both central banks are consistently failing. And so the question has arisen of whether the Fed and the ECB should recognize that 2 percent inflation in a global economy awash in cheap oil, available workers and money-saving technologies might be too ambitious and should lower their targets. ECB President Mario Draghi faced that very question at a news conference Thursday in Frankfurt, Germany. Draghi was having none of it, at least publicly. He said that lowering the ECB’s 2 percent inflation target would represent an admission of failure that could damage the central bank’s authority. “It will test our credibility if we were to change our target, when it’s taking more effort to achieve that target,” he said. In the 19 European countries that share the euro currency, annual inflation is a scant 0.2 percent. In the United States, the Fed’s preferred inflation measure is 0.3 percent. U.S. inflation hasn’t breached 2 percent in more than three years.

Revealed Preferences: Fed Inflation Target Edition -- Over the past  six years the Fed's preferred measure of the price level, the core PCE, has averaged 1.5 percent growth.  That is well below the Fed's explicit target of 2 percent inflation. Why this consistent shortfall?  Some Fed officials are asking themselves this very question. A recent Wall Street Journal article reporting from the Jackson Hole Fed meetings led with this opening sentence: "central bankers aren't sure they understand how inflation works anymore". The article goes on to highlight some deep soul searching being done by central bankers in the Wyoming mountains. It is good to see our monetary authorities engaged in deep introspection, but let me give them a suggestion. Dust off your revealed preference theory textbooks and see what they can tell you about the low inflation of the past six years.   To that end, and as a public service to you our beleaguered Fed officials, let me provide some material to consider. First consider your inflation forecasts that go into making the central tendency consensus forecasts at the FOMC meetings. The figures below show the evolution of these forecasts for the current year, one-year ahead, and two-years ahead. There is an interesting pattern that emerges from these figures as you expand the forecast horizon: 2 percent becomes a upper bound. So the first insight from revealed preferences is that you and your fellow FOMC officials have been consistently looking at an upper bound of 2% on core PCE inflation. Now if we add to this observation the fact that the FOMC has meaningful influence on inflation several years out, then these revealed preference are saying you want and expect to get an inflation upper bound of 2%.

5-Year Deflation Probability Moves Off Zero -- Atlanta Fed's macroblog -- Since 2010, our Bank has regularly posted 5-year deflation probabilities derived from prices of Treasury Inflation-Protected Securities (TIPS) on our Deflation Probabilities web page. Each deflation probability, which measures the likelihood of a decline in the Consumer Price Index over a fixed five-year window, is estimated by comparing the price of a recently issued 5-year TIPS with a 10-year TIPS issued about five years earlier. Because the 5-year TIPS has more "deflation protection" than the 10-year TIPS, the implied deflation probability rises when the 5-year TIPS becomes more valuable relative to the 10-year TIPS. (See this macroblog post for a more detailed explanation, or this appendix with the mathematical details.)  From early September 2013 to the first week of August 2015, the five-year deflation probability estimated with the most recently issued 5-year TIPS was identically 0 as the chart shows.Of course, we should not interpret this long period of zero probability of deflation too literally. It could easily be the case that the "true" deflation probability was slightly above zero but that confounding factors—such as differences in the coupon rates, maturity dates, or liquidity of the TIPS issues—prevented the model from detecting it.Since August 11, however, the deflation probability has had its own "liftoff" of sorts, fluctuating between 0.0 and 1.3 percent over the 16-day period ending August 26 before rising steadily to 4.1 percent on September 2. Of course, this rise off zero could be temporary, as it proved to be in the summer of 2013.

Why China Liquidations May Not Spike US Treasury Yields -- There has been quite a bit of market chatter this week about how central bank selling of foreign exchange (FX) reserves could cause Treasury yields to soar. The market has branded this action ‘Quantitative Tightening’; borrowing the term from a note written by a London-based markets strategist.  Investors seem quick to conclude that it will result in higher yields on Treasury securities. I disagree with this simplified assumption and will use this note to explain why.. No one disputes that central banks have been selling reserves. Aggregate global foreign exchange reserves fell to $11.43 trillion in Q1 from $11.98 trillion last summer. The aggregate amount most likely fell even further in Q2 and Q3 as Chinese economic growth concerns impacted global markets. These reserves are mostly held in G7 currencies, 64% percent of which are held in US dollars. Since the aggregate amount is measured and reported in US dollars, it should be noted that part of the decline is due to the fall in dollar terms of the reserves held in euros and yen.  it is important to understand why central banks have been selling. The decline (selling) is driven by a combination of factors, such as: a Chinese economic slowdown; the preparation of a looming Fed interest rate hike; the Renminbi devaluation; a depreciating domestic currency; capital outflows; and lower revenues from collapsed commodity prices. Put simply, some countries are selling reserves in an attempt to either support falling local currencies or to offset capital flight. If an investor, for example, sells a Renminbi asset for dollars, China can sell some Treasuries to buy the Renminbi and support its currency and currency peg. If the investor chooses to invest the USD into Treasuries, then there is no net effect.

'Quantitative Tightening' Is A Myth (But That Doesn't Mean There Isn't A Problem) - Deutsche Bank has frightened everyone by warning that if China sold substantial quantities of US Treasuries (USTs) to support the yuan, this would amount to a substantial tightening of US monetary policy. The reason why China accumulated USTs in the first place was because of its trade surplus. The excess of exports over import sucked dollars into China, where the People’s Bank of China (PBoC) exchanged them for domestic currency (yuan). The PBoC therefore acquired large amounts of dollars, which it stored in the form of USTs. By doing so, it took USTs out of circulation and returned to the world economy the dollars that had been sucked into China. This can be regarded as a form of dollar quantitative easing (QE). Therefore, Deutsche Bank argues, if PBoC sells its USTs, this amounts to undoing QE.  But it’s not that simple. Deutsche Bank has forgotten about exchange rate effects. A substantial trade surplus indicates that the currency is undervalued relative to that of its trading partner, in this case the US. Indeed China has been accused of maintaining too low a value for the yuan versus the dollar for many years, undermining US export industries and encouraging offshoring of jobs. So if PBoC sold USTs to support the yuan against the determination of the markets to push it down, the effect would be to put downwards pressure on the dollar.  As all exchange-rate targeting countries know, downwards pressure on the currency is monetary loosening, not tightening.

Did The Fed Intentionally Spark A Commodity Sell-off? -- I’m not quite sure what to believe on how and why oil prices remain more than 50 percent below free cash flow break even for most independent E&P companies. I know for sure it’s not just one reason and is more likely a confluence of events.  Part of the reason oil prices broke new six-year lows is tied to hedge funds shorting equities and pressuring equity pricing through shorting oil. Another reason is the desire of private equity firms to buy assets on cheap and some banks seeking M&A fees. Obviously OPEC policy has a part to play. There is also no doubt that EIA statistics mistakenly leave the impression that production has remained resilient throughout the summer. But the spark that set the ball in motion was the dollar strength as every major money center bank in the U.S. recommended going long EU equities and long the dollar because of further monetary easing in Europe. The inverse correlation between the U.S. dollar and oil prices in June was virtually 100 percent, but that has changed more recently, as I have noted previously. At that time, investors here in the U.S. plowed into biotechnology and technology and went short oil as if they knew what assets central banks were going to buy and not buy based on all the free money from Europe and Japan. Since the financial crisis began the cozy relationship between money center banks and the Federal Reserve, since the bail outs, is well known. For example, Goldman Sachs’ deep ties to the U.S. government are notorious and, not surprisingly, they led the charge in calls for a downturn in oil. So has the media, as I have extensively documented all year hereOn the other hand, oil inventories on paper in the U.S. were rising into the fall of last year for sure while the economy was weakening in the U.S. and in China, the largest importer of commodities. So the merits of weaker commodity prices stand on their own to an extent. The correction to $70 from $100 was justified, but the crash to levels not seen since the crisis of 2008-2009 are overblown. Now the cries comparing the 2015 crisis to the 1986 oil demise rise as well. Are economic conditions that bad?

Fed's Beige Book: Economic Activity Expanded -- Fed's Beige Book "Prepared at the Federal Reserve Bank of Boston based on information collected on or before August 24, 2015."Reports from the twelve Federal Reserve Districts indicate economic activity continued expanding across most regions and sectors during the reporting period from July to mid-August. Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book. Respondents in most sectors across Districts expected growth to continue at its recent pace, but the Kansas City report cited more mixed expectations. District reports on manufacturing activity were mostly positive, although among these, the Cleveland, St. Louis, Minneapolis, and Dallas Districts painted a somewhat mixed picture across manufacturing sectors. Only the New York and Kansas City Districts cited declines in manufacturing.  And on real estate:  Residential real estate activity improved across the 12 Districts, with home sales and home prices increasing in every District, while construction activity was more mixed. ...District reports on commercial real estate were positive on balance. Commercial leasing activity increased in the Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Leasing activity was steady in the Philadelphia District, steady or increasing in the New York District, and mixed in the Boston District. Leasing demand was described as very strong in large cities, including Boston, New York, Philadelphia, Chicago, and Dallas, but Houston saw weak leasing demand.  Mostly positive.

Beige Book Highlights: Will They or Won't They? Still Undecided? -- The Fed's Beige Book is a summary and analysis of economic activity and conditions, issued roughly two weeks prior to monetary policy meetings of the Fed.  "Book" is an adequate expression. This month, the Beige Book is 50 pages long. It's prepared with the aid of reports from the district Federal Reserve Banks.  Don't bother reading the book. It's not worth the slog.   Bloomberg offers these Beige Book HighlightsThe Beige Book, prepared for the September 17 FOMC meeting, is not underscoring any urgency for a rate hike. Eleven of 12 districts report only moderate to modest growth with the Cleveland district reporting only slight growth. This compares with 10 districts in the July Beige Book which reported moderate to modest growth. Most districts describe labor demand as no more than modest to moderate and most describe actual job growth as no better than slight or modest. But there are isolated areas of labor shortages and four districts report a rise in wages for specific industries. Inflation is described as stable with only slight upward pressure across districts.  The sample period for the report ended on August 24, capturing the beginning of global market volatility. Several districts cited China as a factor slowing down demand. Still manufacturing, boosted by the auto sector, is described as mostly positive though two districts, New York and Kansas City, report contraction. The strong dollar is cited by five districts as a negative for manufacturing. Farm conditions are described as mixed. Housing is a clear positive in the report, with sales and prices rising in every district. Construction is described as strong. Retail sales are also positive and are continuing to expand in most districts. Loan demand is generally described as rising. There's no significant immediate reaction to the report.  It matters not whether the Fed hikes or not. Either way, bubbles have formed in equities and junk bonds. Tiny hikes will not cause a recession, and the bubbles are destined to pop anyway.

Can We Believe the "Wonderful" GDP News?: In their second estimate of the US GDP for the second quarter of 2015, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 3.70% annualized rate, up +1.38% from their previous estimate and up +3.06% from the first quarter. Follow up: This report included significant upward revisions to the growth rate contributions from commercial fixed investment (revised upward +0.52%), inventories (up +0.30%) and government spending (up +0.33%). Consumer spending was revised upward a more modest +0.13%, and the net impact of exports and imports was also revised upward +0.10%. Real annualized per capita disposable income was reported to be $37,843 per annum, down $3 per year from the last estimate. The household savings rate was unchanged at 4.8% -- still down -0.4% from the prior quarter's 5.2% rate. For this revision the BEA assumed an annualized deflator of 2.07%. During the same quarter (April 2015 through June 2015) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.52%. Under estimating inflation results in optimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline number would show a more modest +2.33% growth rate. Among the notable items in the report :

  • The headline contribution from consumer expenditures for goods was +1.19% (up +0.15% from the previous estimate).
  • The contribution to the headline from consumer services decreased slightly to +0.93% (down -0.02% from the previous report). The combined consumer contribution to the headline number was 2.12%, up +0.13% from the first estimate.
  • The headline contribution from commercial private fixed investments was revised upward to +0.66% -- up an impressive +0.52% from earlier report.
  • Inventories changed from a mild contraction to a modest growth, providing +0.22% of the headline number (up +0.30% from the previous estimate).
  • Governmental spending added +0.47% to the headline (up +0.33% from the earlier report). The revised growth was almost entirely in state and local infrastructure investment.
  • Exports were slightly down from the last estimate, but still added +0.65% to the headline number (down -0.02% from the first estimate).
  • Imports subtracted less from the headline number (-0.42%) than previously reported (an improvement of +0.12%).
  • The "real final sales of domestic product" is now reported to be growing at a +3.48% annualized rate. This is the BEA's "bottom line" measurement of the economy and it excludes the reported inventory growth.
  • And as mentioned above, real per-capita annual disposable income was revised slightly downward and the household savings rate was unchanged. The real per-capita annual disposable income is up only +3.18% in aggregate since the second quarter of 2008 -- an annualized +0.45% growth over the past 28 quarters.

A more accurate measure of economic output - How well is the U.S. economy doing, and where might it be heading in the future? To answer these questions, we need a way to assess the total amount of goods and services the economy is producing in a given time period. One measure of this quantity, gross domestic product (GDP) is well known. It estimates the total value of new goods and services produced in the U.S. over a given period, usually a quarter or a year. (Also, the goods must pass through organized markets, so black market activity and goods produced in homes aren't counted.) However, there's another way to arrive at this estimate of total economic activity: gross domestic income (GDI). GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's income in one way or another. But GDI differs in practice due to the way the national income and product accounts are constructed. Thus, because neither measure is perfect on its own, and the errors in GDP and GDI are largely independent, it should be possible to combine the two measures to improve our estimate of how well the economy is performing in a given time period. That's what two recent strands of research are attempting to do. The first new measure, called gross domestic output (GDO), is now published by the Bureau of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it compares to GDP:

Latest from the GDPNow Forecasting Model -- Interesting divergence between "Blue Chip" consensus and the GDPNow measure from the Atlanta Fed:  GDPNow: The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release. Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet. The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.5 percent on September 3, up from 1.3 percent on September 1. .... As more monthly source data becomes available, the GDPNow forecast for a particular quarter evolves and generally becomes more accurate. That said, the forecasting error can still be substantial just prior to the “advance” GDP estimate release. It is important to emphasize that the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments. It is not an official forecast of the Federal Reserve Bank of Atlanta, its president, the Federal Reserve System, or the FOMC.

Third Quarter GDP Model Inches Up to 1.5% on Auto Strength --The Atlanta Fed third quarter GDPNow Forecast inched up today, primarily based on August motor vehicle sales.  The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.5 percent on September 3, up from 1.3 percent on September 1. The nowcast for third-quarter real personal consumption expenditures growth ticked up from 2.6 percent to 2.7 percent following yesterday afternoon's release on August motor vehicle sales from the U.S. Bureau of Economic Analysis. Wondering why the Blue Chip forecast always seems to lag the GDPNow forecast, and by varying amounts?   Here's the answer from Patrick Higgins, Senior Economist, Federal Reserve Bank of Atlanta:  The Blue Chip forecasts are always published on the 1st and 10th of the month. Furthermore, on the graph, we use the “survey” dates, which are about 4-6 days before these publication dates. This implies the Blue Chip forecasts will, at a minimum, lag about 5 days behind GDPNow and can lag as much as 25 days near the end of each month.

The US Economy Is Not Awesome And It's Not Decoupled -- David Stockman  When the bubble vision stock peddlers get desperate, they talk decoupling. So by the end of yesterday’s bloodbath you would have thought China was on another planet, and that “commodities” were some trinket-like collectibles gathered by people who don’t wear long pants, drink coca cola or jabber on their cell phones. On these fine shores, of course, its all awesome from sea to shinning sea. So don’t be troubled. Buy the dip. Never mind that we are in month 74 of this so-called recovery and that after year upon year of promised “escape velocity” the reliable signs of said event are still few and far between. But the “recovery” narrative stays alive because there is always some stray factoids of seasonally maladjusted, yet-to-be-revised “incoming data” that can excite the MSM headline writers and bubble vision talking heads. Today the data on construction spending and housing took their turn in the awesome circle. Thank heavens that the headline writing software used by the financial press doesn’t yet read graphical data. Otherwise they might have reported that private residential construction soared in July—–well, all the way back to January 2002 levels! And those are the nominal dollars that the Fed has done its level best to depreciate in the 13 years since then. In fact, on an inflation-adjusted basis the housing construction spend is still at 1992 levels.

Wall Street and the Military are Draining Americans High and Dry - The United States (US) government often cites $18 trillion as the amount of money that they owe, but their actual debts are higher. Much higher.The government in the USA owes $13.2 trillion in US Treasury Bonds, $5 trillion in money borrowed by the US Federal government from Federal government trust funds like the Social Security trust fund, $0.7 trillion for state bonds issued by the 50 states, $3.7 trillion for the municipal bond market (US towns, cities and counties), $1.97 trillion still owing by Freddie Mac and Fannie Mae, mostly for bad mortgages in years gone by, $6.23 trillion owed by US government authorities other than Fannie Mae and Freddie Mac, $1.04 trillion in loans taken out by the US Federal government (e.g. government credit card balances, short term loans) and $0.63 trillion in loans owed by government authorities (e.g. their government credit card balances, short term loans). As of April 1, 2015, according to the Federal Reserve Bank’s Financial Accounts of the US report, the government in the USA has $32.77 trillion in debt excluding unfunded government pension debts and unfunded government healthcare costsDebt is money that has to be paid. The government in the USA also has to pay $6.62 trillion for unfunded pension liabilities, as of April 1, 2015. There are thousands of government pension plans in the USA (e.g. County, State, Teacher’s, Police). The Federal Employees Pension Plan is now short $1.9 trillion according to the Fed’s March 2015 statement plus $4.7 trillion in unfunded state and municipal pension liabilities according to State Budget Solutions which calculates on actual pension returns (approx. 2.5% per year from 2009 to 2014, instead of the fantasy ‘assumption’ of an 8% return used by the Fed to guesstimate pension fund money). The largest governmental pension fund in Puerto Rico ran out money (became insolvent) in 2012 and the government now has to pay $20.5 billion for that. Pension contributions into government pension plans have been less than what these pension plans pay out to retirees which is why the government was short by $6.62 trillion for government pensions as of April 1, 2015.

The China Debt Zombie - Paul Krugman -- Matthew Klein notes that Very Serious People are now worried that China’s troubles, which have caused it to switch rather suddenly from a buyer of Treasuries to a seller, will cause U.S. interest rates to spike. He rightly finds this unconvincing. What he doesn’t note is we’re looking at another instance of an economic zombie in action.  For the new concern about China is, in economic terms, the same as the old concern – that the Chinese could destroy our economy by cutting off funding, either for political reasons or out of disgust over our budget deficits. This always reflected a fundamental failure to understand the economic logic, as was pointed out many times not just by yours truly (and much earlier here)but also by people like Dan Drezner. But scare stories about our supposed financial dependence on China just keep shambling along, propounded by people who don’t even realize that there are other views, let alone that they’re talking nonsense.

Mikulski Becomes 34th Sen. To Back Iran Deal, Ensuring Obama Victory - Sen. Barbara Mikulski (D-MD) announced on Wednesday that she will support the Iran nuclear deal, sealing a victory for President Obama.  She is the 34th senator to announce her support, giving Congress the ability to sustain a presidential veto of a resolution aimed at killing the deal. "No deal is perfect, especially one negotiated with the Iranian regime," Mikulski wrote in a statement, according to Roll Call. "I have concluded that this Joint Comprehensive Plan of Action is the best option available to block Iran from having a nuclear bomb. For these reasons, I will vote in favor of this deal. However, Congress must also reaffirm our commitment to the safety and security of Israel."

TISA and Tech's Double Standards On Secret Government Internet Deals…The stash of previously-secret correspondence about the Trade In Services Agreement (TISA) that EFF obtained and published this week speaks volumes about the extent to which technology companies such as IBM and Google, and trade lobby groups such as the Computer and Communications Industry Association (CCIA) and Internet Digital Economy Alliance (IDEA), have bought into the dangerous idea that trade agreements should be used to govern the Internet.  In the 124 pages of documents that we obtained under the Freedom of Information Act (FOIA), industry groups assert that trade agreements can “maximise the economic potential of data in the networked economy and support the Internet as the world’s trading platform”, and “significantly boost the growth prospects for this vital sector of the global economy.” Sadly missing, however, are demands for improved transparency or for the exclusion of Internet-related issues that have little to do with "trade" such as net neutrality and personal data protection.  Perhaps we should not be surprised by the complicity of some tech companies in the ongoing mission-creep of trade negotiations, given their earlier support for Fast Track Authority, which cleared the way not only for TISA but also for other agreements that threaten user rights, such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP).

Congressional Black Caucus Still Trying to Hurt Their Constituents By Killing the Labor Department Fiduciary Rule - David Dayen - Last year, the Huffington Post published the definitive take on the Congressional Black Caucus’ frequent sellouts to Wall Street, and how Maxine Waters has attempted to shut it down. One of the more notable issues the CBC has worked on serves the interests of all their constituents in the asset management industry: In June, 28 CBC members sent a letter to the Department of Labor, urging it to reconsider a rule requiring retirement account managers and investment advisers to act in their clients’ best interests — what is known in finance as a “fiduciary duty.” Fudge told us she was worried the rule would limit minority access to financial advice. But the letter was actually written by Robert Lewis, a lobbyist at the Financial Services Institute, who forgot to scrub his metadata from the document before circulating it around the Hill. That half-assed job didn’t work out for the CBC; the Labor Department issued its fiduciary rule back in April. And despite an exhaustive series of hearings back in August and more expected in September, Labor Secretary Thomas Perez announced he plans to move forward on finalizing the rule sometime before the 2016 elections.  This hasn’t stopped the CBC from trying to kill the rule. This is from D.C. house organ The Hill: “Rich people are always going to get advice,” one aide to a CBC member concerned by the rule said. “But it’s the poor people — many of which are our constituents — who we’re concerned about.”  This is an insane argument. In essence, asset managers are saying that they only way they can afford to offer financial advice to low and middle-income earners is if they screw them. If you force them to act in their clients’ interest, it won’t become cost-effective. So CBC members want to protect their constituents’ ability to get sham advice contrary to their interest? There is no question that these constituents would be better off with no advice at all.

Litigation finance: a terrible idea -- mathbabe -- I watch my share of bad commercials on TV. I couldn’t help notice a proliferation of ads for help with a medical condition called “transvaginal mesh injury.” Basically the ads were asking whether the viewer had such a problem, and whether they’d like to perhaps talk to a lawyer at this free phone number. Pretty much every other ad was about this condition, so it seemed like a pretty big deal, at least for the intended audience of old ladies. Well, I didn’t pay much attention to it, until I came across this fascinating Reuters special report on corrupt medical lending practices entitled New breed of investor profits by financing surgeries for desperate women patients and written by Alison Frankel and Jessica Dye. The article outlines the following scheme: financiers find women who need this surgery, based on a defective medical part, but don’t have the money for it and whose insurance companies won’t immediately cover it. They offer them the financing now in return for part of the eventual settlement with the company that was responsible for the faulty mesh. But then they make a deal with a surgeon to overcharge for the surgery, and they inflate the costs as well, and at the end of the whole thing they take a large part of the settlement which the woman was entitled to, and sometimes the woman even ends up owing them money.

Aguilar Proposes Transparency Fix for Broken SEC Waiver System --  David Dayen - Since Kara Stein became a commissioner on the SEC, we've heard a lot about the agency's waiver policy. Basically, if a financial institution commits a crime, the SEC has a series of automatic penalties that are "automatic" in name only, because the agency routinely waives the penalties. Stein's outcry at this turn of events always makes people like Matt Levine, in his usual role of intentionally missing the point, completely befuddled, because the punishments wouldn't fit the crimes, and banks would lose access to entire lines of business for some unrelated transgression, and that just wouldn't be fair, now would it? The point, of course, is that automatic penalties are either automatic or not. If the punishment of banning institutions from managing mutual funds or working with private companies to find investors, or forcing SEC approval for any stocks or bonds that the firm issues on its own behalf, is simply too harsh as a consequence of committing a crime, then the SEC can go ahead and eliminate the automatic trigger. But having them in place, and then routinely waiving them, makes a mockery of any sort of accountability whatsoever. I personally believe that having these penalties in place are a solid way to ensure compliance across business lines, with the only threat that matters - a threat to the pocketbook - in reserve. If it would be too costly for banks to break the law, well maybe they'll be a little more careful. But I would rather just eliminate the penalties altogether than have the SEC bow and scrape to ensure that committing fraud doesn't lead to anything bad happening to the perpetrator.

Exclusive: Citi aims to boost equities franchise amid industry shakeout - Citigroup plans to rebuild its long-neglected equities franchise seeking to capitalize on a retrenchment by rivals in the face of new rules designed to make the financial system less risky, according to people familiar with the bank's plans. A lack of investment in equities and a traditional focus on bond trading kept the No. 3 U.S. bank by assets in the lower echelons of equities league tables, which measure how much revenue Wall Street banks earn from their equity trading units. It will be tough to dislodge leaders such as Goldman Sachs Group, Morgan Stanley, and JPMorgan Chase & Co, that have long dominated the business. But having shored up its business and capital ratios since the financial crisis, largely by spinning off non-core assets, Citi now aims to profit from a retreat of rivals that were slow in adapting to new rules that force banks to keep more capital, two people with direct knowledge of Citi's plans told Reuters. Deutsche Bank, Credit Suisse Barclays and others are re-aligning their investment banking businesses. Prime brokerage units, which provide loans and other services to hedge funds, are being pared back in favor of less capital-intensive businesses such as wealth management. Citi, meanwhile, plans to court hedge funds more actively as part of a four-point plan to boost its equities market share, the sources said. The strategy includes an overhaul of Citi's trading technology, hiring key executives, expanding research and boosting the unit's financing.

 

August 2015: Unofficial Problem Bank list declines to 282 Institutions -- This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for August 2015.   During the month, the list fell from 290 institutions to 282 after nine removals and one addition. Assets dropped by $1.2 billion to an aggregate $82.7 billion. The asset total was updated to reflect second quarter figures, which resulted in a small decline of $95 million. A year ago, the list held 439 institutions with assets of $139.97 billion. This week, we were anticipating for the FDIC to release second quarter industry results and an update on the Official Problem Bank List, but that will have to wait until next month's update. Actions have been terminated against Bank of the Carolinas, Mocksville, NC ($363 million); Oxford Bank, Oxford, MI ($304 million Ticker: OXBC); Bank of the Rockies, National Association, White Sulphur Springs, MT ($131 million); Madison Bank, Richmond, KY ($123 million); and Bank of Monticello, Monticello, GA ($96 million). Several banks merged to find their way off the problem bank list including First National Bank of Wauchula, Wauchula, FL ($76 million); Pineland State Bank, Metter, GA ($55 million); The Elkhart State Bank, Elkhart, TX ($43 million); and SouthBank, a Federal Savings Bank, Palm Beach Gardens, FL ($20 million). Added this month was OSB Community Bank, Brooklyn, MI ($72 million). In addition, the Federal Reserve issued a Prompt Corrective Action order against Cecil Bank, Elkton, MD ($302 million).

Mortgage lawsuits against BofA, Citigroup and Wells Fargo resurrected -  A U.S. appeals court revived three lawsuits filed by the City of Miami against Wells Fargo, Bank of America and Citigroup, alleging predatory mortgage lending practices against minority borrowers. In a unanimous vote, the 11th U.S. Circuit Court of Appeals reversed a lower court’s dismissal of the city's claims under the federal Fair Housing Act. Miami’s lawsuit alleges the three banks engaged in a long-term lending discrimination in its residential housing market programs. "It is clear that the harm the city claims to have suffered has a sufficiently close connection to the conduct the statute prohibits," Circuit Judge Stanley Marcus wrote. Other cities like Baltimore, Chicago, Los Angeles and Memphis have met with mixed results attempting to bring suits against the lenders for what they call predatory lending targeted at black and Hispanic homebuyers. The lawsuit in Miami charged that the three banks steered black and Hispanic borrowers toward higher-cost loans. The city said in its brief that this "reverse redlining" led to a large number of foreclosures, lower property tax collections and increased cost to the city to deal with the resultant property values loss and concomitant blight.

FDIC: Fewer Problem banks, Residential REO Declines in Q2 -The FDIC released the Quarterly Banking Profile for Q2 today:  Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $43.0 billion in the second quarter of 2015, up $2.9 billion (7.3 percent) from a year earlier and the highest quarterly income on record. The increase in earnings was mainly attributable to a $3.6 billion rise in net operating revenue (net interest income plus total noninterest income). Financial results for the second quarter of 2015 are included in the FDIC's latest Quarterly Banking Profile released today..."Bankers generally reported another quarter of higher earnings, improved asset quality, and increased lending,""There were fewer problem banks, and only one bank failed during the second quarter.  "However," he continued, "the low interest-rate environment remains a challenge. Many institutions have responded by acquiring higher-yielding, longer-term assets, but this has left banks more vulnerable to rising interest rates and that is a matter of ongoing supervisory attention."  The number of banks on the FDIC's Problem List fell from 253 to 228 during the second quarter. This is the smallest number of problem banks in nearly seven years and is down dramatically from the peak of 888 in the first quarter of 2011. Total assets of problem banks fell from $60.3 billion to $56.5 billion during the second quarter. Deposit Insurance Fund (DIF) Rises $2.3 Billion to $67.6 Billion: The DIF increased from $65.3 billion in the first quarter to $67.6 billion in the second quarter, largely driven by $2.3 billion in assessment income. The DIF reserve ratio rose from 1.03 percent to 1.06 percent during the quarter.

Proof of Ongoing Foreclosure Fraud and Mortgage Document Fabrication, in Five Emails --  David Dayen - Five years ago this month, GMAC became the first mortgage servicer to announce that they would suspend foreclosure operations, due to irregularities in their document preparation. Within a few weeks every major mortgage servicer in America followed suit. This is usually called the robo-signing scandal, but to be more precise we gave it the name foreclosure fraud. It ended with the five leading servicers, including GMAC, signing the $25 billion National Mortgage Settlement. Except it didn’t end, and this past week I was handed inconvertible proof of that fact. The scenario is so fantastical that if I didn’t have a working knowledge of foreclosure fraud I wouldn’t have believed it. But it appears to be very real. Bill Paatalo is a former cop who worked in the mortgage industry as a loan officer and became a licensed private investigator specializing in securitization and chain of title analysis. He testifies as an expert witness, working with foreclosure defense attorneys and pro se litigants. On May 15, Bill got an email out of the blue from Jamie Gerber, “team lead” for a company called Security Connections. Here’s that email:   Security Connections, of Idaho Falls, ID, is a document services provider for major mortgage companies. Bank of America used Security Connections years ago on mortgages originated by First Franklin Bank. We have this deposition of Security Connections robo-signer Krystal Hall, who admitted to signing 400 assignments of mortgage per day without knowing any underlying information about the transactions.  This brief description of Security Connections from job site Indeed.com helpfully explains that “if you are missing documents or need a mortgage recorded, we have a highly trained department with the skills to locate and record these documents.” So this is a third party document processor, designed to give mortgage companies plausible deniability for fabricating mortgage paperwork. And they’re coming to Bill Paatalo, a known expert in fighting foreclosure fraud, to get him to forge a mortgage assignment, so Residential Credit Solutions can get clear title on the mortgage.

Not All Foreclosure Victories Have Fairy Tales Endings - MFI-Miami: Remember Diana Yano-Horoski and Gregory Horoski who won one of the few foreclosure victories in the early days of the financial crisis? After winning what everyone thought was one of the few foreclosure victories, they soon became the national face of beating back IndyMac’s “repugnant” and “repulsive” foreclosure after Suffolk County Judge Jeffrey Spinner ripped up the mortgage on their $525,000 ranch home and ripped IndyMac a new asshole. The only problem was that even though it was one of the most high profile foreclosure victories since the crisis, the war for Horoski’s foreclosure was far from over. IndyMac appealed the ruling and won. The Horoski not only lost at the Appeal hearing and their home but they were also slapped with a $264,500 deficiency bill from IndyMac Bank. This included $160,000 in legal fees IndyMac/One West claimed they incurred attempting to foreclose on the Horoskis and the nearly $65,000 in unpaid taxes that IndyMac/One West claimed they had to pay since 2005. Within twelve months of winning one of the most high profile foreclosure victories since the crisis began, the victory was now nullified. Suffolk Judge Jeffrey Spinner, the judge who gave the Horoskis one of their only foreclosure victories by tearing up their $292,500 mortgage with an interest rate of 12.375 percent, told The NY Post that in more than 17 years on the bench and thousands of cases, he has had only three requests for deficiency judgments and those were on commercial mortgages with deep-pocketed borrowers.

Fannie Mae: Mortgage Serious Delinquency rate declined in July, Lowest since August 2008 -- Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in July to 1.63% from 1.66% in June. The serious delinquency rate is down from 2.00% in July 2014, and this is the lowest level since August 2008.   The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".  The Fannie Mae serious delinquency rate has only fallen 0.37 percentage points over the last year - the pace of improvement has slowed - and at that pace the serious delinquency rate will not be below 1% until 2017. The "normal" serious delinquency rate is under 1%, so maybe Fannie Mae serious delinquencies will be close to normal some time in 2017.  This elevated delinquency rate is mostly related to older loans - the lenders are still working through the backlog.

Underwater-Home Recovery Reaches Struggling Neighborhoods - Underwater homeowners–one of the hallmarks of the housing crisis–are starting to get out from under their loans, and now the trend is increasingly reaching the lowest-priced properties. Real-estate information company Zillow said Thursday that the percentage of mortgaged homes worth less than their loans fell to 14.4% in the second quarter, down from 15.4% in the first quarter and 17.9% in the second quarter of 2014. The underwater rate has fallen by more than half from its peak of 31.4% in the first quarter of 2012, according to Zillow, driven largely by the strong rebound in home prices, as well as by foreclosures and short sales. Zillow said that 19.3% of condominiums with a mortgage were worth less than the loan. Having fewer homeowners underwater is a big benefit for the housing market, because it reduces the likelihood that owners get foreclosed upon and frees up home inventory that otherwise might not come up for sale. Despite relief from negative equity broadly, certain low-priced neighborhoods suffered worse during the crisis and have taken longer to rebound, leaving some low-income homeowners hurting while more affluent homeowners shake off the bust. But Zillow on Thursday said that improvement in the lowest-priced third of homes is now what’s driving the bulk of the reduction in negative equity. About 24% of homeowners with a loan among the bottom price tier were underwater in the second quarter, down from 25% in the first quarter. Las Vegas (25%), Chicago (22%) and Atlanta (20.9%) had the highest negative equity rates among large metro areas in the second quarter.

MBA: Mortgage Applications Increase in Latest Weekly Survey, Purchase Index up 25% YoY -- From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey Mortgage applications increased 11.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 28, 2015. ...The Refinance Index increased 17 percent from the previous week to its highest level since April 2015. The seasonally adjusted Purchase Index increased 4 percent from one week earlier to its highest level since July 2015. The unadjusted Purchase Index increased 2 percent compared with the previous week and was 25 percent higher than the same week one year ago....“Although mortgage rates were unchanged for the week, Treasury rates were down sharply early in the week due to the global stock market rout and this led to a significant increase in application volume,” said Mike Fratantoni, MBA’s Chief Economist.... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.08 percent, with points increasing to 0.37 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. Refinance activity remains low. 2014 was the lowest year for refinance activity since year 2000, and refinance activity will probably stay low for the rest of 2015 (after the increase earlier this year). The second graph shows the MBA mortgage purchase index. According to the MBA, the unadjusted purchase index is 25% higher than a year ago.

Mortgage Rates Still Waiting for Bigger News -- Mortgage rates were almost flat again today. Most lenders were just a hair higher in costs vs yesterday. The most prevalent conventional 30yr fixed quote remains 4.0% for top tier scenarios, but 3.875% is still available. In general, the bond markets that drive mortgage rates are remaining nimble until they have a better sense of what the Fed will do in the policy meeting 2 weeks from now. As we frequently discuss, the Fed Funds Rate doesn't dictate 30yr mortgage rates, but the two tend to correlate over time. Moreover, the initial lift-off from record low rates will be a big deal for financial markets in general. It would be hard for mortgage rates not to get caught up in the volatility--most likely in a bad way. In other words, the sooner the Fed officially hikes OR the sooner the economic data makes investors think the Fed is going to hike, the worse it probably is for mortgage rates in the short term. Of course markets have already been doing their best to get ready for such an occasion, and that's one of the reasons interest rates pushed higher in the first half of 2015.

CoreLogic: Home prices rose 6.9% in July 2015 - Home prices nationwide, including distressed sales, increased by 6.9% in July 2015 compared with July 2014, according to CoreLogic. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.7% in July 2015 compared with June 2015. “Home sales continued their brisk rebound in July and home prices reflected that, up 6.9% from a year ago,” said Frank Nothaft, chief economist for CoreLogic. “Over the same period, the National Association of Realtors reported existing sales up 10% and the Census Bureau reported new home sales up 26% in July.” Including distressed sales, only Colorado has more than 10% year-over-year growth. Additionally, only 10 states have experienced increased growth in the last year that matched or surpassed the nation as a whole; those states are: Colorado, Florida, Hawaii, Nevada, New York, Oregon, South Carolina, South Dakota, Texas and Washington. Fifteen states reached new price peaks since January 1976 when the index began including Alaska, Arkansas, Colorado, Hawaii, Iowa, Kentucky, Montana, Nebraska, New York, North Carolina, North Dakota, Oklahoma, South Dakota, Tennessee and Texas. Only two states experienced home price depreciation: Massachusetts (-2.1%) and Mississippi (-0.8%).

CoreLogic: House Prices up 6.9% Year-over-year in July - The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic Reports Home Prices Rose by 6.9 Percent Year Over Year in July Home prices, including distressed sales, increased 6.9 percent in July 2015 compared to July 2014. June marks the 41st consecutive month of year-over-year home price gains. Excluding distressed sales, home prices increased by 6.7 percent year over year in July. On a month-over-month basis, home prices increased by 1.7 percent in July compared to June data. Excluding distressed sales, home prices were up 1.5 percent month over month in July 2015.Home prices nationwide remain 6.6 percent below their peak, which was set in April 2006. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 1.7% in July (NSA), and is up 6.9% over the last year. This index is not seasonally adjusted, and this was a solid month-to-month increase.

Home Builders Say Loans Are No Longer Scarce - Many factors, on the demand and supply sides, continue to hinder the home-construction market in the U.S. from returning to normal. But, several home builders say, the availability of construction loans no longer is one of them. Indeed, lenders are opening the spigot at a steady, albeit moderate, pace for commercial and residential construction alike, which bodes well for output in those industries. That, in turn, stands to benefit the U.S. economy, given that rising construction spending contributes greatly to gross domestic product. Figures released Wednesday by the Federal Deposit Insurance Corp. show that total outstanding balances on construction loans from FDIC-backed institutions amounted to $255.8 billion in the second quarter, up 3.9% from the first. That marks the fifth consecutive quarter of double-digit, year-over-year percentage growth as construction lending rebounds from its nadir of $201.5 billion in early 2013. The main residential component of that total–loans for constructing homes of single- to four-family units–also continued to gain ground this year. Outstanding balances on loans from FDIC-backed institutions for building those houses totaled $56.1 billion in the second quarter, up nearly 4.7% from the first. “For residential-construction loans, this is the fifth consecutive quarter of year-over-year growth in the range of 16% to 17.5%,” said Robert Dietz, a senior economist with the National Association of Home Builders. “Ongoing growth in residential construction loans points to additional expansion for single-family (construction) starts.”

Construction Spending increased 0.7% in July -- The Census Bureau reported that overall construction spending increased in July: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent above the July 2014 estimate of $952.5 billion. Private spending increased and public spending decreased: Spending on private construction was at a seasonally adjusted annual rate of $787.8 billion, 1.3 percent above the revised June estimate of $777.4 billion. ... In July, the estimated seasonally adjusted annual rate of public construction spending was $295.6 billion, 1.0 percent below the revised June estimate of $298.5 billion.  Note: Non-residential for offices and hotels is generally increasing, but spending for oil and gas has been declining. Early in the recovery, there was a surge in non-residential spending for oil and gas (because oil prices increased), but now, with falling prices, oil and gas is a drag on overall construction spending.  As an example, construction spending for private lodging is up 41% year-over-year, whereas spending for power (includes oil and gas) construction peaked in mid-2014 and is down 13% year-over-year. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending has been increasing recently, and is 44% below the bubble peak. Non-residential spending is only 2% below the peak in January 2008 (nominal dollars). Public construction spending is now 9% below the peak in March 2009 and about 12% above the post-recession low. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending is up 16%. Non-residential spending is up 18% year-over-year. Public spending is up 6% year-over-year. Looking forward, all categories of construction spending should increase in 2015. Residential spending is still very low, non-residential is increasing (except oil and gas), and public spending has also increasing after several years of austerity. This was close to the consensus forecast of a 0.8% increase, and spending for May and June was revised up. Overall, another solid construction report.

July 2015 Construction Spending Growth Is Strong.: The headlines say construction spending grew. The backward revisions make this series very wacky - but the backward revisions this month were upward making the data better than the headline view. Our view is that if the data is correct - this was another strong growth month. Econintersect analysis:

  • Growth accelerated 0.6 % month-over-month and Up 13.9 % year-over-year.
  • Inflation adjusted construction spending up 11.9 % year-over-year.
  • 3 month rolling average is 12.5 % above the rolling average one year ago, and up 1.5 % month-over-month. As the data is noisy (and has so much backward revision) - the moving averages likely are the best way to view construction spending.

This month's headline statement from US Census: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent (±1.5%)* above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent (±2.0%) above the July 2014 estimate of $952.5 billion. During the first 7 months of this year, construction spending amounted to $583.2 billion, 9.3 percent (±1.5%) above the $533.7 billion for the same period in 2014. - Spending on private construction was at a seasonally adjusted annual rate of $787.8 billion, 1.3 percent (±1.0%) above the revised June estimate of $777.4 billion. Residential construction was at a seasonally adjusted annual rate of $380.8 billion in July, 1.1 percent (±1.3%)* above the revised June estimate of $376.6 billion. Nonresidential construction was at a seasonally adjusted annual rate of $407.0 billion in July, 1.5 percent (±1.0%) above the revised June estimate of $400.8 billion. - In July, the estimated seasonally adjusted annual rate of public construction spending was $295.6 billion, 1.0 percent (±2.6%)* below the revised June estimate of $298.5 billion. Educational construction was at a seasonally adjusted annual rate of $66.4 billion, 3.0 percent (±3.5%)* below the revised June estimate of $68.4 billion. Highway construction was at a seasonally adjusted annual rate of $90.3 billion, 0.2 percent (±6.6%)* below the revised June estimate of $90.5 billion.

U.S. Construction Spending Hits a New Postrecession High - U.S. construction spending rose to the highest level in more than seven years in July, suggesting that the housing market and business investment can help underpin economic growth amid turbulence outside American borders. Total construction spending climbed 0.7% from the prior month to a seasonally adjusted annual rate of $1.083 trillion, the Commerce Department said Tuesday, the highest level since May 2008. Private building led the way, with both residential and nonresidential construction hitting new postrecession highs. State and local government spending dropped in July, but only after posting solid gains during the previous four months. “The overall impression from the past few months is that the construction sector overall is the strongest part of the economy, with spending up at a remarkable 26% annualized rate in the three months to July,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients.To be sure, construction spending data is volatile and often heavily revised. Low oil prices, meanwhile, may hinder investment in structures used to extract natural resources from the ground. But the overall construction trend has been building through the course of the year and the most recent updates were broadly positive for second-quarter growth. And actual spending during the first seven months of the year was up 9.3% from the same period in 2014.

Peak Construction Spending? --Construction spending grew at 13.7% YoY in July. It has only grown at a faster pace than that once - at the very peak of the idiocy in Q1 2006. Nope - no bubble here... So that got us wondering... how is it that Construction Spending is surging as Lumber Prices are collapsing? (unless homes are now made of Twitter share certificates). The answer is simple - lag... and we have seen this picture before... and it did not end well. Clearly, the exuberant construction industry jumps on Fed-induced signals of recovery and mal-invests en masse... until reality bites again. Charts: Bloomberg

Drone Oversight Is Coming to Construction Sites - For some construction workers, any thoughts of slacking off could soon seem rather quaint. The drones will almost certainly notice. The site of a lavish new downtown stadium for the Sacramento Kings in California are being monitored by drones and software that can automatically flag slow progress. Once per day, several drones automatically patrol the Sacramento work site, collecting video footage. That footage is then converted into a three-dimensional picture of the site, which is fed into software that compares it to computerized architectural plans as well as a the construction work plan showing when each element should be finished. The software can show managers how the project is progressing, and can automatically highlight parts that may be falling behind schedule. “We highlight at-risk locations on a site, where the probability of having an issue is really high,” . It can show, for example, that a particular structural element is behind schedule, perhaps because materials have not yet arrived. “We can understand why deviations are happening, and we can see where efficiency improvements are made,”

Consumer Spending Increased 0.3% in July - The July personal income and outlays report shows a 0.3% increase in consumer spending. When adjusted for inflation, consumer spending rose 0.2%. Personal income increased 0.4% while real disposable income also increased 0.4% for the month. This is moderate growth. Wages also seem to be finally picking up. Consumer spending is another term for personal consumption expenditures or PCE. Real personal consumption expenditures were $11,212 billion for July. Consumer spending is roughly two-thirds of GDP. Real means adjusted for inflation and is called in chained 2009 dollars Disposable income is what is left over after taxes and increased 0.4% when adjusted for prices. Graphed below are the monthly percentage changes for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue). Below are the real dollar amounts for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue) for the last year. Consumer spending encompasses things like housing, health care, food and gas in addition to cars and smartphones. In other words, most of PCE is most about paying for basic living necessities. Graphed below is the overall real PCE monthly percentage change. The reason for the increase in spending was durable goods.   Motor vehicles and parts were identified as half of the durable goods increase.  Nondurable goods are things like gasoline and food.  Services are things like health care.   When people are cutting back on their spending, durable goods are usually the first things to go, especially large ticket items.  Below are the real monthly percentage changes in 2009 chained dollars:

  • Durable goods: 1.3%
  • Nondurable goods: 0.1%
  • Services: 0.1%

Chain Store Sales September 3, 2015: August will be a 4th straight gain for core retail sales based on this morning's reports from retailers which are mostly posting stronger rates of year-on-year sales growth than they did in July. Retailers are upbeat and are confident of meeting targets in what are indications of strength for household spending. A calendar factor makes the strength more impressive as this year's Labor Day, which falls a week later and well into September, has pulled related sales, including back-to-school sales, into September at the expense of August. The ex-auto ex-gas reading in the July retail sales report posted an outsized 0.7 percent month-to-month gain following gains of 0.2 and 1.1 percent in the two prior months.

Reality Check: U.S. Subprime Credit Grows but From a Low Base - U.S. consumers are taking on more debt from sources such as payday lenders and Internet-based finance companies that charge high interest rates to people with low or non-existent credit scores, according to credit counselors and an executive from a leading source of lending data. Although the counselors said there is no evidence of a return to the reckless mortgage lending that preceded the 2008/09 housing bust, credit is available from an increasing number of non-traditional sources that are taking advantage of continuing post-recession restrictions by mainstream lenders. Although the overall consumer debt level is little changed this year, lenders are originating more loans to subprime borrowers, albeit from low levels, for mortgages, credit cards and car purchases, according to data from Equifax. The consumer credit information company reported in mid-August that the number of first mortgages issued to borrowers with credit scores under 620 is 30.5% higher in 2015 to date compared with the same period of 2014. The value of those loans rose 52.7% from the year-ago period. The number of credit cards issued by banks to subprime borrowers also rose 30.5% from a year earlier, while the number of auto loans to those with low credit scores rose by 8.9% to 2.64 million. Dennis Carlson, deputy chief economist at Equifax, said the rise in different types of lending to subprime borrowers should be watched but is not an immediate cause for concern because the increases are from the very low levels that resulted from a sharp contraction of credit availability since the last recession.

Restaurant Performance Index increased in July -- Here is a minor indicator I follow from the National Restaurant Association: Stronger sales, traffic in July boost RPI Driven by stronger same-store sales and customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) posted a solid gain in July.  The RPI stood at 102.7 in July, up 0.7 percent from June and the first gain in three months. In addition, July represented the 29th consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators. “July’s RPI gain was fueled primarily by an improvement in the current situation indicators,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Although a solid majority of operators reported higher same-store sales and customer traffic levels in July, their outlook for both sales growth and the economy is more cautious compared to recent months.”

Healthcare Inflation and the Core Inflation Gap - Cleveland Fed - The gap between two well-known measures of inflation—the year-over-year percent change in the core Consumer Price Index (CPI) and the core Personal Consumption Expenditures (PCE) price index—has widened recently to a level not seen since the last recession.  One potential explanation for this widening spread between the core indexes is low healthcare inflation and the fact that healthcare is treated differently in each index. Each core index can be roughly thought of as a weighted average of the price growth of components in a basket of goods and services. Healthcare receives the largest weight of all the basket components in the calculation of core PCE inflation (about 25 percent) but is weighted at just 10 percent in the core CPI.  This is because the CPI only takes out-of-pocket consumer healthcare expenditures into account, while the PCE augments these with purchases that have been made on behalf of consumers by employer-provided insurance, Medicare, and Medicaid. Given this significant weight differential, it is conceivable that low healthcare inflation could be pushing year-over-year core PCE growth well below the rate of core CPI growth. To investigate this possibility, we construct a composite price index that we can use to measure overall healthcare inflation. We calculate this index in the same way as the core PCE index, but use only the medical goods and services components of the core PCE basket (see Dolmas 2005 for more details). This healthcare index shows that since 2012, and especially since mid-2014, healthcare inflation has been approximately the same as core PCE inflation. Prior to then, healthcare inflation consistently exceeded core PCE inflation. Next, we construct a second index by stripping healthcare goods and services from the core PCE index. Comparing the year-over-year growth in this index to core PCE allows us to see the contribution of healthcare inflation to core PCE inflation over time. Healthcare inflation pushed up core PCE inflation an average of 40 basis points from 2000 to 2007. However, it has had a relatively neutral effect following the shock of the Great Recession, contributing an average of zero basis points to core PCE inflation from 2011 onwards.

Gas Prices Plummet in Many States, Down 30¢ in One Week -- When oil prices drop, so does the cost of filling up at the gas station. That’s how things work normally. But the exact opposite took place in much of the country in August, as gas prices soared in the Midwest—rising 40¢ overnight in some locations—despite oil prices dipping to six-year lows.The blame for the odd, frustrating situation was cast on problems at the Midwest’s most important refinery, located in Indiana and run by British Petroleum. Now that the industry has had time to cope with the outage, prices are retreating—in some cases, almost as quickly as they shot up.In Michigan, the statewide average dropped 32¢ per gallon over the past week. Average prices in Chicago fell around 30¢ too, though because the Windy City is so reliant on the Indiana refinery, prices remain roughly 40¢ per gallon higher compared with the rest of the state. Prices have dropped steeply in states such as Wisconsin as well, falling nearly 35¢ in Milwaukee over the past week.The price crash in the Midwest has pushed the national average southward, reaching $2.47 as of Monday, according to AAA, down roughly 12¢ in the last week. Barring more refinery problems or other issues that could derail the current trend, the national average should keep inching toward the $2 mark this fall, as analysts have forecast.

Gas prices have plunged since Whiting Refinery fixed - Gas prices have plunged by more than 38 cents a gallon locally since the largest crude distillation unit at the BP Whiting Refinery was restarted last week, and they continue to fall. One industry observer said $2-a-gallon gas could be coming soon. Drivers could already buy gas for as little as $2.28 a gallon Tuesday at a Murphy USA Station at Morthland Drive and Frontage Road in Valparaiso. The average retail gas price in the Gary metropolitan area was $2.59 a gallon as of Tuesday afternoon, and it’s trending down, according to GasBuddy.com. The national average fell nearly 13 cents to an average of $2.47 a gallon Monday. “Nationally, gas prices saw their largest weekly drop of the year,” . “Prices moved lower in all but one state, Utah, with plunges at the pump throughout the Great Lakes as a result of BP’s Whiting, Ind., refinery coming back online. The national average now stands at its lowest point since April, a fitting way to close out the summer driving season with Labor Day approaching. “While oil prices rallied late last week, I don’t yet expect it to impact pump prices, as they still have some catching up to do with the drop in crude oil prices. Since June 30, oil prices have fallen 23 percent while retail gasoline prices have fallen about half that amount, so gasoline prices will move lower again this week.”

Gas-Price Drop Takes Americans’ Interest in Fuel Economy Down With It - With gasoline prices heading into Labor Day at the lowest level in more than a decade, Americans’ enthusiasm for fuel economy is waning. Google searches for “MPG,” shorthand for the fuel-economy measure miles per gallon, decreased 32% in the last week of August compared with two years earlier, according to the data from the technology giant. That nearly matches the 33% fall in the price for a gallon of regular gasoline during that time. The Google data shows a tie between movements in gasoline prices and interest in “MPG.” When gas prices edged up this spring from winter lows, as is typical for the season, fuel-economy searches rose, even though gasoline prices were down almost a dollar from a year earlier. Interest on the Internet appears to be translating to dealer lots. U.S. auto dealers sold nearly 600,000 more sport-utility vehicles and pickup trucks through August, compared with the first eight months of last year, and almost 168,000 fewer cars, according to researcher Autodata Corp. When gasoline prices held consistently above $3 a gallon for a four-year stretch between 2010 and last fall, Americans gravitated toward fuel-sipping cars. Small vehicles such as the Toyota Prius Hybrid and Ford Focus grew in popularity and automakers rolled out all-electric cars, such as the Chevrolet Volt and Nissan Leaf. Consumers’ preferences and better technology caused the average fuel economy of all cars sold in the U.S. to peak at 25.8 miles per gallon in August 2014, according to the University of Michigan Transportation Research Institute. In the year since, average fuel economy slipped by a half-mile per gallon. The “decline likely reflects the decreased price of gasoline in August, and the consequent increased sales of light trucks and SUVs,” said Michael Sivak, a Michigan researcher.

U.S. Light Vehicle Sales increased to 17.7 million annual rate in August -- Based on a WardsAuto estimate, light vehicle sales were at a 17.72 million SAAR in August. That is up 2.9% from August 2014, and up 1.3% from the 17.5 million annual sales rate last month.  This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for July (red, light vehicle sales of 17.7 million SAAR from WardsAuto). This was above to the consensus forecast of 17.3 million SAAR (seasonally adjusted annual rate). The second graph shows light vehicle sales since the BEA started keeping data in 1967.  Note: dashed line is current estimated sales rate. This was another very strong month for auto sales - even with Labor Day falling in the September sales month this year (it was included in August last year).  It appears 2015 will be the best year for light vehicle sales since 2001.

Trade Deficit decreased in July to $41.8 Billion -- The Department of Commerce reportedThe U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that the goods and services deficit was $41.9 billion in July, down $3.3 billion from $45.2 billion in June, revised. July exports were $188.5 billion, $0.8 billion more than June exports. July imports were $230.4 billion, $2.5 billion less than June imports. The trade deficit was smaller than the consensus forecast of $42.9 billion.  The first graph shows the monthly U.S. exports and imports in dollars through June 2015.  Imports decreased and exports decreased in July. Exports are 14% above the pre-recession peak and down 4% compared to July 2014; imports are close to the pre-recession peak, and down 3% compared to July 2014. The second graph shows the U.S. trade deficit, with and without petroleum. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products (wild swings earlier this year were due to West Coast port slowdown). Oil imports averaged $54.20 in July, up from $53.76 in June, and down from $97.81 in July 2014. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012. The trade deficit with China increased to $31.6 billion in July, from $30.9 billion in July 2014. The deficit with China is a large portion of the overall deficit.

International Trade September 3, 2015: The nation's trade gap narrowed to a nearly as expected $41.9 billion in July following an upward revised gap of $45.2 billion in June (initially $43.8 billion). The improvement reflects a monthly rise of 0.4 percent in exports, which were led by autos, and a 1.1 percent contraction in imports that reflected a decline in pharmaceutical preparations and cell phones which helped offset a monthly rise in imports of oil where prices were higher in July. Aside from autos, exports of industrial supplies, specifically nonmonetary gold, were strong in July while exports of capital goods also expanded. This helped offset a monthly decline in exports of civilian aircraft and consumer goods. Turning again to imports, other details include a rise in capital goods in what is the latest sign of life for business investment. By nation, the gap with China widened slightly, to an unadjusted $31.6 billion in the month, while the gap with the EU widened more substantially to $15.2 billion, again unadjusted which makes month-to-month conclusions difficult. Gaps with Mexico and Canada both narrowed. This report is another positive start to the quarter and will lift early third-quarter GDP estimates. But these will be cautious estimates as recent market turbulence pushes back conclusions and will make August's trade data especially revealing.

Trade Balance Down 3.3B from Revised June Headline - The International Trade in Goods and Services, also known as the FT-900, is published monthly by the Bureau of Economic Analysis with revisions that go back several months, with data going back to 1992. This report details U.S. exports and imports of goods and services. Since 1976, the United States has had an annual negative trade deficit. Here is an excerpt from the report: The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that the goods and services deficit was $41.9 billion in July, down $3.3 billion from $45.2 billion in June, revised. July exports were $188.5 billion, $0.8 billion more than June exports. July imports were $230.4 billion, $2.5 billion less than June imports.  The July decrease in the goods and services deficit reflected a decrease in the goods deficit of $3.4 billion to $61.4 billion and a decrease in the services surplus of less than $0.1 billion to $19.6 billion.  Year-to-date, the goods and services deficit increased $10.6 billion, or 3.6 percent, from the same period in 2014. Exports decreased $47.0 billion or 3.5 percent. Imports decreased $36.4 billion or 2.2 percent. This series tends to be extremely volatile, so we use a six-month moving average. Today's headline number of -41.86B was slightly better than the Investing.com forecast of -42.40B. Revisions were made going back to January of this year.

July 2015 Trade Data Is Mixed With Deceleration of the Rolling Averages: A quick recap to the trade data released today paints a mixed picture. The unadjusted three month rolling average value of imports and exports decelerated month-over-month,. Many care about the trade balance (which decreased marginally relative to last month), but trade balance simply has little correlation to economic activity. Note that inflation adjusted data paints a prettier picture economically as there is deflation in this sector.

  • Import goods growth has positive implications historically to the economy - and the seasonally adjusted goods and services imports were reported down month-over-month. Econintersect analysis shows unadjusted goods (not including services) growth deceleration of 4.8% month-over-month (unadjusted data). The rate of growth 3 month trend is decelerating.
  • Exports of goods were reported marginally up, but Econintersect analysis shows unadjusted goods exports growth deceleration of (not including services) 1.6 % month-over month. The rate of growth 3 month trend is decelerating.
  • Import goods growth has positive implications historically to the economy - and the seasonally adjusted goods and services imports were reported down month-over-month. Econintersect analysis shows unadjusted goods (not including services) growth deceleration of 4.8% month-over-month (unadjusted data). The rate of growth 3 month trend is decelerating.
  • Exports of goods were reported marginally up, but Econintersect analysis shows unadjusted goods exports growth deceleration of (not including services) 1.6 % month-over month. The rate of growth 3 month trend is decelerating.

Factory Orders September 2, 2015: A lower-than-expected headline gain of 0.4 percent in July reflects price-related weakness in energy products and masks significant underlying strength in factory orders. Pulled down by petroleum and coal products, orders for non-durables fell a sharp 1.3 percent, offsetting a very strong and upward revised jump of 2.2 percent in durable goods orders (initially plus 2.0 percent as posted in last week's advance durable goods report). The gain in durable goods was driven by gains in motor vehicles and includes strong gains for capital goods which indicate, at least it did as of July, rising business investment and rising confidence in the overall outlook. Orders for vehicle bodies, parts & trailers jumped 4.0 percent in July after rising 1.2 percent in June. Orders for ships & boats have been on a special tear, up 19.5 percent following gains of 28.0 and 11.0 percent in the two prior reports. And the July report would have been even stronger if not for a 6.1 percent downswing in commercial aircraft orders that followed June's 70 percent surge. Excluding transportation equipment, factory orders actually fell in July, down 0.6 percent following a 0.6 percent rise in June. Turning to details on capital goods, core orders, that is nondefense goods excluding aircraft, jumped 2.1 percent on top of June's 1.5 percent gain. Shipments for this reading, which are part of nonresidential fixed investment in the GDP report, rose 0.6 percent in July and 1.0 percent in June. Note that the 0.6 percent gain in July is unrevised which should not affect ongoing third-quarter GDP estimates. Total shipments, again reflecting weakness in non-durables, slipped 0.2 percent in July. Unfilled orders rose 0.2 percent with inventories slipping 0.1 percent. The slip in inventories did not change the inventory-to-shipments ratio which is stable at 1.35.

July 2015 Manufacturing Is a Disaster: US Census says manufacturing new orders improved. Our analysis says new orders crashed. Unadjusted unfilled orders' growth is now in CONTRACTION year-over-year. No matter how you cut the data, it is bad. The headline analysis is extremely misleading this month. There was no tailwinds this month in the data. Civilian aircraft was a headwind.

US Census Headline:

  • The seasonally adjusted manufacturing new orders is up 0.4 % month-over-month, and down 7.3 % year-to-date (last month was down 3.6 % year-to-date)..
  • Market expected month-over-month growth of -0.4 % to 1.3 % (consensus +0.9 %) versus the reported +0.4%.
  • Manufacturing unfilled orders up 0.2% month-over-month, and down 0.6% year-over-year (last month was up 4.6% year-over-year).

Econintersect Analysis:

  • Unadjusted manufacturing new orders growth decelerated 11.0 % month-over-month, and down 15.2 % year-over-year
  • Unadjusted manufacturing new orders (but inflation adjusted) up 10.7 % year-over-year - there is deflation in this sector.
  • Unadjusted manufacturing unfilled orders growth decelerated 5.2 % month-over-month, and down 0.6% year-over-year
  • As a comparison to the inflation adjusted new orders data, the manufacturing subindex of the Federal Reserves Industrial Production was growth accelerated 0.9 % month-over-month, and up 1.8% year-over-year.

Dallas Fed: "Texas Manufacturing Activity Holds Steady, but Outlooks Deteriorate" --From the Dallas Fed: Texas Manufacturing Activity Holds Steady, but Outlooks Deteriorate Texas factory activity was essentially flat in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, climbed to near zero (-0.8), suggesting output held steady after five months of declines....Perceptions of broader business deteriorated markedly in August. The general business activity index dropped 11 points from -4.6 to -15.8, and the company outlook index also posted a double-digit decline, coming in at -10.3....Labor market indicators reflected slight employment declines and stable workweek length. The August employment index was negative for a fourth month in a row but edged up to -1.4. This was the last of the regional Fed surveys for August. Three of the five surveys indicated contraction in August, mostly due to weakness in oil producing areas. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

August 2015 Texas Manufacturing Survey Manufacturing Activity Continues to Contract for Sixth Month: Of the five Federal Reserve districts which have released their August manufacturing surveys - one forecasts weak growth and four are in marginal contraction. A complete summary follows. There market expections (from Bloomberg) were -8.0 to 0.5 (consensus 2.5) versus -0.8 actual. From the Dallas Fed: Texas factory activity was essentially flat in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, climbed to near zero (-0.8), suggesting output held steady after five months of declines. Other measures of current manufacturing activity showed mixed movements in August. The capacity utilization index, like the production index, rose to zero after several months in negative territory. The shipments index also edged up, coming in at -3. Sharp declines were seen in measures of demand, however. The new orders index plunged 13 points to -12.5 after rebounding to positive territory last month, and the growth rate of orders index fell from -5.2 to -14. Perceptions of broader business deteriorated markedly in August. The general business activity index dropped 11 points from -4.6 to -15.8, and the company outlook index also posted a double-digit decline, coming in at -10.3. Labor market indicators reflected slight employment declines and stable workweek length. The August employment index was negative for a fourth month in a row but edged up to -1.4. Fifteen percent of firms reported net hiring, compared with 16 percent reporting net layoffs. The hours worked index rose from -6.3 to 0.6, with the near-zero reading suggesting no change in workweek length from July.

Dallas Fed Region Activity Plunges Well Below Any Forecast --  There's little else worth cheering about, not even the stock market lately. And housing is not all that strong either. Today, the Dallas Fed reported that activity in its region plunged to a reading of reading of -15.8, well below any economist's prediction. The Bloomberg Consensus range was -8.0 to +0.5.   Nowhere are the effects of the oil-patch rout more evident than in the Dallas Fed manufacturing report where the general activity index fell to minus 15.8 in August from July's already weak minus 4.6. New orders fell into deep contraction this month, down more than 13 points to minus 12.5 with employment, at minus 1.4, in contraction for a fourth straight month. Hours worked are at minus 6.3 while readings on the business outlook fell steeply though both remain in slightly positive ground. Less weak readings were posted by production, shipments and capacity utilization. But price readings are very weak, with raw materials at minus 8.0 and finished goods at minus 15.7. It really doesn't get any worse than this report which points to increasing drag from the energy sector.

Chicago PMI decreases slightly in August  -- Chicago PMI: August Chicago Business Barometer Down 0.3 Point to 54.4 The Chicago Business Barometer held on to most of July’s gain, falling just a fraction to 54.4 in Augustfrom 54.7 in July. While below the highs seen towards the end of last year, it’s still consistent with a bounceback in activity in the third quarter following recent weaker growth... Chief Economist of MNI Indicators Philip Uglow said, “It was pretty much steady as she goes in August with orders and output just about holding on to July‘s gains. While the slowdown earlier in the year looks temporary, we‘re still some way below the strong growth rates seen towards the end of 2014“ This was below the consensus forecast of 54.7.

August 2015 Chicago Purchasing Managers Barometer Steady As She Goes.: The Chicago Business Barometer insignificantly declined but remains in expansion. From Bloomberg, the market expected the index between 53.0 to 57.5 (consensus 54.9) versus the actual at 54.4. A number below 50 indicates contraction. Chief Economist of MNI Indicators Philip Uglow said, It was pretty much steady as she goes in August with orders and output just about holding on to July's gains. While the slowdown earlier in the year looks temporary, we're still some way below the strong growth rates seen towards the end of 2014. From ISM Chicago: The Chicago Business Barometer held on to most of July's gain, falling just a fraction to 54.4 in August from 54.7 in July. While below the highs seen towards the end of last year, it's still consistent with a bounceback in activity in the third quarter following recent weaker growth. A slight easing in both Production and New Orders prompted the latest decline in the Barometer, with both paring some of the large gains seen in July that had left them at the highest level since January. While New Orders and Production softened in August, both remained above their 12-month averages and significantly up from the depressed levels seen between February and June.

Chicago PMI Bounce Stalls, "Firms At Risk Of Being Over-Inventoried" -- Following this morning's ISM Milwaukee disappointment, missing for the 8th month sof the last 9 (printing 47.67 vs 50.00 exp and hovering at 2 year lows) with production and prices plunging, Chicago PMI just printed a slightly disappointing 54.4 (against expectations of 54.5). After last month's surprise bounce, this slowdown suggests there is little to no momentum in any 'recovery' stemming from a Q2 bounce. Weakness under the surface is broad and as purchasers warned "failure of New Orders to materialize "within the next few weeks" could put firms at risk of being over-inventoried and curtail producton levels." Perhaps most worrying though is the 4th consecutive contraction in employment... but the recovery? Production and Prices plunged holding Milwaukee's ISM near 2-year lows... But then Chicago PMI hit... And underlying factors were weak... Some purchasers reported enough work to keep their facilities "busy" but said that there were a lot of small orders with large orders lacking. Judging by the market's response - it appears bad news is now bad news.

ISM Manufacturing index decreased to 51.1 in August - The ISM manufacturing index suggested expansion in August. The PMI was at 51.1% in August, down from 52.7% in July. The employment index was at 51.2%, down from 52.7% in July, and the new orders index was at 51.6%, down from 56.5%. From the Institute for Supply Management: August 2015 Manufacturing ISM® Report On Business® Economic activity in the manufacturing sector expanded in August for the 32nd consecutive month, and the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.  "The August PMI® registered 51.1 percent, a decrease of 1.6 percentage points from the July reading of 52.7 percent. The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent. The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent. Comments from the panel reflect a mix of modest to strong growth depending upon the specific industry, the positive impact of lower raw materials prices, but also a continuing concern over export growth."Here is a long term graph of the ISM manufacturing index. This was below expectations of 52.8%, and indicates slower manufacturing expansion in August.

ISM Manufacturing Index: 32nd Consecutive Month of Expansion --Today the Institute for Supply Management published its monthly Manufacturing Report for August. The latest headline PMI was 51.1 percent, a decrease of 1.6% from the previous month and below the Investing.com forecast of 55.0. This was the 32nd consecutive month of expansion. Here is the key analysis from the report:"The August PMI® registered 51.1 percent, a decrease of 1.6 percentage points from the July reading of 52.7 percent. The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent. The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent. Comments from the panel reflect a mix of modest to strong growth depending upon the specific industry, the positive impact of lower raw materials prices, but also a continuing concern over export growth." Here is the table of PMI components.

Manufacturing Survey Shows Slowing in August  -- The August ISM Manufacturing Survey shows more deceleration of the manufacturing sector.  While a PMI of 51.1% is still growth, the decline in new orders is disconcerting.  The composite PMI decreased by -1.6 percentage points and new orders decreased by -4.8 percentage points.  Overall the report really shows a weakening manufacturing sector.  The ISM Manufacturing survey is a direct survey of manufacturers.  Generally speaking, indexes above 50% indicate growth and below indicate contraction.  Every month ISM publishes survey responders' comments, which are part of their survey.  Strong and steady are mentioned to describe demand.  Manufacturers also complain of a strong dollar hurting their products. New orders really slid by -4.8 percentage points to 51.7%.  This represents weak growth in new orders. The Census reported July durable goods new orders increased 2.0%, where factory orders, or all of manufacturing data, will be out later this month.  Note the Census one month lag from the ISM survey.  The ISM claims the Census and their survey are consistent with each other and they are right.  Below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics.  Here we do see a consistent pattern between the two and this is what the ISM says is the growth mark: A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.  Below is the ISM table data, reprinted, for a quick view.

ISM Weaker Than Expected, Details Weak, Exports Contract Third Month  - Those expecting a boost from the ISM report for August were disappointed today. The Bloomberg Consensus estimate for ISM was 52.8, with a range of 51.5 to 54.0. The report was below any economist's expectation at 51.1.  The ISM index, at a lower-than-expected 51.1, is signaling the slowest rate of growth for the factory sector since May 2013. And the key details are uniformly weak.  New orders, at 51.7, are at one of the slowest rates of monthly growth of the recovery, since April 2013. Backlog orders, at 46.5, are in a third month of contraction. New export orders, at 46.5, are also in their third straight month of contraction and are at the lowest rate since July 2012.  ISM's sample wasn't hiring much in August, at 51.2 for a 1.5 point decline from July and the weakest reading since April. Production slowed and prices paid, at only a 39.0 level last since in March, points to deflationary pressures.  The good news for the economy is that this report failed to pick up the auto-led surge that lifted the factory sector noticeably in June and July. Still, the ISM is followed closely and will raise doubts, justifiably or not, over a September 17 rate hike. Let's investigate all the details of today's report straight from the Institute for Supply Management Manufacturing ISM® Report On Business® released this morning.

August 2015 ISM Manufacturing Survey Again Marginally Declined But Remains in Expansion: The ISM Manufacturing survey continues to indicate manufacturing growth expansion - but again marginally declined this month. The key internal new orders declined but remains in expansion. Backlog of orders contraction improved over the contraction the previous month.. The ISM Manufacturing survey index (PMI) marginally declined from 52.7 to 51.1 (50 separates manufacturing contraction and expansion). This was slightly below expectations which were 51.5 to 54.0 (consensus 52.8). Earlier today, the PMI Manufacturing Index was released - from Bloomberg:  Growth in Markit's manufacturing sample is as slow as it's been since October 2013, at a composite 53.0 in August which is right at the Econoday consensus. Growth in new orders slowed while growth in backlog orders was marginal. Export orders, hurt by the strong dollar, contracted for the fourth time in five months with August's drop the deepest of the run. Growth in output is the slowest since January 2014 while growth in employment is the slowest since July 2014. Inventory data are positive, showing the first decline this year for finished goods and the slowest build for pre-production in just over a year, a combination which may ease concern that inventories in the sector are heavy. Price readings are quiet.

US Manufacturing Plunges To 2-Year Lows As New Orders, Employment Tumble -- Following disappoint PMIs from around the world, the US decoupling meme took another knock today as Markit PMI printed 53.0 (from 53.8) - its lowest in almost 2 years, led by aplunge in the employment subindex. Weakness was also evident in new factory orders. As Markit notes, "U.S. manufacturing sector continues to struggle under the weight of the strong dollar and heightened global economic uncertainty." On the heels of Milwaukee and Dallas Fed weakness, ISM Manufacturing printed a disastrous 51.1 (vs 52.5 expectations) - the lowest since May 2013. Employment tumbled, as did New Export ordedrs, but unadjusted New Orders plunged to its lowest since 2013, which is a problem given the massive inventory builds that have saved the world in the last few months.

Inventory Grows in Economic Liftoff Anticipation - The Chicago PMI reading came in just shy of the Bloomberg Econoday Estimate of 54.9The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction.  Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end.  Let's dive into the Chicago PMI Report for further details.  While New Orders and Production softened in August, both remained above their 12-month averages and significantly up from the depressed levels seen between February and June. Part of that resilience in Production and New Orders was due to stock growth as companies built inventories at the fastest pace since November 2014. Feedback from companies was mixed although our assessment is that the overall positive tone of the survey is consistent with a deliberate stock-build in anticipation of stronger demand in Q4. Despite the latest gain, the labour component remained in contraction for the fourth consecutive month and was still close to June’s nearly 5-1/2 year low. The Employment component has been relatively weak in recent months and the survey suggests it’s unlikely to see a strong pick-up in the short-term.Responding to a special question asked in August, 63% of our panel said they didn't plan to expand their workforce over the next three months.  Once again, everyone hopes for a "second half liftoff" that perennially struggles to arrive as strong as expected.  This year, I highly doubt 2% for the entire year. 1% growth might be an achievement. Nonetheless, businesses stockpile in anticipation liftoff.

Location Matters: Effective Tax Rates on Manufacturers by State -- The country’s manufacturing sector is in decline. In 1979, about 19.6 million Americans were employed in manufacturing. Today the number stands at 12.3 million. Despite—or perhaps because of—this economic shift, manufacturing firms tend to be the recipients of substantial state incentives. That’s one takeaway from our new Location Matters study, which calculates the tax bills of seven model firms. We calculate their tax liability in all fifty states, first as mature firms and then again as new firms more likely to be eligible for state incentives, allowing for an apples-to-apples comparison of how state taxes fall on distinct business types.  Two of our seven model firms were manufacturers: a capital-intensive manufacturing facility and a labor-intensive manufacturing facility, given their distinct tax exposure. Predictably, unemployment insurance tax burdens tend to be more significant to labor-intensive manufacturing, but the impact of other taxes varies across the two firm types as well.

What a $15 Minimum Wage Would Mean for Manufacturing -- In Mississippi, 7.3% of all workers in the state are manufacturing workers who make less than $15 an hour. Losing many of these jobs would have a serious negative impact on the state. Because of its sample size, the CPS is of more limited use for small geographies. However, there is a relatively large number of observations for Los Angeles County, CA. Almost 400,000 manufacturing workers live in the county, and 55% of them make less than $15 an hour. Many of these workers will be affected by $15 minimum wages that have been approved for the City of Los Angeles and the unincorporated parts of Los Angeles County. This data suggest that if the minimum wage was increased to $15 an hour across the U.S., it would impact a significant number of manufacturing workers, with some states being hit harder than others. This reflects the fact that lifting the minimum wage to $15 an hour would not just be quantitatively larger than previous U.S. experience, but qualitatively different in that it would affect a different set of workers and industries. Leisure/hospitality and retail make up 54% of the workers who make less than $8 an hour, but only 34% of those making less than $15 an hour. As the minimum wage rises it affects other sectors. For manufacturing, at least, the effect is likely to be greater.

ISM Non-Manufacturing Index decreased to 59.0% in August --The August ISM Non-manufacturing index was at 59.0%, down from 60.3% in July. The employment index decreased in August to 56.0%, down from 59.6% in July. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: August 2015 Non-Manufacturing ISM Report On Business®  "The NMI® registered 59 percent in August, 1.3 percentage points lower than the July reading of 60.3 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 63.9 percent, which is 1 percentage point lower than the July reading of 64.9 percent, reflecting growth for the 73rd consecutive month at a slower rate. The New Orders Index registered 63.4 percent, 0.4 percentage point lower than the reading of 63.8 percent in July. The Employment Index decreased 3.6 percentage points to 56 percent from the July reading of 59.6 percent and indicates growth for the 18th consecutive month. The Prices Index decreased 2.9 percentage points from the July reading of 53.7 percent to 50.8 percent, indicating prices increased in August for the sixth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in August. Overall, respondents continue to be optimistic about business conditions and the economy. This is reflected by indexes that are again strong; however, lower than what was seen in July." This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

ISM Non-Manufacturing: Continued Growth at a Slower Rate -- Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 59.0 percent, down 1.3 percent from last month's 60.3 percent. Today's number came in above the Investing.com forecast of 56.1 percent. Here is the report summary:  "The NMI® registered 59 percent in August, 1.3 percentage points lower than the July reading of 60.3 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 63.9 percent, which is 1 percentage point lower than the July reading of 64.9 percent, reflecting growth for the 73rd consecutive month at a slower rate. The New Orders Index registered 63.4 percent, 0.4 percentage point lower than the reading of 63.8 percent in July. The Employment Index decreased 3.6 percentage points to 56 percent from the July reading of 59.6 percent and indicates growth for the 18th consecutive month. The Prices Index decreased 2.9 percentage points from the July reading of 53.7 percent to 50.8 percent, indicating prices increased in August for the sixth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in August. Overall, respondents continue to be optimistic about business conditions and the economy. This is reflected by indexes that are again strong; however, lower than what was seen in July." Unlike its much older kin, the ISM Manufacturing Series, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

August 2015 ISM Services Index Marginally Declines: The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined from 60.3 to 59.0 (above 50 signals expansion). Important internals likewise declined but remain in expansion. Market PMI Services Index was released this morning, also is in expansion, but improved. This was above expectations of 56.5 to 61.5 (consensus 58.5). For comparison, the Market PMI Services Index was released this morning also - and it strengthened. Here is the analysis from Bloomberg: New orders have been strong in this report and hiring has been described as robust, a reminder that the domestic economy, apart from global troubles, remains solid. There are two sub-indexes in the NMI which have good correlations to the economy - the Business Activity Index and the New Orders Index - both have good track records in spotting an incipient recession - both remaining in territories associated with expansion. This index and its associated sub-indices are fairly volatile - and onande needs to step back from the data and view this index over longer periods than a single month. The Business Activity sub-index declined 1.0 points and now is at 63.9.

US Services Economy 'Solid' In August - Signals September Hike Back On Table -- Markit's US Services PMI printed a healthy 56.1 for August, rising for the 2nd consecutive month, comfortably beating expectations and giving The Fed more ammo for a September hike. This rise was achieved despite the weakest rise in new work in 3 months. While Markit notes that this headline print suggest 'everything is awesome' it suggests the need for more stimulus just in case, as prices are falling. Following the dramatic spike in the July ISM Services to 10 year highs, it dropped back modestly, thanks to slide in New Orders, with an August print of 59.0 - still the highest since Nov 2005, again offering no excuse for The Fed to stay on hold.

Intuit Small Business Index: A First Look - Here we introduce the Intuit Small Business Employment Index (SBI) which measures employment in firms with fewer than 20 employees with data going back to 2007. The real-time data comes directly from Intuit software, not from surveys, and is the only source of monthly data on small business revenues, expenses, and payroll data. It allows for a much earlier read on the health of small businesses. These small businesses (less than 20 employees) make up 87 percent of the total U.S. private employer base, which is almost 21 million people. The SBI represents 5 percent of this nationwide category.  Intuit has created an index based on the monthly employment numbers from BLS with 100 equaling January 2007. We have used that series for our charts with recessions highlighted. The current index comes in at 97.6.  For comparison, let’s look at the ADP Small Business Report, which measures private sector business employment using client payroll data and is a subset of the ADP National Employment Report. The primary difference between the SBI and ADP are the categorizations of small businesses. ADP includes in their index small businesses such as singular franchise stores that are part of a larger business, whereas the SBI uses only independent business with less than 20 employees. The ADP index tends to be more optimistic than SBI due to this fact.  Here is the ADP Small Business Report along with NFIB Small Business Optimism Index and its 12 month MA. The NFIB Research Foundation collects data on small businesses and calculates an Optimism Index to gauge small business sentiment with data going back to 1986 using surveys. We have indexed both the ADP and NFIB to January 2007 = 100 for comparison to the Intuit Small Business Index.

The single most important thing about the US economy sure looks broken --US productivity in the second quarter grew at the fastest pace since the end of 2013, according to revised government figures. But if you pull back the camera, longer-term productivity growth remains terribly worrisome. IHS Global Insight: This  Productivity growth remains low. The slowdown started about 10 years ago. The Great Recession muddied the data, making it difficult to tell whether the slowdown was a byproduct of the business cycle or something fundamental. In recent years, it has become clear that something was fundamentally off.  Productivity’s slow pace has the profession puzzled. Some economists have concluded that today’s innovations are simply not as path-breaking as those that supported previous productivity booms. Others believe that the numbers are plain wrong because government statisticians have not figured out how to measure the value of recent innovations.  Should we be worried about productivity? If the numbers are being measured correctly, yes because in the long-run, productivity is the best measure of an economy’s success. Applying the Rule of 72, if growth is 2%, the pie doubles every 35 years, if growth is 1%, it doubles every 72 years and, as it is now, if growth is 0.5%, it doubles every 144 years. Or look at it this way: Capital Economics points out in a recent note that real worker compensation has increased by an average of just 0.6% over the past decade vs. 2.3%, 1995 to 2005. But without “the slowdown in productivity growth that began a decade ago, real incomes would be 10% higher than they actually are today.” If productivity growth stays this slow and you assume 1% labor force growth, then America’s potential growth rate isn’t even 2%. The pie may double only every half century. While Democrats are focusing on their demand-side, consumer-oriented “middle out” economics, the US economy may well face serious supply-side issues.

Weekly Initial Unemployment Claims increased to 282,000 --  The DOL reported: In the week ending August 29, the advance figure for seasonally adjusted initial claims was 282,000, an increase of 12,000 from the previous week's revised level. The previous week's level was revised down by 1,000 from 271,000 to 270,000. The 4-week moving average was 275,500, an increase of 3,250 from the previous week's revised average. The previous week's average was revised down by 250 from 272,500 to 272,250.  There were no special factors impacting this week's initial claims.  The previous week was revised down to 270,000. The following graph shows the 4-week moving average of weekly claims since 1971.

Challenger Job-Cut Report September 3, 2015: Lay-off announcements, at 41,186, were moderate in August and far lower than the 105,696 in July which was skewed higher by a massive Army cutback. August layoffs were led by the retail sector reflecting the bankruptcy of the A&P supermarket chain. Layoff levels in this report have generally been on the low side but are not nearly as striking as actual jobless claims which are extremely low. This report will have no effect on expectations for tomorrow's employment report which is expected to be moderate to soft and in line with trend.

Total Job Cuts On Pace To Be Biggest Since 2009: Challenger -- Moments ago Challenger reported August job cuts, which at 41,186 were a 60% drop from the 115,730 reported last month (the highest since September 2011), which however was driven by a one-time mass layoffs last month in military staffing. Putting August in its correct perspective, the number was 2.9% higher than the same month a year ago, when 40,010 planned job cuts were announced. What is troubling is that this marks the seventh month this year that the job-cut total was higher than the comparable month from 2014. What is worse is that for all the euphoria about initial claims printing at or near record lows, the reality as measured from the bottom-up, is far different and as Challenger notes, so far in 2015 employers have announced 434,554 job cuts: that is up 31 percent from the 332,931 planned layoffs in the first eight months of 2014.  What is worst, and what reveals the true picture of the economy, is that with monthly totals averaging 54,319, 2015 job cuts are on track to exceed 650,000 for the year, which would be the highest year-end tally since 2009 (1,272,030).In other words, not only is the economy no longer growing at its previous pace, but due to the ongoing oil rout, tens of thousands of highly-paid workers mostly in the oil space are getting pink slips just as the Fed is preparing to tighten. Putting a number to that estimate, Challenger says that "since the beginning of the year, oil prices have been blamed for 82,268 layoffs, mostly in the energy sector, but also among industrial goods manufacturers that supply equipment and materials for oil exploration and extraction."

ADP: Private Employment increased 190,000 in August  -- From ADP: Private sector employment increased by 190,000 jobs from July to August according to the August ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis....Goods-producing employment rose by 17,000 jobs in August, more than double the 7,000 gained in July. The construction industry added 17,000 jobs in August, up from 15,000 last month. Meanwhile, manufacturing added 7,000 jobs in August, after gaining only 1,000 in July. Service-providing employment rose by 173,000 jobs in August, up slightly from 170,000 in July. ... Mark Zandi, chief economist of Moody’s Analytics, said, “Recent global financial market turmoil has not slowed the U.S. job market, at least not yet. Job growth remains strong and broad-based, except in the energy industry, which continues to shed jobs. Large companies also remain more cautious in their hiring than smaller ones.” This was below the consensus forecast for 210,000 private sector jobs added in the ADP report. 

ADP: US Private-Sector Jobs Rise 190k In August -- Payrolls at US companies increased by a moderate 190,000 (seasonally adjusted) in August, according to this morning’s monthly release of the ADP Employment Report. The respectable if not particularly impressive gain is slightly below Econoday.com’s consensus forecast for a 210,000 advance. Meanwhile, last month’s rise translates into another round of easing for the year-over-year rate. Nonetheless, today’s numbers are strong enough to fend off worries that a recession is imminent for the US. Recent global financial market turmoil has not slowed the US job market, at least not yet,” said Mark Zandi, chief economist of Moody’s Analytics, which publishes the data in connection with ADP. “Job growth remains strong and broad-based, except in the energy industry, which continues to shed jobs. Large companies also remain more cautious in their hiring than smaller ones.” Yet it’s also clear that the pace of job creation in annual terms is still decelerating. For the year through last month, ADP’s estimate of private-sector employment rose 2.2%, fractionally below July’s pace and the slowest year-over-year advance since April 2014. But let’s not overplay the deceleration card just yet. The current 2.2% annual increase is quite healthy and close to the best pace for the history of this series, which dates to 2001. The concern is that the slowdown in growth rolls on. Then again, maybe the annual rate will stabilize in the low-2% range.

August 2015 ADP Job Growth at 190,000 - Below Consensus Expectations -- ADP reported non-farm private jobs growth at 190,000. The rolling averages of year-over-year jobs growth rate remains strong but the rate of growth continues in a downtrend.

  • The market expected 190,000 to 227,000 (consensus 210,000) versus the 190,000 reported. These numbers are all seasonally adjusted;
  • In Econintersect's August 2015 economic forecast released in late June, we estimated non-farm private payroll growth at 170,000 (unadjusted based on economic potential) and 200,000 (fudged based on current overrun of economic potential);
  • This month, ADP's analysis is that small and medium sized business created 79% of all jobs;
  • Manufacturing jobs grew by 7,000;
  • 91% of the jobs growth came from the service sector;
  • July report (last month), which reported job gains of 185,000 was revised down to 177,000;
  • The three month rolling average of year-over-year job growth rate has been slowing declining since February 2015 - it is now 2.26% (down from 2.30% last month)

ADP changed their methodology starting with their October 2012 report, and ADP's real time estimates are currently worse than the BLS.

ADP Misses Again, Drops YoY For 7th Month In A Row - Following its disappointing tumble in July (having missed expectations for 6 of the last 7 months), August ADP printed another miss at 190k against expectations of a 200k rise with last month revised lower. As the energy sectyoir continues to bleed jobs at a rate of 10k per month, ADP's Zandi notes that manufacturing jobs growth is all auto-related (which is extremely worryinmg given the size of inventories). Job groiwth was largely driven by small businesses (85k) as opposed to large business (40k) with Service-producing goods drastically outpacing manufacturing job growth (173k to 17k). Perhaps most notably, ADP jobs data has dropped YoY for the last months.  Mark Zandi, chief economist of Moody’s Analytics, said, “Recent global financial market turmoil has not slowed the U.S. job market, at least not yet. Job growth remains strong and broad-based, except in the energy industry, which continues to shed jobs. Large companies also remain more cautious in their hiring than smaller ones.”  Charts: Bloomberg

August Employment Report: 173,000 Jobs, 5.1% Unemployment Rate --  From the BLS: Total nonfarm payroll employment increased by 173,000 in August, and the unemployment rate edged down to 5.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care and social assistance and in financial activities. Manufacturing and mining lost jobs... The change in total nonfarm payroll employment for June was revised from +231,000 to +245,000, and the change for July was revised from +215,000 to +245,000. With these revisions, employment gains in June and July combined were 44,000 more than previously reported....In August, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $25.09, following a 6-cent gain in July. Hourly earnings have risen by 2.2 percent over the year. The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed - mostly in 2010 - to show the underlying payroll changes). Total payrolls increased by 173 thousand in August (private payrolls increased 140 thousand). Payrolls for June and July were revised up by a combined 44 thousand. This graph shows the year-over-year change in total non-farm employment since 1968. In August, the year-over-year change was over 2.9 million jobs. That is a solid year-over-year gain.The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was unchanged in August at 62.6%. This is the percentage of the working age population in the labor force. A large portion of the recent decline in the participation rate is due to demographics. The Employment-Population ratio increased to 59.4% (black line).

August Jobs Report – The Numbers - The pace of hiring slowed sharply in August and the unemployment rate fell, the Labor Department said Friday.  U.S. employers added a seasonally adjusted 173,000 jobs in August–the worst monthly gain since March. The figure disappointed economists, who had forecast a gain of 220,000 jobs. Initial estimates for job gains in August have come in on the low side in recent years, only to be revised upward later. August marked the 59th consecutive month of job gains, the longest stretch on record.  Payroll readings in the prior two months were revised up by a total of 44,000 jobs. Employers added 245,000 jobs in both June and July. The average job gain over the past three months was 221,000, a slowdown from the July three-month average of 250,000, but still a healthy pace.  The headline unemployment rate fell to 5.1% last month from 5.3% in July. That pushes the jobless rate to its lowest level since April 2008.The rate is down from its 10% peak in October 2009, and is just above the 5% reading recorded when the recession began in late 2007. The current rate is within the 5% to 5.2% range Federal Reserve officials view as the likely long-run average. Average hourly earnings of private-sector workers rose by 8 cents to $25.09 last month. That’s a 2.2% increase from a year earlier. The gain suggests a modest acceleration in workers’ pay. The average workweek also increased by 0.1 hour last month. Wages had been advancing at a modest 2% pace during most of the expansion. Many economists point to the slow gains as a reason that consumer spending and the broader economy aren’t growing more rapidly. 10.3% A broader measure of unemployment that includes people looking for work, stuck in part-time jobs or who have been discouraged about finding a job dropped to 10.3% in August, down from 12% a year earlier. The rapid decline in the reading known as the U-6 rate has pushed the measure below its 20-year average of 10.7%. The labor-force participation rate stayed the same last month at 62.6%.The participation rate—the share of the population either working or actively looking for work—has been dropping for several years and is near levels last consistently recorded in the late 1970s, a time when women were entering the workforce in larger numbers. The latest reading is a result of the labor force shrinking by 41,000 last month, despite other signs of an improving jobs market. Employment in mining, a category that includes oil and gas extraction, fell by 9,000 in August. Since reaching a peak in December 2014, mining employment has declined by 90,000.

US Job Growth Stumbles In August --Private payrolls in the US grew at a surprisingly slow pace in August, according to this morning’s monthly employment update from the US Labor Dept. Companies created 140,000 new jobs last month—well below expectations for 200,000-plus. The disappointing news raises new questions about the strength of economic growth–and the timing of the Federal Reserve’s interest-rate hike. Last month’s pace of job creation stumbled, but there’s minimal effect on the year-over-year rate of employment growth—a more reliable measure of the trend. The annual change in employment growth ticked down in August, although the roughly 2.4% gain in year-over-year terms is still a healthy advance. Still, the downward bias this year deserves close attention. The burning question, which will take time to answer: Will growth continue to decelerate? After peaking at a 2.7% annual increase in February, the upside trend in private non-farm payrolls has been slipping, albeit slowly. It’s unclear if the slower rate of growth is a warning sign for the business cycle or just a normal process of fluctuation. Considering that most economic indicators for the US are still pointing to moderate growth for the near-term future, it’s premature to interpret today’s report as a clear-cut signal of trouble for the macro trend. Indeed, economic recessions aren’t likely to begin with 2%-plus year-over-year growth in payrolls. Employment is a lagging indicator, of course, and so there are limits to analyzing the state of the economy in real time by way of the labor market. That said, payrolls would have to weaken further in the months ahead in order to dispense a clear and unambiguous recession warning. Meantime, the worst that you can say by looking at today’s payrolls data is that growth has slowed. The crucial unknown: Will it continue to slow? No, according to initial jobless claims—a leading indicator for employment. Although new filings for unemployment benefits rose last week, claims are still close to the lowest level since the early 1970s and continue to post decent if unspectacular declines on a year-over-year basis.

Establishment Survey +173K Jobs, Private Jobs +140,000; Unemployment Rate 5.1% -- The establishment survey came in a weaker than expected 173,000 job. The Bloomberg Consensus estimate was 223,000 jobs. However, the preceding two months were revised up by 44,000 and wages were strong. Bloomberg provides a nice summation of the strengths and weaknesses.  The headline may not look it but there's plenty of strength in the August employment report. Nonfarm payrolls rose only 173,000 which is at the low-end estimate, but the two prior months are now revised up a total of 44,000. The unemployment rate fell 2 tenths to 5.1 percent which is below the low end estimate and the lowest of the recovery, since April 2008. And wages are strong, with average hourly earnings up 0.3 percent for a 2.2 percent year-on-year rate that's 1 tenth higher than July. Debate will definitely be lively at the September 17 FOMC!  Private payroll growth proved very weak, at only 140,000. Government added 33,000 jobs vs July's 21,000. Manufacturing, held back by weak exports and trouble in energy equipment, shed a steep 17,000 jobs followed by a 9,000 loss for mining which is getting hit by low commodity prices. A plus is a 33,000 rise in professional & business services and a respectable 11,000 rise in the temporary help subcomponent. This subcomponent is considered a leading indicator for long-term labor demand. Retail rose 11,000 with vehicle dealers, who have been very busy, adding 2,000 jobs following July's gain of 11,000.  Average hourly earnings for all employees on private, nonfarm payrolls rose by 8 cents in August, following a 6-cent gain in July. Hourly earnings are up 2.2 percent over the year. In August, average weekly hours of all employees edged up 0.1 hour to 34.6 hours. BLS Jobs Statistics at a Glance:

  • Nonfarm Payroll: +173,000 - Establishment Survey
  • Employment: +196,000 - Household Survey
  • Unemployment: -33,000 - Household Survey
  • Involuntary Part-Time Work: +158,000 - Household Survey
  • Voluntary Part-Time Work: -131,000 - Household Survey
  • Baseline Unemployment Rate: -0.2 to 5.1% - Household Survey
  • U-6 unemployment: -0.1 to 10.3% - Household Survey
  • Civilian Non-institutional Population: +220,000
  • Civilian Labor Force: -41,000 - Household Survey
  • Not in Labor Force: +261,000 - Household Survey
  • Participation Rate: +0.0 to 62.6 - Household Survey

BLS Jobs Situation Disappointing in August 2015. Growth Rate of Employment Continues to Slow.: The BLS jobs report headlines from the establishment survey was disappointing. The unadjusted data shows growth is at the lowest levels since the Great Recession. Hey, if the kids were not going back to school (teachers being hired) - this report would have been a disaster.

  • The rate of growth for employment continued to decelerate this month (red line on graph below).
  • The unadjusted jobs added month-over-month was well below normal for times of economic expansion - and the worst since the end of the Great Recession.
  • Economic intuitive sectors of employment were showing some growth.
  • This month's report internals (comparing household to establishment data sets) was consistent with the household survey showing seasonally adjusted employment growing 196,000 vs the headline establishment number of growing 173,000. The point here is that part of the headlines are from the household survey (such as the unemployment rate) and part is from the establishment survey (job growth). From a survey control point of view - the common element is jobs growth - and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL jobs growth, not just non-farm).
  • The household survey removed 41,000 people to the workforce.
  • BLS reported: 173K (non-farm) and 140K (non-farm private). Unemployment declined from 5.3% to 5.1%.
  • ADP reported: 190K (non-farm private)
  • In Econintersect's August 2015 economic forecast released in late June, we estimated non-farm private payroll growth at 170,000 (unadjusted based on economic potential) and 200,000 (fudged based on current overrun of economic potential);

Job Growth Weakens in August -- Dean Baker -- The Labor Department reported that the economy added 173,000 jobs in August, somewhat less than most predictions. However, the prior two months' numbers were revised upward by 44,000, bringing the average gain over the last three months to 221,000. The story on the household side was mixed. The unemployment rate dropped to 5.1 percent, as employment increased by 196,000. However the employment-to-population ratio (EPOP) was little changed at 59.4 percent, a number that is still three percentage points below the pre-recession peak. Health care was the biggest job gainer in August, adding 40,500 jobs. Job growth in health care has increased substantially since the ACA took effect. Average job gains over the last five months have been 43,700 compared to growth of just 18,300 per month in the three years from December 2010 to December 2013. Restaurants added 26,100 jobs, roughly in line with their recent pattern. One of the aspects of the recovery that has been striking is that restaurant employment continues to account for a large share of employment growth. In the late 1990s, the share of employment growth in restaurants fell as the labor market tightened and workers were able to get better paying jobs. The other sector reporting big gains was state and local government education which added 31,600 jobs. This reflects a timing issue with many schools starting earlier than normal. These jobs will likely disappear in next month's report. Construction added just 3,000 jobs. Average growth in the sector over the last three months has been just 3,700 jobs. This is surprisingly weak given relatively strong data on housing starts and construction more generally. On the other hand, the growth earlier in the year was surprisingly strong given relatively weak construction data. Manufacturing lost 17,000 jobs, more than reversing a gain of 12,000 in July. With the rise in the dollar and weak growth elsewhere in the world, the general trend is likely to be downward.   Retail added just 11,200, less than half the 27,700 average monthly rate for the last year. This might just be the result of unusually rapid growth in the prior three months. The temp sector added 10,700, barely offsetting a loss of 9,200 jobs in July. The extent to which the temp sector provides a harbinger of future job growth is exaggerated, but this growth is not a strong point. nOverall, private sector job growth of 140,000 was the weakest since a weather-reduced 117,000 reported for March. Prior to that, it would be necessary to go back to December, 2013 to find weaker numbers.

August Jobs Came in Low—By 1/33 of a Percentage Point - The August jobs report, showing nonfarm payrolls up 173,000, came in shy of economists’ expectations for a gain of 220,000. If a difference of 47,000 sounds big, take a step back with us. The monthly gain in total payrolls in August was 0.1217%. An increase of 220,000 jobs, on top of the upwardly revised July figure, would have been a gain of 0.1548%. Yes, that’s 0.03 percentage point. You generally don’t find a lot of people worried about a difference of 0.03 percentage point. If you look over the prior year, total nonfarm payrolls climbed 2.1% in August from a year earlier. That’s the same pace as in July and June. In fact, only six months over the past six years since the recession ended have been better than that pace—and never higher than 2.3%. (Unrounded, the annual gain was 2.094% in August, 2.126% in July and 2.133% in June.) However you cut it, the month-to-month movements are hard to spot when you look at the big picture. In the prior economic expansion, from 2001 to 2007, only one month posted an annual payroll gain above 2%. (That was 2.2% in March 2006.) There’s a reason almost all other economic data is generally communicated as percent change. It may be tougher to visualize the human impact, but easier to focus on longer-run trends. What if you don’t like percentages? The jobs report still covered you. The prior two months of payroll figures were revised upward on Friday by 44,000 jobs, nearly offsetting the lower August figure. August, of course, could be revised higher in coming months as other August reports have seen in recent years.

August Payrolls Miss, Rise Only 173K, Even As Prior Revised Higher; Hourly Earnings Rise More Than Expected -- The "most important and anticipated payrolls number ever", or at least since the last payroll number, is out and it is a doozy at only 173K, it is a huge miss to the 217K expected (and almost in line with LaVorgna's forecast). This was the worst monthly payrolls number since Marhc, and the second lowest number in 19 months. However, the curious twist is that the July and June NFPs were both revised higher to 245K, making the net revision up  The unemployment rate dropped to just 5.1%, below the 5.2% expected, and well below July's 5.3%.  And while the headline NFP would be enough to assure no September rate hike, it was the average hourly earnings which jumped 0.3%, above the 0.2% consensus, and above July's 0.2% that may be the indication that September is still on the table after all.  Bottom line: something for everyone in this report.

Record 94 Million Americans Not In The Labor Force; Participation Rate Lowest Since 1977 -- While the kneejerk headling scanning algos are focusing on the seasonally-adjusted headline monthly NFP increase which came in a worse than expected 173K, the presidential candidates - especially the GOP - are far more focused on another data point: the labor force participation rate, and the number of Americans not in the labor force. Here, they will have some serious ammo, because according to the BLS, the main reason why the unemployment rate tumbled to the lowest since April 2008 is because another 261,000 Americans dropped out of the labor force, as a result pushing the total number of US potential workers who are not in the labor force, to a record 94 million, an increase of 1.8 million in the past year, and a whopping 14.9 million since the start of the second great depression in December 2007. And since there are still those confused why wages so stubbornly refuse to rise, here is our favorite labor-related chart, showing the annual increase in average hourly wages superimposed next to the US civilian employment-to-population ratio, which remains solidly below 60%, and has barely risen since the great financial crisis.

Plunging 5.1% Unemployment Rate Belies Record Low Labor Participation  --The August unemployment report shows steady as she goes sorts of statistics.  Yet, the report is really a mixed bag.  The unemployment rate dropped two tenths of a percentage point to be 5.1%.  The labor participation rate remained the same, 62.6%, and hasn't changed for three months.  Once again over a quarter of a million people dropped out of the labor force.  The ranks of the unemployed dropped almost as much and those employed grew by almost two hundred thousand.  Generally speaking one month of employment statistics isn't enough to base any conclusions on, but the labor participation rate has remained at it's October 1977 low for three months now.  Once again the very low unemployment rate makes the picture look much better than the situation really is. This article overviews and graphs the statistics from the Employment report Household Survey also known as CPS, or current population survey.  The CPS survey tells us about people employed, not employed, looking for work and not counted at all.  The household survey has large swings on a monthly basis as well as a large margin of sampling error.  Those employed bumped up by 196,000 this month.  From a year ago, the ranks of the employed has increased by 2.585 million.  That's more than enough required to keep up with population growth.  Those unemployed decreased by -237,000 to stand at 8,029,000.  From a year ago the unemployed has decreased by -1.539 million.  Below is the month change in unemployed and as we can see, this number typically has wild swings from month to month.  Those not in the labor force increased by 261,000 to over ninety-four million.  The below graph is the monthly change of the not in the labor force ranks.  Those not in the labor force has increased by 1,821,000 in the past year. The labor participation rate stayed at 62.6%, which is no change from last month and a low not seen since October 1977.  Wow.  Below is a graph of the labor participation rate for those between the ages of 25 to 54.  The rate is 80.7%, which is no change from last month and a rate not seen since September 1984, (discounting times past the great recession when the American work experience collapsed).  This proves labor participation rate cannot be explained away by retiring baby boomers and continuing education past high school full time as these are prime working years for people.The civilian labor force, which consists of the employed and the officially unemployed, declined by -41 thousand this month.  This implies even more people dropped out of the labor force for the month since the labor force consists of those employed or officially unemployment.  The civilian labor force has grown by 1,047,000 over the past year.  New workers enter the labor force every day from increased population inside the United States and immigration, both legal and illegal.  The small annual figure also implies people are dropping out of the labor force.  Notice how those not in the labor force has grown 174% bigger than the civilian labor force.  Below is a graph of the civilian labor force, or the official employed plus unemployed, in maroon, scale on left, against those not in the labor force, in blue, scale on right.  Notice how those not in the labor force as a trend exceeded those considered employed and unemployed starting around mid 2009. 

August Jobs Report Nothing To Write Home About -- August’s Jobs Report paints a picture of an economy that is growing, but growing rather slowly, and once again calls into question the Federal Reserve’s apparent plan to begin raising interest rates in September: Total nonfarm payroll employment increased by 173,000 in August, and the unemployment rate edged down to 5.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care and social assistance and in financial activities. Manufacturing and mining lost jobs. In August, the unemployment rate edged down to 5.1 percent, and the number of unemployed persons edged down to 8.0 million. Over the year, the unemployment rate and the number of unemployed persons were down by 1.0 percentage point and 1.5 million, respectively. (See table A-1.) The figures for June and July were revised upward to show a total of 245,000 jobs created each months, a total upward revision of 44,000 net jobs over the two months. Including the figures for August, that means that job gains have averaged 221,000 per month over the summer, a respectable number but hardly a sign of a robust and growing economy. One good sign can be found in the work week and hourly wage figures, both of which increased during the month of August after having been mostly stagnant for the better part of 2015, hovering around an annualized growth rate of around two percent. Whether this is the start of a trend or a an anomaly remains to be seen, however, especially since there are other signs that businesses remain cautious when it comes to new spending and investment. , so it’s better  Long term unemployment remains unchanged as it has all summer, and is still above ten percent, although it is worth noting that it is below where it was a year ago, when it was still stuck at twelve percent. Finally, the labor force participation rate remains at levels unseen since the Carter Administration. Heading into the announcement of today’s report, analysts were expecting net job growth somewhere in the range of 220,000 new jobs, so these figures are obviously disappointing in one respect. In another, though, they are likely to be viewed positively on Wall Street.

Jobs Report: Yes, the unemployment rate is 5.1%. No, we are not at full employment. -- Job growth came in below expectations, as August’s payrolls grew 173,000, according to this morning’s jobs report from BLS. Private sector job growth was particularly weak, at 140,000, its weakest month since March. Wage growth remains tame—remarkably so, given the low unemployment rate, which fell to 5.1% last month—and the labor force remains historically low, suggesting significantly numbers of potential workers remain on the sidelines, creating downward pressure on wages and a downward bias on the jobless rate. The unemployment rate, as noted, fell from 5.3% to 5.1%, the lowest rate since April 2008 and the rate that the Federal Reserve believes consistent with full employment in the job market. The labor force remained flat in August, meaning the participation rate is still stuck at a low 62.6%, more than three points off of its peak prior to the downturn. Some of that decline can be assigned to retiring boomers, but some remains due to persistently weak demand. The number of involuntary part-timers—those working part-time who want full-time hours—remains highly elevated at 6.5 million, though that trend too is moving in the right direction, down 700,000 over the past year. Thus, for the closely watched Fed decision as to whether they will begin their rate-raising campaign later this month, today’s report poses a bit of a dilemma. The unemployment rate says “raise!” The payroll number says “hold!” What’s the Fed to do? More on that in a moment. Job gains were particularly weak in goods-producing industries, down 10,000 in construction and 17,000 in manufacturing, which has been hurt by the strengthening US dollar, which makes our manufactured goods less competitive abroad. So far this year, factories have added 28,000 workers, well below last year’s pace of 119,000 by this point. Retail trade fell off of its recent pace, adding only 11,000 jobs after adding over 30K in the prior two months. Government employment, on the other hand, has added between 20K and 30K over the past three months, including 33K last month, largely in local education. Since the jobs data are seasonally adjusted, that implies an increase in education hires over the usual August bump you’d expect based on back-to-school activities.

The August Jobs Report in 10 Charts - The U.S. economy added 173,000 jobs in August, a bit of a slowdown from prior months but still a sign of steady expansion. Friday’s report from the Labor Department offered a few changes from the prior month on a range of measures, including the unemployment rate falling to 5.1% and an 8 cent rise in average hourly earnings. The economy has added around 2.9 million jobs over the past 12 months. That’s down slightly from earlier this year, when the 12-month pace surpassed three million, but it is still well ahead of the 2.5 million jobs added for the year ended July 2014. Job growth over the past three months has taken a small step down, with an average of 221,000 added per month. Meanwhile, the unemployment rate fell to its lowest level since April 2008. A broader gauge of underemployment, which includes workers who have part-time positions but say they would like full-time jobs, ticked down to 10.3%. The economy is very different for college graduates, who face only a 2.5% unemployment rate, compared with 5.5% for those who have no education beyond high school and 7.7% for those who did not complete high school. The share of Americans in the labor force–that is, those who are working or looking for work, has remained at the lowest level since 1977. The share of Americans with jobs has risen somewhat in the past five years, but remains lower than before the recession. When looking only at workers between ages 25 and 54, labor-force participation is at 80.7%. That’s still down from before the recession, as is the share of workers with jobs. The report provided some signs of accelerating wages. Average weekly earnings rose 2.2% from a year earlier. Jobless spells are lasting a little longer in August than through most of the spring and summer. And the share of the unemployed who have been without work for more than half a year rose last month. Today’s share of the long-term jobless is higher than any of the previous three recessions. A big drop in oil prices has squeezed the industry, which is shedding jobs.

August Employment Report Comments and more Graphs -- This was a decent employment report with 173,000 jobs added, and employment gains for June and July were revised up. There was even some wage growth, from the BLS: "In August, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $25.09, following a 6-cent gain in July. Hourly earnings have risen by 2.2 percent over the year." A few more numbers: Total employment increased 173,000 from July to August and is now 3.9 million above the previous peak. Total employment is up 12.6 million from the employment recession low. Private payroll employment increased 140,000 from July to August, and private employment is now 4.3 million above the previous peak. Private employment is up 13.1 million from the recession low. In August, the year-over-year change was just over 2.9 million jobs.  Since the overall participation rate declined recently due to cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the participation rate for this group was trending up as women joined the labor force. Since the early '90s, the participation rate moved more sideways, with a downward drift starting around '00 - and with ups and downs related to the business cycle. The 25 to 54 participation rate was unchanged in August at 80.7%, and the 25 to 54 employment population ratio increased to 77.2%. The participation rate for this group might increase a little more (or at least stabilize for a couple of years) - although the participation rate has been trending down for this group since the late '90s. Average Hourly Earnings This graph is based on “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report. Note: There are also two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation. The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees. Nominal wage growth increased 2.1% YoY - and although the series is noisy - it does appear wage growth is trending up a little. Wages will probably pick up a little more this year. Note: CPI has been running under 2%, so there has been some real wage growth.

Where are U.S. data on the gig economy? - So in an era of Uber, Airbnb, TaskRabbit, and Handy do we need to update our labor market data? Take a look at the current labor market statistics and you won’t find much evidence of a dramatic emergence of an “Uberfied” work force. Adam Ozimek, an economist at Moody’s Analytics looks at a number of labor market data sets from the U.S. Bureau of Labor Statistics and finds no evidence of a “nation of freelancers.” The share of workers who are self-employed actually looks to be on the decline in recent years and workers aren’t more likely to hold multiple jobs. Josh Zumbrun at the Wall Street Journal finds very similar results when he also digs into the data. But as Justin Fox writes at Bloomberg View—commenting on Ozimek’s post—the labor market “fringes are where interesting stuff usually begins.” With that in mind, it’s heartening to see the recent letter to the U.S. Bureau of Labor Statistics from Senator Mark Warner (D-VA), who asks a number of questions about the agency’s capabilities to measure the gig economy now and in the future. The Bureau of Labor Statistics produces high quality data on a number of issues, but no data set is ever perfect. Economists Larry Katz of Harvard University and Alan Krueger at Princeton University are looking into the gig economy and find evidence that the BLS surveys are missing out on some developments. Case in point: they find some evidence of a larger gig economy in tax data.

Obamacare hasn’t killed full-time jobs, either - When we last looked at Obamacare as an alleged “job-killer,” Matt Yglesias had just pointed out that 2014, the first full year of insurance on the exchanges, was also the best year for job creation since 1999. But recently a non-blogging friend reminded me of a related anti-Obamacare meme, the idea that employers have been cutting their workers below 32 hours per week so they would not have to provide them with health insurance. His argument was, logically enough, that this would mean a loss of full-time jobs. As with so many other anecdotal Obamacare horror stories, this one does not stand up to even simple inspection. Just like total job creation, it turns out that full-time (BLS uses 35 hours/week, not 32, by the way) job creation has quickly increased since December 2013, just before exchange insurance went into effect. Not only that, part-time employment has fallen slightly. The Bureau of Labor Statistics’ monthly “Employment Situation” (Table A-9 in both cases) tells the tale.I included both seasonally adjusted and not seasonally adjusted data for completeness sake, but when we are comparing a summer month to a winter month, surely the seasonally adjusted figures are the correct ones to use. For those of you keeping score at home, then, full-time jobs have increased by 4.3 million since Obamacare exchange insurance went into effect, whereas part-time jobs have fallen by 107,000. Neither of these fits the anecdotes of workers being shunted from full-time to part-time work to avoid providing insurance. This increase in full-time work has been accomplished in the span of just 19 months, or an average of over 226,000 new full-time jobs per month.

Just a Third of U.S. States Outperformed the U.S. Economy Last Year - Just 16 states outperformed the country as a whole last year. In 32 states, gross domestic product advanced at the same or slower pace than the 2.2% economic growth recorded for the U.S. And the economies in two other states—Alaska and Mississippi—contracted last year, according to Commerce Department data released Wednesday. How could much of the country’s economic growth be concentrated in so few states? Among those 16 were the four largest state economies: California, Texas, New York and Florida. The leader of that pack was Texas. The state’s $1.5 trillion economy is larger than Australia’s and grew at an impressive 5.2% clip last year. Mining, which includes gas and oil extraction, accounted for nearly half of total economic growth in the state. Two other fast-growing industries were construction and the sector of manufacturing that includes oil refining. Only tiny North Dakota’s economy grew faster in 2014 , rising 6.3%. But unlike North Dakota, Texas advanced its economy every quarter last year. North Dakota—like most of the rest of the country—contracted in the first quarter of 2014. Colorado, Pennsylvania, Utah and Washington were the other states to grow each quarter last year. California’s economy, the largest state economy, grew 2.8%. The Golden State was propelled by a 7.7% growth rate in the third quarter of last year. Florida’s economy advanced 2.7% in 2014 and New York’s economy grew 2.5%. See change in gross domestic product in 2014, by state, and annualized rate of change in each quarter:

This Was to Be the Year of Bigger Wage Gains. It’s Not. -- The unemployment rate is low by any historical standard at 5.3 percent. Businesses are complaining of worker shortages in industries including health care, construction and trucking. Household-name companies like Walmart and McDonald’s have announced increases to their pay for low-wage workers. Add those together, and it would seem to point to 2015 as being the year American workers start seeing substantially larger paychecks. The only problem: There is no real evidence in the economic data that this is happening. Rather, a wide range of economic measures points to the same sluggish pay rises in 2015 that American workers witnessed in 2011 and every year since. The giant question hanging over the United States economy — for workers hoping to see a raise, employers trying to decide whether to give them one, and the Federal Reserve as it decides when and how much to raise interest rates — is whether that is poised to change soon. Average hourly earnings for all private-sector workers were up 2.1 percent in July from a year earlier, roughly the same level at which wage growth has been for years. There has been no evidence of acceleration in pay as the year has progressed; in the last three months hourly pay rose at a 1.6 annual rate, well below its level earlier in the year. Other data points to the same conclusion. Employment compensation costs — which includes both wages and the employer’s cost of health care and other benefits — rose 2 percent in the year ended in June, in line with recent years.

Searching for Higher Wages  - NY Fed - Since the peak of the recession, the unemployment rate has fallen by almost 5 percentage points, and observers continue to focus on whether and when this decline will lead to robust wage growth. Typically, in the wake of such a decline, real wages grow since there is more competition for workers among potential employers. While this relationship has historically been quite informative, real wage growth more recently has not been commensurate with observed declines in the unemployment rate.  Of course, there are several other important determinants of wage growth that are missing from this useful yet simplified correlation. Typically, an individual’s earnings path is thought of through the lens of a “job ladder” model. In this framework, a worker may enter the labor market unemployed, actively searching for a suitable job. Once securing employment, she can search on the job for better employment, and can be selective about which jobs to take because she has her current job as a fallback. One of these opportunities might lead to a better quality match and thus higher wages. At this point, the search might begin again, until an even better job is found, and wages grow yet again. Hence, we can think of workers climbing a job ladder through their working lives, with each rung of the ladder leading to better quality jobs and pay gains.

Low-Income Workers See Biggest Drop in Paychecks - Despite steady gains in hiring, a falling unemployment rate and other signs of an improving economy, take-home pay for many American workers has effectively fallen since the economic recovery began in 2009, according to a new study by an advocacy group that is to be released on Thursday. The declines were greatest for the lowest-paid workers in sectors where hiring has been strong — home health care, food preparation and retailing — even though wages were already below average to begin with in those service industries. “Stagnant wages are a problem for everyone at this point, but the imbalance in the economy has become more pronounced since the recession,” said Irene Tung, a senior policy researcher at the National Employment Law Project and co-author of the study.  And the report by NELP, a left-leaning research and advocacy group, underscores why so many Americans are still angry about the state of the economy and with what they see as the inability of Democratic and Republican leaders alike in Washington to do anything to improve living standards for many ordinary workers. One explanation may lie in the findings of another study released on Wednesday by the Economic Policy Institute, also a liberal research group. Its report showed that even as labor productivity has improved steadily since 2000, the benefits from improved efficiency have nearly all gone to companies, shareholders and top executives, rather than rank-and-file employees. Labor Department data released on Wednesday indicated that productivity in the American economy in the second quarter rose at an annual rate of 3.3 percent, the biggest quarterly gain since late 2013 and much better than first estimated.

A real puzzle about real wages -- This morning the National Employment Law Project (NELP) released its annual update on real wages during the recovery.  Their findings are a puzzle to say the least.  Virtually every other measure of real wages shows a bottom in late 2012. (Real wages declined from 2009-12 as the price of gas went from $14.0 to $3.90, hence inflation outstripped miserly nominal wage growth): In contrast, here is the NELP graph of real occupation wage changes from 2009-2014: Note that the OES is calculated through May of each year, so the latest report misses the effect of the big decline in gas prices in the last 12 months. It is virtually gospel that as the labor market improves, so should wage growth. In other words, wages could be down from 2009, but up from 2012 or 2013. So I went back and compare the NELP's latest report with earlier reports. Here is what I found:From 2009 through 2013: and from 2009 through 2012: In case it isn't obvious from the graphs, according to the NELP, wage declines have increased across every single wage quintile from 2012 to 2013, and even more in from 2013 to 2014!  To double-check the NELP data, I went to the OES database, which can be found here: (http://www.bls.gov/oes/tables.htm ) and obtained the median hourly pay for all occupations for each year 2009-14, and then divided by the change in prices as calculated by the CPI from May 2009 (the OES is calculated as of May of each year), and here is what I got:  The NELP shows real median wages down -4.0%, not -.3.6%, since 2009, so they appear to be using a different inflation adjustment. But more importantly, the OES data shows not just a continuous decline from 2009, but the decline in real wages actually *accelerating* from 2013 to 2014 -- much moreso than during the much weaker labor market of 2009-10! I'm at a loss for an explanation.  This data cannot be dismissed as at outlier because it is very thorough.  But still it is not at all in accord with what other data on real wages have been showing.

Walmart Cuts Workers’ Hours After Raising Its Minimum Wage Earlier This Year - After raising the minimum wage for its lowest compensated workers, Walmart is now cutting some workers’ hours to try to trim costs. Store managers were recently told to cut back on hours to reduce costs, which has led to them eliminating hours from the schedule, telling workers to leave their shifts before they end, or having employees take longer lunches, Bloomberg News reports. A spokesperson told Bloomberg that these changes are only happening in stores where managers had overscheduled employees. One anonymous Walmart worker near Houston told Bloomberg that her store had cut more than 200 hours a week by asking people to go home early. Another in Fort Worth was told that the store would cut 1,500 hours and said that employees who had been asked to stay late for extra work earlier in the week were told to take two-hour lunch breaks later on to make up for those hours. In February, Walmart announced that it would raise its base pay to at least $9 an hour by April and $10 an hour by early next year, increasing wages for about 500,000 employees and spending more than $1 billion on the effort. At the time, the CEO said the company expected those changes to lower employee turnover and attract better talent, as well as to lead to better customer service that would boost sales. But earlier this month, the company lowered its annual earnings forecast based in part on the higher cost of employee compensation. It had originally said the cost of higher pay would reduce profit by 20 cents per stock share, but then revised that to 24 cents a share. “The changes we need to make require investment, and we’re pleased with the steps we’ve taken,” CEO Doug McMillon said at the time. “Even if it’s not as fast as we’d like, the fundamentals of serving our customers are consistently improving, and it’s reflected in our comps and revenue growth.”

Judge grants class-action status to Uber drivers who are suing to be classified as employees - Uber suffered a major legal setback on Tuesday when a San Francisco judge ruled that the jobs of Uber drivers in California are similar enough that workers can sue the company as a class. The class-action status means that many of California's 160,000 current and former Uber drivers could be reclassified as employees of the company, rather than independent contractors, if the lawsuit prevails. Should Uber lose the case, it could potentially upend the business model that has turned Uber into one of the world's most valuable private tech companies, with a whopping $51 billion valuation. And it would send shock waves across a broad spectrum of richly-valued "sharing economy" startups that rely on independent contractors to keep costs low. A wholesale change from contractors to employees could cost Uber tens of millions of dollars — or more, according to some estimates. In today's decision, Judge Edward Chen wrote that the plaintiffs had "met their burden to show that a class can be certified on both the threshold employment classification question and their claim for converted tips." However, Chen did not certify a class that could recoup reimbursements if the drivers are determined to be employees. The plaintiff's attorney, Shannon Liss-Riordan, had argued that reimbursing mileage alone would be sufficient for drivers, but Chen found that it was unclear if that was in the best interests of a class of Uber drivers since many also pay for expenses like gum or water bottles.

Millions of Working People Don’t Get Paid Time Off for Holidays or Vacation -- As Labor Day approaches, about a quarter (24 percent) of private sector workers will not be enjoying a paid day off on Monday. A similar number (23 percent) earn no paid vacation time. While this overall lack of paid holidays and vacation time is quite telling (especially compared to our international peers, who more or less universally mandate paid time off), access to paid time off varies dramatically between workers by their pay. As the chart below shows, only 34 percent of private-sector workers at the bottom of the wage distribution receive paid holidays and only 39 percent receive paid vacation. Among the top 10 percent of workers, meanwhile, 93 percent receive both paid holidays and paid vacation. It’s important to remember how much the labor movement has done for workers: among its many victories are the establishment of weekends, the institution of a 40-hour work week, and the eradication of child labor. However, we must also remember what remains to be done, including guaranteeing that workers have access to paid leave.

Will Americans Become Poorer? - Martin Feldstein - Robert Gordon of Northwestern University has launched a lively and important debate about the future rate of economic growth in the United States. Although his book The Rise and Fall of American Growth will not be published until January 2016, his thesis has already garnered coverage in the Economist and Foreign Affairs. Clearly, Gordon’s gloomy assessment of America’s growth prospects deserves to be taken seriously. But is it right?  Gordon argues that the major technological changes that raised the standard of living in the past are much more important than anything that can happen in the future. He points to examples such as indoor plumbing, automobiles, electricity, telephones, and central heating, and argues that all of them were much more important for living standards than recent innovations like the internet and mobile phones.  I agree with Gordon that I would rather give up my mobile phone and even the Internet than go without indoor plumbing and electricity. But that just means that we are lucky to be living now rather than a century ago (and even luckier to be living now than two centuries ago or in the middle ages). The fact that these major innovations happened in the past is not a reason to be pessimistic about the future.  Gordon also points to the recent slowdown in real (inflation-adjusted) GDP growth. According to official US statistics, real GDP per worker grew at an average annual rate of 2.3% from 1891 to 1972, but by only 1.5% since then.  But the official statistics on GDP growth fail to capture most of the gains in our standard of living that come from new and improved goods and services. That means that the official growth rate does not reflect the rise in real incomes that came with air conditioning, anti-cancer drugs, new surgical procedures, and the many more mundane innovations. Moreover, because the US government does not count anything in GDP unless it is sold in the market, the vast expansion of television entertainment and the introduction of services like Google and Facebook have been completely excluded from the national account

Blood Plasma, Sweat, and Tears: Selling What's in Your Veins to Get By - There is no money to be made selling blood anymore. It can, however, pay off to sell plasma, a component in blood that is used in a number of treatments for serious illnesses. It is legal to “donate” plasma up to two times a week, for which a bank will pay around $30 each time. Selling plasma is so common among America’s extremely poor that it can be thought of as their lifeblood. But no one could reasonably think of a twice-weekly plasma donation as a job. It’s a survival strategy, one of many operating well outside the low-wage job market. In Johnson City, Tennessee, we met a 21-year-old who donates plasma as often as 10 times a month—as frequently as the law allows. (The terms of our research prevent us from revealing her identity.) She is able to donate only when her husband has time to keep an eye on their two young daughters. When we met him in February, he could do that pretty frequently because he’d been out of work since the beginning of December, when McDonald’s reduced his hours to zero in response to slow foot traffic. Six months ago, walking his wife to the plasma clinic and back, kids in tow, was the most important job he had.

Selling plasma to survive: how over a million American families live on $2 per day - In early 2011, 1.5 million American households, including 3 million children, were living on less than $2 in cash per person per day. Half of those households didn't have access to in-kind benefits like food stamps, either. Worst of all, the numbers had increased dramatically since 1996. Those are the astonishing findings Johns Hopkins' Kathryn Edin and the University of Michigan's Luke Shaefer discovered after analyzing Survey of Income and Program Participation (SIPP) data in 2012. In the intervening years, Edin and Shaefer sought out Americans living in this situation, with basically no cash income, relying on food stamps, private charity, and plasma sales for survival. The result is $2.00 a Day, a harrowing book that describes in devastating detail what life is like for the poorest of America's poor. I spoke with Edin and Shaefer about the book Friday; a lightly edited transcript follows.

The dangerous separation of the American upper middle class - The American upper middle class is separating, slowly but surely, from the rest of society. This separation is most obvious in terms of income—where the top fifth have been prospering while the majority lags behind. But the separation is not just economic. Gaps are growing on a whole range of dimensions, including family structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to be clustering more tightly together, each thereby amplifying the effect of the other.  In a new series of Social Mobility Memos, we will examine the state of the American upper middle class: its composition, degree of separation from the majority, and perpetuation over time and across generations. Some may wonder about the moral purpose of such an exercise. After all, what does it matter if those at the top are flourishing? To be sure, there is a danger here of indulging in the economics of envy. Whether the separation is a problem is a question on which sensible people can disagree. The first task, however, is to get a sense of what’s going on.For many, the most attractive class dividing line is the one between those at the very, very top and everybody else.  It is true that the top 1 percent is pulling away very dramatically from the bottom 99 percent. But the top 1 percent is by definition a small group. It is not plausible to claim that the individual or family in the 95th or 99th percentile are in any way part of mainstream America, even if many of them think so: over a third of the demonstrators on the May Day ‘Occupy’ march in 2011 had annual earnings of more than $100,000.

The Upper Middle Class Is Ruining America - We often hear about the political muscle of the ultrarich. Billionaires like the libertarians Charles and David Koch and Tom Steyer, the California environmentalist who’s been waging a one-man jihad against the Keystone XL pipeline, have become bogeymen for the left and right respectively. The influence of these machers is considerable, no doubt. Yet the upper middle class collectively wields far more influence. These are households with enough money to make modest political contributions, enough time to email their elected officials and to sign petitions, and enough influence to sway their neighbors. Upper-middle-class Americans vote at substantially higher rates than those less well-off, and though their turnout levels aren’t quite as high as those even richer than they are, there are far more upper-middle-class people than there are rich people. Another thing that separates the upper middle class from the truly wealthy is that even though they’re comfortable, they’re less able to take the threat of tax increases or benefit cuts in stride. Take away the mortgage interest deduction from a Koch brother and he’ll barely notice. Take it away from a two-earner couple living in an expensive suburb and you’ll have a fight on your hands. So the upper middle class often uses its political muscle to foil the fondest wishes of egalitarian liberals. This week offered a particularly vivid reminder of how that works. In the windup to his State of the Union address, Barack Obama released a proposal to curb the tax benefits associated with 529 college savings plans, which primarily benefit upper-middle-class families, to help finance the expansion of a separate tax credit that would primarily benefit lower-middle- and middle-middle-class families. Only 3 percent of households actually make use of these accounts, and 70 percent of the tax benefits go to households earning more than $200,000, so you can see why Obama might have thought no one would get too worked up about the proposal.

Murder Rates Rising Sharply in Many U.S. Cities— Cities across the nation are seeing a startling rise in murders after years of declines, and few places have witnessed a shift as precipitous as Milwaukee. With the summer not yet over, 104 people have been killed this year — after 86 homicides in all of 2014.More than 30 other cities have also reported increases in violence from a year ago. In New Orleans, 120 people had been killed by late August, compared with 98 during the same period a year earlier. In Baltimore, homicides had hit 215, up from 138 at the same point in 2014. In Washington, the toll was 105, compared with 73 people a year ago. And in St. Louis, 136 people had been killed this year, a 60 percent rise from the 85 murders the city had by the same time last year.Law enforcement experts say disparate factors are at play in different cities, though no one is claiming to know for sure why murder rates are climbing. Some officials say intense national scrutiny of the use of force by the police has made officers less aggressive and emboldened criminals, though many experts dispute that theory.Rivalries among organized street gangs, often over drug turf, and the availability of guns are cited as major factors in some cities, including Chicago. But more commonly, many top police officials say they are seeing a growing willingness among disenchanted young men in poor neighborhoods to use violence to settle ordinary disputes.“Maintaining one’s status and credibility and honor, if you will, within that peer community is literally a matter of life and death,” Milwaukee’s police chief, Edward A. Flynn, said. “And that’s coupled with a very harsh reality, which is the mental calculation of those who live in that strata that it is more dangerous to get caught without their gun than to get caught with their gun.”

America’s Incarcerated Economy - Laura Tyson and Lenny Mendonca -- The United States has 5% of the world’s population and 25% of the world’s prison population – about 2.2 million people, five times as many as in 1980. One out of every 100 American adults is incarcerated – the highest per capita rate in the world, 5-10 times higher than in Western Europe or other democracies. The social and economic toll is similarly high.   The boom in America’s prison population in recent decades is the result of ramped up punitive crime-prevention measures, including tougher drug penalties and mandatory minimum sentences, backed up by growing numbers of police and other law-enforcement officials. Beyond the financial costs of larger police forces and increased pressure on the judicial system is $60 billion a year in spending on state and federal prisons, up from $12 billion 20 years ago. And then there are the huge costs for those imprisoned (many for non-violent crimes) and for their families and communities – costs that fall disproportionately on the poor, the uneducated, African-Americans and Latinos, and the mentally ill.  Perhaps the worst part is that the expected benefits of America’s “get tough” approach have failed to materialize. Indeed, there is only a modest correlation between higher incarceration rates and lower crime rates.  Moreover, the recidivism rate is shockingly high: according to a recent US Department of Justice report, more than one-third of released prisoners were rearrested within six months, and more than two-thirds were rearrested within three years. In order to reduce the size of the prison population, the recidivism rate must drop.

Prison Vendors See Continued Signs of a Captive Market - Is there anything that cannot be turned into a weapon? Walk around the exhibitors’ hall at the conference of the American Correctional Association, held in Indianapolis in early August, and at some point the question will answer itself. Apparently, with enough malign intent and the right tools — a lighter, for instance — even disposable plates can be transformed into shivs.“This is a piece of Styrofoam, rolled, then heated, then rolled and heated some more,” said Michael Robertson, salesman for a company called JonesZylon. He handed over a dark brown, six-inch spike that looked nothing like a piece of Styrofoam. Touch its sharpened end and it felt like the tip of a blade.  Mr. Robertson was one of 264 vendors in booths at the Indiana Convention Center for what is essentially a trade show for the prison industry. It is the shiny, customer-friendly face of a fairly grim business. The A.C.A. accredits jails and prisons and is also the country’s largest association for the corrections field, with a membership filled with wardens and state and county correctional administrators.The convention is where those people window-shop. The United States currently imprisons about 2.2 million people, making it the world’s largest jailer. Those in charge of this immense population need stuff: food, gas masks, restraints, riot gear, handcuffs, clothing, suicide prevention vests, health care systems, pharmacy systems, commissary services — the list goes on. These outlays are a small fraction of the roughly $80 billion spent annually on incarceration, though precise sales figures are hard to come by because most companies in this niche market are private. Two publicly traded players, the private prison operators Corrections Corporation of America and the GEO Group, have a combined market capitalization of almost $5.8 billion. Both companies had booths in Indianapolis.

Citizens taking video of police see themselves facing arrest: (AP) — Thomas Demint's voice is heard only briefly on the eight-minute video he took of police officers arresting two of his friends, and body-slamming their mother. "I'm videotaping this, sir," he tells an officer. "I'm just videotaping this." What's not seen is what happened just after he stopped recording: Demint says three officers tackled him, took away his smartphone and then tried, unsuccessfully, to erase the video. They then arrested him on charges of obstruction of governmental administration and resisting arrest. "I am 100 percent innocent," the 20-year-old Long Island college student told reporters earlier this month. "I didn't do anything wrong. I was just there to videotape." Civil liberties experts say Demint is part of a growing trend of citizen videographers getting arrested after trying to record police behavior.

New York’s Electricity Market Is a Scam - David Cay Johnston - If you agree with legislators in about half the states that the most efficient way to provide electricity is through wholesale auctions, take a leap down the rabbit hole into world of the New York Public Service Commission. Electricity should be cheap in New York because the state’s capacity to generate power far outstrips demand. Its surplus is huge, as much as 63 percent in May, and never less than 4.6 percent, New England Power Coordinating Council reliability reports show. Prices should fall when demand is below capacity. But when capacity falls short of demand by even 1 percent, electricity market prices soar. Demand in New York is falling, primarily because of “a decrease in upstate industrial” electricity use, the Northeast Power Coordinating Council’s latest report shows. Yet instead of enjoying cheaper power, New Yorkers pay 40 percent more than the average for the 48 contiguous states,federal pricing data show. Adjusted for inflation, electricity in New York costs almost 17 percent more than a decade ago (though it is down a bit from last year).       So why does capacity-rich New York suffer the fifth most expensive electricity among the 48 states? The answer lies in the Alice in Wonderland rules of the Pubic Service Commission, the regulator; the Independent System Operator, which runs the so-called markets; and the independent power producers.

What the United States Owes Puerto Rico - WSJ: Joseph Stiglitz & Mark Medish - While there are important differences, the Puerto Rican and Greek situations are similar enough to warrant comparison for policy lessons, though perhaps not the ones intended by Mr. Schäuble. Both are cases of fiscal mismanagement and unsustainable external debt in the context of fixed exchange rates through a common currency, the U.S. dollar for Puerto Rico and the euro for Greece. Equally striking, both Puerto Rico and Greece represent quasi-colonial dependencies of distant powers in Washington and Berlin (via Brussels). Though there is an important distinction: Greece chose to join the eurozone; Puerto Rico never chose to become an unincorporated U.S. territory. The islands, more than a 1,000 miles south of Miami, were acquired from Spain in 1898 after the Spanish-American War. Washington has since been content to play absentee landlord. The commonwealth of Puerto Rico is neither fish nor fowl in the constitutional order. It lacks both the privileges of a U.S. state and the powers of a sovereign. Indeed, its relationship to the U.S. gives the lie to the notion of a “commonwealth.” The U.S. wants the benefits of an offshore tax haven without the responsibilities to rescue it in time of need. Washington treats Puerto Ricans as second-class citizens. The list of slights is long and depressing. The territory receives reduced Medicare and Medicaid coverage. Corporate tax holidays were granted and capriciously withdrawn by Congress. The North American Free Trade Agreement has beggared Puerto Rico through substantial trade diversion in favor of Mexico. And the 1920 Jones Act forces the U.S. territory to use high-cost American shipping carriers.

87K homeless school children in NYC, report says - NY Daily News: About 87,000 New York City school children were living in homeless shelters or temporary housing in the 2013-2014 school year, according to a new report on the latest available figures. The number has shot up a whopping 71% since 2007-2008, when about 51,000 homeless students attended city schools. In the last year alone, there were about 6,600 more homeless students in the schools, according to the report by the non-profit Institute for Children, Poverty and Homelessness. City officials said there are now roughly 23,000 homeless children living in shelters, including those who many not be of school age. The report – using data from the city education department – showed there were homeless students in every school district across the city, including many staying with extended family. It also revealed that the majority of the youngest students - kindergarten through second grade - were Hispanic. Jennifer Erb-Downward, a principal policy analyst at the Institute, said that the high cost of housing and a tough economy has forced more city families into homelessness. “We didn't end up with a population of homeless students the size of Trenton, N.J. overnight,” said Erb-Downward. “Homeless children have been New York City's hidden homeless for far too long, and the number has steadily increased for almost a decade.”

School Protesters Force Chicago Mayor Rahm Emanuel To Shut Down Budget Meeting: A group of protesters caused Chicago Mayor Rahm Emanuel to shut down a budget meeting on Wednesday evening after he refused to answer their questions regarding the future of a city school. According to local news reports, Emanuel was holding a public hearing about the city’s 2016 budget when residents protesting the closure of Dyett High School pressed him about the city’s plans for the future of the school.  After he repeatedly declined to answer their questions, the protesters swarmed the stage, demanding an answer from him “right now.” Chicago police quickly escorted Emanuel out of the meeting. The mayor’s office then ended the meeting early.  Dyett High School closed in June due to low test scores and enrollment rates, part of a wave of school closures in Chicago over the last two years. City officials have yet to make permanent plans for the school, but neighborhood residents want it to reopen next year as an open-enrollment, science-focused school called Dyett Global Leadership and Green Technology High School. Some of the protesters have been part of a hunger strike that reached its 17th day on Wednesday.

The new SAT results aren't pretty - AEI: The Class of 2015 SAT results are out, and they’re ugly. The College Board reported this week that scores on the SAT have sunk to the lowest point since the venerable college-admission test was revamped in 2005. Just how bad were the results? The 1.7 million test-takers in the Class of 2015 posted a combined average score of 1490 (out of 2400) for the three tests in math, critical reading, and writing. Those scores are down 28 points from the 1514 of the Class of 2006. The 2015 results maintained the steady downward trend — one that’s held for the past decade and on each of the three tests. The story gets more interesting, though. That’s because the past decade has also been a time of steady improvement in the performance of fourth- and eighth-grade students in reading and math on the National Assessment of Educational Progress (NAEP). In 2013, fourth- and eighth-graders posted their best NAEP math performance since 1990, and their best reading performance since 1992 (except for 2011, when fourth-graders did even better). The question is why these gains in elementary and middle school aren’t showing up at the end of high school. The conventional response in education circles is to conclude that we’re continuing to get high school “wrong” — that all of the frenzied efforts to adopt new teacher-evaluation systems, standards, and curricula, digital tools, and the rest have had a big impact in K-8 schools but not in high schools. (As the Washington Post headline had it: “Sliding SAT scores prompt an alarm over high schools.”) That diagnosis may be right. Whether it is or not, it has the added appeal of giving the various pundits and advocates an excuse to trot out their pet remedies — and call for more dollars to fund them.

Americans Have Never Been Dumber -- Three years ago, we noted the dumbification of America was accelerating as SAT scores hit record lows. It appears the need for the Derek Zoolander Center For Kids Who Can't Read Good And Wanna Learn To Do Other Stuff Good Too has never been greater as Bloomberg reports that students in the high school class of 2015 turned in the lowest critical reading score on the SAT college entrance exam in more than 40 years, with all three sections declining from the previous year. The mean score on the math portion of the SAT, 511, is the lowest since 1999. The highest possible score on each section is 800. The reading score of 495 is the worst since 1972, according to data provided by the College Board. The test administrator reported the lowest score for the SAT's writing section since it began in 2005.

Penn State’s Frackademics to Brainwash Freshman -- By making incoming freshman read about fracking’s rosy scenario. From a fracking apologist.   And nothing else about fracking – in order to supply more Penn State Frackademics for the future.  Only from Penn State, the university that made pedophilia a varsity sport!  http://pennstatereads.psu.edu  “An all-campus read means that all incoming freshman (7,000 of them at Penn State) participate in a reading program, are assigned read a common book that speaks to a Great Issue of Our Time, and engage in campus discussions about the book when they first arrive on campus.  Typically, the author then comes to campus, gives a lecture, meets with students, and guest teaches in classes.”  As the one book all freshman must read. All 7,000 of them. No, I am not making this up. All frosh must drink the same flavor Kool Aide. The one with that slightly tart taste of toluene. And diesel oil, methane, arsenic, barium, what-have-you.  Read the fracking book, it’s all not in there.

NY Fed Study Should Redefine How We Think About Student Loans and College Costs - Mike Konczal - Sometimes you hear something that sounds so much like common sense that you end up missing how it overturns everything you were actually thinking, and points in a far more interesting and disturbing direction. That’s how I’m feeling about the coverage of a recent paper on student loans and college tuition coming out of the New York Federal Reserve, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs.”  They find that “institutions more exposed to changes in the subsidized federal loan program increased their tuition,” or for every dollar in increased student loan availability colleges increased the sticker price of their tuition 65 cents. Crucially, they find that the effect is stronger for subsidized student loans than for Pell Grants. When they go further and control for additional variables, Pell Grants lose their significance in the study, while student loans become more important. There’s been a lot of debate over this research, with Libby Nelson at Vox providing a strong summary. I want to talk about the theory of the paper. People have been covering this as a normal debate about whether subsidizing college leads to higher tuition, but this is a far different story. It actually overturns a lot of what we believe about higher education funding, and means that the conservative solution to higher education costs, going back to Milton Friedman, will send tuition skyrocketing. And it ends up providing more evidence of the importance of free higher education.

Degrees of Debt: As college debt grows, more students fall behind - – Student debt is binding many new college grads, keeping them at home with mom and dad as they lick their financial wounds. If staying at home weren't frustrating enough, an increasing number of former students are having trouble recovering at all and are slipping into delinquency and default. "If there was a nuclear war, the only thing that would be left would be cockroaches and student debt," said Stephen Mazzeo, of Easton, who is resolved to stay on top of his $250,000 in student loans.About 1 in 7 college borrowers can't or won't keep up with their loans, according to the U.S. Department of Education. After a borrower is behind on payments for a certain period of time - usually nine months for federal loans - a bank will declare a loan in default. The entire balance then comes due. If that happens, a bank can garnish wages and move to take a borrower's tax refund. Bankruptcy won't help shed student loans, and personal credit scores tank. In Pennsylvania, where the cost of attending the state's premier public colleges leads the nation, about 26,000 former students are in default. Only seven states - including New York and Ohio - have more young people who've fallen so far behind that their banks have declared them in default. Growing rates of delinquency and default are magnified because they coincide with rapid increases in the number and value of loans.

APS still seeking solution to pension troubles -- Atlanta Public Schools is still in search of a long-term solution to funding a district pension fund, one of the worst-funded pension plans in Georgia. Last week school board members agreed they would not ask seek voter approval this fall to fund more than $500 million of unfunded pension liability by borrowing money to bet on the stock market, board chairman Courtney English said. The board had voted in June to authorize Superintendent Meria Carstarphen to prepare for the referendum, but decided against pursuing it after finding that rising borrowing rates would reduce potential savings by nearly $30 million, English said.  Both then and now, we stressed that we would pursue such an option only if market conditions were favorable.” English said in a written statement. “But with the rising costs of maintaining our pension plans, we must continue to explore other options.” The pension debt has been building for at least 35 years. When many Atlanta teachers transferred from the school pension plan to the Teachers Retirement System of Georgia in the late 1970s, they brought most of the school retirement plan’s assets with them. About 3,100 active and retired school system employees, many of them bus drivers and custodians, remain in the pension plan, which is overseen by a city of Atlanta pension board. The pension plan has become a huge cash drain on the district. It is essentially paying out cash nearly as fast as it comes in. Critics have called the proposal to fund pension debt by betting on the stock market a risky strategy that could exaggerate losses if the stock market slumps. But district officials have said selling bonds could save the district money by taking advantage of historically low interest rates and giving the school system breathing room to invest the proceeds for the long haul.

Calstrs Aims to Cut Risk by Moving Up to $20 Billion Out of Stocks -- For years, financial planners have advised their clients to reduce their stock market plays as they age. Buying and holding high-quality bonds may seem less rewarding, but it could protect retirees from gyrations when a big loss of principal would be devastating.Now one of America’s biggest pension funds is considering whether to apply that principle to its giant portfolio, as record numbers of its members are reaching retirement age and drawing their benefits.The board of the California State Teachers’ Retirement System, known as Calstrs, is discussing whether it would be best to shift as much as $20 billion of its portfolio out of stocks and even out of some fixed-income positions, in favor of something new, a “risk mitigation strategy.”The strategy is not a new asset class but an approach. At a meeting on Wednesday, consultants told the trustees that it could involve holding very safe securities like Treasury securities, using hedge funds, or shifting money into assets expected to rise in value during stock bear markets. Many corporate pension funds have adopted some form of risk mitigation, but the approach is seldom seen among public pension funds. The discussion took place against the backdrop of a profound demographic shift in Calstrs. The number of California teachers who are drawing their benefits has been rising every year, and they are enjoying longer, healthier life spans than actuaries predicted in the past. Not surprisingly, the payouts to the retirees have grown every year as well. The average payment to a retiree last year was $44,328, while in 2005 it was $31,404.

Second Largest US Pension Fund To Sell 12% Of Stocks Holdings In Advance Of "Another Downturn" --While many continue to debate if what with every passing day increasingly looks like a global recession, one from which the US will not decouple no matter how many "virtual portfolio" asset managers claim the contrary, there are those who without much fanfare are already taking proactive steps to avoid the kind of fallout that the markets have hinted in the past month of trading, is inevitable. Some such as Calstrs: the nation's second largest pension fund with $191 billion in assets (smaller only than Calpers), which as the WSJ reports is "considering a significant shift away from some stocks and bonds amid turbulent markets world-wide." The move represents "one of the most aggressive moves yet by a major retirement system to protect itself against another downturn." A downturn which the pension fund implicitly suggests, is now inevitable. According to the WSJ, the top investment officers of the California State Teachers’ Retirement System will move as much as $20 billion, or 12% of the fund’s portfolio, into "U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund." And it will certainly be more than just Calstrs: once one fund announces such a dramatic shift in strategy, most tend to follow.

CalPERS’ Private Equity, Exposed: Executive Summary -- Yves Smith -  Over the course of this week and next week, we will examine a recording from the most recent meeting of the Investment Committee of CalPERS’ Board of Directors, This session was part of the regular process of the review and oversight of CalPERS’ portfolio. We will focus on the agenda items related to private equity. This video demonstrates that:

    • ¶ Senior private equity professionals at CalPERS do not understand the economics of private equity funds, raising questions about the staff’s competence
    • ¶ CalPERS’ staff made significant misrepresentations to the board about the private equity practices and current legal/regulatory issues, either overtly or via omission of important information
    • ¶ CalPERS’ staff appears to be largely captured by the private equity industry. It has internalized the viewpoint of the private equity general partners who manage the funds and recites their talking points when challenged
    • ¶ When CalPERS’ staff faces questions that have the potential to expose either the limits of their expertise or questionable private equity industry practices, staff members become highly evasive at best and at worst, insubordinate and overtly defiant
    • ¶ Most CalPERS board members lack sufficient knowledge of private equity to compensate for the failings of staff. That means they are not able to adequately supervise CalPERS’ substantial private equity investments or judge whether staff members have succeeded at, or are even capable of fulfilling that duty. It also means that the overwhelming majority of the board members are also effectively captured by virtue of having to rely on staff members that are themselves captured.

Senior Private Equity Officers at CalPERS Do Not Understand How They Guarantee That Private Equity General Partners Get Rich. - Yves Smith - Over the course of the last Investment Committee meeting of the CalPERS Board of Directors, many of the statements made by senior members of CalPERS’ investment staff showed a lack of understanding of basic issues, such as the industry’s economics and how widely-used contract terms operate. The fact that a single meeting in which private equity was only one of several topics exposed so much in the way of ignorance and misunderstanding is deeply troubling.  As we will demonstrate, these failings are obvious in the case of Réal Desrochers, the Managing Investment Director responsible for private equity. But the lack of sufficient expertise is evident among all the senior staff members responsible for private equity: Desrochers, Ted Eliopoulos, the Chief Investment Officer, and Wylie Tollette. Other than Desrochers, no senior CalPERS officers have meaningful previous experience in private equity; Eliopolis both come out of real estate investing; Tollette spent 18 years before CalPeRS at Franklin Templeton Investments, where he worked only with liquid investments. Anne Stausboll by background is a lawyer and political operative.   Now in theory, it would be possible for any of these professionals to study up and become sufficiently skilled in private equity. Thus, the failure rests with CalPERS’ Chief Executive Officer Anne Stausboll. It is her job to recognize that the risk and complexity in private equity are greatly disproportionate to that of CalPERS’ other investments and to make sure that her staff, particularly its senior leaders, is up to the task. Instead, her team amounts a group of actors performing a private equity play. It is not hard to understand why they are easily led by the private equity general partners since as we’ll see, they feed these performers their lines.

CalPERS Staff Demonstrates Repeatedly That They Don’t Understand How Private Equity Fees Work -- The oversimplifications, mistakes, and refusals to answer basic questions by CalPERS staff members at the last Investment Committee meeting of its board suggest that CalPERS has so little understanding of private equity that it cannot responsibly invest in that strategy at all. These errors related to concepts that are fundamental to understanding the economics of a private equity investments and hence to negotiating them.  In a must-read post, CalPERS Can’t Explain Private Equity, Andrew Silton, former Chief Investment Advisor to the State Treasurer of North Carolina, wrote: As I watched the staff for the better part of two hours, I could only think that CalPERS shouldn’t have $30 billion in exposure to private equity and probably upwards of $45 billion in future commitments. The senior staff of the world’s largest public fund cannot readily explain the basics of private equity investing and doesn’t demonstrate mastery over its investment portfolio. As I listened to Mssrs. Eliopoulos, and Desrochers I heard lots of platitudes about transparency, due diligence, and alignment of interest, but very few specifics. Although CalPERS has been investing in private equity for decades, I heard comments and questions from the trustees (and these are the trustees on the Investment Committee) that I would have expected from a public pension plan that had never invested in private equity before. Moreover, when one or two trustees asked pointed questions, it seemed as if the senior staff was doing a fine impression of evasive private equity executives instead of acting as a staunch stewards of a public pension.

CalPERS Chief Investment Officer Defends Tax Abuse as Investor Benefit - Yves Smith - While it was troubling to see CalPERS’ Managing Investment Director responsible for private equity, Réal Desrochers, repeatedly demonstrate that he did not understand basic aspects of private equity economics, its Chief Investment Officer, Ted Eliopoulos, did not fare much better in his star turns in the August Investment Committee meeting of CalPERS’ Board of Directors. Like Desrochers, Eliopoulos made statements to the Investment Committee that are demonstrably false.  Eliopoulos depicted a tax device widely used by general partners as virtuous by aligning the economic interests of the general partners with the limited partners, when it does nothing of the kind. Even worse, he failed to mention that the IRS has recently proposed rules to end this tax abuse.  As Lee Sheppard wrote in Tax Notes, “Private equity often seems like a tax reduction plan with an acquisition attached.” So it is imperative for investors to understand the tax aspects of private equity transactions to assess general partner compensation and risks.  But as a video of the August Investment Committee meeting shows, Eliopoulos apparently does not grasp how a common tax avoidance scheme by general partners is not beneficial to limited partners. Moreover, he compounded the error by putting the most general-partner-friendly spin possible on it.  The truth is that private equity general partners are so determined to get optimal tax results for themselves that interests of their investors, the limited partners, fall by the wayside.

Fortune’s Dan Primack Takes Up CalPERS’ Private Equity Scandal, Calls Head of Private Equity “Factually Wrong”  -- Yves Smith --- Dan Primack of Fortune has weighed in on what he calls the private equity “mess” at CalPERS, in an important new story, “CalPERS still can’t get out of its own way on private equity.” I strongly urge you to read it in full, but here are some key points:  Primack confirmed that Réal Desrochers, CalPERS’ Managing Investment Director of Private Equity, was “factually wrong” in his presentation to the Investment Committee in August. He also reports that some of his correspondents were “stunned” by the exchange between board member JJ Jelnicic and Desrochers that we reported in one of our CalPERS’ posts, on how management fee offsets, a common feature in private equity agreements, work. Intriguingly, Desrochers has always kept or been kept away from the media: I have never spoken to Real Desrochers. And it’s not for a lack of trying. I asked to interview him when he first got the job, when the carried interest issue arose and now this week (plus, I believe, at least one other time). Always denied. In fact, I can find only one media interview ever with Desrochers since he took over at CalPERS, in a trade publication that asked about what kinds of funds he was interested in backing. And, as I explained to the CalPERS spokesman, it leaves me with only Desrochers’s public testimony with which to judge his understanding of fee offsets and the like.. Primack also says that CalPERS had a unscheduled meeting on this past Monday, and the participants included the CEO, CIO, general counsel, and Desrochers, and it was …..largely centered around what had happened during the investment committee meeting. It is notable that the meeting was called after the [Naked Capitalism] blog post appeared, not after the actual meeting (which had occurred 14 days earlier).

Markets’ wild moves might make U.S. public pension funds vulnerable (Reuters) - Last week's wild gyrations in global financial markets almost certainly exposed the vulnerability of U.S. state and local authority public pension funds which have piled into riskier assets in recent years, according to actuaries and other pension experts. Based on data from the Federal Reserve, the funds are sitting on nearly $4 trillion in assets that are more than 70 percent exposed to equities and other riskier assets, such as commodities and hedge funds. And some states with massive pension funding deficits, such as Illinois, are likely most in danger of suffering big losses given their risk profiles. Since the financial crisis, many public pension funds have increased their exposure to hedge funds and other higher-risk assets to meet ambitious investment return targets. Most funds assume a rate of return of 7-8 percent a year, according to a May report by the National Association of State Retirement Administrators. Those assets can also take a big hit when equity and related markets plunge. At the same time, they have cut back on safer assets, such as U.S. government debt and other lower-risk fixed income investments, which are not expected to provide big returns in the next few years. Most major pension funds have also stopped short of employing other approaches to limiting losses in broad market sell-offs such as volatility management or dynamic asset allocation strategies that have attracted more attention in recent years, according to industry experts.

The Never-ending Fight to Save Social Security - A trial balloon now being inflated by Republicans in Congress needs to be popped before it gets any bigger.I’m talking about their latest plan for unwise and unnecessary cuts to Social Security. The issue involves the way the Social Security disability fund interacts with the much larger and better known retirement fund.Under Social Security, the nation’s 150 million workers are insured in the event they suffer a serious and long-lasting medical disability during their work lives. Currently, 11 million disabled workers collect these modest but vital benefits, which average about $1,165 a month.  The problem is that by late 2016, the disability fund will not have enough money to pay all of the promised benefits. This is no surprise. The shortfall, which would cause an immediate cut in benefits of nearly 20 percent, was projected as far back as 1995. It is due mainly to the aging of the population and to tax changes, made in 1983 and only partially reversed in later years, that have left the disability system underfunded.Such shortfalls have happened before and Congress has always been able to cope in a sensible, noncontroversial way, by reallocating some of the revenue from the large retirement fund to the much smaller disability fund. Reallocations along the lines of those undertaken in the 1990s would enable both funds to pay full benefits until 2033, plenty of time for lawmakers to enact basic reforms to keep the entire system healthy for future generations. But instead of a reallocation, Republicans are floating the idea of forcing the disability fund to borrow the money it needs from the retirement fund. They seem to think that borrowing is more fiscally responsible than reallocation. It’s not. In fact, borrowing would make the disability situation worse, because without more tax revenue going into the system – the solution Republicans refuse to consider – there would be no way to repay the loan. Taking out a loan with no ability to repay would only dig the hole deeper. And when the hole is deep and dark and getting deeper, you can be sure that Republicans will sound the alarm over the fund’s immense debt, for which draconian benefit cuts are the only answer they can think of.

ObamaCare’s Narrow Networks, and Who To Blame When “There Is No Alternative” -- Most coverage of ObamaCare lately has focused solely on increased enrollment numbers; as we know, this is a deceptive metric, and is probably due, at least in part, to an economy no longer in the depths of depresssion. However, the mere fact of enrollment tells us nothing — any more than a ticket to a movie means the movie ends happily — and so in this post I want to focus on “narrow networks,” since it seems a common-sense notion that your doctor (whether you could “keep” them, or not) and your hospital are key determinants in your quality of care, especially if you require a specialist, and narrow networks limit both, as Modern HealthCare describes: Narrow-network plans have grown in popularity, particularly on the Affordable Care Act’s insurance exchanges, because their cheaper premiums appeal to price-sensitive consumers. About 70% of plans sold on the exchanges in 2014 featured a limited network, and their premiums were up to 17% cheaper than plans with broader networks, according to a study by consulting firm McKinsey & Co. But there is significant consumer and provider dissatisfaction with how many of these plans are organized, including concern about inadequate access and information. Critics say insurers have made many missteps in building adequate networks and maintaining accurate, up-to-date provider directories. In some rural areas, there are too few in-network providers, forcing plan members to travel long distances to see one. Some patients find out that a hospital or doctor was out-of-network only after they receive a shockingly high bill. So far, federal and state regulations on narrow networks are vague and inconsistent, experts say. Naked Capitalism readers, of course, have been warned about narrow networks starting in 2013: See here, here, and here, for starters. Modern Health confirms our warnings:

ObamaCare to Crapify Health Insurance at 26% of Employers with “Cadillac Tax” --I haven’t written about much about ObamaCare’s “Cadillac Tax” mostly because it seemed (as we shall see) such an obvious union-busting measure that there wouldn’tbe much of interest to say. However, a recent Kaiser briefing on how many employers will be affected by it has generated a lot of coverage, and, as it turns out, the Cadillac tax — not that anybody could have predicted this — turns out to be insanely complex, based on a crazypants neo-liberal economic assumption, and will screw over a lot more working people than originally thought. So, what is the “Cadillac Tax”? It’s an excise tax; a tax you have to pay when you purchase a particular type of good.  From the Vox explainer: The Cadillac tax — which doesn’t go into effect until 2018 — places a 40 percent tax on health benefits above a certain threshold, encouraging employers to offer less expensive insurance or, if they don’t, pay a big fine. From the Kaiser briefing: [T]o avoid the perception that this was a new tax on employees, the HCPT was structured as a tax on the service providers of the health benefit plans providing benefits an employee: insurers in the case of insured health benefit plans; employers in the case of HSAs and Archer MSAs; and the person that administers the benefits, such as third party administrators, in the case of other health benefits. Because there can be numerous service providers with respect to an employee, the excess amount must be allocated across providers. In some cases, it may not be possible to know whether or not the benefits provided to an employee will exceed the threshold amount until after the end of a year, which means that service providers may need to bill the employer retroactively for the cost of the tax they must pay.  In other words, the Cadillac tax is an obvious horror show, and that probably accounts for employer reaction. ForbesUniversally, when queried, purchasers say they will take whatever steps are needed to avoid paying this 40% tax.

 Outrage builds over mentally ill man shot at hospital - In the middle of a mental health episode last Thursday night, 26-year old University of Houston student Alan Pean had the foresight to drive himself to a nearby hospital to get treatment. But instead of getting the mental health treatment he sought, he ended up in the intensive care unit getting treated for a gunshot wound to the chest. After stepping into the St. Joseph Medical Center, a second episode struck. Two off-duty Houston Police Department officers, who were working separate jobs as hospital security guards, responded. The three of them reportedly had a violent struggle. During the bout, one of the officers fired a single shot, hitting Pean in the chest. Pean is facing two counts of aggravated assault on a public servant for the incident, the Houston Police Department told Fusion.  These preliminary facts of the case have been met with anger from friends and family of Pean, as well as mental health professionals around the country.

Two More European Countries Ban Monsanto’s GMO Crops --Two more European countries are rejecting genetically modified organisms (GMOs). Lativia and Greece have specifically said no to growing Monsanto‘s genetically modified maize, or MON810, that’s widely grown in America and Asia but is the only variety grown in Europe. Lativia and Greece have chosen the “opt-out” clause of a European Union rule passed in March that allows member countries to abstain from growing GM crops, even if they are authorized by the EU. Scotland and Germany also made headlines in recent weeks for seeking a similar ban on GMOs. According to Reuters, in many European countries, there is widespread criticism against the agribusiness giant’s pest-resistant crops, claiming that GM-cultivation threatens biodiversity. Monsanto said it would abide by Latvia’s and Greece’s request to not grow the crops. The company, however, accused the two countries of ignoring science and refusing GMOs out of “arbitrary political grounds.” Monsanto also told Reuters that since the growth of GM-crops in Europe is so small, the opt-outs will not affect their business. “Nevertheless,” the company continued, “we regret that some countries are deviating from a science-based approach to innovation in agriculture and have elected to prohibit the cultivation of a successful GM product on arbitrary political grounds.” According to NewsWire, the EU’s opt-out clause “directly confronts U.S. free trade deal supported by EU, under which the Union should open its doors widely for the US GM industry.”

Clean Water Is Wildly Popular. So Why All The Hate For EPA’s Clean Water Rule? -- Speaking generally, Americans really care about clean water. According to one Gallup poll, they care about it even more than clean air, and clean soil. And when it comes to water, Americans really care about clean drinking water — even more than clean rivers and lakes.  So it might be confusing that there’s been so much opposition to the EPA’s clean drinking water rule, known as the Waters of the United States rule, or WOTUS. Speaking privately, environmentalists generally agree that organized opposition to WOTUS has been more fierce and direct than it has been for other controversial Obama administration regulations — even the Clean Power Plan, which seeks to limit carbon emissions from existing coal-fired power plants.  Under WOTUS, 2 million miles of streams and 20 million acres of wetlands that provide drinking water would be designated as protected under the Clean Water Act. This is necessary, the EPA and Army Corps of Engineers argue, because one-third of Americans get their drinking water from sources connected to these steams and wetlands. But late last week, a federal judge halted the EPA from implementing it, just hours before it was scheduled to go into effect. The decision, of course, was met with cheers from Republican lawmakers and the fossil fuel industry, both of which have staunchly opposed the rule. But it was also a huge win for small business groups, agriculture groups, and real estate developers, three groups you don’t normally see acting as fiercely as they currently are to fight an environmental regulation. In fact, a wide array of unlikely interest groups have been lobbying on the rule — as Politico reported earlier this year, they range from mining companies to pesticide manufacturers to golf course operators.  For them, the rule gives the federal government too much control over even the smallest bodies of water. Farmers, they argue, would have to worry about getting sued for diverting a small stream, and developers would worry the same if they filled in a wetland for a building.

Injunction against federal water rule may expand — A federal judge in North Dakota is allowing arguments over the scope of his injunction blocking a new Obama administration rule that would give the federal government jurisdiction over some smaller waterways. U.S. District Judge Ralph Erickson in Fargo issued a temporary injunction last week that was requested by North Dakota and 12 other states to stop the U.S. Environmental Protection Agency and the Army Corps of Engineers from regulating some small streams, tributaries and wetlands under the Clean Water Act. The EPA maintains that injunction applied only to the 13 states said it began enforcing the rule in all other states on Friday. “There appears to be a dispute between the parties as to the breadth of the court’s order granting the motion for a preliminary injunction,” the judge wrote in a brief to attorneys in the case. “Each side may file a brief addressing the issue of whether the injunction applies nationally or in a limited geographic area.” The deadline was Tuesday at 5 p.m. CDT, the judge said. North Dakota Attorney General Wayne Stenehjem, who filed the injunction request, tells The Associated Press that he and other lawyers from the 13 states believe the EPA , by enforcing the rule in the 37 other states, is doing so “contrary to, and in defiance of, the court’s order.” The EPA said in a statement that it and the Army Corps are “considering next steps in the litigation.” The 13 states exempted for now are Alaska, Arizona, Arkansas, Colorado, Idaho, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota and Wyoming. The 13 states say the regulation is unnecessary and infringes on their sovereignty. The federal government said the new rule clarifies ambiguity in the law and actually makes it easier for the states to manage some waterways.

New ozone regulations could cripple Pennsylvania economy, trade group says -- New ozone regulations proposed by the federal Environmental Protection Agency potentially could destroy a manufacturing resurgence in Pennsylvania and wipe out thousands of jobs gained by the recent Marcellus shale natural gas boom. That was the message put forth by industry leaders Wednesday who railed against the proposals, which would force companies across the nation to reduce their use of fossil fuels to comply with the new rules. The EPA is proposing to cut ground-level ozone standards to between 65 and 70 parts per billion, down from the current standard of 75 parts per billion set in 2008. Ozone, produced both by transportation vehicles and manufacturers, causes smog and is known to significantly reduce air quality. The idea, another in a series from President Barack Obama designed to tackle climate change, could be the most costly regulation ever, to the tune of $1.1 trillion to implement, according to a study by the National Association of Manufacturers. In a conference call Wednesday, the president of the Pennsylvania Manufacturers’ Association called the proposed EPA regulations “outrageously unreasonable and completely untenable.”

Biodiversity belowground is just as important as aboveground – University of Copenhagen: Although most of the world’s biodiversity is below ground, surprisingly little is known about how it affects ecosystems or how it will be affected by climate change. A new study demonstrates that soil bacteria and the richness of animal species belowground play a key role in regulating a whole suite of ecosystem functions on Earth. The authors call for far more attention to this overlooked world of worms, bugs and bacteria in the soil. Ecosystem functions such as carbon storage and the availability of nutrients are linked to the bugs, bacteria and other microscopic organisms that occur in the soil. In fact, as much as 32% of the variation seen in ecosystem functions can be explained by the biodiversity in the soil. In comparison, plant biodiversity accounts for 42%. That is the conclusions of a new study published in Nature Communications. “Biodiversity below ground is neither very visible nor very cute, but pick up a handful of soil and you might find more species there than all of the vertebrates on the planet. We need to turn our attention towards these organisms, if we are to better understand the ecosystems we depend on for a range of functions”, says co-author Aimée Classen from the Center for Macroecology, Evolution and Climate. The study is unique in relating soil biodiversity to a whole suite of ecosystem functions rather than focusing on a few. These were combined in an index called ecosystem multifunctionality (EMF). “Ecosystems have multiple functions which are all important. They store carbon in soil and biomass which has massive implications for climate change, but they also hold back and release various nutrients which have effects on natural areas as well as agricultural yield. Therefore, we need to be concerned with the multiple functions of ecosystems, what controls them and how this might change with climate change“, says Dr. Xin Jing from Peking University.

Research demonstrates millions of plastic particles exist in cosmetic products - Everyday cosmetic and cleaning products contain huge quantities of plastic particles, which are released to the environment and could be harmful to marine life, according to a new study. Research at Plymouth University has shown almost 100,000 tiny 'microbeads' - each a fraction of a millimetre in diameter - could be released in every single application of certain products, such as facial scrubs. The particles are incorporated as bulking agents and abrasives, and because of their small size it is expected many will not be intercepted by conventional sewage treatment, and are so released into rivers and oceans. Researchers, writing in Marine Pollution Bulletin, estimate this could result in up to 80 tonnes of unnecessary microplastic waste entering the sea every year from use of these cosmetics in the UK (United Kingdom/Great Britain) alone.

Plastic Poses a Growing Threat to Seabirds, Study Says -- Seabirds like albatross, petrels and penguins face a growing threat from plastic waste in parts of the Pacific, Atlantic, Indian and Southern Oceans, according to a new study published on Monday.  Brightly colored floating bits – debris that includes items such as discarded flip-flops, water bottles and popped balloons – often attract seabirds, which confuse them for food like krill or shrimp. Many die from swallowing the plastic. The problem received some national attention in 2013 with the documentary “Midway,” which showed a remote island in the Pacific covered in corpses of baby albatross. Their exposed innards revealed lighters, bottle caps and toothbrushes mistakenly fed to them by their parents.  The number of incidents like these is rapidly increasing, according to the new study in Proceedings of the National Academy of Sciences. Researchers from Australia and Britain analyzed a number of papers from 1962 to 2012 that had surveyed 135 seabirds. The team found that fewer than 10 percent of seabirds had traces of plastic in their stomachs during the 1970s and 1980s. They estimated that today that number has increased to about 90 percent of seabirds. And they predict that 99 percent of all seabirds will swallow plastic in 2050. Researchers had previously thought that giant garbage patches swirling between Hawaii and California were the most likely places where birds would eat the waste. Instead, most seabirds are ingesting plastic at hotspots that stretch from Australia and New Zealand to South Africa and Chile.

As Much As 90 Percent Of Seabirds Have Ingested Plastic, New Study Estimates --The study, published Monday in Proceedings of the National Academy of Sciences, looked at 186 species of pelagic seabirds. Pelagic birds, a group that includes albatrosses, puffins, and storm petrels, spend most of their lives on the open ocean, as opposed to birds like seagulls which spend a lot of time on land. The researchers looked at previous studies done on seabirds between 1962 and 2012, which found that 29 percent of birds studied had ingested plastic. Using models, the researchers determined that if those studies had been conducted today, as much as 90 percent of the seabirds looked at would have plastic in their guts — a figure study co-author Denise Hardesty called “astronomical.”  And, according to the study, that figure is set to increase. Right now, concentrations of plastic can be as high as 580,000 pieces per square kilometer (about .386 square miles) of ocean. “Modeling studies, validated by global sampling efforts, demonstrate that plastics are ubiquitous, with high concentrations in all five subtropical convergence zones and along the coastal margins near human population centers,” the study states.  According to a study from earlier this year, 4 to 12 million metric tons of plastic washed out into the ocean in 2010 alone, a figure that represents up to 4.5 percent of the world’s total plastic production. And as plastic production around the world increases — “between 2015 and 2026, we will make as much plastic as has been made since production began,” Monday’s study states — concentrations in the ocean will also likely go up. Because of that, the researchers predict that, by 2050, 99 percent of all seabirds will have plastic in their guts.

Ocean Plastic Will Be Found in 99 Percent of Seabirds by 2050 -- Plastic pollution in the ocean is like a floating minefield to marine life, from microscopic plankton to giant whales. Now, a new study estimates that plastic debris can be found in the majority of all species of seabirds. It’s no surprise that as more plastic enters the oceans, more seabirds will accidentally eat it. What’s surprising is how much these numbers have escalated over time. Researchers from the Commonwealth Scientific and Industrial Research Organization (CSIRO) in Australia and Imperial College London found that in the 1960s, only 5 percent of seabirds had plastic in their stomachs. By 2010, that number rose to a startling 80 percent. Of all seabirds alive today, the researchers estimated that 90 percent of the birds have eaten plastic. Worryingly, if current trends continue (that is, if humans don’t stop dumping plastic into the ocean), it’s predicted that 99 percent of seabirds will swallow plastic by 2050, the researchers said. These findings were published in the Proceedings of the National Academy of Sciences. According to NBC News, the study’s authors used oceanographic and ecological modeling to predict the risk of plastic ingestion to 186 seabird species globally, including albatross, shearwaters and penguins.

Trash-mapping expedition sheds light on 'Great Pacific Garbage Patch' -- Scientists and volunteers who have spent the last month gathering data on how much plastic garbage is floating in the Pacific Ocean returned to San Francisco on Sunday and said most of the trash they found is in medium to large-sized pieces, as opposed to tiny ones. Volunteer crews on 30 boats have been measuring the size and mapping the location of tons of plastic waste floating between the west coast and Hawaii that according to some estimates covers an area twice the size of Texas. “It was a good illustration of why it is such an urgent thing to clean up, because if we don’t clean it up soon, then we’ll give the big plastic time to break into smaller and smaller pieces,” said Boyan Slat, who has developed a technology he says could start removing the garbage by 2020. A 171ft mother ship carrying fishing nets, buckets, buoys and bottles, among other items, and two sailing boats with volunteers who helped collect the garbage samples arrived at San Francisco’s Piers 30-32. The boats went on a 30-day voyage as part of the “Mega Expedition”, a major step in an effort to clean up what is known as the Great Pacific Garbage Patch. The expedition was sponsored by the Ocean Cleanup, an organisation founded by Slat, a 21-year-old innovator from the Netherlands. Slat said the group would publish a report of its findings by mid-2016 and after that hoped to test out a one-mile barrier to collect garbage near Japan. The ultimate goal is the construction of a 60 mile (96.5km) barrier in the middle of the Pacific.

Researchers survey 'endless layer of garbage' in Pacific Ocean (+video) - A research expedition returned Sunday from mapping the massive cluster of plastic waste known as the Great Pacific Garbage Patch, a swath of hundreds of miles of open sea dominated by floating trash. The team of 15 researchers and volunteers set out from San Francisco a month ago in a reconnaissance mission to survey and study the debris as part of a major plan to purge the Pacific of human-linked trash. “We were surrounded by an endless layer of garbage," sad Serena Cunsolo, an Italian marine biologist who works for The Ocean Cleanup, a Netherlands-based startup that develops technology to extract and intercept plastic pollution. "It was devastating to see."  Most of the waste they found were medium to large-sized pieces, as opposed to tiny plastic shards that could enter the food chain and are extremely difficult to clean up, Boyan Slat, the company’s 21-year-old founder, said.  Slat, who was inspired to start his cleanup effort after a diving trip in the Mediterranean Sea five years ago, has envisioned using long-distance floating barriers that will attach to the seabed with an anchoring system used by oil-drilling rigs. Social news site TakePart described the project last year:   Powered by solar panels, the platform would be attached to the seabed and have movable arms that could funnel recyclable plastic into a column. A floating barrier would prevent marine animals from getting trapped in the array. The project is budgeted to cost about $43 million annually for 10 years, which would be offset by the marketable and usable recycled plastic.

Science-Based Solutions Reject Boyan Slat’s Approach to Rid the Ocean of Plastic - While capture and reclamation of ocean plastics are attractively simple, and can be justified for recovering navigational hazards from lost fishing nets and line, our research has ultimately led us to believe that these types of concepts are not an effective approach to deal with plastic pollution. The 5 Gyres Institute with eight other colleagues conducted 24 ocean expeditions, over 100k ocean miles over seven years, producing the first global estimate of all plastics in all oceans. As a result 5 Gyres strongly advocates upstream design and policy solutions to clean up the oceans.  OCP has now completed a journey across the North Pacific with 30 vessels, called the Mega Expedition. We respect and admire innovation, but feel the need to offer some important suggestions. After our meeting in Amsterdam with OCP, then again in Long Beach, we both participated in an online webinar to discuss the efficacy of the Net Array, with its 60km sweeping arms. OCP’s feasibility study acknowledges that neutrally buoyant marine life will sink and go under the net. When asked during the webinar about the passive floating organisms that do not swim, Slat was not aware of them. The potential for “bycatch” is too great to be ignored. Organisms like the beautiful purple janthina snail, rafting barnacles and numerous jellies, like the wind-driven velella velella, could amount to tens of millions of organisms captured over a short time.  The solution here is to produce a proper Environmental Impact Report (EIR) from an outside agency. Though we’re thoroughly impressed with Slat’s “big picture” thinking, he must conform to the ethical standards of any structural development of this magnitude. Knowing the full environmental impact of his project is currently missing from the OCP plan.The solution here is to produce a proper Environmental Impact Report (EIR) from an outside agency. Though we’re thoroughly impressed with Slat’s “big picture” thinking, he must conform to the ethical standards of any structural development of this magnitude. Knowing the full environmental impact of his project is currently missing from the OCP plan.

Why are so many whales dying on California's shores?  == Last week, scores of local residents made their way to Sharp State Park in Pacifica, California, a 20-minute drive south of San Francisco, to view the body of a humpback whale that came ashore on 4 May. When the 32-foot female humpback whale’s body came ashore, after days being tossed by waves, it was only the latest in a string of strandings along northern California’s Pacific coast. On 14 April, also in Pacifica, a 48ft sperm whale washed ashore. Researchers are unsure of exactly what occurred in the ocean but report the whale was emaciated and had slight hemorrhaging, which could have been the result of a ship collision. Shortly after that incident, an orca came ashore north of San Francisco in Fort Bragg. According to researchers there, the orca appears to have been injured as a result of fishing nets and was also showing signs of hunger. Then, on 24 April, two gray whales were stranded in Santa Cruz county, south of Pacifica. There were signs of trauma on one of the whales after what scientists believe was an encounter with an orca, but again, scientists could not give a definitive cause of death. The latest stranding, in early May, has increased questions asking what is happening in the Earth’s oceans. Oceans attorney for the environmental law organization Earthjustice Andrea Treece says the most common causes of whale deaths in recent years are the result of ships and the mammals being tangled in fishing gear and nets. While numbers are limited due to scientists’ unwillingness to give definitive causes of death, collisions with ships are a serious threat to some species. Of the North Atlantic right whale, the International Whaling Commission says: “It is thought that mortality due to ship strikes may make the difference between extinction and survival for this species.” 

Carbon Pollution Is Expanding Global Dry Zones, As Predicted -- A landmark study in the journal Nature documents an expansion of the world’s dry and semi-arid climate regions since 1950 — and attributes it to human-caused global warming. The new study, “Significant anthropogenic-induced changes of climate classes since 1950,” looks at multiple datasets of monthly temperature and precipitation over time. The main finding: About 5.7% of the global total land area has shifted toward warmer and drier climate types from 1950–2010, and significant changes include expansion of arid and high-latitude continental climate zones, shrinkage in polar and midlatitude continental climates…. As for the cause, “we find that these changes of climate types since 1950 cannot be explained as natural variations but are driven by anthropogenic factors.” In short, humans are causing the world’s arid and semi-arid climate zones to expand into the highly populated mid-latitude continental climates (where, for instance, most Americans live) — and causing the high-latitude climates to expand into the polar zones. Of course, the polar zones are precisely where the carbon-rich frozen tundra is and the land-locked ice of the world’s biggest ice sheets and glaciers.  These are stunning changes when you consider the fact that the world has only warmed about 1°F since 1950, and we are on track to warm 5 times that much (or more) this century alone. Multiple climate studies project continued climate inaction will put some one-third of the currently-habited and arable landmass of the planet into a state of near permanent drought post-2050. This new study finds that we are well on our way.

When the Wells Run Dry: California Neighbors Cope in Drought - Living with a dried-up well has turned one of life's simplest tasks into a major chore for Lozano, a 40-year-old disabled Army veteran and family man.Millions of Californians are being inconvenienced in this fourth year of drought, urged to flush toilets less often, take shorter showers and let lawns turn brown. But it's dramatically worse in places like Okieville, where wells have gone dry for many of the 100 modest homes that share narrow, cracked streets without sidewalks or streetlights in a dry corner of California's Central Valley.Farming in Tulare County brought in $8.1 billion in 2014, more than any other county in the nation, according to its agricultural commissioner. Yet 1,252 of its household wells today are dry — more than all other California counties combined.It's particularly alarming in Lozano's neighborhood, where at least 15 domestic wells used by 23 homes have dried up.Some neighbors rig lines from house to house to share water from the remaining wells deep enough to hit the emptying aquifer below. Others benefit from state drought relief that pays for trucked-in water to fill 2,500-gallon tanks in their yards, and boxes of drinking water that get stacked in bedrooms and living rooms.Lozano watches his sons kick a soccer ball in front of their rented home while waiting on his neighbors to free up the next few drops. He pays $50 a month to join five other homes sharing a makeshift water system that taps into a well a half-mile away.

The Invisible Victims Of California’s Drought - A 17-year-old pregnant farmworker died in a vineyard of heat exhaustion in the summer of 2008 in triple-digit temperatures. The nearest water cooler was a 10-minute walk and a foreman allegedly wouldn’t let her take a break to get a drink of water. She arrived in a coma at the hospital with a body temperature of 108 degrees. She later died of heat exhaustion, three years after California issued groundbreaking heat illness regulations for employers to provide shade and water for farmworkers.  As the west coast grapples with a mixture of drought and heat waves, heat-related illnesses among farm workers has continued to persist. Particularly in California where 70 percent of the state is classified in a state of “exceptional” or “extreme” drought, heat waves are becoming more severe due to higher humidity and warmer nighttime temperatures, with the hottest summer days twice as likely to occur in the state’s Central Valley due to climate change.  But a decade after California implemented the heat illness emergency resolutions, some growers in one of the most agriculturally-rich parts of the country still have yet to ensure protections for farmworkers who work prolonged hours during peak heat times. The prolonged drought has thrown farms into crisis mode and sent temperatures soaring. At least 28 farmworkers have died since the regulations were passed, according to the United Farm Workers union.

The World Lost An Area Of Trees Twice The Size Of Portugal In 2014  --Some tropical countries saw an “alarming” surge of tree cover loss in 2014, according to a new report. The report, published Wednesday by the World Resources Institute’s Global Forest Watch, uses data on tree cover loss — a measure of the removal, natural or human-caused, of all kinds of trees, whether they’re in a forest or on a plantation — from the University of Maryland and Google. That data show that in 2014, the planet lost more than 45 million acres of tree cover, with tree cover loss in tropical countries accounting for more than half of that total. Tropical countries alone, the report found, lost nearly 25 million acres of tree cover in 2014, a chunk about the size of South Korea. The data shows that tree cover loss in the tropics is speeding up. Brazil, which has reduced Amazon deforestation by 70 percent over the last 10 years, saw an increase in tree cover loss in 2014. Indonesia, too, experienced an uptick in tree loss after seeing a drop in 2013. “This analysis identifies a truly alarming surge in forest loss in previously overlooked hotspots,” Nigel Sizer, global director of WRI’s Forests Program said in a statement. “In many of these countries, we’re seeing accelerating clearing associated with commodities such as rubber, beef, and soy, along with palm oil.”

Why Did 60,000 Endangered Antelopes Mysteriously Die in Four Days? -- This past May, a large herd of saigas—a critically endangered antelope in Kazakhstan—died en masse, to the horror of conservationists worldwide. More than 120,000 of these creatures had mysteriously died across the Central Asian country in two weeks, including a whopping 60,000 saigas in central Kazakhstan in just four short days. In a few short weeks, one-third of the worldwide population of saigas—known for its distinctive bulbous nose and for its key role in steppe grassland ecosystems—were found dead. Scientists had no idea why. The horrendous population dive stopped suddenly that June, causing even more confusion. But now, as Live Science reported, scientists believe they have pinpointed the culprit—a common and normally harmless bacteria that lives in the animals’ bodies. According to Live Science, an extensive analysis revealed that that toxins produced by Pasteurella and possibly Clostridia bacteria caused extensive bleeding in the animals’ organs. Pasteurella, a gut bacteria found in all ruminants such as saigas, is harmless unless the animal already has a weakened immune systems.Scientists have yet to figure out why this typically harmless bacteria has led to mass death.

Obama paints doomsday scene of global warming in Alaska — President Barack Obama is painting a doomsday scenario for the Arctic and beyond if climate change isn’t dealt with fast: entire nations submerged underwater, cities abandoned and refugees fleeing in droves as conflict breaks out across the globe. It’s a harrowing image of a future that Obama insists is inevitable unless the world follows his and America’s lead by making sweeping cuts to greenhouse gases. The president was to drive the message home on Tuesday by hiking a melting glacier in Alaska. Obama is counting on Alaska’s exquisite but deteriorating landscape to elicit a sense of urgency that his previous calls to action on climate change have not. He opened his three-day trip to the nation’s largest state on Monday with a speech to an Arctic climate summit, calling global warming an escalating crisis already disturbing Alaskans’ way of life. “We will condemn our children to a planet beyond their capacity to repair,” Obama said. Alluding ironically to the threat of rising seas, he castigated leaders who deny climate change as “increasingly alone — on their own shrinking island.” The trip is more about visuals than words, and the high point comes Tuesday when Obama flies by helicopter to Seward to hike the famed Exit Glacier, a sprawling expanse of ice that is liquefying under warmer temperatures. Some 700 square miles in the Kenai Mountains are blanketed by glacier ice, remnants of the Ice Age, when roughly a third of the Earth was covered with sheets of ice. One of nearly 40 glaciers springing out from Harding Icefield, Exit Glacier has been receding for decades at a rate of 43 feet a year, according to the National Park Service.

Obama can rename Mount McKinley Denali — but he can’t stop its loss of ice - The Washington Post: This Monday through Wednesday, President Obama will be in Alaska, visiting melting glaciers and remote towns and meeting with other Arctic leaders. On Sunday, the president made a major statement by officially renaming Mt. McKinley — the U.S.’s highest peak — Denali, its traditional native name. The trip’s purpose is to highlight climate change — and for Alaska in particular, the change has been dramatic. Alaska has already warmed by more than 3 degrees Fahrenheit over the last 50 years. Alaska is a state famous for its snowy peaks and mountain glaciers — a major tourist draw. Yet its ice volume has declined greatly in recent years. A study earlier this year found that Alaska’s glaciers were losing 75 billion metric tons of ice per year — meaning that although Alaska’s mountain glaciers only comprise 11 percent of the world’s total, they’re contributing 25 percent of the losses (and rising sea level) from this source. [Alaska’s glaciers are now losing 75 billion tons of ice every year] The Kenai peninsula’s Exit Glacier pictured above — which Obama will visit — is just one case in point. It retreated 43 feet per year between 1815 and 1999, according to data from the National Park Service. The retreat has only continued since then, and last year the glacier retreated 187 feet. Denali itself has lost a dramatic amount of its ice. 16 percent of Denali National Park and Preserve is covered by glaciers, according to the National Park Service, but “the evidence is clear that Denali’s glaciers are thinning and retreating,” it says. Between 1950 and 2010, Denali’s glaciers lost 8 percent of their area.

Obama to Call for More Icebreakers in Arctic as U.S. Seeks Foothold - — President Obama on Tuesday proposed speeding the acquisition and building of new Coast Guard icebreakers that can operate year round in the nation’s polar regions, part of an effort to close the gap between the United States and other nations, especially Russia, in a global competition to gain a foothold in the rapidly changing Arctic.The president’s proposal, on the second day of a three-day trip to Alaska to highlight the consequences of climate change and call for a worldwide effort to address the issue, touches on one of its most profound effects. The retreat of Arctic sea ice has created opportunities for shipping, tourism, mineral exploration and fishing, but the rush of marine traffic that has followed is bringing new difficulties.“Arctic ecosystems are among the most pristine and understudied in the world, meaning increased commercial activity comes with significant risks to the environment,” the White House said in a statement.  “The growth of human activity in the Arctic region will require highly engaged stewardship to maintain the open seas necessary for global commerce and scientific research, allow for search-and-rescue activities, and provide for regional peace and stability,” the statement said. The aging Coast Guard fleet is not keeping pace with the challenge, the administration acknowledged, noting that the service has the equivalent of just two “fully functional” heavy icebreakers at its disposal, down from seven during World War II. Russia has 41 of the vessels, with plans for 11 more. China unveiled a refurbished icebreaker in 2012 and is building another.

New NASA videos show stark ice loss from Earth's ice sheets The US space agency, NASA, yesterday released brand new images showing the pace of ice loss from Earth's two vast ice sheets, Greenland and Antarctica. The amount of ice lost from the frozen expanses at the very north and south of the planet is accelerating, say the scientists, and together have helped raise global sea level by more than 7cm since 1992. The Greenland ice sheet covers approximately 1.7m square kilometres (660,000 square miles), an area almost as big as Alaska. At its thickest point, the ice sitting on top of the land is more than 3km deep. Since 2004, Greenland has been losing an average of 303bn tonnes of ice every year, according to NASA data, with the rate of loss accelerating by 31bn tonnes per year every year. In the animation below, red shows areas that have lost ice, blue shows areas that have gained ice.. A NASA press release accompanying yesterday's data explains:  "Greenland's summer melt season now lasts 70 days longer than it did in the early 1970s. Every summer, warmer air temperatures cause melt over about half of the surface of the ice sheet - although recently, 2012 saw an extreme event where 97% of the ice sheet experienced melt at its top layer." Covering nearly 14m square kilometres (5.4m square miles), Antarctica is more than eight times the area of Greenland. The continent is also losing ice, though less quickly than its northern counterpart. Antarctica has lost, on average, 118bn tonnes of ice per year since 2004, compared to Greenland's 303bn tonnes.  Once again, red in the above animation is shows areas that have lost ice, blue shows areas that have gained ice. As you can see, most of the ice loss is coming from West Antarctica. Since 2004, the rate of ice loss from the region has accelerated by 28bn tonnes each year.

World sea levels set to rise at least one metre over next 100-200 years, NASA says - Sea levels are rising around the world and the latest satellite data suggests that one metre or more is unavoidable in the next 100-200 years, NASA scientists have said. Ice sheets in Greenland and Antarctica are melting faster than ever, and oceans are warming and expanding much more rapidly than they have in years past.Rising seas will have "profound impacts" around the world, NASA Earth Science Division director Michael Freilich said. "More than 150 million people, most of them in Asia, live within one meter of present sea level," he said. Low-lying US states such as Florida are at risk of disappearing, as are some of the world's major cities such as Singapore and Tokyo. "It may entirely eliminate some Pacific island nations," he said. There is no doubt that global coastlines will look very different in years to come, US space agency experts told reporters on a conference call to discuss the latest data on sea level rise. "Right now we have committed to probably more than three feet (one metre) of sea level rise, just based on the warming we have had so far," said Steve Nerem of the University of Colorado, and leader of NASA's sea level rise team. "It will very likely get worse in the future. "The biggest uncertainty is predicting how quickly the polar ice sheets will melt."

How to make sense of 'alarming' sea level forecasts: According the to the IPCC sea level rise has accelerated from 0.05 cm each year during 1700-1900 to 0.32 cm each year during 1993-2010. Over the next century the IPCC expects an average rise of 0.2 to 0.8 cm each year.  The IPCC report adds that “it is very likely that there will be a significant increase in the occurrence of future sea level extremes” and “it is virtually certain that global mean sea level rise will continue for many centuries beyond 2100, with the amount of rise dependent on future emissions”. Looking to the past The IPCC estimates stand in sharp contrast to projections made by some climate scientists, in particular James Hansen who pointed out in 2007 and in his and his colleagues' latest study of the effects of ocean warming on the ice sheets. The IPCC reports did not take into account rates of dynamic ice sheet breakdown, despite satellite gravity measurements reported in the peer-reviewed literature by other scientists.In Greenland, ice loss reached around 280 gigatonnes of ice each year during 2003-2013, whereas in Antarctica the loss reached around 180 gigatonnes of ice each year during the same period. Both ice sheets appear to be undrgoing accelerated rates of ice melt, as shown in the diagrams.

Would warming stop after greenhouse gas emissions end? Not quite - The latest IPCC report estimated our remaining “carbon budget” that would give us a chance of reaching the goal of keeping global warming below 2 degrees Celsius this century. That estimate was created using a simpler class of climate model that can crank out long or repeated simulations without tying up a supercomputer for a week. A new study using one of the most complex models, however, suggests that the simpler models get a key issue wrong: they overestimate how much carbon we can emit if we actually want to stay below 2 degrees Celsius over the centuries that follow. A recent study used one of those simpler models (technically known as “Earth System Models of Intermediate Complexity," or EMICs) to look at how long it takes us to reap the benefits of cutting emissions. Rather than the oft-repeated estimate that there is a delay of about 40 years, the researchers found that the peak in temperature came just 10 years after emitting a simulated pulse of CO2. However, they only modeled about a hundred years. ETH Zürich’s Thomas Frölicher and David Paynter of NOAA’s Geophysical Fluid Dynamics Laboratory turned to a more complex model and a much longer timeframe to investigate a related question: what happens long after we stop emitting greenhouse gases? Using their model, they simulated a scenario in which CO2 emissions grew 1 percent each year for 100 years, raising the atmospheric concentration from 286 to 745 parts per million, and raising temperature by 2 degrees Celsius. At that point, CO2 emissions dropped to zero. Then, they simulated nine more centuries, watching atmospheric CO2 drop back to 476 parts per million as it gradually moved into the ocean and natural reservoirs on land. Rather than tie up a supercomputer with an even longer simulation, they estimated the temperature after another 9,000 years using measures of the model’s characteristics and lower-resolution simulations of atmospheric CO2 changes.

A Key Element for the Forthcoming Paris Climate Agreement -- Stavins - The upcoming Paris climate negotiations will constitute a critical step in the ongoing international process to reduce global greenhouse gas (GHG) emissions. Whether the Paris outcome will be sufficiently ambitious to put the world on a path towards limiting global average warming to 2o C, as agreed in Cancun, remains to be seen. In general, greater ambition is more easily realized when costs are low. Market-based mechanisms are an important element in the portfolio of actions that can lead to cost-effective solutions. Linkage – between and among market and non-market systems for reducing GHG emissions – is a closely-related key element. In an article just published in Climate Policy, “Facilitating Linkage of Climate Policies through the Paris Outcome,” my co-authors – Daniel Bodansky of Arizona State University, Seth Hoedl of Harvard Law School, and Gilbert Metcalf of Tufts University – and I examine how the Paris outcome, and more generally the ongoing climate negotiations, can allow for and advance linked systems.

Big Bank Says It’s Going To Cost A Lot To Do Nothing On Global Warming - A new report from Citibank found that acting on climate change by investing in low-carbon energy would save the world $1.8 trillion through 2040, as compared to a business-as-usual scenario. In addition, not acting will cost an additional $44 trillion by 2060 from the “negative effects” of climate change.  The report, titled Energy Darwinism, looked at the predicted cost of energy over the coming decades, the costs of developing low carbon energy sources, and the implications of global energy choices.  “What we’re trying to do is to take an objective view at the economics of this situation and actually look at what the costs of not acting are, if the scientists are right,” Jason Channell, Global Head of Alternative Energy and Cleantech Research at Citi, told CNBC. “There is a cost to not doing this, and although there is a cost to acting, what we’re trying to do is to actually weigh up the different costs here.”  The report includes analysis of the cost of stranded assets — the idea that in order to prevent 2ºC of warming, a third of the world’s oil reserves, half of its gas reserves, and more than 80 percent of its coal reserves need to stay in the ground.  “Overall, we find that the incremental costs of action are limited (and indeed ultimately lead to savings), offer reasonable returns on investment, and should not have too detrimental an effect on global growth,” the report’s authors write. In fact, they found that the necessary investment, such as adding renewable energy sources and improving efficiency, might actually boost the global economy.

Citi report: slowing global warming would save tens of trillions of dollars - Citi Global Perspectives & Solutions (GPS), a division within Citibank (America’s third-largest bank), recently published a report looking at the economic costs and benefits of a low-carbon future. The report considered two scenarios: “Inaction,” which involves continuing on a business-as-usual path, and Action scenario which involves transitioning to a low-carbon energy mix. One of the most interesting findings in the report is that the investment costs for the two scenarios are almost identical. In fact, because of savings due to reduced fuel costs and increased energy efficiency, the Action scenario is actually a bit cheaper than the Inaction scenario. What is perhaps most surprising is that looking at the potential total spend on energy over the next quarter century, on an undiscounted basis the cost of following a low carbon route at $190.2 trillion is actually cheaper than our ‘Inaction’ scenario at $192 trillion. This, as we examine in this chapter, is due to the rapidly falling costs of renewables, which combined with lower fuel usage from energy efficiency investments actually result in significantly lower long term fuel bill. Yes, we have to invest more in the early years, but we potentially save later, not to mention the liabilities of climate change that we potentially avoid. The following figure from the Citi report breaks down the investment costs in the Action ($190.2 trillion) and Inaction ($192 trillion) scenario.  This conclusion soundly refutes the main argument against climate action – that it’s too expensive, with some contrarians even having gone so far as to claim that cutting carbon pollution will create an economic catastrophe. To the contrary, the Citi report finds that these investments will save money, before even accounting for the tremendous savings from avoiding climate damage costs.

Is there a wind shortage? -- In academia, no, but in the real world perhaps: Electricity generated by US wind farms fell 6 per cent in the first half of the year even as the nation expanded wind generation capacity by 9 per cent, Energy Information Administration records show. The reason was some of the softest air currents in 40 years, cutting power sales from wind farms to utilities… “We never anticipated a drop-off in the wind resource as we have witnessed over the past six months,” … Standard and Poor’s put a negative outlook on bonds issued by two wind farm companies as their revenues tracked wind speeds lower. “Although our current expectation is that the wind resource will revert back to historical averages, at this time it is unclear when that will happen,” the rating agency said. Wind generated 4.4 per cent of US electricity last year, up from 0.4 per cent a decade earlier. But this year US wind plants’ “capacity factor” has averaged just a third of their total generating capacity, down from 38 per cent in 2014. EIA noted that slightly slower wind speeds can reduce output by a disproportionately large amount. The Gregory Meyer FT article is here.  Here are some earlier articles on wind speeds slowing down, some of them appear to be reputable.  According to this recent article, for parts of 2015 wind speeds may be 20-50 percent below average in the American West.  Caveat emptor, but food for thought.

Chinese environment: Ground operation - FT.com: The chemicals warehouse explosions in the port city of Tianjin last month reached straight into Yan Hongmei’s apartment, fracturing her mother’s pelvis when a window frame crashed on to her bed. A few days later, rain sprinkled the city with foamy yellowish flecks. The day after that, thousands of dead fish turned riverbanks into a silvery-white mass. “They say there are no problems now, but what about the future? What if our children will be affected down the road?” “We are afraid of the pollution posed by chemicals. Even though they say there is no pollution and it is safe, we still believe pollution exists.” The fallout in Tianjin — from air, to water, to soil — is mirrored in industrial pollution across China. The thick smog that blocks the sun and causes hospital admissions to rise, often dubbed the “smog-ocalypse”, makes headlines worldwide. Rivers sometimes inexplicably turn red, plagues of dead fish can materialise overnight and algae blooms turn lakes bright green. But soil pollution — invisible, its effects lingering long after the original polluter is gone — may be the thorniest problem of them all. Faced with public discontent, Beijing has started to address air pollution by modernising factories and moving coal-consuming industries away from cities. By 2020, many major waterways are supposed to meet new drinking water standards. Some of these remedies may be counter-productive, since moving polluting factories to the hinterlands can have the perverse effect of fouling air, soil and water closer to river sources. Yet the government is only now beginning to grapple with soil pollution, after years in which experts struggled to bring attention to the issue.

Coal Ash Can Contain Levels Of Radioactive Elements Up To 10 Times Higher Than Coal Itself -- Scientists have known for years that coal — and its burned byproduct, coal ash — contains radioactive elements. In 2009, for example, a group of researchers at Duke University — including Avner Vengosh, professor of earth and ocean sciences — measured high levels of radioactivity in coal ash from a spill at the Tennessee Valley Authority’s Kingston power plant. But they lacked a complete picture of radioactivity in coal ash — the second-largest form of waste generated in the United States. So, Vengosh and a group of researchers at Duke set out to complete the first systematic study of radioactivity in coal and coal ash from all three of the United States’ major coal producing basins. The results of that study, published Wednesday in Environmental Science & Technology, show that radioactive elements are present in both coal and coal ash from all three major coal basins — the Illinois, Appalachian and Power River basins. The levels of radioactivity in the coal ash were also up to five times higher than levels in normal soil and up to 10 times higher than in the parent coal itself. “We found that the radium in coal ash is concentrated during the combustion process, because of the combustion and losing of carbon from coal,” Vengosh told ThinkProgress.  Along with toxic contaminants, like arsenic, selenium, and mercury, coal contains naturally occurring radioactive elements like uranium and thorium, which, when they decay, form chemical by-products like radium. Currently, toxic contaminants have been of the most concern to those monitoring coal ash disposal sites — disposal sites aren’t monitored for radioactivity.

The Coal Industry Is Hurting, But Its Execs Are Still Getting Raises -- The coal industry has had a rough time in recent years. Between late 2010 and the end of 2014, the top ten publicly-traded coal companies saw their combined share price value drop by more than half, as hundreds of plants closed and thousands of employees were laid off. This spring, Alpha Natural Resources, the nation’s largest producer of metallurgical coal, declared Chapter 11 bankruptcy. And Obama’s new Clean Power Plan, aimed at reducing carbon emissions, isn’t likely to make things any easier for U.S. coal producers.  But according to a September 2nd report from the Institute for Policy Studies, the industry’s problems haven’t put a dent in the compensation of its top executives. In fact, they’re still getting raises.  “The boards of the 10 top coal companies doled out eight percent more salary and annual cash bonus pay to their top five executives in 2014 than in 2010, before the coal meltdown began,” the report reads. In total, these executives have made nearly $6 billion over the past five years.  The executives’ astronomical earnings are bad news for the fight against climate change, IPS points out, because they mean these executives have little incentive to stop fighting for coal over more environmentally-friendly alternatives. What’s more, taxpayers are footing much of the bill: federal subsidies to fossil fuel companies are about $37.5 billion a year.

Let Coal Die A Natural Death - Coal-fired electricity is becoming ever less profitable. That's the good news -- or it should be, since it gives power companies greater incentive to embrace cleaner and cheaper sources of energy.   But not every energy company is content to let the market guide its decision-making. In a role reversal, at least one energy company is asking regulators to intervene to keep coal profitable for a while longer.   In Ohio, the Public Utilities Commission is considering a request from the Akron company FirstEnergy to have consumers cover the higher cost of electricity from three aging coal plants. (One of these just underwent a $1.8 billion pollution-control upgrade to comply with federal law.) The aim is to keep the plants open for another 15 years. Under this plan, FirstEnergy ratepayers could spend $3 billion more than necessary for electricity, according to the Office of the Ohio Consumers' Counsel, a state agency.   The strategy is similar to one FirstEnergy followed in West Virginia, when it got state approval to sell a coal-fired plant to its regulated subsidiaries, so that when the price of coal power became uncompetitive, the subsidiaries could secure an officially sanctioned rate increase. Earlier this month, they asked for a 12.5 percent rate rise.   Other energy companies aren't so shortsighted. In Iowa, for example, MidAmerican Energy is investing $900 million in new wind farms that will enable the company to draw more power from wind than from coal. Iowans can look forward to years of low, stable electricity prices.  The declining profitability of coal is an opportunity to save consumers money and reduce reliance on a dirty power source.

Is George Soros Betting On The Long-Term Future Of Coal? - Perhaps the greatest nightmare for investors in a commodity stock is that the commodity in question goes the way of coal. After more than a century of dominance in the U.S. and abroad, coal appears to have entered into a structural decline. The EIA and others see coal export volumes declining, domestic U.S. demand remaining questionable, and intense competition from natural gas continuing. A funny thing happened on the way to the graveyard for coal companies though – one of the industries greatest detractors, George Soros, appears to be stepping in as a supporter. Soros, whose $24 billion fortune is built on successful trading, appears to have purchased several million dollars’ worth of stock in coal producers Peabody and Arch Coal according to filings reviewed by Britain’s The Guardian newspaper. Thermal coal has been hit hard by shifting utility company preferences for other power sources, while metallurgical has been hammered by the downturn in China which has hit demand for steel and other building materials. 2014 was a terrible year for coal producers, and 2015 has not shaped up much better. All of this leads one to wonder what a savvy trader like Soros sees in coal. There are a few possibilities. First it’s possible that Soros is simply looking for a short-term bounce in beaten down coal stocks that have been left for dead. After all, the stocks of virtually all coal miners now trade for a fraction of what they did only a few years ago, and investors may be overly pessimistic about the short-term outlook in the sector.

Gates Mills voters to again decide on proposal to control drilling in village - cleveland.com — Voters will again be faced with a proposal in November that would give residents more control over fracking in the village. The charter amendment would require voters to sign off on, or reject, any new lease or renewal of an existing lease of village property for deep-well horizontal fracking.  Charles Belson, a council candidate, and several other residents circulated petitions to have the amendment placed on the November ballot. They gathered 70 valid signatures, about 10 more than required.  Last November, voters overwhelmingly rejected a bill of rights that would have prohibited any additional oil and gas wells, including less-invasive vertical wells from being drilled in the village. Gates Mills is already home to more than 40 vertical wells.  Residents formed a group and petitioned for the bill of rights after Mayor Shawn Riley announced plans in January 2014 to form a land trust to control fracking in the village. Riley hoped that by pooling all village-owned property and land owned by people willing to participate in the trust, the group could have bargaining power when confronted by drillers. Horizontally drilled wells require hundreds of acres of contiguous land; if the owners of the majority of the property needed for the well agree to the drilling, oil and gas companies can pool the rest of the land they need.. Riley said he expects horizontal wells in Gates Mills within the next decade.  The village is one of several Northeast Ohio communities, including Broadview Heights and Munroe Falls, that have attempted to adopt policies that would give municipalities more control over drilling, since the state has exclusive authority over where and when companies can drill.

Fracking foes say Ohio elections chief exceeds his authority (AP) — Residents in three Ohio counties where Secretary of State Jon Husted (HYOO’-sted) invalidated anti-fracking ballot issues this fall are arguing that voters, not the elections chief, should decide the substance of such issues. In a filing Tuesday, residents in Fulton, Medina (meh-DY’-nuh) and Athens counties tell the Ohio Supreme Court that Husted was supposed to decide the validity of their petitions, not the merits of the “community rights county charters” they proposed. Husted’s office says his action was “fully rooted in Ohio law.” The charters call for restricting development projects related to the gas-drilling technique of hydraulic fracturing, or fracking. County commissioners and others filed protests saying the charters would leave counties without an authorized form of government. Husted’s ruling said the proposals improperly sought to circumvent state law.

 Will Ohio communities be allowed to zone out fracking? - The recent debate over Ohio cities and counties’ efforts to ban or regulate oil and gas drilling, fracking and/or waste disposal has mainly involved proposed community bill of rights that assert an innate right of local citizens to pass laws to protect their environment. So far, those efforts haven’t had much luck with Ohio courts, including the highest one, the Supreme Court.   However, the Supreme Court is currently considering a case involving a different question – whether traditional zoning can dictate where oil and gas activities can go, just as it does with other industrial, commercial and residential activities. This case, if it goes against the industry, could be the lifeline that municipalities in Ohio have been seeking when it comes to asserting some control over oil and gas activities within their borders. The industry, however – in this case, specifically Beck Energy Corp. of Ravenna, Ohio – hopes for a different outcome. Beck, the lead plaintiff in a landmark Ohio case involving local oil and gas regulations, Morrison (Munroe Falls) vs. Beck Energy, is seeking an order from the Ohio Supreme Court stating that the small northeast Ohio city cannot use its zoning ordinance “to prohibit drilling for oil and gas in 99.06 percent of the city’s territory.” Beck wants the Supreme Court to vacate a stop-work order that Munroe Falls issued on June 18 based on its zoning ordinance because it “contravenes the permit issued by the Ohio Department of Natural Resources under Revised Code Chapter 1509, which expressly allows Beck Energy to drill a new oil and gas well in Munroe Falls.” Last February in the Ohio Supreme Court, Beck Energy prevailed in a case that Munroe Falls had brought against the company, ruling 4-3 in an appeal of a lower-court decision that ORC Chapter 1509 expressly reserves regulation of oil and gas activities to the ODNR.

Protesters voice opposition to fracking decision at Husted event - More than two dozen people protested outside a downtown venue where Republican Secretary of State Jon Husted was speaking Wednesday, voicing further opposition to his decision last month barring several fracking-related charter proposals from appearing on ballots in three counties. Several of the protesters also displayed signs and interrupted Husted's interview inside the building following the Columbus Metropolitan Club event, chanting "Let the People Vote" over reporters' questions.Husted invalidated charter proposals in Athens, Fulton and Medina counties that were related to oil and gas exploration, including horizontal hydraulic fracturing, or fracking. Husted said the issues were an attempt to circumvent state law, which places oil and gas regulations with the Ohio Department of Natural Resources. The latter has already been upheld by the Ohio Supreme Court. "Allowing these proposals to proceed will only serve as a false promise that wastes taxpayers' time and money and will eventually end in sending the charters to certain deaths in the courts." Husted said Wednesday that groups that want to change the state law and regulatory setup should pursue legislative action or the citizen initiative process to take the issue to a statewide vote. But protesters Wednesday disagreed, at times chanting loud enough from outside to be heard while Husted was speaking inside. Tish O'Dell, a community organizer with the Community Environmental Legal Defense Fund, called Husted's action on the local charter issues a violation of residents' constitutional rights. "They collected all the signatures that they needed," she said. "They had enough signatures. The form of the petition was correct, everything was correct, and he thinks he can make this decision to keep this off the ballot."

Youngstown officials file complaint to get anti-fracking charter amendment on ballot  - Youngstown Vindicator - In a filing with the Ohio Supreme Court, city officials contend the Mahoning County Board of Elections acted “illegally” by refusing to place an anti-fracking citizen-initiative on Youngstown’s Nov. 3 ballot. The city filed the complaint Friday with the Ohio Supreme Court asking it to compel the board and the Ohio Secretary of State’s Office to place the proposal back on the ballot.  The filing caught the board of elections chairman and FrackFree Mahoning Valley, the group that supported the proposal, off-guard. “It’s not a surprise a lawsuit was filed, but we thought the FrackFree people would initiate it,” said board Chairman Mark Munroe. “It was a surprise the city initiated the lawsuit.” Susie Beiersdorfer, a FrackFree member, said, “I’m pretty speechless, but it’s the right thing to do with a charter amendment and home rule, so I applaud the city.” The board of elections unanimously voted Wednesday to keep the charter-amendment proposal off the ballot with its members saying it did so largely based on a Feb. 17 decision by the Ohio Supreme Court.  That decision says the state constitution’s home-rule amendment doesn’t grant local governments the power to regulate oil and gas operations in their limits, and that Ohio law gives the state government – specifically the Department of Natural Resources – the exclusive authority to regulate oil and gas wells. City Law Director Martin S. Hume said the filing of the complaint for a writ of mandamus was not an endorsement of the content of the proposal. Rather, the complaint seeks to vindicate the proposition that citizens should have the right to petition the government in accordance with Youngstown’s home-rule charter and the federal and state constitutions, he said.

City Asks Ohio Supreme Court to Order Anti-Fracking Proposal Back on Ballot - City officials in Youngstown, OH, have asked the state Supreme Court to reverse a county board of elections vote that would prevent a referendum to ban oil and gas development within city limits from appearing on the November ballot. The city filed the complaint last week after the Mahoning County Board of Elections voted unanimously not to certify a grassroots petition that would ask voters to amend Youngstown's charter to prohibit any kind of oil and gas activity (see Shale Daily, Aug. 27). FrackFree Mahoning Valley, which circulated the petition was not a part of the city's decision. Similar proposals were rejected by city voters in 2013 and 2014. Through its law director, the city has asked the Ohio Supreme Court to order the charter amendment proposal back on the ballot. In its decision, the board of elections cited an Ohio Supreme Court ruling that found municipalities could not prohibit oil and gas development in a way that conflicts with the state's regulatory authority (see Shale Daily, Feb. 17). Last week, board chairman Mark Munroe told NGI's Shale Daily that he expected a legal challenge against the vote, but said it would likely come from the citizens that circulated the petition. Prior to the board's vote, however, the Youngstown City Council had voted to send the charter proposal to the board for certification. Councilman Mike Ray said the council received a legal opinion from city law director Martin Hume to move the petition to the county. Ohio Secretary of State Jon Husted has invalidated similar petitions in Athens, Fulton and Medina counties that he said were an attempt to circumvent state law and legal precedent (see Shale Daily, Aug. 14). Youngstown officials said Husted's decision does not apply to the city because it was made at the county level.

Decision on anti-fracking charter vote likely imminent - A decision on a complaint before the Ohio Supreme Court involving whether voters in Athens County and two other Ohio counties will have an opportunity to vote on anti-fracking charters this November should come soon. Even though the Supreme Court agreed to an accelerated briefing schedule on the case, both sides in the legal dispute so far have been beating the deadlines for filing requested briefs. That’s fortunate for charter supporters. In order to be placed on the ballots in each of the involved counties – Athens, Medina and Fulton – the Supreme Court would need to make a favorable decision before Sept. 19 at the very latest, since that’s when military and overseas voting begins, according to Joshua Eck, press secretary for Secretary of State Jon Husted. “Obviously, the earlier this can be resolved, the better for the boards of elections, but the elections officials will obviously do whatever needs to be done, pending a resolution in the case.” In the expedited case before the Supreme Court, representatives of committees in the three counties are asking the high court to order Husted to dismiss protests against the measures and allow them to make the general election ballots in the three counties. In a decision Aug. 13, the secretary of state rejected petitions for the charter/bill of rights proposals in Athens, Medina and Fulton counties, finding that the provisions in each of the charters relating to oil and gas development represented an attempt to circumvent state law in a manner Ohio courts (including the Supreme Court in Morrison vs. Beck Energy) already have found to violate the state constitution.

Londonderry, Smith townships are Ohio oil, natural gas hot spots -  Two townships are the current hot spots for natural gas and oil production in Ohio. Guernsey County's Londonderry Township is the home of the Top 5 oil-producing wells in Ohio. All five wells are owned and operated by American Energy Utica (now Ascent Resources), an Aubrey McClendon company. The Caston well is No. 1 with 56,150 barrels of oil in 2Q 2015. It was also the No. 1 well in Ohio for daily oil production with 617 barrels per day. For natural gas, the No. 1 township is Belmont County's Smith Township. That's where you will find the Top 5 Ohio wells for natural gas. All five wells are owned and operated by Pennsylvania-based RiceEnergy. Its Gold Digger well is No. 1 with 1,547,649 Mc. Its daily production is also No. 1 in Ohio with 17,007 Mcf.

Utica and Marcellus activity, August 23-29 -- The Pennsylvania Department of Environmental Resources might have approved 27 new oil and gas leases between August 23 and 29, but hundreds of oil and gas well owners throughout the state reportedly fell short of their responsibilities. This is the first year the DEP has required well owners to submit reports that indicate if a well is structurally sound or at risk for leaks or decay. The new requirement apparently caught some well owners off-guard– the Pittsburgh Post-Gazette reported yesterday that 450 of the 5,600 well owners throughout Pennsylvania failed to submit the reports.“It’s a pretty horrible compliance rate,” said DEP Deputy Secretary for Oil and Gas Management Scott Perry. Over in Ohio, an anti-frackers’ lawsuit continues against Secretary of State Jon Husted, who is accused of wrongfully invalidating ballot measures that sought to limit oil and gas development.   According to the Ohio Department of Natural Resources, 21 newly-granted oil and gas permits bumped the Utica Shale formation’s total permit count up to 1,996 on August 29. The formation’s total for drilled horizontal wells sits at 1,586. The ODNR reported no new permits for that same week. According to its Cumulative Permitting Activity log, 44 horizontal permits have been granted for the Ohio Marcellus formation, while 29 horizontal wells have been drilled. The Pennsylvania Department of Environmental Protection reported 30 new oil and gas permits throughout the state; three were renewals, the rest were new. Elk County topped other areas with 10 new permits split between Seneca Resources Corp and William H. Brawand.

Shale gas violations down as DEP steps up inspections -- Pennsylvania oil and gas producers pinched by the lowest prices in years are not catching any breaks from state regulators. The Department of Environmental Protection’s oil and gas office conducted 1,700 more inspections during the first seven months of the year, an 11 percent increase over the same period in 2014, according to department data. A boost in office staff last year and a big slowdown in drilling because of low prices have given inspectors time to eyeball more wells and related records. New wells require more inspections during drilling and fracking. “A big reason is the decline in drilling,” said Scott Perry, the deputy DEP secretary who oversees the oil and gas office and its staff of 227, up from 202 early last year. “They’re getting back to older wells.” The results of the increased scrutiny are mixed. Shale gas operations had only 205 violations through July, the department’s online compliance reports show. That’s down from 283 through the same period last year, despite a nearly 16 percent increase in inspections to 8,100.  On the other side, the department is finding more violations in the lower-profile conventional oil and gas industry, whose more plentiful wells are generally older, shallower and less productive than those tapping the Marcellus and other shale layers. The DEP reported 1,552 violations by those operations through July, a 25 percent increase from last year.

Media Matters: How Gasland Changed the Debate -- Social scientists have long argued documentary films are powerful tools for social change.But a University of Iowa sociologist and his co-researchers are the first to use the Internet and social media to systematically show how a documentary film shaped public perception and ultimately led to municipal bans on hydraulic fracking.By measuring an uptick in online searches as well as social media chatter and mass media coverage, Ion Bogdan Vasi, corresponding author of a new study, demonstrated how local screenings of Gasland—a 2010 American documentary that focused on communities affected by natural gas drilling—affected the public debate on hydraulic fracking. Additionally, Vasi and his collaborators demonstrated how local screenings were linked to an increase in anti-fracking mobilizations that, in turn, influenced the passage of local bans on fracking.“There are few studies that describe the effect of documentaries on collective behaviors and social movement campaigns,” says Vasi, an associate professor with a joint appointment in the Department of Sociology in the College of Liberal Arts and Sciences and the Department of Management and Organizations in the Tippie College of Business at the UI. “They used anecdotal evidence but not rigorous research.”The study, “‘No Fracking Way!’ Documentary Film, Discursive Opportunity and Local Opposition against Hydraulic Fracturing in the United States, 2010-2013,” was published online Sept. 2 and will appear in the October print issue of the American Sociological Review.

Big cities scramble to be prepared for an oil train disaster — They rumble past schools, homes and businesses in dozens of cities around the country — 100-car trains loaded with crude oil from the Upper Midwest. While railroads have long carried hazardous materials through congested urban areas, cities are now scrambling to formulate emergency plans and to train firefighters amid the latest safety threat: a fiftyfold increase in crude shipments that critics say has put millions of people living or working near the tracks at heightened risk of derailment, fire and explosion. After a series of fiery crashes, The Associated Press conducted a survey of nearly a dozen big cities that, collectively, see thousands of tank cars each week, revealing a patchwork of preparedness. Some have plans specifically for oil trains; others do not. Some fire departments have trained for an oil train disaster; others say they’re planning on it. Some cities are sitting on huge quantities of fire-suppressing foam, others report much smaller stockpiles. The AP surveyed emergency management departments in Chicago; Philadelphia; Seattle; Cleveland; Minneapolis; Milwaukee; Pittsburgh; New Orleans; Sacramento, California; Newark, New Jersey; and Buffalo, New York. The responses show emergency planning remains a work in progress even as crude has become one of the nation’s most common hazardous materials transported by rail. Railroads carried some 500,000 carloads last year, up from 9,500 in 2008. “There could be a huge loss of life if we have a derailment, spill and fire next to a heavily populated area or event,” said Wayne Senter, executive director of the Washington state association of fire chiefs. “That’s what keeps us up at night.”

Big Rail's little cousins find boon in U.S. oil-by-rail bust – Amid the rolling mountains surrounding this quiet town in southwest New York state, tucked away on miles-long stretches of underused rail tracks, hundreds of idle oil tank cars attest to the extent of fallout from oil’s rout. The oil tank cars – a year ago sought-after to haul crude from North Dakota to New Jersey – now stand idle as a result of two converging trends: the reversal in U.S. shale oil production and the completion of new pipelines. They show how the pain from the slump in the oil-by-rail industry has spread far and wide. Big rail lines, such as Berkshire Hathaway-owned BNSF Railways or Union Pacific are losing what used to be their fastest-growing source of new traffic; refiners such as PBF Energy are left with millions of dollars worth of unused rolling stock; and leasing firms such as Trinity Industries and Greenbrier Companies Inc have seen monthly rates fall to a third of peaks above $2000 per car. There is one winner, though. Short-line railroads from Utah to Pennsylvania are making millions of dollars every month by providing refiners, producers and traders a place to park their unused tank cars. Outside this town of 14,000, along sidings that once helped ship vast volumes of coal, lumber and other raw materials during the region’s industrial heyday, the Western New York and Pennsylvania Railroad is now collecting fees for about 800 cars. “They’ve been here for about five months, and we hear rumors more are coming,” 

Boat Crash Causes 120,000 Gallons Of Oil To Spill Into The Mississippi River - More than 120,000 gallons of oil spilled into the Mississippi River Wednesday evening after two tow boats collided, causing damage to a barge.The spill, which occurred near Columbus, Kentucky, prompted the Coast Guard to shut down the section of the Mississippi River from mile marker 938 to 922. “We are working diligently to try to restore our marine transportation system,” Coast Guard spokesperson Lt. Takila Powell said. “We understand that it is vital.”The substance that spilled into the river was “clarified slurry oil,” which is heavier than typical crude oil. To move the oil, Powell told the AP, it needs to be heated. “How this type of product typically would react is that when it reaches the water that is of a lower temperature, it would solidify and sink,” she said Thursday. “But one of the things that we will be doing tomorrow is trying to determine where that oil has migrated to, to try to determine whether or not it has moved down the river or if it’s still in the vicinity of where the collision occurred.”Some of the oil has been cleaned up from the site, and clean-up crews have put a boom around the barge to make sure no additional oil leaks into the river. Officials say that the spill won’t have an effect on water supplies, because wells provide the water in the region. So far, there haven’t been any reports of fish kills.

After the Frack: Bright Lights in the Middle of Nowhere - The humming sound was deafening. Standing in the driveway of the Brothers’ home it was 50 decibels, but as we walked toward the edge of the road, the sound meter jumped to 85 decibels. The creator of this offensively loud humming noise was the compressor station located just across the road. It ran night and day, 24/7, and had invaded Frank and Theresa Brothers’ home just a year ago. Unfortunately, compressor stations are a necessary component of an oil and gas pipeline system. They help move gas and liquids from one part of the pipeline system to another. Noise pollution is only one of the many types of pollution that people living around oil and gas exploration areas have to deal with. And even after the fracking vehicles move on, remnants like compressor stations remain as constant reminders that the landscape around them has changed forever. Light and air pollution also often linger around along with the noise long after the oil and gas wells have been sucked dry. Humans aren’t the only ones affected by this. Long before drilling rigs, fracking trucks, and compressor stations enter neighborhoods, the wildlife in the area already begins to feel the impact of preliminary exploration work. If the animals’ habitats haven’t already been fragmented by the oil and gas exploration activity, their homes are certainly changed once the drilling operations start in earnest. Scientists have already established that shale development operations cause light, noise, and air pollution, but not much is known about the specific biological impacts of these operations.In a 2014 report that appeared in Frontiers in Ecology and Environment, a team of ecologists and biologists examined thousands of studies to determine knowledge gaps in estimating ecological threats to plants and wildlife in shale development regions. The researchers found that “surprisingly little research has focused on the biotic impacts of shale development.”

The Texas Energy Revolt - --- Today, state lawmakers, the oil and gas industry and national environmental groups have become acutely aware of Denton, home to two universities, 277 gas wells and now, thanks to a ragtag group of local activists, Texas’ first ban on fracking.  Thrust into the saga is George P. Bush, who in January will take the helm of the Texas General Land Office, an otherwise obscure office that manages mineral rights on millions of acres of state-owned property. In his first political office, Jeb’s eldest son, George W.’s nephew and one of George H.W.’s “little brown ones,” will inherit one of two major lawsuits filed against Denton, home to a sliver of that mineral portfolio.  “ We don’t need a patchwork approach to drilling regulations across the state,” Bush, a former energy investment consultant, told the Texas Tribune in July as the anti-fracking campaign gained steam. It appears to be his only public statement on the issue.  Bush’s role in the dispute—however peripheral—only brightens the spotlight on Denton, and it forces him and others to choose between two interests Texans hold dear: petroleum and local control.  McMullen’s group—Frack Free Denton—convinced nearly 59 percent of Denton voters to approve a fracking ban on November 4, after knocking on doors, staging puppet shows and performing song-and-dance numbers. The movement had help from Earthworks, a national environmental group, but its opponents—backed by the oil and gas lobby—raised more than $700,000 to spend on mailers and television ads and a high-profile public relations and polling firm. That was more than 10 times what Frack Free Denton collected.

Drillers Unleash ‘Super-Size’ Natural Gas Output - WSJ: The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices. Experimental wells in Louisiana by explorers including Comstock Resources Inc. CRK 19.28 % and Chesapeake Energy Inc. CHK 0.54 % are proving highly lucrative thanks to modern drilling techniques and the sheer volume of fossil fuels that can be coaxed out of the ground. The trick is applying supersize versions of the horizontal-drilling and fracking techniques that worked successfully elsewhere to an area that hasn’t seen this approach yet. The gains come from extending the lateral portions of wells by thousands of feet and pumping them full of enormous volumes of sand, chemicals and water to flush out more hydrocarbons.The field produces 8% of the nation’s natural gas, making it the second largest after the giant Marcellus Shale in the Northeast. Because it is located in Louisiana, near several interstate pipelines, potential export facilities and industrial consumers, an increase in gas production in the Haynesville has an outsize impact on gas prices across the entire country. The cost of natural gas matters because the fuel increasingly powers the U.S. economy and is critical to the Obama administration’s push to reduce carbon emissions in electricity generation. American gas consumption has risen at a 2.4% annual growth rate for the past decade, while demand for coal has fallen by 2.7% and oil by less than 1%, according to the federal Energy Information Administration. Gas now is used to generate about 30% of U.S. electricity and heat nearly half of all American homes. Domestic natural gas is abundant and inexpensive, largely due to the newer drilling and extraction techniques that came into widespread use a decade ago.In August, Comstock officials told investors that it could get a 30% return on its new wells even with gas at $2.50 a million BTUs. The Frisco, Texas-based company plans to drill more wells in Louisiana’s Haynesville than it will in the oily Eagle Ford Shale in South Texas.

“Supersize” Fracking Could Keep Natural Gas Prices Low For Years -  As natural gas drillers turn to “supersize” fracking, natural gas supplies could be abundant and cheap for a long-time to come. That is how the Wall Street Journal phrases what is going on in the natural gas industry, where gas exploration companies continue to innovate the same drilling techniques that sparked the original shale gas revolution. By now we have all heard about fracking and horizontal drilling. But companies continue to expand these techniques and fine tune them. Now, according to Wall Street Journal, a few companies in Louisiana have begun using “supersize” versions of horizontal drilling. Comstock Resources and Chesapeake Energy, among others, have enjoyed huge successes by extending the lateral portions of horizontal wells far beyond what has been done in the past, adding thousands of feet to their lengths.  Then, they essentially do what they have done before, only on a larger scale. They pump these extra-long laterals with huge volumes of water, sand, and chemicals, fracturing a massive natural gas well. The practice allows a driller to produce much more gas from a single well. Still, it is too early to tell whether or not this will result in another shale revolution of sorts. The successful results have only been achieved in one section of Louisiana in the Haynesville shale. But if it can be replicated, the ramifications would be profound. “There’s a large likelihood that the United States will be enjoying very low gas prices for a very long time, maybe 20 years,”

Texas regulator clears oil and gas company of causing quakes (AP) — The regulatory agency overseeing Texas’ oil and gas industry has determined that a series of small earthquakes in North Texas likely wasn’t caused by drilling operations by an Exxon Mobil subsidiary. The preliminary findings mark the first decision by the Texas Railroad Commission since it was authorized last year to consider whether seismological activity was caused by injection wells, which store briny wastewater from hydraulic fracturing. The commission ordered hearings after a university study suggested two companies’ wells were responsible for quakes that shook Reno, Texas, in 2013 and 2014. Commission investigators concluded that a well where Exxon Mobil subsidiary XTO Energy pumps millions of gallons of the wastewater likely didn’t cause the quakes, but also said there wasn’t enough evidence to demonstrate the earthquakes were naturally occurring. Parties have 15 days to respond.. The report was released Monday, a day before a new law took effect barring Texas cities and towns from banning hydraulic fracturing, or fracking, and limiting local authority to restrict other oil and gas operations. Reno Mayor Lynda Stokes, whose city passed an ordinance banning injection wells, said she wasn’t surprised by the commission’s findings and wasn’t sure what legal recourse was available. “They’ve pretty much given industry free reign to roll over us,”

Eagle Ford continues to pull billions in investments - These days, petroleum prices are a calamity at best, but according to a new projected capital analysis, energy companies will spend $20 billion in the Eagle Ford Shale this year. The new projections come from a recent study from research firm Wood Mackenzie. Last week, the firm stated that even with severe reductions in activity, the Eagle Ford remains resilient and continues to draw more investments than any other shale play in the nation. Other regions— such as the northern Bakken/Three Forks and the neighboring Permian Basin— are projected to see far less spending. According to a recent San Antonio Express News report, The Bakken region can expect 12.8 billion in new spending while the Permian’s Wolfcamp formation can expect $12.5 billion. “The big players in the Eagle Ford are some of the most stable companies in U.S. onshore markets,” Wood Mackenzie analyst Jeremy Sherby said. “Overall, Eagle Ford production growth is not dependent on the smaller, more financially vulnerable companies.”

West Texas Fracker Uses Toilet Water To Cut Cost -- It is no secret that fracking companies across the U.S. have been turning over every rock in the supply chain looking for ways to cut costs and improve efficiency. That’s what the business requires in a downturn. But now Pioneer Natural Resources seems to be going a step further in the name of price cuts and efficiency. The firm is finding an efficient, if somewhat unconventional, source of water for use in its fracking operations – the neighbors’ toilets. Pioneer recently signed an 11-year, $117 million deal with the city of Odessa, Texas giving Pioneer the rights to treated sewage from toilets, sinks, and showers across the city. The firm will start getting waste water deliveries by the end of the year. Of course, since the water is treated, it’s actually perfectly safe and would likely even be potable with, at most, a little more treatment. After all, most cities more or less run on the basis of using the same water over and over again. But Pioneer’s move is a clever one in that people don’t like to think about reusing waste water and this is a good way to get access to large quantities of water in the dry region. The Odessa-Pioneer deal actually makes a lot of sense given that Pioneer needs the water and places a high value on it in light of its economic usefulness. In contrast, Odessa city officials indicated that the treated water was mostly just used for irrigation, so diverting it to Pioneer makes more sense economically. In addition of course, by giving Pioneer access to waste water, the company can now avoid using the potable water it previously relied upon.

One Texas company claims even $15 per barrel is profitable - Texas-based oil giant Carson Energy may have figured out a means to completely scoff at even the lowest of oil prices. The industry can’t remove its gaze away from Carson. This week, the company released new analysis that shows rich Texas oil fields can be profitable at just $15 a barrel. “Many investors feel you have to be getting over $60 per barrel for oil to be profitable, but that’s only on expensive shale plays,” Michael Johnson of Carson Energy stated in a press release. “Carson operates in rich Texas blanket sands where it’s possible to make money when prices are as low as just $15 a barrel.” Investors are nervous at best with all the variables intruding on crude oil prices. However, many oil industry experts say this is often the best time to invest in new exploration and development. Wells and production are then in place when prices go back up, that is if a company can hold out that long. Experienced energy investors refer to this situation as one ripe for “double dipping.” An investor can benefit from very cheap drilling costs, and then have oil in production just as energy prices spike again. Such a payoff is inevitable. Demand, although sluggish, is increasing worldwide. “Once the extra supply of oil that’s on the market from expensive shale plays and tar sands has been used up, the global economy may find its way under-supplied and then it’s off to the races with high oil prices again,” Johnson said.

Oil and gas spill report for Aug. 31 - The following spills were reported to the Colorado Oil and Gas Conservation Commission in the past two weeks. 

  • DCP Midstream LP, reported on Aug. 27 that groundwater was discovered while in the process of excavating a dry gas release outside of Roggen.
  • Foundation Energy Management LLC, reported on Aug. 25 that an unknown amount of produced water was spilled outside of Raymer.
  • Foundation Energy Management LLC, reported on Aug. 24 that between one and two barrels of oil was spilled, along with between five and 100 barrels of produced water outside of Briggsdale. The water tank overflowed, spilling about 10 total barrels due to a malfunction.
  • PDC Energy Inc., reported on Aug. 24 that an unknown amount of oil and condensate was spilled outside of LaSalle. A historic release was discovered while installing flow lines for a new facility.
  • Kerr McGee Oil & Gas Onshore LP, reported on Aug. 21 that an unknown amount of condensate and produced water was spilled outside of Platteville. Historical impacts were discovered following the removal of a produced water sump.
  • Whiting Oil & Gas Corporation, reported on Aug. 21 that between five and 100 barrels of oil was spilled outside of Raymer.
  • Kerr McGee Oil & Gas Onshore LP, reported on Aug. 20 that between five and 100 barrels of condensate was spilled, as well as less than 100 barrels of produced water. A release from a wellhead occurred when a tractor and implement struck and compromised the wellhead.
  • Noble Energy Inc., reported on Aug. 19 that between one and five barrels of produced water was spilled outside Keenesburg.
  • Noble Energy Inc., reported on Aug. 18 that a flowline leak was discovered during operations outside of LaSalle. Between one and five barrels of oil was spilled.
  • Bonanza Creek Energy Operating Company LLC, reported on Aug. 17 that a separator rupture disc released about five barrels of oil during production outside of Kersey. Roughly three barrels of oil were release inside of containment.

BNSF: Court order could disrupt economy - BNSF Railway says a temporary court injunction against use of its new track through the La Crosse River marsh would damage the railroad and disrupt the economy of the northern part of the country. In documents filed this week, attorneys for BNSF challenge an order issued earlier this month by La Crosse County Circuit Judge Scott Horne, which allowed the railroad to continue construction of a second track through the marsh but restricted use of the track until legal challenges are settled in late September. That order would have “a serious impact on interstate rail transportation, with effects that will be felt by thousands of rail customers across the northern United States,” the railroad argues. BNSF says construction of the controversial 4-mile segment will be completed by the end of August, just in time for “fall peak” traffic season, when farmers ship their grain to market and retailers begin stocking up for the holidays. The La Crosse project is part of the railroad’s $6 billion in network improvements scheduled this year. BNSF says it is intended to solve a bottleneck created by the longest single-track segment between the Twin Cities and Savanna, Ill. A group of rail safety and environmental advocates led by La Crosse County Supervisor Maureen Freedland sued the Wisconsin Department of Natural Resources in March, claiming the agency granted BNSF wetland permits without adequate environmental review.

Letter to the editor: The North Dakota flaring conundrum - Flaring is a challenge in North Dakota. Bakken oil and gas production surged faster than pipelines and plants could be built. While trucks were an easy solution for oil, gas requires massive infrastructure. As a result, flaring increased and concerned many, including industry leaders. To answer the challenge, they proposed achievable goals based on expected investments in infrastructure, construction timetables and technological advancements. Today, the industry beats these goals, but a new economic environment has weakened the future outlook. Investment budgets are restricted in the new price environment and construction has eased slightly due to these market conditions and increased regulatory efforts, especially in local subdivisions. Timetables set in 2014 no longer apply in 2015. Strictly adhering to these goals in this economic environment will cause production to slow, widespread layoffs, significant negative impacts on local businesses, and substantial declines in tax revenues. North Dakota produced almost $2 billion of oil and gas in June of 2015. Flaring accounted for less than $25 million of this total. If it chooses not to adapt its targets, North Dakota will lose its golden goose ($24 billion annually) over a commodity that, though flared, makes up only 1.3 percent of total value of petroleum produced. To put this in comparison, it would be as if the median household ($51,939 of income) chose to quit working because it lost $685 along the way.

Where there is oil money, crime follows - — The oil and gas industry sustains more than just the local economy in Eddy County, it is also inadvertently fuels crime rates in the area. Statistics show that crime rates have been steadily rising in Carlsbad and Eddy County since the beginning of the boom, causing some agencies to get creative with their resources and straining the resources of other departments. The marriage between an oil and gas economy and crime is much like a traditional marriage — one follows the other through poverty and prosperity. When times in the oil patch are good, expendable income draws those offering recreational drugs or darker entertainment such as prostitution. Now with oil dropping below $40 a barrel, officials said they won’t be surprised to see theft and burglaries skyrocket, a trend that’s already showing itself. And residents aren’t the only one’s being targeted. The oil and gas industry itself is beginning to measure the price of doing business in Southeast New Mexico, with the dollar amounts of stolen property in the millions.

Majority of US shale firms pass up Q2 chance to hedge $60 crude -- With the benefit of hindsight, last quarter may have been the best chance for cash-strapped U.S. shale oil producers to ensure they would get at least $60 a barrel for the next year or two. Barely a third did so. According to a Reuters analysis of hedging disclosures by the 30 largest such firms, more than half of them did not expand their hedges during the three months ended June or had no hedges at all, exposing them to a plunge that wiped more than $20 off the price of oil in the following months. In total, 12 companies increased their outstanding oil options, swaps or other derivative hedging positions by 36 million barrels at the end of the second quarter compared with the end of the first quarter, according to the data. Another 14 companies ended the quarter with hedging positions reduced by a total 37 million barrels, mainly as a result of expiring past hedges, the data show. The remaining four companies did not hedge oil production at all. (Graphic: http://reut.rs/1KnrGZy ) As a whole, the group remains more vulnerable to tumbling spot market prices than a year ago, with a third fewer barrels hedged, the data show. “The general feeling among producers is that if you aren’t hedged today… (you are) not going to start tomorrow and lock in lower levels,” said Mike Corley, president of energy trading and risk consultancy Mercatus Energy, which advises energy producers, consumers and refiners. Producers buy a variety of financial options to secure a minimum price for crude and safeguard future production. Typically, market rallies, such as one in April, allow producers to lock in prices at a lower cost.

For commodity trading advisors, oil's downtrend has been a friend - – The nearly two-month-long slide in oil prices to 6-1/2 year-lows has been a boon to many so-called systematic funds, which trade based on technical signals or computer algorithms rather than fundamentals. While most market commentary has focused on the persistent glut in the global market caused by unrelenting OPEC output and surprisingly resilient U.S. shale production, these commodity trading advisors (CTAs) have ridden the downtrend to robust returns. It is too early to say how most of them fared on Thursday, as oil prices surged by more than 10 percent in the biggest one-day gain since the financial crisis. Interviews with five of the larger and best-performing CTAs also show that investors who opened or maintained short positions have reaped significant profits this year, despite a rally that began after the previous lows were hit in March. Several of those successful funds have paid no attention to fundamentals like an oversupply from resilient U.S. production or concerns about Chinese demand. Instead, these “systematic” funds have simply let their algorithms respond to price trends.

New U.S. oil data shows lower 2015 production: EIA | Reuters: The U.S. oil industry pumped less crude than initially estimated this year, according to new government data that offered the clearest look yet at the impact of drillers' retrenchment in response to collapsing prices. The downward supply revisions were "unambiguously" bullish for a global market awash with oil, said Credit Suisse global energy economist Jan Stuart, suggesting the oft-cited resilience of U.S. shale producers to lower crude prices might have been overstated. Oil prices surged by as much as $3 a barrel on Monday, with some traders citing the new data. The Energy Information Administration said its new survey-based output data showed the United States pumped a hair below 9.3 million barrels per day in June, down by 100,000 bpd from a revised May figure. The June figure was also nearly 250,000 bpd below what the EIA had estimated a few weeks ago, highlighting the steep reversal in output as a five-year boom sours and suggesting to some analysts that a global glut might ease sooner than expected. "If the downward trend in U.S. production continues, global markets should return to balance by early 2016," said veteran energy economist Philip K. Verleger. The EIA revised production data for the first five months of the year, based on an expanded monthly survey of operators that includes crude oil and lease condensate for the first time. As a result, output in the months of February, March and May was 80,000 bpd to 125,000 bpd lower than previously reported, according to a detailed breakdown.

U.S. tight oil production decline -- U.S. oil production has begun to drop in response to low oil prices, but not as dramatically as many had anticipated.  Oil companies have cut back spending significantly in response to the fall in the price of oil. The number of rigs that are active in the main U.S. tight oil producing regions– the Permian and Eagle Ford in Texas, Bakken in North Dakota and Montana, and Niobrara in Wyoming and Colorado– is down 58% over the last 12 months. Nevertheless, U.S. tight oil production continued to climb through April. It has fallen since, but the EIA estimates that September production will only be down 7%, or about 360,000 barrels/day, from the peak in April. This is despite the fact that typically output from an existing well falls very quickly after it begins production. The EIA estimates that tight oil production from wells that have been in operation for 3 months or more has declined by 1.6 mb/d since April, as calculated by the sum of the EIA estimated monthly declines in legacy production from May to September. One would think that these decline rates from existing wells and the drop in the number of rigs drilling new wells would mean that production would have fallen much more dramatically. Why didn’t it? The answer is that there has been a phenomenal increase in productivity per rig. For example, the EIA estimates that operating a rig for a month in the Bakken would have led to a gross production increase of 388 barrels/day two years ago but can add 692 barrels today. A key factor in the productivity gains is that companies are finding ways to complete wells faster, so that more wells can be drilled each month from the same number of rigs. For example, The Barrel reports that Occidental Petroleum “has seen a 40% decrease in spud to rig release time in the Wolfcamp area of its Permian holdings from 43 days in 2014 to 26 days in March this year with a target of eventually reaching 16 days.” The modest drop in U.S. production has been enough to start to bring inventories down. U.S. crude oil stocks last week were down more than 30 million barrels from April. But that still leaves them way above normal.

U.S. Oil Production Nears Previous Peak -- Monthly Energy Review came out a couple of days ago. The data is in thousand barrels per day and the last data point is July 2015.  US consumption of total liquids, or as the EIA calls it, petroleum products supplied, reached 20,000,000 barrels per day for the first time since February of 2008. Something I never noticed before, consumption started to drop in January 2008, seven months before the price, along with world production, started to drop in August 2008. This had to be a price driven decline. Could the current June and July increase in consumption be price driven also? US Production was down 96,000 barrels per day in July to 9,503,000 bpd. That is 190,000 bpd below the March level of 9,693,000 bpd. Here is what the last 50 years of US production looks like. The peak was in 1970 or 1971, depending on what you call the peak. In March 2015 we were still 351,000 barrels per day below the peak month of 10,044,000 bpd in November of 1970. But right now we are headed in the wrong way to break that record. In July we were 541,000 bpd from that record. Right now the 2015 average, January through July, is 9,534,000 bpd. That is 103,000 barrels per day below the 1970 average. But the 2015 average is likely to get smaller as the year plays out.

U.S. crude output cuts will only come if prices stay low – Goldman -- Further U.S. production cuts needed to rebalance oil markets will only happen if U.S. crude prices remain low, at around $45 a barrel, Goldman Sachs said late on Monday. U.S. oil dropped to around $48 on Tuesday morning, curbing 8 percent gains recorded the session before after the downward revision of U.S. output data by the U.S. Energy Information Administration (EIA). But Goldman said in a note that further, sustained U.S. output cuts would likely be necessary to rebalance oil markets by late 2016, which could happen at a price around its short-term U.S. crude forecast of $45 per barrel. Oil prices have lost around half their value since June 2014 as record global output increasingly clashed with slowing economic growth, especially in Asia. The Organization of the Petroleum Exporting Countries under leadership of Saudi Arabia has so far refused to cut production, instead keeping taps open in a bid for market share, but pressure by some of its members like Venezuela to reduce output has been rising in recent weeks.

Government Report Finds Economic Benefits of Oil Exports - WSJ: —A long-awaited study by the Obama administration concludes that lifting the nation’s four-decade ban on oil exports wouldn’t increase U.S. gasoline prices and could even help lower them, raising the stakes in the debate about whether to lift or relax the ban. The report, issued Tuesday by the U.S. Energy Information Administration, an analytic division of the Energy Department, is expected to provide momentum to efforts by the oil industry and its supporters in Congress eager to end the ban and tap higher-priced foreign buyers amid surging global supplies and a market rout that has dragged prices to six-year lows. The effort has gained traction in Washington this year, though such a change still faces hurdles before Congress ultimately would adopt it. More than a dozen oil companies—including Continental Resources Inc., ConocoPhillips and Marathon Oil Corp. —have been lobbying Congress for the past year, arguing that allowing unfettered domestic oil exports would eliminate market distortions, streamline U.S. petroleum production and stimulate the domestic economy. In response to industry requests, the administration already has taken some initial incremental steps in the past year to ease the growing glut of domestically produced oil, which is pumping at a rate of 9.3 million barrels a day—more than 70% higher than five years ago—with commercial crude stockpiles near all-time highs.

Oil price crash prompts scramble for Caribbean storage tanks - Demand for crude storage in the Caribbean, one of the world’s most important oil hubs, is rising as producers and traders try to ride out the worst price crash in six years by holding onto more barrels or making blends that can be sold for premiums. The last time tanks in the logistically-important islands were this full, during the price collapse of 2009, companies started leasing vessels to use as floating storage. That is not yet happening now, but the only way to get tank space at the moment is to sublease it, said one tank broker with decades of experience. Since June, his firm alone has received requests to lease up to 7.5 million barrels of tankage in a region with some 100 million barrels of capacity. That is much more than in previous months, though no official statistics are available. Others signs also point to a shortage of tanks. Midstream players Buckeye Partners LP and NuStar Energy LP say they have basically run out of space. And some producers with terminals in the zone say now is a good time to put barrels into tanks and wait for U.S. crude prices to rise from $40-a-barrel doldrums. “All tanks are subscribed,” said the storage broker. Things have not looked this tight in six years. Crude inventories have been building up in recent months in most terminals, leaving limited space for subleasing, which could imply higher rents, he said.

Shell president: 'Oil will be required for a long time' - — The president of Shell Oil Co. said exploratory drilling off Alaska’s northwest coast is going well despite stormy weather last week that caused the company to halt operations for a few days. And in an interview Tuesday with The Associated Press Marvin Odum said he expects further protests against the company’s plans for Arctic drilling like the ones in Seattle and Portland where activists in kayaks tried to block Shell vessels. Arctic offshore drilling is bitterly opposed by environmental groups that say a spill cannot be cleaned in ice-choked waters and that industrial activity will harm polar bears, walrus and ice seals already harmed by diminished sea ice. In Seattle, Shell faced protests on the water by “kayaktivists” upset over the company staging equipment in the city. In Portland, Oregon, Greenpeace USA protesters hung from the St. Johns Bridge to delay a Shell support vessel, from heading to the Arctic. “I think the right assumptions for me to make are, it’s not going to go away,” Odum said. “We saw quite a bit of very public opposition when we were in the Pacific Northwest.” Odum said he’s “110 percent ready” to work with people who want to find ways to improve drilling.

Secretary Kerry Calls For Swift Action On Climate Change, Still Defends Arctic Drilling --In a recent interview with the Huffington Post, Secretary of State John Kerry defended the Obama administration’s decision to allow Shell to drill for oil in the Arctic, pushing back against claims that such a decision is at odds with the administration’s action on climate change. “These are leases that were granted some time ago prior to President Obama becoming president,” Kerry told Huffington Post reporter Sam Stein. “So the leases existed, and Shell and other companies are going to be drilling somewhere over the course of these next years, because we’re not going to suddenly be weaned from oil.” Moving to a de-carbonized economy, Kerry continued, could take up to 40 years. He noted that during that transition the United States would still be dependent on oil to meet some of its energy needs.  “I’d rather have our supply come from an American-controlled source in that respect than somewhere else,” he said, adding that “in the long run, we have to wean ourselves from a carbon-based economy,” and that the country isn’t moving quickly enough toward a carbon-free economy. “We have to do it much faster than we are right now. I think the president understands that, I understand that. We’re advocating as powerfully as we can,” Kerry said.

U.S. lags behind Russia and other nations in the Arctic  - U.S. lags behind Russia and other nations in the Arctic -  As Barack Obama becomes the first sitting president to visit the Arctic next week, the U.S. is falling behind other nations in the critical region. The U.S. is sitting on the sidelines while Russia claims a huge part of the Arctic, with its vast energy and mineral resources, and China builds icebreakers to get in on the race for influence in the north. The U.S. hasn’t built a new heavy-class icebreaker in 40 years, and as oil drilling and vessel traffic increases off Alaska’s northern coast, the nation hasn’t developed a deepwater port within 900 miles. There’s a lot at stake: About 13 percent of the world’s undiscovered oil and 30 percent of its natural gas are thought to be in the Arctic, with a trillion dollars’ worth of minerals. Sea lanes are opening as ice melts because of global warming and shipping is on the rise, bringing opportunities but also the need for ports and emergency-response vessels for rescues. The Obama administration created an Arctic strategy and is working to put it in place, said Fran Ulmer, chairwoman of the U.S. Arctic Research Commission. But Arctic projects cost money, she said. “As other countries in the Arctic move forward with their plans to be better prepared for what is coming in the Arctic _ which is more human activity _ hopefully Congress will step up and fund some of the necessary infrastructure,” Ulmer said. Ulmer said she hopes Obama’s visit next week will “communicate to the rest of the United States how important the Arctic is.” Obama and Secretary of State John Kerry will be in Alaska talking about the impact of climate change, and Obama will visit the Arctic village of Kotzebue. In the meantime, Russia is wasting no time making its moves in the Arctic. This month, Russia staked a claim to a more than 460,000 square miles of Arctic territory, including the North Pole.

Canada synthetic crude spikes on Syncrude fire, Nexen pipelines | Reuters: Canadian light synthetic crude prices spiked higher on Monday after a weekend explosion and fire at the Syncrude oil sands project in northern Alberta halted production and regulators ordered pipeline shutdowns at a separate Nexen Energy site. Traders scrambled to secure temporarily short supply after a fire early Saturday morning at the 326,000 barrel per day (bpd) Syncrude facility, Canada's largest synthetic crude project, disrupted output. Canadian Oil Sands Ltd, the largest-interest owner in the Syncrude joint venture, did not give any estimate as to when production would resume. In a separate incident, CNOOC-owned subsidiary Nexen Energy said it was working to comply with a weekend order from the Alberta Energy Regulator to shut in 95 pipelines at its Long Lake oil sands facility, also in northern Alberta. Long Lake produces around 50,000 bpd of bitumen, which is upgraded on site into refinery-ready synthetic crude. Light synthetic crude from the oil sands for September delivery jumped to a one-month high of $1 per barrel below the West Texas Intermediate benchmark, according to Shorcan Energy brokers, rallying hard from $4.50 per barrel below WTI on Friday.

Forced Asset Sales Seen as Banks Squeeze Canada Oil Companies -  It’s crunch time on asset sales for Canada’s struggling oil producers. Starting in earnest after Labor Day, oil and natural gas companies will begin the twice-yearly pilgrimage to their banks to discuss funding. It’s not going to be easy, with companies from Penn West Petroleum Ltd. to Athabasca Oil Co. under pressure to sell assets to keep the money flowing. With no relief from the price of oil, which has tumbled under $50 a barrel, companies are cutting more staff, reducing dividends and even selling hedging positions on commodities and currencies to boost cash flow. Banks will next likely force some producers to sell their best assets to avert bankruptcy, “The banks are going to tell these guys to sell their coveted assets,” “That means the strong companies get to lick their chops.” The oil slump has already made victims out of many of Canada’s fossil fuel producers which have cut thousands of jobs, most of them in Calgary. Banks approached struggling producers in the spring and told them to do what they could to strengthen their balance sheets and find ways to raise funds, “This time, they won’t be so friendly,” he said. Companies have so far been reluctant to sell. There were 14 pending and completed oil and gas deals worth $418 million in Canada’s oil patch in the third quarter, on pace for the the lowest quarterly value since at least 2003, according to data compiled by Bloomberg.

Interview - Canada oil industry says price drop makes new pipelines essential – Tumbling crude prices have made building new pipelines more important than ever for Canadian oil and gas producers because the fate of some projects hinges on shipping costs, the head of the industry’s main lobby group said on Wednesday. Canadian companies have long complained that the industry suffers major lost revenue because their oil, Western Canadian Select, is at times sold at a discount of up to $40 per barrel to Western Texas Intermediate crude. More recently Canadian heavy crude has been trading at a discount of $15 a barrel. The industry hopes new projects giving them expanded access to U.S. and Asian markets, such as TransCanada Corp’s Keystone XL pipeline and Enbridge Inc’s Northern Gateway project, would reduce this gap. Tim McMillan, president of the Canadian Association of Petroleum Producers, said the discount on Canadian crude takes an especially heavy toll with oil prices down by more than 50 percent since June 2014 to around $45 per barrel. Related “At $100 a barrel it was a big concern. At $45 a barrel, that is a far larger percentage (of revenue) and is likely the difference between profitable and unprofitable on many of the assets,” McMillan said in an interview.  Environmentalists are pressuring U.S. and Canadian politicians to reject all new pipelines, in hope of stopping the expansion of northern Alberta’s oil sands. Oil sands require the consumption of vast amounts of water and fossil fuels to extract bitumen.

 Fuel Ships Take 4,000-Mile Africa Detour as Oil Prices Plunge -  -- Slumping oil prices are spurring 4,000-mile (6,400-kilometer) diversions of tankers filled with diesel and jet fuel as the price of ship fuel plunges, opening up trading opportunities. At least five tankers will deliver refined products to European ports in August and September, sailing around South Africa rather than using the normal shortcut through Egypt’s Suez Canal, ship tracking data show. The falling cost of fuel oil, used to power ships, has made longer voyages viable at a time when there are advantages for traders to keep cargoes at sea. Long-distance shipments between continents have increased this year, according to Torm A/S, world’s second-biggest publicly traded product-tanker owner. Plunging oil opens up new trades as product tankers take the long route to Europe Plunging oil opens up new trades as product tankers take the long route to Europe Brent crude futures plunged about 50 percent since August last year as OPEC nations kept pumping more than the market needs. Across oil markets, the rout triggered what traders call contango, a price pattern that lessens the need for speedy oil deliveries because future fuel prices are higher than immediate ones. “There’s massive demand to move oil products over very long distances,” “These shipments tell me that there are very good times ahead for product-tanker owners,” referring to ships that carry refined fuels like gasoline and diesel.

OPEC cracks, ready to talk with world producers - The stubborn drive of OPEC is finally weaning down as the crude cartel has stated that it’s ready to talk to other producers about crashing oil prices, according to a release from an OPEC publication on Monday. “Today’s continuing pressure on prices, brought about by higher crude production, coupled with market speculation, remains a cause for concern for OPEC and its members—indeed for all stakeholders in the industry,” the commentary in the latest OPEC Bulletin said. Petroleum prices haven’t seen such lows in a decade. The Organization of Petroleum Exporting Countries has kept production at all-time highs as strategy to abolish world competitors. Most notably, OPEC wanted to crush the shale boom in America. While the bulletin is titled “Cooperation holds the key to oil’s future,” there aren’t real details to how this would play out among oil producing nation. However, OPEC did state that the market “has to be a level playing field,” and that “OPEC will protect its own interests.”  At no surprise, once OPEC announced of a potential deal, crude prices began to rebound on Monday. West Texas Intermediate crude prices rose $3.98—almost 9 percent— to $49.20 a barrel in New York. Brent crude—the international standard—was up $3.61 to $53.60. In addition, The U.S. Energy Department cut its expectations for U.S. oil production based on lower projected output in Texas. This information mixed with the news from OPEC has given the market a slight boost investors are rallying behind.

Oil jumps 8 percent, biggest three-day surge since 1990 -- Oil futures soared on Monday for a third consecutive day, rising more than 8 percent, as a downward revision of U.S. crude production data and OPEC's readiness to talk with other producers helped extend the biggest three-day price surge in 25 years. U.S. crude oil prices have skyrocketed more than $10 a barrel in three days, erasing the month's declines as a series of relatively small-scale supply disruptions and output risks prompted bearish traders to take profits on short positions, which had been near a record a week ago. On Monday, prices fell initially but reversed course mid-morning. The three-day gains were more than the 20 percent mark that often signals a bull market. Even so, few were prepared to call a definitive end to the slump. "Sharp gains over the past three trading sessions were driven by a combination of short covering and chart-readers again looking to call a bottom falsely," Citi said in a report, saying that prices may yet test new lows before year's end. Brent LCOc1 October futures rose $4.10, or 8.2 percent, to settle at $54.15 a barrel, with volumes relatively muted by a British public holiday.

Why Did Oil Prices Just Jump By 27 Percent In 3 Days? - Oil prices have posted their strongest rally in years, jumping an astounding 27 percent in the last three trading days of August.  While much of the recent price movement defies reason and is enormously magnified by speculative movements by traders to take and cover their bets on oil, still, there were a series of rumors, events, and fresh data that helped contribute to the spike. For example, on August 31, the oil markets woke up to the news that Russian President Vladimir Putin will meet his counterpart from Venezuela to discuss “possible mutual steps” to stabilize oil prices. The meeting will take place in China on September 3. Venezuelan President Nicolas Maduro has already called for an emergency meeting of OPEC, a call that has fallen on deaf ears, at least in the most important country of Saudi Arabia. It is still highly unlikely, but the one country that might be able to change the minds of Saudi oil officials is Russia. Again, even if Russia promised to cut back oil production to boost prices (which it has not shown a willingness to do), Saudi Arabia has little trust in Moscow to follow through on those promises. Similar understandings to cooperate in the past have fallen apart, making coordinated action unlikely. Moreover, it is not at all clear that Russia’s best move is to cut back on production. Sure, it wants higher oil prices, but selling less oil will arguably offset price gains. And the depreciation of the ruble has cushioned the blow of low oil prices – Gazprom just reported a 29 percent gain in net profit for the second quarter compared to a year earlier, largely due to a weaker ruble. So, Russia is eager for oil prices to rebound, but the Kremlin is not as desperate as Venezuela.

Why So Much Oil Price Volatility? Blame The Speculators --Oil prices crashed last week only to rebound at lightning speed. On August 28, oil prices surged 10 percent, the largest one-day gain in seven years. So, what happens next for oil prices? On the face of it, the crash and massive rebound makes little sense, with many oil market analysts undoubtedly left shaking their heads. But there is a logic to what unfolded, just not the logic of the physical market for crude. Oil prices, as if we needed a reminder, are largely driven by speculation. Why else would oil prices plummet by five percent, then spike by 10 percent just a few days later? Not much changed in terms of actual supply and demand of oil in the intervening days. Sure, Royal Dutch Shell declared force majeure on some oil shipments from Nigeria, as two pipelines had to be shut down. That could interrupt some oil supplies. But other than that, the physical market for crude didn’t see a whole lot of change in just a few days’ time.  In financial markets, however, a lot changed. Last Monday, fears that the meltdown of China’s stock market would lead to global contagion sparked a worldwide sell off. Crude prices suffered a massive one-day fall.  Several days later, on August 26, the EIA reported that oil storage levels declined by 5.4 million barrels for the week, the steepest drop in weeks. That stopped crude prices from sliding further. Then on August 27, the U.S. Department of Commerce reported surprisingly strong GDP figures – the U.S. economy expanded at an annualized rate of 3.7 percent, a huge upward revision from previous estimates. Oil prices shot up by more than 10 percent, the largest gain since 2008. But it wasn’t just the inventory data and the GDP figures, which are ostensibly linked to physical realities in the market. Lower inventories and higher GDP point to actual demand for oil moving higher.

Citi Slams Today's Historic Oil Surge: "Another False Start, Time To Fade The Rally" - Earlier today we were wondering how long it would take the big banks - many of whom are short the commodity - to jump in the path of the oil momentum train, and we didn't have long to wait for the answer.  Just before the NYMEX close, Bank of America revised its year end and 2016 oil forecasts lower, from $58 and $62 to $55 for 2015 and $61 for 2016. But the real downgrade came moments ago from Citi's Ed Morse who, together with Goldman, has been bearish on oil for a good part of the past year, just slammed today's crude breakout and doubled down on his double-dead cat skepticism, when he released a report titled "Another False Start…Time to Fade the Rally" whose punchline is that "Citi foresees that WTI and Brent prices should post another fresh leg lower—perhaps making new 2015 lows—before year-end."

Oil Caps Biggest Three-Day Gain Since 1990 as OPEC Ready to Talk - Oil capped the biggest three-day gain in 25 years after OPEC said it’s ready to talk to other global producers to achieve ‘fair prices’ and the U.S. government reduced its crude output estimates. Crude traded in New York surged 27 percent in three days, the most since August 1990 when Iraq invaded Kuwait. Both West Texas Intermediate and Brent benchmarks have climbed more than 20 percent from their closing low on Aug. 24, meeting the common definition of a bull market. The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world’s supply, said in a monthly publication it’s willing to talk, “but this has to be on a level playing field.” Prices erased last week’s drop to a six-year low as the OPEC comments and signs that the U.S. shale boom is fading faster provided optimism that a global supply glut will evaporate sooner than estimated. A measure of oil-price fluctuations rose to a five-month high as traders sought protection from market swings. “The market turned around on two pieces of news,” "The EIA cut its U.S. output estimates and OPEC says its ready to talk to others about cutting output." WTI for October delivery surged $3.98, or 8.8 percent, to close at $49.20 a barrel on the New York Mercantile Exchange. It was the highest settlement since July 21. Prices slipped as much as $1.62 to $43.60 earlier. Volume was almost double the 100-day average. Brent for October settlement rose $4.10, or 8.2 percent, to end the session at $54.15 a barrel on the London-based ICE Futures Europe exchange. It was the highest close since July 24. Prices have climbed 26 percent in three days, also the most since August 1990. The European benchmark crude closed at a $4.95 premium to WTI.

OPEC magazine op-ed that fueled oil rally baffles insiders --– An OPEC publication written by the exporter group’s public relations team helped oil prices jump and prompted speculation over a possible shift in output policy – to the bafflement of some OPEC insiders. The commentary on Monday in the OPEC Bulletin, a magazine issued by OPEC’s Vienna headquarters, said downward pressure on prices due to higher production “remains a cause for concern” and OPEC “stands ready to talk to all other producers”. While the 799-word article helped add another 8 percent to oil’s three-day surge, by Tuesday it seemed clear there was no sign of a significant shift in OPEC policy or any indication of a fresh push to shore up markets, analysts and OPEC insiders said. A Gulf delegate said the Bulletin reflected genuine concern in the Organization of the Petroleum Exporting Countries about falling prices but it did not signal a policy shift or pending production cut. “I see it as a message sent to the market that we are willing to talk to non-OPEC, we are concerned about prices and we are not closing our eyes to what’s going on‎.” Another OPEC insider said: “I found it surprising,” referring to the jump in prices on Monday. “The Bulletin wasn’t saying anything new.”

Oil retreats more than $5 on weak data, eroding 25 percent rally -  Oil prices plummeted on Tuesday, settling 8 percent lower, as weak Chinese data extended a roller-coaster run that knocked oil to its lowest in 6-1/2 years last week before frenzied short-covering fueled a 25 percent three-session surge. The past few weeks have been among the most volatile in the modern oil market's three-decade history, with prices plunging early last week as worries about China's economic strength sent shivers through risk markets, only to bounce back fiercely as bearish traders rushed to cash in short positions. Traders took flight on Tuesday after seeing China's official Purchasing Managers' Index (PMI) drop to 49.7 in August and U.S. manufacturing sector growth slow to its weakest pace in more than two years, reinforcing fears of slowing global growth and weaker fuel demand. "It was primarily the China fear factor," Carsten Fritsch at Commerzbank in Frankfurt told the Reuters Global Oil Forum. Some also wondered if the 25 percent three-day surge through Monday, the biggest since Iraq's invasion of Kuwait in 1990, was overdone given a persistent global supply glut. And an OPEC magazine commentary that some traders interpreted on Monday as signaling a possible subtle policy shift was nothing of the sort, OPEC insiders said.WTI Crude Crashes 8% - Biggest Plunge Since Nov 2014's OPEC Meeting - Surprise!!! Month-end window-dressing manipulation massacred... This is the biggest single-day drop since Nov 28 2014 - When OPEC stunned the world.  Charts: Bloomberg

Oil market takes a walk on the wild side (again) – Crude oil prices have been on a rollercoaster over the last four trading sessions that has seen some of the highest volatility in a quarter of a century. The market is providing a brutal reminder of the extreme side of commodity pricing, leaving many analysts and traders struggling to identify a safe strategy. Front-month Brent crude futures rose by more than 10 percent on Thursday, 5 percent on Friday and 8 percent on Monday, before plunging by more than 8 percent on Tuesday. To put that in context, the percentage daily price movements were 4.6 standard deviations away from the mean on Thursday, 2.4 standard deviations on Friday, 3.7 on Monday and 3.8 on Tuesday. If price changes followed a normal distribution, a move of 3.5 standard deviations should occur only once every eight years and a move of greater than 4.5 standard deviations should happen once every six centuries.

Oil market displays its irrational side  (Reuters) – U.S. crude prices jumped more than 27 percent in three trading days between Thursday and Monday, which should convince even the most die-hard believers the oil futures market is neither efficient nor rational. The rally has left traders, analysts and journalists struggling to make sense of the sudden change in direction after prices had fallen steadily for two months, hitting their lowest level since 2009. Possible explanations range from a bounce in global stock markets, pipeline problems in Nigeria, new data showing U.S. oil production falling, and an editorial published in OPEC’s monthly bulletin interpreted by some analysts as a call for a coordinated approach to cutting output (“Cooperation holds the key to oil’s future,” August 2015). But it should be obvious none of these factors, singly or in combination, is sufficient to explain an increase in the price of U.S. crude from $38 to $49 in the space of less than a week. Far more important was the unusually large concentration of short derivatives positions in U.S. crude still held by hedge funds betting prices would fall even further. Large concentrations of hedge fund long or short positions have often preceded a sharp reversal in prices, as happened in March this year, when an unusual concentration of short positions preceded a sharp $18 rally.

WTI Tumbles Back To $44 Handle After API Inventories Surge Most In 5 Months - After the worst day since last November's OPEC meeting, WTI crude is falling further tonight asAPI reported a huge 7.6 million barrel inventory build. This is the biggest build (compared to DOE data) since early April!   and the reaction is more selling in WTI... Charts: Bloomberg

U.S. crude oil stocks rise as refinery runs fall, imports jump (Reuters) – U.S. crude oil stockpiles rose unexpectedly last week as refinery throughput fell for a fourth week and imports jumped, while gasoline stocks fell, data from the Energy Information Administration (EIA) showed on Wednesday. Crude inventories rose 4.7 million barrels to 455.4 million in the week to Aug. 28, the biggest one-week rise since April, compared with analysts’ expectations for stocks to remain unchanged. U.S. crude imports rose 656,000 barrels per day (bpd) to 7.4 million bpd. Crude stocks at the Cushing, Oklahoma, delivery point for the U.S. crude futures fell 388,000 barrels to 57.3 million barrels, EIA said. Analysts expect inventories at Cushing to rise this autumn as refiners shut for maintenance, potentially exceeding a record 62.2 million barrels reached this past spring. “While there is some seasonality to crude beginning to build at this time of the year, a four-plus-million-barrel build is bearish and larger than normal,”After seesawing ahead of the EIA report, U.S. crude futures extended losses and Brent turned lower after the data. U.S. October crude was down $1.22 at $44.19 a barrel at 11:05 a.m. EDT, having swung from $43.71 to $46.32. Refinery crude runs fell 269,000 bpd to 16.4 million bpd, EIA data showed. Refinery utilization rates fell 1.7 percentage points to 92.8 percent of capacity. Due to a series of unexpected outages and incidents, U.S. refinery output has fallen for four straight weeks, after reaching a record high over 17 million bpd in late July. Gasoline stocks fell 271,000 barrels, compared with analysts’ expectations in a Reuters poll for a 1.3 million-barrel drop.

Oil Triple Whammy: Inventory Build, Iran Nuke Deal Has Votes, & China Gives Venezuela $5 Billion Loan - Following last night's epic inventory build., according to API, DOE has reported a 4.7mmm barrel build but US crude production pluinged 1.4% (most since July).  However, ths oil complexc has been hit by two other 'issues' this morning as Obama captures the votes he needs to confirm the Iran nuclear deal (guaranteeing more oil supply) andChina encumbers more Venezuelan oil ($5bn loan) allowing them to keep pumping at below-cost levels. The reaction for now is notable selling pressure...Charts: Bloomberg

Maintenance season need not mean higher U.S. crude stocks (Reuters) – U.S. crude oil stocks are set to rise in the next few months as the summer driving season ends and refineries enter the autumn turnaround season, according to many analysts and traders. Rising stocks will emphasize continuing oversupply in the oil market and are expected to put renewed downward pressure on crude oil prices before the end of the year. The problem with this argument is that there is no evidence that the end of the driving season and autumn refinery maintenance, events which happen every year, normally cause crude stocks to build.  Between 2005 and 2014, stocks were generally flat between the middle of August and the middle of October, and fell between the middle of October and the end of December.U.S. commercial crude stocks are normally lowest in December and January, rising to a peak between April and June, and then falling back again during the summer and autumn (http://link.reuters.com/ceq55w). Between 2005 and 2014, crude stocks rose on average by around 38 million barrels between the start of January and the beginning of May. Stocks then typically fell by around 24 million barrels during the summer driving season between May and the start of September. Stocks then normally declined by another 6 million barrels between the start of September and the end of December.

U.S. Oil Rig Count Falls to 662 in Latest Week - WSJ: The U.S. oil-rig count fell by 13 to 662 in the latest week, breaking six consecutive weeks of increases, according to Baker Hughes Inc. BHI -2.85 % The number of U.S. oil-drilling rigs, which is a proxy for activity in the oil industry, has fallen sharply since oil prices headed south last year. The rig count dropped for 29 straight weeks before climbing modestly in recent weeks. Despite recent increases, there are still about 59% fewer rigs working since a peak of 1,609 in October. According to Baker Hughes, gas rigs were unchanged at 202. The U.S. offshore rig count is 33 in the latest week, up three from last week and down 32 from a year earlier. For all rigs, including natural gas, the week’s total was down 13 to 864.

Oil rig count falls for the first time in 7 weeks -  The US oil rig count fell by 13 to 662 this week, according to driller Baker Hughes. It was the biggest decline in the rig count in three months. The tally of oil rigs climbed by one last week, rising for the sixth straight period. It was also an increase for the eighth out of nine weeks. The total count of oil and gas rigs fell by 13 to 864. Oil prices have been volatile of late, tumbling below $40 per barrel two weeks ago, and then rebounding from that level in a strong three-day gain. After the release on Friday, West Texas Intermediate crude oil gained some ground and rallied, after being down 1%, to about $46.67 per barrel. Here's the latest chart of the oil rig count:

Saudi Arabia Just Cut Crude Selling Prices To The US, Europe And Asia --WTI Crude oil prices are in total panic buying mode this morning as the algos are fully in charge once again. WTI is up 5% this morning in a straight line since US equity markets opened (and USO went vertical). What is most ironic is that Saudi Aramco just slashed prices for crude oil to everyone around the world.  As Bloomberg reports, Saudi Arabia, the world’s largest crude exporter, cut pricing for all October oil sales to the U.S. and Northwest Europe and reduced the premium on its main Light grade to Asia by 30 cents a barrel. State-owned Saudi Arabian Oil Co. cut its official selling price for October sales to Asia of Arab Light crude to 10 cents a barrel more than the regional benchmark, the company said in an e-mailed statement. The discount for Medium grade crude for buyers in Asia widened 50 cents to $1.30 a barrel less than the benchmark.

Qatar exports plunge over 40 pct in year (AFP) - Energy-rich Qatar's exports plunged more than 40 percent in value in the year up until July 2015, on the back of a slump in petrol and hydrocarbon sales, official figures showed Sunday. State news agency QNA, citing figures from the development planning and statistics ministry, said exports for July totalled 23.5 billion Qatari riyals ($6.5 billion, 5.8 billion euros). The figure represented a drop of around one percent on June, but a massive 41.7 percent fall compared to July 2014, QNA said. Petrol and hydrocarbon exports slumped by 40.5 percent to 15.6 billion riyals. The figures also showed that imports had risen by 13 percent month-on-month, and Qatar's biggest imports were helicopters, planes and cars. Japan was the top exporter to Qatar, with 4.3 billion riyals worth of products.

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump -- Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reported at the time.  But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg: Qatar issued 15 billion riyals ($4.1 billion) of bonds on 1 September as the country takes advantage of low borrowing costs to replenish funds eroded by the decline in oil prices.  The sale, intended to boost the local capital market, was four times oversubscribed, central bank Governor Abdullah Bin Saoud Al Thani told reporters in Doha, without commenting on the bond’s duration or pricing. Qatar follows Saudi Arabia in raising money from local banks as the slump in oil prices buffets the finances of the Middle East’s largest oil and gas exporters. Saudi Arabia said it tapped local markets in June and August and has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007. Qatar needs an oil price of $59.1 dollars a barrel to balance its budget, according to the IMF, and on 29 August said its trade surplus fell 56  in July. Crude dropped below $45 a barrel on 2 September.

Why The Great Petrodollar Unwind Could Be $2.5 Trillion Larger Than Anyone Thinks -- Last weekend, we explained why it really all comes down to the death of the petrodollar.  China’s transition to a new currency regime was supposed to represent a move towards a greater role for the market in determining the exchange rate for the yuan. That’s not exactly what happened. As BNP’s Mole Hau hilariously described it last week, "whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term." Of course a reduced role for the market means a greater role for the PBoC and that, in turn, means FX reserve liquidation or, more simply, the sale of US Treasurys on a massive scale.  The liquidation of hundreds of billions in US paper made national headlines this week, as the world suddenly became aware of what it actually means when countries begin to draw down their FX reserves. But in order to truly comprehend what’s going on here, one needs to look at China’s UST liquidation in the context of the epochal shift that began to unfold 10 months ago. When it became clear late last year that Saudi Arabia was determined to use crude prices to bankrupt US shale producers and secure other "ancillary diplomatic benefits" (think leverage over Russia), it ushered in a new era for producing nations. Suddenly, the flow of petrodollars began to dry up as prices plummeted. These were dollars that for years had been recycled into USD assets in a virtuous loop for everyone involved. The demise of that system meant that the flow of exported petrodollar capital (i.e. USD recycling) suddenly turned negative for the first time in decades, as countries like Saudi Arabia looked to their stash of FX reserves to shore up their finances in the face of plunging crude. Of course the sustained downturn in oil prices did nothing to help the commodities complex more broadly and as commodity currencies plunged, the yuan’s dollar peg meant China’s export-driven economy was becoming less and less competitive. Cue the devaluation and subsequent FX market interventions.Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ “petrodollar” accumulation. This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves

Mysterious Buying And Selling By China Distorts Mid-East Oil Price, Baffles Traders - Well, leave it to China - whose economic deceleration is in many ways behind the worldwide demand dearth and attendant global deflationary supply glut - to turn the existing supply/demand imbalance for the world’s most important (and financialized) commodity on its head leading to mass confusion among market participants.  Apparently, two state-owned Chinese oil trading companies (Chinaoil, which is the trading arm of state-run China National Petroleum Corp. and Unipec, which is owned by Sinopec) have been busy monopolizing the Dubai spot market, as a bout of suspicious trading activity between the two has served to distort prices and confuse other traders.  Chinaoil bought a record 72 out of the 78 cargoes traded in the Dubai cash market last month, "most of which", Bloomberg says, were purchased from Unipec. Here’s more: The record buying in Singapore was part of the market-on-close price assessment process run by Platts, a unit of McGraw Hill Financial Inc., where bids, offers and deals are reported by traders through e-mails, instant messages and phone conversations in a fixed period each day.These are used to create end-of-day price assessments for various commodities and form benchmarks for transactions globally. “Chinaoil and Unipec each have their own trading book and strategy,”  “The Chinese government will not hinder free trading.”

China oil market reform paves way for new crude benchmark – China may launch a global crude oil futures contract as early as October to compete with the existing London Brent and the U.S. WTI benchmarks, three sources said, as it pushes ahead with reforms to open up its oil markets. The long-awaited crude contract would better reflect China’s growing importance in setting crude prices, as well as boost the use of the yuan in which it will be traded, although volatile global trading conditions and China’s recent interference in stock markets have raised some concerns. The Shanghai International Energy Exchange, also known as INE, circulated a draft of the futures contract to market participants last month, saying the launch could happen as early as October, the sources who saw the draft, told Reuters. China, the world’s second-biggest oil consumer, has already begun to loosen its grip on the physical oil sector this year by granting quotas for imported crude to privately-owned refiners for the first time, surprising market participants with the speed of reform. “The development of a futures market is closely linked to the physical market,” INE said in a statement issued to Reuters in response to questions about the new contract. “The more physical players participate, the better the liquidity of the futures market will be.”

Everything you’ve heard about China’s stock market crash is wrong --This week’s Chinese stock market implosion has been widely viewed as a reaction to the Chinese government’s devaluing the yuan on Aug. 11—a move many presume was a frenzied bid to lower export prices and strengthen the economy. This interpretation doesn’t stand up to scrutiny. First, Chinese investors haven’t been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed “Black Monday,” was more likely a reaction to the central bank’s failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February and April had boosted stock prices. The government eventually caved and announced a cut on Tuesday (Aug. 25). Second, the crash happened nearly two weeks after the devaluation, and the government only let the yuan depreciate by about 3% before swooping in and propping up its value again—which hardly helps exporters since the currency’s value effectively rose some 14% in the last year. The devaluation probably had more to do with breaking the yuan’s tightly managed peg to the US dollar, an obligation that has been draining the economy of scarce liquidity as capital outflows swell. Both moves—the government pulling back from its market bailout and the currency devaluation—stem from the same ominous problem: China’s leaders are scrambling to find the money to keep its economy running. To understand the broader forces that led to this predicament, here’s a chart-based explainer tracing its origins:

China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks -- In China, a massive witch hunt is underway. Beijing regulators now seek individuals who are destabilizing the market and spreading rumors after Large-Scale Share Purchases Failed the mission.  China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials. For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak. After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.  Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities. Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market. The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

China pins market plunge on financial journalist, airs ‘confession’ -- What's roiling China's stock market? A journalist, apparently. Wang Xiaolu, a reporter for a respected Chinese business magazine, "confessed" to causing chaos and panic in the markets, state media reported Sunday. In footage broadcast Monday morning on CCTV, China's state broadcaster, a weary-looking Wang said he obtained information about China's securities regulator "through private channels" and then added his "own subjective judgment" to the report. "During a sensitive period, I should not have published a report which had such a huge negative impact," he said. The high-profile — and deeply problematic — forced apology came amid a broader crackdown as Chinese authorities struggle to cope with the fallout from the Tianjin blasts and the ongoing stock crisis. Wang is one of 197 people recently punished for spreading rumors, Xinhua reported.

China Strengthens Yuan By Most In 9 Months As Goldman Slashes Growth Outlook -- A busy weekend in Asia was dominated by mayhem in Malaysia, and witch-huntery in China. Chinese authorities began a wide-scale crackdown on rumor-mongerers, arrested journalists, and even detained a regulator for insider trading, as they lifted loan caps on the banking system at the same as withdrawing (verbally) support for the stock market. China strengthen the Yuan fix by 0.15% to 6.3893 - this is the biggest 2-day strengthening of the Yuan fix since Nov 2014. Then just to rub some more salt in the wounds, Goldman cut China growth expectations to 6.4% and 6.1% respectively for the next 2 years. Chinese stocks are opening modestly lower

Defending the RMB -- Perry Mehrling - It’s hard to short China, but not so hard to short China’s currency, and that’s a problem for the central bank. We’ve all heard about PBOC intervention in the spot exchange market, where the central bank is selling some of its vast horde of USD Treasury securities and buying RMB (thus shrinking its own balance sheet, since RMB are its own liability). A recent report suggests that the PBOC is also fighting back by trading onshore FX swap contracts, which the report characterizes as “unusual and complex financial derivative instruments”. It is vitally important NOT to fall into the trap of interpreting the futures price as an unbiased estimate of the likely future spot exchange rate. That’s the theory of so-called Uncovered Interest Parity, and that theory is regularly and soundly rejected by the data. Typical empirical studies find that, not only is the futures price a biased estimate of future spot, but more often than not it even gets the direction wrong! If the futures price suggests the currency will depreciate, then it actually appreciates instead. To be sure, speculators no doubt have some expectation about the future RMB/USD spot exchange rate. But there is no reason to think that the futures price distills those individual expectations into a composite reflecting the “wisdom of the crowd”. In general the (unobservable) market expectation of future spot price differs from the current (observable) futures price by a risk premium, which is largely a liquidity premium. The market clearing price equates buying pressure and selling pressure, that’s all. In the case of the RMB, there are two relevant FX swap markets, one for onshore (so-called CNY) and one for offshore (so-called CNH). Apparently the PBOC has been intervening in the onshore market. Here is the key passage from the report: “Thanks to what is described as “massive” orders from a few commercial banks acting on the PBOC’s behalf, the one-year dollar-yuan swap plunged to 1200 points from 1730 points Wednesday. In the offshore market, the one-year dollar-yuan swap also dropped to 1950 points from 2310 points Tuesday, following the onshore swaps move.”

Is China's devaluation a game changer? --  The day has come for China to become more closely integrated into the global financial system, and this has a number of implications. The most important is that as prices and quantities of financial assets (rather than goods) are determined in markets, bureaucrats lose a great deal of control. But, as recent events very clearly demonstrate, Chinese authorities are reluctant to let go. Last August, we posted our most popular blog piece to date: China’s Capital Controls and the Exchange Rate Regime. In it, we explained how capital controls make it possible for China to maintain a fixed exchange rate while policymakers could adjust interest rates to stabilize their domestic economy. We also highlighted how these same capital controls are incompatible with the objectives of making Shanghai a global financial center and the renminbi (RMB) a leading international currency. Given the risks inherent in freeing cross-border capital flows, we concluded that the process of financial liberalization (both domestically and externally) would remain gradual. Yet, having seen China develop in unprecedented ways in the past, we have been watching to see if China could also alter conventional paradigms of finance and monetary policy. Could China do what no one else has done? Well, it turns out that the “impossible trinity” or “trilemma” – which compels policymakers to choose only two of three from among free capital flows, discretionary monetary policy, and a fixed exchange rate – may be more like a physical law than nearly any economic principle we know. And policymakers in China look to be quite unhappy about the constraints this is creating. (For more on the impossible trinity, see here and here.)

U.S. Treasury's Lew says China will be held accountable on currency | Reuters: The Obama administration on Wednesday urged China to be clear about its intentions when it changes currency policies. "They need to understand that they signal their intentions by the actions they take and the way they announce them," U.S. Treasury Secretary Jack Lew told network CNBC in an interview ahead of a Group of 20 meeting that Chinese officials will attend. "They have to be very clear that they are continuing to move in a positive direction and we're going to hold them accountable," Lew said.

Michael Pettis: If We Don’t Understand Both Sides of China’s Balance Sheet, We Understand Neither  - With so much happening in China in the past month it seems that there are a number of very specific topics that any essay on China should focus. I worry, however, that we get so caught up staring at strange clumps of trees that we risk losing sight of the forest. What happened in July this year, and again in August, or in June 2013, or a number of other times, was not an unexpected shock and game changer. China is a dynamic and unbalanced economic system entering into something that we might grandly call a “phase shift”, or less grandly the rebalancing process, and that it is doing so with a great deal of debt structured in a highly inverted way. Anyone who sees China this way would have been able to predict not so much the specific shocks, panics, and credit crunches that we have experienced, but rather that we would of necessity experience a series of very similar shocks. These debt-related shocks will occur regularly for many more years, and each shock will advance or retard the rebalancing process so that it affects the way future shocks occur. There are only a few broad paths along which the Chinese economy can rebalance, and if we can get some sense of the China’s institutional constraints and balance sheet structures, we can figure what these paths are and how likely we are to slip from one to another. I would argue that above all we must understand debt, and balance sheet structures more generally, dynamically. Four years ago one of my clients sent me a research report by Standard Chartered in which their China analyst warned that while Chinese debt levels were still negligible, there was a chance, small but no longer insignificant, that credit growth could speed up sharply and debt eventually become a significant constraint for policymakers. A leading analyst who had long been part of the overwhelming bull consensus was, he said, finally beginning to understand the Chinese economy and the problems it faced. I wasn’t so sure. It seemed to me that those who understood the Chinese growth model would have also understood that its overreliance on investment to fuel growth, combined with the structure of its credit markets, extremely low interest rates, and wide-spread moral hazard, made soaring debt almost inevitable and that debt was already constraining policymaking.

Why is China finding it hard to fight the markets? -- China’s market drama started in June this year with the collapse of the Shanghai stock exchange, followed by frantic interventions by the Chinese authorities. As if the estimated $200 billion already spent on propping up stock prices were not enough, China found itself in another battle with the market, defending the RMB against depreciation pressures after the PBoC devalued the RMB by nearly 2% on August 11. The cost of the foreign exchange intervention to keep the RMB stable is estimated at $200 billion. This adds to existing pressures on China’s international reserves, which though still extensive, have been reduced by as much as $345 billion in the last year, notwithstanding China’s still large current account surplus and still positive net inflows of foreign direct investment (Graph 1). The fall in reserves is not so much due to foreign investors fleeing from China but, rather, capital flight from Chinese residents. Another –more positive reason – for the fall in reserves is that Chinese banks and corporations, which had borrowed large amounts from abroad in the expectation of an ever appreciating RMB, finally started to redeem part of their USD funding while increasing it onshore. While this is certainly good news in light of the recent RMB depreciation, the question remains as to how much USD debt Chinese banks and corporations still hold and, more generally, how leveraged they really are a time when the markets may become much less complacent, at least internationally.

IMF’s Christine Lagarde Tries to Tamp Down China Panic, but Urges Vigilance - When questions about the fate of the global economy arise, the International Monetary Fund often falls in one of two camps: Highlighting all the risks or trying to inject confidence into markets. IMF chief Christine Lagarde appears to be taking the latter approach to China, where fears the No. 2 economy is about to fall off a cliff are fueling global market routs. “Growth is slowing—but not sharply, and not unexpectedly,” Ms. Lagarde said in a prepared speech in Indonesia on Tuesday. “The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy.” That being said, the IMF earlier this year boldly challenged Beijing’s official growth target of 7% this year by forecasting 6.8%. Although that may seem like a small difference, the fund’s breaking with the Chinese government forecast is unusual. It was designed to send a message: Things aren’t as rosy as the government is letting on and authorities should be working diligently to bolster the economy. Despite that forecast, the IMF is satisfied that China’s data is fairly robust. (One problem is that there’s a lag in information, however, and delayed data may mask real-time facts on the ground.) The managing director’s confidence is also buoyed by trust in Beijing’s ability to handle problems. Even if China’s economy experiences a little turbulence, “the authorities have the policy tools and financial buffers to manage this transition,” the head of the world’s premier economic adviser said. That’s a green light from the IMF for the government to juice the economy in the near-term. Ms. Lagarde may be trying to encourage greater crisis-management rather than describing the government’s response so far: Regulatory disarray amid the selloffs helped stoke concern about Beijing’s capabilities. Outside China, some officials want clear communication about the government’s plans and reiteration of commitments to longer-term economic overhauls. The U.S. and the IMF are concerned the market volatility in China could undermine political support for promised measures meant to open up the largely closed economy to international investors. Oh, and by the way, the IMF is downgrading its global growth forecast again, putting the fund’s latest outlook due in October below what was already the weakest since the financial crisis.

Ghost Cities of China: A Discussion with Wade Shepard -- Wade Shepard grew up around ghost cities in Rust Belt, USA, so he’s reluctant to call China’s newly constructed, yet-to-be-populated urban developments “ghost cities”, but he does so for brevity’s sake. After years of traveling to and writing about China’s ghost cities on his website Vagabond Journey, he’s finally published a book on the subject. As a phenomenon with lots of hype but lacking in critical analysis, Shepard’s mission is to desensationalize and rationalize ghost cities’ existence in the context of China’s massive push for urbanization. His research has led him to see the purpose of urbanization in China, and even the basic function of cities and residences, in a different light. When Shepard came to the Bookworm several months ago to talk about his new book, Ghost Cities of China (which is out now and available here) I got the chance to sit down with him and hear stories about biking into new cities, sleeping in tents in the middle of massive metropoles, and being part of a new generation of China writers. Read our discussion below, which was edited for length and clarity.

China Jan-July services trade deficit $109.2 billion: FX regulator - China's trade deficit in services continued to widen in July to $17.6 billion, the foreign exchange regulator said on Monday, as Chinese spent more abroad than foreign visitors in the country. The deficit was led by a huge gap of $15.9 billion in spending between Chinese and foreign visitors, the State Administration of Foreign Exchange (SAFE) said in a statement. China posted a $46 billion surplus on trade of goods in July, resulting in a combined surplus on trade in goods and services of $28.4 billion. The government has been trying to boost the services sector, which could help offset some downward pressure on the economy as the vast manufacturing sector falters due to both weak domestic demand and patchy global growth. Chinese Premier Li Keqiang said recently international market instability "has increased the uncertainties around the global economic recovery, and the impact on China's financial market and imports and exports has also deepened, with the economy facing new pressure." In June, the services sector had a deficit of $14.9 billion. For the first seven months, China recorded a deficit of $109.2 billion in services trade and a surplus of $301.4 on trade in goods, yielding a combined surplus on trade in goods and services of $192.2 billion, data showed.

Consumer Anxiety in China Undermines Government’s Economic Plans - - Many young middle-class Chinese who grew up during the nation’s glittering boom years, when double-digit growth was the norm, are suddenly confronting the shadow of an economic slowdown, and even hints of austerity. They are canceling vacations and delaying weddings and even selling recently purchased apartments to have cash on hand. Those who have lost money in the ongoing stock market crash are especially anxious. Their angst poses dual problems for China’s leadership. The ruling party bases its legitimacy on delivering high rates of growth and employment. It also hopes to encourage consumer spending as a new engine of growth as the manufacturing sector slows and to nudge the economy away from an investment-driven model. Eroding confidence threatens both goals. These days, Chinese are using the social media app WeChat to look for news and advice on the economy rather than the state news media, which, at the orders of the Communist Party’s propaganda department, have only had bare-bones reporting on the stock market crisis and the broader concerns over slowing economic growth. Earlier this month, China’s central bank devalued the Chinese currency, the renminbi, by the largest amount in decades, signaling to outsiders that officials were worried about China’s growth rate, which the government had earlier projected at 7 percent for the year. Then the sharp drop in the Chinese stock market this week, following a steep midsummer fall that had been slowed only through muscular government intervention, destabilized stock markets worldwide.

China’s Economic Slowdown: How Bad Is It? - In Beijing, the government released a set of figures indicating that output from the country’s enormous manufacturing sector is declining. Another new statistic showed that the Chinese services sector, which has been growing pretty strongly, is now exhibiting some weakness, too. At least two interpretations of the data are possible. The optimistic reading is that several one-off factors, including the temporary shuttering of factories in northern China to relieve pollution in Beijing, depressed the manufacturing figures, which should rebound in the months ahead and reassure the markets. Recently, the government has taken a number of policy measures to bolster demand, such as accelerating infrastructure projects, lowering interest rates, and devaluing the Chinese currency. Over the weekend, Li Keqiang, the Chinese Premier, said that these measures were already having an effect, and he assured the citizenry that the government, in order to meet its objective of seven per cent annual G.D.P. growth, would do more if necessary.A pessimistic reading is that the negative forces impacting the Chinese economy, which include the bursting of a stock-market bubble, a huge debt burden, and slowing growth in some of the country’s trading partners, are threatening to overwhelm Beijing’s efforts to stabilize things. The official manufacturing index, which is similar to the U.S. purchasing-managers’ index, has zigzagged quite a bit during the past few years, but in August it fell to the lowest level seen since 2012. And the bad news was confirmed by a private-sector survey, from Caixin/Markit, that also showed manufacturing output declining.

China PMI Contracts Fastest Since February-March 2009 -- China manufacturing and services are both in contraction at the fastest rate since early 2009. The Caixin China General Manufacturing PMI shows operating conditions deteriorate at fastest rate since March 2009.  Chinese manufacturers saw the quickest deterioration in operating conditions for over six years in August, according to latest business survey data. Total new orders and new export business both declined at sharper rates than in July, and contributed to the most marked contraction of output since November 2011. Lower production requirements prompted companies to reduce their purchasing activity at the fastest rate since March 2009, while weaker client demand led to the first rise in stocks of finished goods in six months. Meanwhile, softer demand conditions contributed to marked falls in both input costs and output charges in August. Key Points:

  • Output contracts at quickest rate in 45 months as new business falls solidly
  • Purchasing activity declines at sharpest rate since March 2009
  • Input costs and output charges both fall at marked rates

Global stocks lower as China PMI shrinks - FT.com: Activity in China’s manufacturing sector contracted at its fastest pace in three years, sending shares down in Europe and Asia and exacerbating fears about a China slowdown that have roiled global markets. The official Purchasing Managers’ Index fell to 49.7 in August from the previous month’s reading of 50, the first time since February that the bellwether figure for large industrial enterprises has fallen below 50 — the level that separates expansion from contraction. European stock markets fell fast on Tuesday after fresh turmoil on Chinese equities markets once again set a fractious tone to trading across the region. Only three stocks on the FTSE Eurofirst 300 were not registering losses in morning trade. Stocks directly exposed to the world’s second-biggest economy made some of the biggest losses, with mining and luxury goods makers leading the selling. It took the pan-European index down 2.6 per cent to 1,394.61 and back towards the closing low of 1,349.50 that it reached on August 24, which was its lowest level since December 2014. The PMI reading backs up the earlier Caixin flash PMI, representing a group of private sector and small and medium-sized enterprises, which fell to 47.1 in August from the final reading of 47.8 in July. China’s stock markets spiralled as much as 5.8 per cent lower after the data, but pared back losses later. The Shanghai Composite Index was down 1.1 per cent at the lunchtime close, while Shenzhen had fallen 2.9 per cent.

Goldman slashes China’s economic growth targets - Goldman Sachs on Monday slashed its economic outlook for China over the next three years, as signs of weakness in the world’s second-largest economy has picked up. Goldman analysts, led by Andrew Tilton, cut its outlook for Beijing’s gross domestic product growth in 2016 to 6.4% from 6.7% and trimmed their forecast for 2017 to 6.1% from 6.5% and reduced their 2018 outlook to 5.8% from 6.2%. “Policy uncertainty has increased. Measures to contain local governments’ off-balance sheet financing have taken a back seat for now to a focus on reviving infrastructure spending,” said Tilton in the Monday report. In highlighting the severity of China’s economic woes, Tilton notes that China’s industrial production fell sequentially in the first two months of 2015, marking just the third time since 1995 that China’s industrial output posted consistent declines since the Asian financial crisis in 1997-1998 and the U.S.-sparked global financial crisis in 2008. Furthermore, the economy likely contracted in July on a combination of slower exports, a retrenchment in policy support and a massive correction in China stocks.

IMF Says China Slowdown, Other Risks Threaten Global Outlook - WSJ: China’s slowdown and a host of other downside risks threaten to push the global economy into much deeper trouble without concerted action by the world’s largest economies, the International Monetary Fund warned Wednesday. “Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook,” the IMF said in a report on the state of the global economy ahead of a meeting of top finance officials from the Group of 20 biggest economies. “Strong mutual policy action is needed to raise growth and mitigate risks,” the IMF told the G-20. IMF Managing Director Christine Lagarde on Tuesday said the fund plans to downgrade its global growth forecast again, putting the fund’s latest outlook due in October below what was already the weakest since the financial crisis. Stock market routs and a series of weak data out of China are fueling concerns that China’s economy is nose-diving—and the government won’t be able to pull back the throttle, triggering selloffs in markets around the globe. But China isn’t the only concern. With growth slowing in many corners of the world and the U.S. economy strengthening, investors have plowed back into the U.S., pushing the value of the dollar up against most major currencies. That is a problem for many countries and corporations that have borrowed heavily in dollars but whose income is denominated in local currencies. And with the U.S. Federal Reserve preparing to raise interest rates, weak growth prospects and heavy debt loads are a toxic mix for many companies and economies, especially in industrializing nations. “Near-term downside risks for emerging economies have increased,”

Central banks to dump $1.5 trillion FX reserves by end-2016 -Deutsche | Reuters: Central banks will sell $1.5 trillion foreign exchange reserves by the end of next year as they try to counter capital outflows stemming from slowing growth in China, low oil prices and an impending rise in U.S. interest rates, Deutsche Bank said on Tuesday. This would mark a major shift in global capital flows, ending two decades of reserve accumulation by emerging markets and potentially forcing the Federal Reserve into slowing down the unwinding of its "quantitative easing" crisis-fighting stimulus. George Saravelos, currency strategist at Deutsche and co-author of the report, said the $1.5 trillion estimate is based on the pace that emerging markets - especially China - have been drawing down their FX reserves recently to counter capital flight. "The risks are it's actually faster than that,"

Citigroup Chief Economist Thinks Only "Helicopter Money" Can Save The World Now -- Having recently explained (in great detail) why QE4 (and 5, 6 & 7) were inevitable (despite the protestations of all central planners, except for perhaps Kocharlakota - who never met an economy he didn't want to throw free money at), we found it fascinating that no lessor purveyor of the status quo's view of the world - Citigroup's chief economist Willem Buiter - thata global recession is imminent and nothing but a major blast of fiscal spending financed by outright "helicopter" money from the central banks will avert the deepening crisis. China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned. As The Telegraph's Ambrose Evans-Pritchard reports, Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright "helicopter" money from the bank to avert a deepening crisis. Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said the dollar will “go through the roof” if the US Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets. "So why it matters is that the competence of the Chinese authorities as managers of the macro economy is really in question - the messing around with monetary policy, the hinting on doing things on the fiscal side through the policy banks. But I think the only thing that is likely to stop China from going into, I think, recession - which is, you know, 4 percent growth on the official data, the mendacious official data, for a year or so - is a large consumption-oriented fiscal stimulus, funded through the central government and preferably monetized by the People’s Bank of China.Well, they’re not ready for that yet. Despite, I think, the economy crying out for it, the Chinese leadership is not ready for this. So I think they will respond, but they will respond too late to avoid a recession, and which is likely to drag the global economy with it down to a global growth rate below 2 percent, which is my definition of a global recession. Not every country needs go into recession. The U.S. might well avoid it. But everybody will be adversely affected."

Japan’s Industrial Production Unexpectedly Declines in July -  apan’s industrial production unexpectedly fell in July, sapping a rebound in the economy from a slump last quarter. Output fell 0.6 percent from June, when it increased 1.1 percent, the trade ministry said on Monday, compared with the median forecast for a 0.1 percent gain in Bloomberg survey. The world’s third-biggest economy is struggling to recover from a contraction, as slowing growth in China -- Japan’s biggest trading partner -- weighs on exports. Household spending unexpectedly declined and the Bank of Japan’s key inflation gauge slowed to zero for a third time this year, data for July showed last week. Production cutbacks in the electrical components and the transport equipment industries led the decline in manufacturing. Companies trimmed inventories by 0.8 percent in July from the previous month, the first reduction since May. Bank of Japan Governor Haruhiko Kuroda said in New York last week that weakness in production and exports would pass and that leading indicators point to a pick up in business investment. The government and central bank should boost stimulus if the economy fails to grow again this quarter, Koichi Hamada, an adviser to Prime Minister Shinzo Abe, said last week. Manufacturers plan to boost production by 2.8 percent in August and then reduce it 1.7 percent in September, according to a trade ministry survey. Those forecasts point to a 0.7 percent increase in production this quarter, said Marcel Thieliant, an economist at Capital Economics.

Japan August PMI survey shows services expand at fastest pace in almost two years | Reuters: Activity in Japan's services sector expanded at the fastest pace in almost two years in August, a survey showed on Thursday, as companies turned more optimistic on business conditions in a sign the economy may be bouncing back. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) rose to a seasonally adjusted 53.7 from 51.2 in July to reach the highest since October 2013. The index remained above the 50 threshold that separates expansion from contraction for the fifth consecutive month. The index for business expectations rose to 56.0 from 54.8 in the previous month to reach the highest since September 2013. The index for new business eased slightly to 52.9 from 53.2 in July but still signaled solid demand. The reading on the services sector could ease concern about the economy after disappointing industrial production and household spending data for July. Japan's economy contracted in April-June as exports and consumer spending weakened, and the government is counting on a return to growth in the current quarter to fulfill its pledge to revitalize the economy after a decade of stagnation and deflation.

Japanese Workers’ Piece of Pie Smallest in More Than Two Decades - Japanese companies are generating record profits but by one measure workers are getting the smallest slice of the pie in more than two decades, indicating that businesses haven’t taken to heart Prime Minister Shinzo Abe’s entreaties to pass along more of their profits to workers. Sharing those earnings is a key link in the “virtuous cycle” the Abe government is seeking to create, in which higher profits lead to higher wages and greater consumer spending, generating a sustainable economic recovery. Overall wages are expected to rise this year but only modestly.  Meanwhile, the labor share of value-added, a rough measure of how much workers receive from what companies make, in the April-June quarter fell to 58%, the lowest level since 1992.

South Korea exports plunge 14.7% - FT.com: South Korea has suffered its heaviest fall in exports for six years, bolstering expectations that the central bank will cut rates next week to tackle a rapidly darkening outlook. Exports fell 14.7 per cent last month from a year before, the trade ministry said on Tuesday — the biggest decline since August 2009. Domestic consumption also slumped, pulling imports down 18.3 per cent in their biggest drop since February. The trade surplus fell to $4.35bn from $7.72bn in July. South Korea has been hit hard by the economic slowdown in China, which accounts for about a quarter of its exports, with the value of shipments to the country falling 8.8 per cent in the period. Total exports were dragged down further by a still sharper decline in exports to Europe and Japan, both of which declined by more than a fifth. The latest trade data were much worse than expected. Exports of petroleum products and ships led the way, with respective declines of 40.3 per cent and 51.5 per cent amid a slide in oil prices. Demand for Korean cars also cooled, although shipments of smartphones and semiconductors rose. The continuing weakness would probably prompt the Bank of Korea to cut its policy interest rate next week by 25 basis points to a new record low of 1.25 per cent. The coming months could bring further sharp declines in exports, he added, with the recent devaluation of the Chinese renminbi set to reduce the dollar value of South Korean sales to the country. “A devaluation of the renminbi will decrease China’s spending power and hurt Korea’s exports and tourism,” he said. “Massive fund flows would trigger reaction by Korea’s central bank.” Exports account for about half of South Korean gross domestic product. The country is the world’s largest exporter to China — and so among the most exposed to the renminbi’s depreciation.

Global Trade In Freefall Confirms By Biggest Plunge In South Korea Exports Since 2009 -- While the market's attention overnight was focused on China's crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July's 3.4%. The number is critical because not only do exports account for about half of South Korea's GDP (with Samusng alone anecdotally accountable for 20% of the country's GDP), but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that "Global Trade Is In Freefall".  Putting South Korea plunging trade in context, this was the worst monthly decline since August 2009, and was coupled by an 18.3% tumble in imports, the biggest drop since February. Worse, South Korea may soon run into a true Black Swan: a trade deficit: in August, the country's trade surplus tightened to just $4.3 billion, one third worse than tha $6.1 billion expected, and nearly less tthan half the $7.7 billion surplus in July, suggesting South Korea may be forced to dip into its reserves next, or finally engage in what many have said is long overdue: the next Asian currency devaluation as China's FX war spills over to what may be the most important harbinger of global trade.

Statement by Glenn Stevens, Governor: Monetary Policy Decision -- The global economy is expanding at a moderate pace, with some further softening in conditions in China and east Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.  The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy. Equity markets have been considerably more volatile of late, associated with developments in China, though other financial markets have been relatively stable. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.  In Australia, most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Australia's current account deficit blows out by 41 per cent while net debt approaches $1 trillion -- Australia's trade position has collapsed dramatically, with the June quarter current account deficit blowing out 41 per cent to $19 billion. The market had been expecting a deficit to widen from the previous quarter's $13.5 billion, but the $5.5 billion deterioration was well beyond the most pessimistic forecast. The result leaves Australia's net foreign debt hovering just below $1 trillion. Net foreign debt now stands at $976 billion. The current account is a measure of the net sum of imports and exports, as well the so-called invisibles such as net interest and dividend payments from abroad. Citi economist Josh Williamson said the figures would cut a larger than expected 0.6 per cent from GDP figures which will be released on Wednesday. However today's data was not all bad news for GDP. Mr Williamson noted that public sector demand and an increased expenditure on defence were the main factors that could stop the economy contracting in the June quarter. "Government consumption increased by 2.2 per cent in the June quarter from more defence spending that was probably related to operational expenses in the Middle East conflict," he said. The deficit on balance on goods and services doubled from $4.7 billion in the March quarter to $9.6 billion, while the net income position fell 9 per cent to $9 billion.

Australia’s Surprise Retail Sales Slide Adds to Economic Gloom - WSJ: Anyone hoping for Australian retailers to ride to the rescue of the nation’s ailing economy will be disappointed by the latest sales figures from department stores, supermarkets and restaurants. A day after the government reported the worst quarter of economic growth in four years, official data on Thursday showed retail sales fell by 0.1% in July from the previous month—the first time in more than a year that month-to-month sales have fallen. The surprise dip—economists had expected a 0.4% increase—was the latest sign that Australia’s economy, creaking at the end of a long resources boom, is deteriorating faster than many had anticipated. The report also soured policy makers’ hopes that record-low interest rates and recent tax concessions would lure more shoppers out onto the high street. “Retail won’t save the day,”  “This suggests further downside risks to the household spending outlook in 2016,”  .Economists have been turning increasingly negative on the outlook for a country that has gone 96 quarters without a recession, one of the longest economic expansions in modern history, thanks to a decadelong resources boom that began fizzling out a few years ago. A string of disappointing economic data in recent weeks has included numbers showing businesses nationally are curbing spending plans, and a surprisingly large fall in net export volumes in the second quarter, which hurt economic growth. The government said Wednesday that gross domestic product grew by 0.2% in the second quarter from the first, half of what economists expected on average and well below the first quarter’s 0.9% growth.

India's economic growth slows to 7% - BBC News: India's economy grew at an annual rate of 7% between April and June, official figures have shown. This is slower than the 7.5% growth recorded for the previous quarter, and lower than expected. India and China - which also posted 7% growth in the second quarter - are now the joint fastest growing major economies in the world. But some economists have expressed concerns that India's official figures do not accurately reflect true growth. "At face value, today's GDP figures for [the second quarter] suggest that India matched China as the world's fastest-growing major economy last quarter," said Shilan Shah at Capital Economics. "But the GDP data remain inconsistent with numerous other indicators which suggest that, at best, the economy is in the early stages of recovery after three years of tepid growth. "The official GDP data are overstating the strength of the economy, most probably by a significant margin."

Slower Growth Adds Pressure On India Govt, Central Bank - India’s economic expansion decelerated to 7% year-over-year in the quarter ended June 30, highlighting the challenges Asia’s third-largest economy faces as it tries to gain momentum. India’s economy grew by a slower than expected 7.0 per cent in the first quarter of this financial year, official figures show. Trade, hotels, transport and communication was the only sector to grow in double digits at 12.8 per cent, faster than 12.1 per cent a year ago. The farm sector expanded by 1.9 percent, below the overall growth rate, and so did the mining industry (by 4 percent), energy by (3.2 percent) and construction (by 6.9 percent), and social and defence services (by 2.7 percent). Chandrajit Banerjee said that the impressive 7 percent GDP growth at the onset of the first quarter of the current fiscal, which is higher than 6.7 percent experienced in the same period previous year, bolsters the perception that the economy is showing signs of a turnaround and is on the road to recovery. The same for the manufacturing sector slowed to 7.2 per cent as against 8.4 per cent in Q1 of FY15. Growth during the quarter was driven primarily by the services sector. The figures were the latest economic growth data to be released since the government introduced a revised formula for calculating GDP that some analysts have criticised.

Millions strike in India over 'anti-labour' reforms - Millions of workers across India went on strike Wednesday in protest at planned labour law reforms, the biggest show of strength by trade unions since Prime Minister Narendra Modi took office. They say labour reforms planned by Modi's government will put jobs at risk, and are demanding it scrap changes that would make it easier to lay off workers and shut down unproductive factories. All India Trade Union Congress secretary Gurudas Dasgupta said the response had been "magnificent" and estimated over 150 million workers participated in the strike, although this could not be independently confirmed. The strike -- the biggest in India for more than two years -- included staff at state-run banks and mines as well as some factory, construction and transport workers. "This strike is a reminder to the government that it must consult the millions of employees (affected) before changing the labour laws," striking bank worker Amit Khanna told AFP in New Delhi. Most cities remained peaceful, but clashes between police and activists broke out in the eastern state of West Bengal, which has a long history of left-wing union activism. Television footage showed police baton-charge protesters in the state capital Kolkata and drag away women strikers who had staged a sit-in, while protesters threw stones and smashed vehicles. Banks, shops and other businesses remained closed in the city, stranding commuters and travellers at the main station, while dozens of flag-waving protesters halted suburban trains. In Delhi, long queues formed at bus stops early Wednesday, while passengers were stuck at airports as many taxis and autorickshaws stayed off the streets.

FII outflows the most since Jan 2008 - Amid concern over the crisis in China and a likely interest rate increase by the US Federal Reserve, selling by foreign investors in August was the highest since the beginning of the global financial crisis in January 2008. Foreign institutional investors (FIIs) pulled out about Rs 16,700 crore ($2.5 billion) from Indian equities in August, sending the BSE Sensex down 6.5 per cent, the most since November 2011. The selling tally for the month was the second-highest in rupee terms and the third-highest in dollar terms. In January 2008, foreign investors had pulled out Rs 17,227 crore ($4.4 billion), the highest ever, which had led to the Sensex falling 13 per cent, owing to the global financial meltdown triggered by a subprime crisis in the US. Foreign investors are the most influential on Dalal Street and their trading activity has a huge bearing on the market. The selling in August was largely due to fear of a China-led global slowdown, said analysts. “China, the world’s second-largest economy, contributes 14 per cent to world GDP (gross domestic product) and 50 per cent to world GDP growth,” Edelweiss Investment Research said in a note on Monday. Adding: “A slowdown in such a major economy is likely to have a ripple effect across the globe … This has resulted in risk aversion across the globe, with FIIs exiting emerging markets.”

Google Antitrust Inquiries Spread Over Globe, With India the Latest Problem - — Google is quickly becoming the company government regulators around the world love to investigate.The Silicon Valley giant’s latest problems come from India. Last week, after a three-year investigation, India’s antitrust authority, echoing similar complaints in Europe, sent Google a report outlining its concerns about search dominance and anticompetitive behavior.The report from the investigative arm of the Competition Commission of India, citing the company’s size and financial heft, argued that Google was abusing its dominant position in search and online advertising by ranking its own services ahead of those of competitors, according to people familiar with the report, which has not been made public.The Indian commission adds to growing international scrutiny about how Google operates. The company appears to be facing a kind of regulatory contagion, with accusations in one jurisdiction hopping across borders and emboldening competitors and authorities elsewhere.In Brazil, the authorities are investigating whether Google favored its own services over others’. In Mexico, a local regulator, also mirroring regulation in Europe, has backed so-called right-to-be-forgotten proposals that allow people to request links about themselves be removed from search results. And privacy watchdogs from Argentina to Hong Kong have questioned the amount of data that Google collects on its users.The biggest of these threats is in Europe, where the region’s antitrust authority has charged the company with abusing its dominance in search to benefit some of its own services and is also investigating other potential violations connected to Google’s Android mobile phone software.The European Commission’s decisions are likely to influence regulators in other regions.

Thailand approves stimulus measures to help stumbling economy --  Thailand's military government has approved economic measures worth a combined 136 billion baht (S$5.377 billion) aimed at boosting spending power in rural areas, as the junta struggles to lift economic growth. The measures include soft loans via village funds worth 60 billion baht and a budget of 36 billion baht for sub-districts, Deputy Finance Minister Wisut Srisuphan told reporters after a cabinet meeting. The government will also speed up spending on small projects with 40 billion baht, he added. Southeast Asia's second-largest economy has yet to regain traction after the army seized power in May 2014 to end months of political unrest, with exports and domestic demand stubbornly sluggish. Low commodity prices have cut farmers' earnings while record-high household debt has curbed consumption. The national planning agency last month cut its 2015 economic growth forecast again to 2.7-3.2 per cent from 3.0-4.0 per cent. Many economists believe the revised target is still too optimistic. Growth in 2014 was only 0.9 per cent, the weakest since flood-hit 2011. The economy grew 0.4 per cent in April-June from the previous quarter, with tourism the key driver. A bomb in Bangkok two weeks ago, which killed 20 people, has dealt a further blow to the economy.

Thousands protest in Jakarta as economy slows - Thousands of workers took to the streets in the capital Jakarta, demanding job security among other things, as Indonesia faces its slowest economic growth in five years. Led by workers unions, they marched from the National Monument to the Presidential Palace where President Joko Widodo met the IMF chief Christine Lagarde.  The police have deployed more than 8,000 personnel to ensure the protests remain peaceful. The labour unions have put forward a nine-point demand, including providing job security, disallowing foreign workers and lowering prices for staples. Indonesia's labour intensive industries such as garments and footwear have suffered most from the economic slowdown, shedding thousands of workers in recent months.Workers are also hurt by soaring food prices, which caused July's inflation rate to rise to 7.6 per cent. Southeast Asia's largest economy has also been hit by the weakening rupiah that has lost 14 per cent of its value against the US dollar since the start of the year.

Asean's biggest companies tempt fate with sixfold debt jump since '98 crisis - - Southeast Asia's biggest companies have increased debt sixfold since the regional financial crisis, stoking concern over default risks as investors draw parallels with the 1998 meltdown. The region's 100 largest listed companies by assets, including Thailand's CP ALL Pcl, Petron Corp. of the Philippines and Singapore's Wilmar International Ltd., had accumulated US$392 billion (S$552.6 billion) by June 30, data compiled by Bloomberg show. That's up six times from December 1998. Debt loads as a proportion of assets are climbing back near levels from the crisis at 31.7 per cent, up from 29.5 per cent in 2010. Slowing regional growth, China's yuan devaluation and the outlook for higher US interest rates sparked a selloff in Southeast Asia that sent the ringgit and the rupiah to their lowest levels since 1998. Default risk in Asia outside Japan posted the sharpest jump in 2015 last month, bonds lost the most in two years and shares suffered their worst slide since 2011. "Companies still clearly have their foot on the expansion throttle, they show no sign of slowing down just yet at a time where the road is becoming more bendy," said Bertrand Jabouley, director of Asia-Pacific corporate ratings in Singapore at Standard & Poor's. "Currency depreciations are the bitter icing on the cake and they come at a time when debt-funded expansion has weakened corporate balance sheets." S&P said foreign-currency debts grew two to three times more rapidly than local debt for Malaysian, Philippine and Indonesian companies between 2010 and 2014, based on its own sample of the top 100 companies. The borrowings made up 30 to 50 per cent of total debt there, it said.

Nigerian Economy Heading Towards Recession -  The collapse of oil price is already taking its toll on the Nigerian economy. As it stands, there is no light at the end of the tunnel yet. Nigeria's situation is further worsened by the current government delay in appointing ministers and forming a government. This has left an economic vacuum as there seems to be no policy direction at the moment. The vacuum created by lack of fiscal policy has left the Central Bank of Nigeria with no option than to attempt to combine monetary and fiscal policies in an attempt to direct the economy. The lack of apparent policy direction of the present government has left a lot of decisions hanging. Investors are playing a wait-and-see game; some have pulled out their funds in the capital and bond markets. Because there are no ministers, all activities are in the presidency. This in itself has one implication, delay in decision-making in government circles as there is little the President alone can do in a day in the economic and political arena. It is sad that the gains all Nigerian financial markets had from the election outcome have proved to be short-lived. The naira which appreciated immediately after the elections has suffered reversal, the same with the capital market. As at today, the global hazy clouds and the impatience of some investors with the new President have brought about a market reversal in Nigeria's financial markets and the economy. Looking at the way things are, it is worrisome that the 2016 budget will be difficult to put together. Nigeria's policy-makers do not expect to be rescued by a strong pick-up in the oil price any soon. Oversupply in the market, China worries and the Iran deal militate against a recovery before 2017. So it is apparent that the 2016 budget has to be lean and Nigerians should not expect any major improvement in their welfare in the immediate term. Already, some quarters in the international community are calling for a third devaluation of the naira.

Do financial crises lie in Africa’s future? - From the FT: The likes of Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal, and Ivory Coast have all issued foreign currency dominated sovereign bonds in recent years. Ghana is one African nation with a history of debt crises (pdf), and also dating back to the 1980s (pdf).  Tanzania was another offender, both current and past (pdf), and for a while a lot of lending to Africa dried up and that limited the number of possible debt crises.  But now…? Here is Amadou Sy at Brookings, telling us it is not yet time to worry.  Here is the African Development Bank worrying a bit more than that: Today, a third of African countries have debt to GDP ratios in excess of 40 percent. The outstanding sovereign debt for Africa as a whole increased 2.6 times between 2009Q2 and 2015Q2. In contrast, total debt in developing countries rose 2.3 times over the same period. The appreciation of the dollar has raised the nominal currency values of dollar denominated debts. Thus Africa’s outstanding bond debt is already 29 percent higher today in real terms than it would have been had the dollar remained at its March 2011 level… Here is Andrew England at the FT: A recent note by Fathom Consulting highlighted a 40 per cent year-on-year dip in Chinese imports from Africa for July. Martyn Davies, chief executive of Frontier Advisory, a group that specialises in Africa-China investment, says there is anecdotal evidence of an easing in Chinese activity on the continent. “The hurdle rates of Chinese sovereign wealth investment, or part sovereign wealth fund invested projects in Africa have been raised so the capital is more discerning and seeks greater profitability,” he says. Here is my previous post on which countries are most likely to experience the next financial crises.

Child labour on Nestlé farms: chocolate giant's problems continue - Children younger than 15 continue to work at cocoa farms connected to Nestlé, more than a decade after the food company promised to end the use of child labour in its supply chain. A new report by the Fair Labor Association (FLA), commissioned by Nestlé, saw researchers visit 260 farms used by the company in Ivory Coast from September to December 2014. The researchers found 56 workers under the age of 18, of which 27 were under 15. At one farm in the Divo district of the country, the FLA found evidence of forced labour, with a young worker not receiving any salary for a year’s work at a farm. Ivory Coast is the world’s largest producer of cocoa, the raw ingredient that makes chocolate. The industry is estimated to be worth close to £60 billion a year. Researchers from the FLA, which was commissioned by Nestlé to investigate workers rights on its west African farms in 2013 amid international pressure, found child workers at 7% of the farms visited. Nestlé’s code of conduct prohibits the use of child labour in its supply chain.

Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To "Bloody Terror Film" -- Late last week, Brazil officially entered a recession as the economy contracted 1.9% in Q2, a quarter in which Brazilians suffered through the worst stagflation in over ten years.  What was perhaps worse than the GDP print however, was budget data for July which was meaningfully worse than expected. "On a 12-month trailing basis the consolidated public sector recorded a 0.9% of GDP primary deficit in July, worse than the 0.6% of GDP deficit recorded in December and, therefore, increasingly distant from the new unimpressive +0.15% of GDP surplus target," Goldman noted.  We summed the situation up as follows: “No primary surplus for you!"  And while analyzing LatAm fiscal policy doesn’t make for the most exciting reading in the universe, this particular budget battle is critical for a number of reasons, the most important of which is that Brazil’s investment grade credit rating might just depend on it and to the extent the country is forced to concede that it will not, after all, hit its primary surplus target this year, junk status could be just around the corner. Needless to say, if Brazil is cut to junk, that will do exactly nothing to help the country combat a bout of extremely negative market sentiment tied to Brazil’s rather prominent role in the great emerging market unwind. Sure enough, government sources have now confirmed that embattled President Dilma Rousseff - whose political woes are making it nearly impossible to pass legislation designed to plug gaps - will now submit a 2016 budget proposal that projects a deficit. Here’sBloomberg: The Brazilian government will send to Congress Monday a budget proposal for 2016 that projects a primary deficit instead of the previously expected surplus, according to two government sources familiar with the matter.

Just When You Thought It Couldn't Get Worse For Brazil... Just when you’re sure - and we mean sure - that it can’t possibly get any worse, or at least not materially worse in the very short-term, something else happens to further underscore the deep, dark economic malaise plaguing one of the world’s most important emerging markets.  So after last Friday’s GDP print which confirmed that the country slid into recession during Q2 - a quarter in which Brazilians suffered through the worst inflation-growth outcome in at least a decade - and after July’s budget data which confirmed that the country’s fiscal situation is, as Citi put it, “a bloody terror film,” we got a look at industrial production today and boy, oh boy was it bad. So bad in fact, that it missed even the lowest analyst expectations. Here are some key excerpts from Goldman's breakdown: Sharp Decline in Industrial Production in July IP contracted by a much larger than expected -1.5% mom sa (-8.9% yoy) in July (vs. the -0.1% mom sa market consensus). Furthermore, the June print was revised down to -0.9% mom sa from the original -0.3% mom sa.During the last nine months industrial production declined at an average monthly rate of -0.9% mom sa. Of the 24 main industrial segments, 14 recorded a contraction of output in July. IP declined 8.9% yoy in July, with the largest decline recorded in capital goods -27.8%. Overall, IP declined 6.6% yoy during January-July 2015.IP has now contracted for eight consecutive quarters and is likely to decline again during 3Q2015. In July, IP was 14.1% below the peak level registered in June 2013 and was at the same level as March-April 2006.

Brazil's economic outlook getting worse - Barclays - - FT.com: The economic backdrop in Brazil hasn't captured the same attention that China's has, but it's deteriorating. And a weak second quarter showing in which GDP shrank almost 2 per cent from the prior period is prompting analysts to trim their forecasts for Latin America's largest economies. On Thursday, those at Barclays warned Brazil faces a much deeper recession this year than they had previously expected, with a prediction that the economy will shrink 3.2 per cent. They had previously expected a 1.1 per cent contraction. The chief culprit is the Brazilian consumer. Consumer spending fell in the second quarter, and Barclays expects Brazilians to buckle further as the year unfolds, with household consumption shrinking 4 per cent. The recession will persist into 2016, Barclays reckons, with a 1.5 per cent contraction.

Brazil’s 2016 budget intensifies fear of financial crisis: - Brazil’s transformation from investment community darling to black sheep gathered pace this week as evidence mounted that the country’s political class is too divided to come up with a strategy to avoid a looming fiscal crisis. Facing a deepening recession that has devastated tax receipts, President Dilma Rousseff sent congress her budget for 2016 which, for the first time since the exit from hyperinflation in the early 1990s, forecasts a primary fiscal deficit of 0.34 per cent of GDP. The projected shortfall follows the failure to deliver on a small surplus for this year and leaves the left-wing president open to charges that she is breaking the country’s fiscal responsibility law which demands that Brazil’s traditionally spendthrift governments live within their means. More immediately, the 2016 budget intensified fears that the risk of a damaging sovereign downgrade to junk status is rising. Markets have reacted to the budget details by selling the local real for dollars, which has gained 70 per cent against it in the last 12 months. Brazil’s debt to GDP ratio stands at just 65 per cent, significantly lower than many developed economies. But its history as a serial defaulter, with nine sovereign defaults since independence in 1821, means creditors remain particularly sensitive to any deterioration in the Brazilian government’s debt dynamic. They have been spooked by the ratio’s steady rise from 53 per cent in 2011 with economists projecting it will hit 70 per cent in the near future.

Brazil's economic troubles threaten to spill over into Peru -finmin -Brazil's sinking economy is a new risk to Peru's fragile recovery and builds on worries about China's slowdown and an exodus of capital ahead of an expected U.S. interest rate hike, Peru's finance minister said Wednesday. Brazil's economy is slipping into a recession that is on track to be the country's worst in nearly three decades. "That has a direct impact on Peru because of economic links but also because of the uncertainty that it can generate in the region," Finance Minister Alonso Segura said. Peru lowered its growth forecasts for 2015 and 2016 on Monday and warned of further "negative shocks" to the mining-powered economy. Officials in Peru are struggling to consolidate a recovery from the worst slowdown in four years. Growth picked up to a 3 percent year-on-year expansion in the second quarter. Brazil's economy is Latin America's biggest and its sharp downturn is contributing to fears that emerging markets will cripple global growth. The impact could be particularly acute in small neighbors such as Peru, where Brazilian construction and mining companies have invested billions in recent years.A vast corruption inquiry into engineering firms that has paralyzed public works in Brazil has already affected Peru. In response to Brazil's investigation, Peru's attorney general launched a probe into potential bribery on a transcontinental highway built by Brazilian companies.

IIF warns of emerging market sell-off of crisis proportions | Reuters: The current slump in emerging market stocks and currencies has reached "crisis proportions" the Institute of International Finance warned on Thursday. The Washington-based finance industry body said China's woes had been a key catalyst in the fast-moving rout, which has seen MSCI's global emerging market stocks index slump 40 percent. Vast swathes of emerging market currencies have also taken a battering, but rather than just making countries more competitive, for some it has created terms of trade and inflation problems. "The decline in equity and currency values across a range of emerging markets has reached crisis proportions," the IIF said, adding that emerging market bond markets could also soon come under pressure. The current problems had compounded the strains of lacklustre worldwide growth and with many developing countries' economic models unbalanced and unsustainable, the problems were likely to last for some time. Even if the Federal Reserve were to hold off from raising U.S. interest rates in September - another major uncertainty contributing to recent emerging market market volatility - it was only likely to offer "short-term relief," the IIF said. "The deepening monetary divergence between the U.S., the UK and the rest of the world is likely to lead to further bouts of volatility," it said.

Hit by cheap oil, Canada's economy falls into recession | Reuters: The Canadian economy shrank again in the second quarter, putting the country in recession for the first time since the financial crisis, with a plunge in oil prices spurring companies to chop business investment. The confirmation on Tuesday of a modest recession will figure heavily into the election campaign as Canadians head to the polls Oct. 19 and poses a challenge to Conservative Prime Minister Stephen Harper, who is seeking a rare fourth consecutive term. Still, there was a silver lining as growth picked up for the first time in six months in June, underscoring expectations the recession will be short-lived. Harper was quick to downplay what some supporters and economists have dismissed as a "technical" recession, pointing to the upbeat June figures during a campaign stop. "The Canadian economy is back on track," he said. But politicians from the opposition New Democrats and Liberals said the numbers were evidence Harper's economic policies were failing. Economists mostly agreed the 0.5 percent pickup in June put Canada on good footing for a better third quarter.

Alberta deficit forecast at $5.9B as province feels impact of low oil prices - The effect of low oil prices is starting to make an impact on Alberta finances, according to the province's first-quarter update released Monday, and it could get worse. A steep drop in the price of West Texas Intermediate crude in August is prompting finance officials to revise their estimates for the rest of the fiscal year. Rachel Notley's NDP government is forecasting to end the year with a $5.9-billion deficit, $814 million more than forecast in the March 2015 budget, which was introduced but never passed by the previous Progressive Conservative government. However, this forecast was finalized on July 30 before the price of WTI crude started dropping well below the $57.94 US a barrel average in April, May and June. "It is clear that the revenues have dipped even further in these past weeks," said Finance Minister Joe Ceci. "If current conditions continue, the final deficit will be in the range of $6.5 billion." Ceci said he will look for new sources of revenue, but ruled out the introduction of a provincial sales tax. He has told each ministry to look for items to trim from their budgets. However, he said the government will not cut essential services or fire thousands of public workers like teachers and doctors.

Other People’s Dollars, and Their Place in Global Economics, by Paul Krugman - There are actually four English-speaking countries with dollars of their own; the others are the Canadian loonie and the New Zealand kiwi. And you can learn a lot about the global economy, busting some popular monetary myths, by comparing those currencies and how they serve their economies.  First, we learn that even relatively small countries closely linked to big neighbors can maintain monetary independence..., that should have been made obvious by the example of Canada... Second, we learn that what right-wingers call currency “debasement” ... can be a very good thing. Canada was able to combine spending cuts with strong growth in the 1990s because exports were raised by the depreciation of the loonie. Australia rode through the Asian financial crisis of 1997-98 with little damage thanks largely to a falling Aussie. In both cases times would have been much tougher if the countries had been using U.S. dollars, or worse yet been on the gold standard. Third, we learn that people pay far too much attention to the role national currencies play in the international monetary system..., a glance at Australia shows that both positive and negative claims about the international role of the dollar are wildly exaggerated. The Aussie dollar plays no special role in the world monetary system, yet Australia has consistently attracted bigger inflows of capital relative to the size of its economy — and run proportionately bigger trade deficits — than the United States. What’s important for both capital and trade, it turns out, is whether your economy offers good investment opportunities under an umbrella of legal and political stability. Whether you control an international currency is a trivial concern by comparison.

US trade contraction adds to global fears - FT.com: The US economy’s trade with the rest of the world contracted in the first seven months of this year, according to figures that will add to concerns over a slowdown in global trade. The numbers released on Thursday show how trade between some of the world’s biggest trading blocs — the US, EU and China — have been affected by the slowdown. They illustrate how even the relatively robust economic expansion in the US has its limitations as an engine of global growth. Global trade in the first six months of this year recorded its slowest expansion since 2009, in what economists have interpreted as a sign of the fragile state of the global economy and evidence that the globalisation of recent decades may have peaked. The US lost its place as the world’s largest trading nation to China last year. China has, by some measures, surpassed the US as the world’s largest economy. While concerns are growing about a slowdown in China and the impact it will have on economies such as Australia and South Korea, the new US trade data also illustrate the limits of its ability to offset that. According to July trade data released by the US census bureau, the value of US trade in goods and services with the rest of the world fell 2.7 per cent — or more than $83bn — in the first seven months to $2.94tn. In that period, the value of US exports of goods and services fell 3.5 per cent, or $47bn. So, too, did the value of imports of goods and services into the US — down 2.2 per cent, or $36.4bn. The US recorded its largest trade deficit with the EU in July. But from January to July, total imports of goods from the EU rose only 1.5 per cent from the same period in 2014, while exports of goods to the EU fell 1.3 per cent.

Russia economy, shoppers hit by falling global oil prices - Oil and gas form the backbone of Russia’s economy, accounting for 75 percent of exports and over half of the revenue for government coffers. For every dollar the oil price falls, Russia loses out on $2 billion a year in revenue, analysts say. Russia insists it will not slash production to boost oil prices, but that still means an era of effectively lower take-home wages and higher prices for ordinary consumers. “If we cut, the importer countries will increase their production and this will mean a loss of our niche market,” said Energy Minister Alexander Novak. For years, steadily rising oil and gas revenue allowed the Kremlin to dramatically increase living standards. In exchange, voters mostly turned a blind eye to President Vladimir Putin’s clampdown on dissent. This unspoken agreement between Mr. Putin and the Russian people was known as “sausages for freedom.”  Low oil prices, combined with tough Western sanctions over the Kremlin’s actions in Ukraine, mean Mr. Putin is struggling to keep his end of the bargain. This month, Russia’s economy entered a recession for only the second time since 2000. The economy shrank by 4.6 percent in the second quarter of the year, while retail sales were off 8 percent compared with the same period last year.

Russia to see bigger slump as global outlook worsens: Reuters poll -  Russia’s economy is heading for a bigger contraction this year than previously expected as a lower oil price and weaker global economy weigh, a Reuters poll of analysts predicted on Monday. Economists are revising down their forecasts after a renewed slide in the international oil price, exacerbated by global concerns focused on China’s weakening economy. The poll of 12 forecasters predicted that Russia’s economy would decline by 3.7 percent in 2015, more than the 3.5 decline projected in last month’s poll. “We cut our real GDP outlook… to take into account a weaker-than-expected second quarter, a deteriorating global emerging market outlook, and our oil price revisions,” said Bank of America Merril Lynch economist Vladimir Osakovskiy. “Lower oil prices constrain the potential for a revival of economic activity this year, despite potential support from renewed rouble weakness.” Now below $50 per barrel, international oil benchmark Brent is down from nearly $70 per barrel in May, when there had been premature hopes excess supply in the oil market would abate. For 2016, the poll predicted the economy would grow by 0.5 percent, the same as last month’s forecast.

Two-Thirds Of Global PMIs Deteriorate In August -- First the good news: of the 28 global regions that have reported PMIs so far (the US Markit PMI is due later today), 18 posted a print of over 50, or indicating manufacturing expansion. Now the bad news: comparing August to July PMI data saw a deterioration in 19 of the 28 countries, or more than two thirds, suggesting that while the global economy is not in a recession yet, absent some dramatic improvement, which in this day and age would mean another dramatic bout of monetary easing since fiscal stimulus stopped doing anything ever since central bankers took over in 2009, a global economic contraction is just around the corner. Here is the detail from Bank of America: World: On the first workday of a new month, global PMI manufacturing surveys are released around the world. That gives us an early read on the state of manufacturing. As the below table shows, 28 regions have reported so far. Nine saw improvements in their manufacturing sectors in July, and 19 recorded a weakening. A reading above 50 reflects expansion, while below 50 indicates contraction. In this regard, there were 18 countries in positive territory and 10 in negative. In particular, Hungary and Switzerland moved from contraction to expansion, while China, South Africa and Turkey did the reverse.

Perfect Storm Of Worldwide PMI Slippage --Yesterday was, apparently, the perfect storm of downbeat PMI’s. As usual, sentiment surveys have limited value except in cases of outliers or in unanimity. There was some of both across the world’s manufacturing updates. First, which was certainly most watched, China’s PMI fell to a three-year low below 50, further suggesting that there isn’t yet a bottom for how much “this” will eventually subtract. The official Purchasing Managers’ Index fell to 49.7 in August from the previous month’s reading of 50, the first time since February that the bellwether figure for large industrial enterprises has fallen below 50 — the level that separates expansion from contraction — and its lowest since August 2012. With industrial production slowing again in July this wasn’t much of surprise even to economists who get their hopes up after every monthly turn higher. China’s economy is still struggling and the full weight of financial fireworks is still to show up in all that.Despite the “dollar’s” entanglements there, it is still convention that China’s problems are its own and that the US has, or will someday, decouple since Janet Yellen and the Fed has been so “highly accommodative” for so long. The “unexpected” slump of earlier in the year has been ignored again as the “dollar” pause after March took off just enough pressure for mainstream extrapolations to once more take hold as if it were all again another “aberration.”This second “dollar” wave suggests the opposite, which is why deceleration showing up in US activity is taken more seriously this time around; to the point now of “global growth concerns.”The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.1 from 52.7 the month before, marking the lowest reading since May 2013…The new orders subindex fell to 51.7 from 56.5 to also mark the lowest level since May 2013. The prices paid index fell to 39.0 from 44.0 to mark the weakest level since March, disappointing expectations for 42.5. The employment index slipped to 51.2 from 52.7 to mark its lowest level since April, while the imports index hit its lowest level since January 2013 at 51.5.

Maybe This Global Slowdown Is Different - Justin Fox -- The global economy is slowing down. A couple of the big emerging-market economies that drove much of the growth during the past 15 years have hit a wall, and the question of the moment is whether the biggest of them, China, is in real trouble too. Commodity prices are tanking. Trade volumes are down. The Baltic Dry Index of shipping costs, which rebounded from a record low earlier this year, is falling again.  These are all characteristic of a cyclical downturn. And this is a cyclical downturn -- oil prices will rise again someday. So will emerging-market stock and bond prices. But there could also be something else afoot. We could be seeing early signs of longer-term changes in the global economy -- changes that could be enormously positive, but also have the potential to upend a lot about how the world works today.   First, here's the picture on global trade:  After a spectacular rise in the 2000s, trade volumes plummeted after the 2008 financial crisis. They then recovered, but declined again in 2013. More up-to-date figures for just the G7 and BRIICS countries show that the decline may be accelerating.  Again, these things do go in waves. But there's good reason to think that the trade gains of the 1990s and 2000s probably won't be replicated anytime soon. As Michael Francis and Louis Morel of the Bank of Canada summed up in a recent report[T]rade reforms and technological innovations that lowered trade costs during the 1990s are largely complete, the underlying incentives to expand trade are likely weaker now than they were in previous decades, leaving the world in a state where trade is neither rising nor falling relative to GDP.  Building global supply chains became so fashionable for Western manufacturers that they built them even when it made sense to keep production closer to customers; now they're retrenching and revising their approach.  Still, I can't help but thinking (perhaps wishfully thinking) that what we're seeing might also be the beginnings of a plateauing in the world's demand for things -- and, even more, the resources needed to make those things. After all, the latest United Nations population projections, released in July, do indicate that we may be nearing a plateauing of the number of people on the planet.

Shrinking currency reserves to slow tightening of global monetary policy: The great global monetary tightening of 2015 is under way, but it's not being led by the Federal Reserve. Even as US policy makers ponder whether to raise interest rates this month, one recent source of central bank liquidity in financial markets is drying up and the loss of it partly explains August's trading volatility. Behind the drawdown are the foreign exchange reserves run by the central banks. Bolstered following financial crises in the late 1990s as a buffer against capital outflows and falling currencies, such hoards fell to $US11.43 trillion in the first quarter from a peak of $US11.98 trillion in the middle of last year, according to the International Monetary Fund. Driving the decline is a combination of forces including the economic slowdown and recent devaluation in China, the Fed's pending rate hike, the collapse of oil and decisions in Switzerland and Japan to cease intervening in currencies. Each means central banks are either paring their reserves to offset an exit of capital or manage currencies, have less money flowing into their economies to salt away or no longer need to sit on as much. Whichever it is, the shrinking of reserves means much less money flowing into the financial system given authorities tended to recycle their cash piles into local currency or liquid assets such as bonds.

Migrant children rescued from Austria minivan 'recovering' - Three children are recovering in hospital in Austria after being rescued from a minivan containing 26 migrants. Police said the severely dehydrated children would not have lasted much longer in the cramped vehicle. The minivan was stopped in Braunau district on Friday and the Romanian driver was arrested after a chase. Separately, four men appeared in court in Hungary following the discovery last week of another truck in Austria containing the bodies of 71 people. The three Bulgarians and an Afghan, who were arrested in Hungary, were remanded in custody until 29 September. Austria is expected to seek their extradition. The latest incident - which was not reported until Saturday - happened near the small town of St Peter am Hart, close to the German border.The discovery of the 71 bodies in the lorry left on a roadside near the Hungarian border last week led to an outcry. Officials said the 59 men, eight women and four children - thought to be mainly Syrians - had probably died of suffocation two days earlier. Austrian police were alerted when a road worker saw liquid seeping from the vehicle and the badly decomposing bodies were found inside.

An Escalating Migrant Crisis and an Intensifying Search for Solutions -- A mounting migrant crisis has forced members of the European Union to search for new ways to adequately house, feed and effectively screen thousands of people seeking asylum. The recent influx of migrants, mostly from the Middle East and Northern Africa, has overwhelmed some countries and exposed vulnerabilities in the continental bloc’s open-border policy. The response to the Continent’s largest mass migration since the end of World War II has been muddled. Under the European Union system for processing asylum seekers, known as the Dublin Regulation, all migrants are to apply for asylum in the country where they first set foot. Their applications are to be treated equally, regardless of where they register, but the conditions they encounter while awaiting a decision to grant asylum vary widely.   Most migrants are looking to settle in Germany or other West European countries, and they are using the union’s open border policy to travel to their desired destinations before registering for asylum. If asylum seekers are found to have entered the union through another member country, they could be sent back there to submit their applications.The system appears to be breaking down. Countries are reacting to the flow of migrants by either trying to slow migrants from entering or, once the migrants have entered, speeding them quickly through to the next destination. Many migrants are crossing from Turkey to Greece, Macedonia and Serbia before entering Hungary and then moving on to wealthier countries in northern Europe. (There is an important legal distinction between a migrant who has fled his or her country and a refugee seeking asylum.) The conditions in which they would wait out approval of their applications in Germany and Sweden are better than in places such as Hungary or Greece.

Migrants shut Eurostar trains to UK; dead wash up on Turkish beach - Reuters: - Hundreds of migrants poured overnight onto the high-speed railway linking Paris with London near the French port of Calais, stranding passengers in darkness aboard Eurostar trains. Thousands of miles away, the bodies of other migrants washed up on a Turkish beach. Photos of a drowned toddler face down in the surf spread quickly across the Internet, yet another searing image from Europe's worst migration crisis since the 1990s Balkan wars. Outside a Budapest train station, an angry crowd camped out demanding to board trains for Germany, as Europe's asylum system crumbled under the strain of the influx. Hundreds of thousands of refugees fleeing wars, as well as economic migrants escaping poverty, have arrived in the European Union, confounding EU leaders and feeding the rise of right wing populists.Thousands have drowned in the Mediterranean and many others have died travelling over land, including 71 people found in the back of an abandoned truck in Austria last week. The EU's executive European Commission promised to unveil a new policy next week to make it easier to process asylum claims, send those from safe countries home and distribute bona fide refugees among the bloc's 28 members. Meanwhile, authorities have struggled to enforce rules which ordinarily allow free movement within most of the EU but restrict travel by undocumented migrants. 

Europe's Refugee Crisis "Out Of Control", Hungary PM Rages "This Is A German Problem, Not An EU Problem" --The current refugee crisis is not an EU problem, but rather "a German problem,"according to Hungary's Prime Minister Viktor Orban as his nation's borders are swamped with foreigners seeking to travel on to Germany. "People in Europe are full of fear because they see that the European leaders are not able to control the situation," he exclaimed after a meeting with EU President Schultz. He is right, of course, as we detailed here and here, but the sheer scale of the tragedy is worst than many could imagine. Orban defended his decision to erect a fence along its southern border with Serbia, saying: "we don’t do this for fun, but because it is necessary," adding rather pointedly that his country was being "overrun" with refugees, most of whom, according to the prime minister, were not Christians.

Writing numbers on refugees’ arms, are you f’ing kidding me? - If Hungary can forget after 25 years why a fence on its border is shameful, disgraceful, and disgusting then I guess we shouldn’t be surprised that the Czech police may forget after 70 years that marking people with numbers on their arms for identification purposes is, well, not something that should be happening. Seriously, WTF.  If you’ve been living under a rock or focusing on US media/most Americans’ FB feeds, you may not even know what’s really going on. This Human Rights Watch piece gives a helpful overview. It also points out why things as they stand don’t work. Worth noting is this piece from Al Jazeera that makes a very good case for why commentators, very much including the mainstream media, should not be talking about refugees as though they were migrants. They are refugees escaping inexplicable circumstances and we owe them the respect to acknowledge that when we discuss their plight. It boggles the mind that some people, or in certain cases many people, cannot sympathize with these refugees and have nothing but hatred toward them. Is it history education that has completely failed us? Where is people’s compassion? The source of significant current problems is ISIS, hardly a group with which many in Europe would sympathize. So why is it so hard for people to appreciate that these refugees need help? I guess then it is not surprising that people can’t go the extra step to recognize the potential benefits of welcoming these refugees even if they can’t get on board with the humanitarian need.

European Integration In Jeopardy: Italy "Willing To Temporarily Suspend Schengen" In Response To Refugee Crisis -- Europe's refugee crisis just took a dramatic turn for the worse, and strikes at the very hear of Europe's Shengen customs union which has allowed borderless travel within Europe for decades. As Bloomberg reports, the Italian Province of Bolzano in Northern Italy said in a statement that it agreed with the Italian government on request by German Federal State of Bavaria by "communicating a willingness to restore border controls at Brenner and temporarily suspend the Schengen agreement." Here is the official statement from the Bolzano province, google translated: In the South Tyrol, Italy intervenes in support of Germany in receiving temporary refugees: Bavaria asked logistical support to the Province of Bolzano in these hours of emergency and President Kompatscher had green light from the Italian government for hosting for a few days a contingent of migrants to Germany. Bavaria record wave record arrivals of refugees in the last hours, mainly via the Balkan route, which is creating an unmanageable situation: working to find new structures and cope immediately with the exponential growth in the number of migrants.  The Government has promptly activated in support of Germany's request by communicating the willingness to step up, in respect of the Schengen agreement, controls the Brenner border, as was done during the G7. The Province of Bolzano will welcome then for a few days - as a temporary measure to enable Bavaria to regroup and meet emergency contingent - a number of refugees estimated to be between 300 and 400. They will be found some gyms, where sanitation and infrastructure are already functioning, while in managing and assisting the Province activate the Civil Protection and the proven collaboration of local associations voluntary. The costs for this extraordinary humanitarian intervention will be borne by the state.

France, Germany agree binding migrant quotas needed: Merkel -  (AFP) - Germany and France have agreed that the European Union, facing an unprecedented influx of migrants, should impose binding quotas on the numbers member states take in, Chancellor Angela Merkel said Thursday. "I spoke this morning with the French president, and the French-German position, which we will transmit to the European institutions, is that we agree that ... we need binding quotas within the European Union to share the burden. That is the principle of solidarity," Merkel told reporters during a visit in the Swiss capital. She insisted the bloc needed to adhere to the basic principle that "those who need protection ... get it." She said the "economic power and size (of countries) should play a role" in the number of migrants they are asked to take in, but stressed that without quotas, "we cannot solve this problem." The French presidency also announced the two European powerhouses would send joint proposals to Brussels "for organising the welcome of refugees and their fair distribution in Europe" and for "reinforcing the European asylum system." With the large number of refugees and migrants flooding into Europe and moving through the continent, it warned that "dramas are being followed by tragedies." "Thousands of victims have died since the start of the year. The European Union must act in a decisive manner in line with its values," the French presidency said.

The Real Refugee Crisis Is In The Future - Ilargi - Perhaps Angela Merkel thought we didn’t yet know how full of it she is. Perhaps that’s why she said yesterday with regards to Europe’s refugee crisis that “Everything must move quickly,” only to call an EU meeting a full two weeks later. That announcement show one thing: Merkel doesn’t see this as a crisis. If she did, she would have called for such a meeting a long time ago, and not some point far into the future. With the death toll approaching 20,000, not counting those who died entirely anonymously, we can now try to calculate and predict how many more will perish in those two weeks before that meeting will be held, as well as afterwards, because it will bring no solution. Millions of euros will be promised which will take time to be doled out, and further meetings will be announced. But the essence remains that Europe doesn’t want a real solution to the crisis. That’s why Merkel refuses to acknowledge it as one. The only solution Europe wants is for the refugees to miraculously stop arriving on its shores. If more people have to drown to make that happen, Berlin and Brussels and London and Paris are fine with that. If those who make it must be humiliated by not making basic needs available, by letting them walk dozens if not hundreds of miles in searing heat, then the so-called leaders are fine with that too. Europe needs leadership but it has none. Zero. At the exact moment that it is time for all alleged leaders to stop talking about money, and start talking about human lives. It’s matter of priorities, and everything Europe has done so far points to nobody in charge having theirs straight.That goes for Greece too: Tsipras, Varoufakis, all of them, need to stop campaigning on money issues, and direct their attention towards lives lost. That may well lead to a Grexit not on financial grounds, but on humanitarian ones. And those are much better grounds on which to leave Europe. Get your priorities straight. Europe needs to, first, meet tomorrow morning and engage in immediate action to facilitate humane treatment of all refugees. And then it needs to call subsequent meetings at the highest levels to look at the future of this crisis. Not doing this guarantees an upcoming disaster the scope of which nobody can even imagine today.

French farmers' tractor protest rolls into Paris - The Local: Hundreds of tractors rolled into Paris on Thursday as farmers tried to clog up the capital's roads in protest at falling food prices. Farmers on their tractors have been descending -- slowly -- on the capital from all corners of France, angry over the falling food prices which they blame on foreign competition, Russian sanctions, and a raw deal from local supermarkets and distributors. It has taken many of them a week to reach the capital, travelling at an average speed of 35 kilometres (22 miles) an hour. "What we're asking for today is three or four centimes more on a burger," said Xavier Beulin, head of France's leading farmers' union FNSEA, told iTele. The first tractors to arrive came from the northwestern region of Brittany, a major producer of milk and pork. SEE ALSO: Why the French back their striking farmers Leading farmers' union FNSEA said they were expecting 1,733 tractors as well as dozens of cars and buses carrying up to 5,000 farmers. Police said they had counted more than 1,300 tractors on the roads into Paris. "Milk has dropped to €320 per tonne from €340 last year, and it's still falling," said Christian Ribet, who had arrived on a tractor from Brittany. "We sell at a loss even though it's supposed to be against the law."

The promised ‘transparency’ around TTIP has been a sham -- Are you concerned about the implication of the Transatlantic Trade and Investment Partnership (TTIP)? Don’t worry! Only this month, the EU trade commissioner Cecilia Malmström promised another offensive on TTIP transparency: even more documents from the negotiations would be made available.Her promise was put to the test only a few days later: the corporate transparency nerds of Corporate Europe Observatory finally received documents on exchanges between the tobacco lobby and the Brussels institution concerning TTIP and the EU-Japan trade talks. The punchline of the story? Most of the documents were redacted. An exercise in black humour, in the most literal sense possible. A picture of the blackened documents received thousands of shares and likes on social media since.This rather amusing episode demonstrates the secrecy that still pervades the trade deals. Certainly, the EU commission has responded to the wave of criticism by civil society organisations against TTIP. A long list of documents, which they had previously kept secret, was published on its website. But the most important TTIP documents are still unavailable. No one knows what the US government is really asking from Europe. This is why many positive as well as negative claims cannot be substantiated, and exaggerations from supporters and adversaries of TTIP dominate the debate. Wikileaks’s offer of a €100,000 reward for the first person to leak the most secret documents is therefore highly welcome.

Warning: TTIP could be hazardous to your health - Four-fifths of TTIP's claimed benefits in terms of economic growth are derived from EU-US regulatory ‘harmonization’ and elimination of ‘non-tariff barriers’.4 The 1995 Sanitary and Phytosanitary Standards (SPS) Agreement, a key element of the WTO regime, has already been used to challenge European health and safety regulations, notably in the area of hormone-treated meat for human consumption.5 The European Commission, which negotiates TTIP on behalf of EU member countries, is promoting ‘SPS-plus’ provisions that go far beyond those in the 1995 agreement. Industry has recently mounted a concerted political attack on the precautionary principle, which is currently entrenched in EU law, as applied to regulating endocrine-disrupting chemicals.6,7 TTIP might also give large corporations the opportunity to launch legal challenges, claiming that proposed regulations are not based on scientific risk assessments or that they are ‘unnecessarily trade restrictive’. The latter category is extremely broad, and the USA and other exporting countries have indicated that they consider national policies to reduce medicine costs, tax sugary drinks and junk foods, require nutritional labelling of foods, and protect personal data to fall into that category.

Alexis Tsipras Rallies Supporters as Syriza Takes Knock in Polls - Alexis Tsipras tried to rally Syriza party members behind him at the weekend in advance of a snap election, as opinion polls reflected deepening disappointment among voters with his government’s record.   His message to the weekend meeting was undermined by infighting among senior party officials, reflecting Syriza’s disarray in the wake of mass defections last week to Popular Unity, a new radical party led by the former energy minister Panagiotis Lafazanis, according to people who were present at the event on Saturday.  In another blow to the Syriza leader’s authority, a usually loyal party faction known as the “Group of 53”, which includes several former cabinet ministers, circulated a document at the meeting sharply criticising the premier’s decision last month to make a policy “somersault” and agree to a third rescue package totalling €86bn after months of tense negotiations. “We need to come up with a persuasive alternative plan . . . that will lead us out of the memorandum [bailout agreement],” the document said. More than 50 members of Syriza’s central committee and 27 of its MPs, including a former deputy finance minister, have switched to Popular Unity, which is campaigning on a defiant platform that calls for a voluntary exit from the eurozone and the re-adoption of the drachma.  “Re-adopting the drachma is not a catastrophe. . . There are plenty of European countries doing well that are not members of the eurozone,” Mr Lafazanis said at the weekend. However, Syriza is still expected to win the election by a narrow margin, according to six opinion polls published over the weekend. All give Syriza a lead of between 1.5 and 2.5 points over the centre-right New Democracy party, marking a sharp decline from its commanding 12 to 15-point lead in June — before Athens agreed to further tax increases and spending cuts in the latest rescue package.

Greek opposition New Democracy party closes gap on Syriza - FT.com: Alexis Tsipras’s leftwing Syriza party is facing a backlash from dissatisfied voters as campaigning heats up for a snap general election on September 20. Two opinion polls by Greek research companies published on Wednesday showed Syriza’s lead over the centre-right New Democracy party shrinking from 2.5 per cent to around to 1 per cent this week, following mass defections by central committee members and the party’s youth wing. A third poll put ND ahead by a narrow margin for the first time since it was swept out of office by a Syriza landslide at the last general election, held in January. A rebellion last month by hardline leftists in Syriza against Mr Tsipras’s decision to accept further austerity measures in return for a new €86bn rescue package prompted a split in the party and the formation of a new grouping, Popular Unity, which is campaigning on an anti-European platform. “Mr Tsipras is projecting an image of a weak leader who didn’t manage to keep his party together . . . it’s the core of Syriza that has broken away,” said Aris Hatzis, an Athens university professor of law and political commentator. A poll by Pulse for a Greek political website put support for Syriza at 26 per cent compared with 25 cent for ND. Another poll by Alco gave Syriza 23 per cent to 22.6 per cent for the conservatives. To the surprise of many observers, a third poll by GPO for a private television channel showed ND ahead of Syriza by 25.3 per cent to 25.0 per cent. However, more than 10 per cent of voters were still undecided in all three polls. Four smaller parties with around 5 per cent of the vote were competing for third place, trailed by Popular Unity with 4 per cent. “Whatever the outcome, the winning party won’t be able to govern alone . . . We are looking at a probable coalition with not one but two smaller parties,” said a pollster who declined to be identified.

Greece Loses 17,000 Jobs in July, Most Since 2001 - It's no wonder Greek prime minister Alexis Tsipras wanted elections now rather than later. He does not want the grim news of job losses and austerity to hit when he is more vulnerable. Tsipras' problem may well be that he is too late. Via translation from Libre Mercado, The Greek Economy Lost 17,000 Jobs in July, the Worst Result Since 2001Industrial production recorded a record drop in July, according to estimates by Markit. In addition, capital controls, have resulted in record job losses according to data published on Monday the National Confederation of Commerce and Companies (ESEE ). Consequently, economic sentiment has suffered an unprecedented collapse, returning to its lowest level since the start of the crisis. According to the local press, Greece destroyed about 17,000 jobs in July, the worst result since 2001. In addition, another 40,000 people went to work part time from full time, with a consequent reduction in salary. What a disaster.

Grexit may be better for Greece: Euro architect: Leaving the euro might help struggling Greece, according to Otmar Issing, the former European Central Bank (ECB) board member and chief economist who is known as one of the euro currency's architects. "The euro is irreversible – but if it is irreversible for every country has become an open question," Issing told CNBC on Tuesday. Issing raised eyebrows earlier this summer when he said that the euro's irreversibility was an "illusion," contradicting current ECB members who have insisted that there is no going back from the single currency. However, economists and politicians away from the ECB have questioned whether highly indebted Greece can remain in the euro zone and whether it might in fact do better economically outside the currency union. "For Greece, there are very good arguments that it would do well outside the euro area for some time to come, but it all depends on the Greek government's reactions" Issing told CNBC. Greece has just begun a third much-needed bailout, after months of negotiations, which looked like they might result in a disorderly exit from the single currency region.

Euro zone factory growth eases in August despite modest price rises - PMI | Reuters: Euro zone manufacturing growth eased last month, despite factories barely raising prices, adding to the European Central Bank's woes as it battles to spur expansion and inflation, a survey showed. Tuesday's disappointing readings come almost half a year after the ECB began pumping 60 billion euros a month of fresh cash into the economy and a day after official data showed inflation in the 19-country bloc at just 0.2 percent. With inflation so far below the ECB's 2 percent target ceiling there is a growing chance the ECB will have to extend its stimulus program beyond the planned completion in September 2016. Markit's final manufacturing Purchasing Managers' Index was 52.3 last month, below an earlier flash reading that suggested it had held steady at July's 52.4. It has, however, been above the 50 mark that separates growth from contraction for over two years. An index measuring output that feeds into a composite PMI, due on Thursday and seen as a good guide to growth, rose to 53.9 from 53.6, above the preliminary 53.8 reading. "By nation, the Netherlands, Italy and Ireland remained the most impressive performers," said Rob Dobson, senior economist at Markit. "Although there were signs of manufacturing growth cooling in these countries, this was largely offset by a solid acceleration in Germany, suggesting that the region's industrial powerhouse is taking on more of the growth strain."

France 'stuck in the doldrums' with second worst factory sector in the eurozone - Telegraph: France's beleaguered factories deteriorated again in August, with output tumbling to a four-month low, confirming the country's position as the eurozone's manufacturing laggard. An influential survey of French industry (PMI) came in below analyst expectations at 48.3 last month from 49.6 in July. Any number below 50 indicates contraction. Despite a moderate expansion across the rest of the eurozone, French factories reported their sharpest decline in production since April, suffering from fewer new orders and job losses. "The French industrial sector remains in the doldrums and is likely to continue to act as a drag on the broader French economy," said Rob Dobson, senior economist at Markit, which carries out the survey. The rate of contraction was only topped by crisis-hit Greece, where factories saw moderate improvement having collapsed to an all-time low in July. Greece's PMI reading came in at 39.1, still one of the worst figures in the survey's history as the country remains saddled with capital controls that restrict the movement of cash around the economy.

E.C.B. Cuts Growth Forecast, Saying It’s Ready to Expand Stimulus if Needed - The European Central Bank opened the door to an increase in its economic stimulus program on Thursday as it issued a more pessimistic growth forecast. But the central bank will not act until it has more information about the effect of a slowdown in emerging markets and other risks, Mario Draghi, the bank’s president, said at a news conference.“The Governing Council wanted to emphasize its willingness to act, its readiness to act and its ability to act,” Mr. Draghi said after a meeting of the council, the bank’s policy board.For now, though, the central bank still needs to assess whether what is happening in the rest of the world is “worsening our medium-term outlook or is just a transitory thing,” Mr. Draghi said. “And then we’ll decide whether to do more or not.”European stocks, which had already been up for the day, were further buoyed by Mr. Draghi’s remarks, illustrating his skill at reassuring investors without actually taking action. The only concrete move by the European Central Bank at its meeting on Thursday was to raise self-imposed limits on how much it can buy of any single government’s or private lender’s bond issue. The change gives the central bank more leeway to increase the asset purchases that it began in March as a way of pumping money into the eurozone economy and forcing down interest rates.

'QE and Financial Interests' -- Simon Wren-Lewis says: Corbyn, QE and financial interests: I want to talk about Quantitative Easing (QE). The basic idea behind QE is that by buying long term assets at a time when their price is high (interest rates are low) to make their price even higher (interest rates even lower) in the short term, and selling them back later when asset prices are lower (and interest rates higher), you could stimulate additional demand. At first sight it seems not too dissimilar to a central bank’s normal activities in changing short rates. There are however two major differences.... After discussing the differences, and some of the problems with QE, he continues with: In the absence of an appropriate government fiscal policy, I find the logic for helicopter money compelling and the arguments against it pretty weak. But just as with fiscal policy, just because something makes good macroeconomic sense does not mean it will happen. I have always been reluctant to pay too much attention to the distributional impact of monetary policy, because it seemed like one of those occasions when even well meaning attention to distribution can mess up good policy. Yet in terms of the political economy of replacing QE, perhaps we should. It is more likely than not that QE will lead to central bank losses. ... After all, they are buying high, and selling low. That is integral to the policy. Who gains from these losses. Where does the money permanently created because of these losses go? To the financial sector, and the owners of financial assets (who are selling to the central bank high, and buying back low). In that sense, likely losses on QE will involve a transfer from the public to the financial sector.

Nearly one million households with interest-only mortgages can't pay off debts -- Almost one million homeowners with interest-only mortgages have made no arrangements for paying off their debt.The ‘ticking time bomb’ means nearly one in three with such loans could see their home repossessed at the end of the term.With interest-only mortgages – taken out by millions in the 1980s and 1990s – monthly repayments are lower than with a traditional home loan because only the interest, rather than any capital, is paid off, but the full debt must be cleared at the end of a typical 25-year term. Almost one million homeowners with interest-only mortgages have made no arrangements for paying off their debtNow a study suggests 3.3million homeowners have an interest-only mortgage – 500,000 more than previously thought – but 934,000 of these have no plan in place to pay it off when their term ends. Half have not even considered how to repay the capital.  Extending the length of the mortgage to gain more time to raise the money has become increasingly difficult since the introduction of stricter lending criteria last year, with many now deemed too old for a loan extension. Citizens Advice, the charity that conducted the research, said some homeowners told it they were mis-sold their loan and were not even aware they had to repay the full capital at the end of their term.Others bought an endowment policy, a stockmarket-linked savings plan designed to pay off the loan in full but which, millions have discovered, is not enough to cover the debt.

A million interest-only mortgage holders 'face repossession' -- Almost a million people have no strategy in place for repaying their interest-only mortgage and could face repossession as a result, Citizens Advice has warned. Research from the charity estimates that 934,000 people have an interest-only home loan and do not have a plan for how they will pay it off when it matures. That is much higher than a previous estimate issued by the Financial Conduct Authority in 2013, which put the number at around 260,000. Citizens Advice said “time is running out” for some homeowners, who would either have to sell their home or find the money from somewhere to pay off the debt, or risk having the property repossessed. Its research represents the latest in a series of warnings about interest-only mortgages, which have helped millions of people on to the housing ladder during the past two decades but have in recent years become the subject of a regulatory clampdown. With this type of loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place to pay off the debt at the end of the term. In 2013 the FCA published research showing that up to 2.6m interest-only mortgages will mature by 2041, of which almost half of the homeowners may be unable to repay the loan at the end of the term. However, 90% of the borrowers said they had a repayment strategy in place to repay what they owed. The Citizens Advice research, which included a YouGov poll, suggests the regulator may have underestimated the scale of the problem. It puts the number of people holding interest-only mortgages at 3.3 million. The charity said that included 1.7 million who said they had no linked repayment vehicle, such as an endowment or Isa, and 934,000 who had no strategy for repaying the loan. More than 430,000 people “have not even thought about how they will repay the capital”, it said.