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

Saturday, July 27, 2013

week ending July 27

US Fed balance sheet grows 8 straight weeks (Reuters) - The U.S. Federal Reserve's balance sheet grew for the eighth week in the latest week as the U.S. central bank increased its holdings of Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which are a broad gauge of its lending to the financial system, stood at $3.532 trillion on July 24, compared with $3.495 trillion on July 17. The Fed's holdings of Treasuries rose to $1.970 trillion as of Wednesday, from $1.962 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) increased to $1.261 trillion from $1.235 trillion from the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $66.52 billion, unchanged from $66.52 billion from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $10 million a day during the week, compared with $13 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances-- Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks July 25, 2013

Up for Debate at Fed: A Sharper Easy-Money Message - The Federal Reserve is on track to keep its $85 billion-a-month bond-buying program in place at its policy meeting next week, but officials will debate changes to the way the central bank describes its plans for the program and for short-term interest rates. Fed Chairman Ben Bernanke has been saying since May that the central bank expects to begin winding down its bond-buying program later this year, if the economy strengthens as the Fed forecasts. At their July 30-31 meeting, Fed officials are likely to discuss whether to refine or revise "forward guidance," the words they use to describe their intentions for the next few years. With short-term interest rates near zero, the Fed sees such guidance as an important part of its monetary-policy arsenal. For instance, telling investors that short-term rates will stay low for a long time, Fed officials believe, helps hold down long-term rates, and that encourages borrowing, spending, investing and growth. The Fed has said that it intends to keep short-term interest rates near zero at least until the jobless rate drops to 6.5% or unless inflation rises to a 2.5% annualized rate. Mr. Bernanke suggested at his June press conference that the Fed might lower that 6.5% threshold for unemployment, which was set in September. Such a move would drive home to markets that short-term interest rates will be low for a long time.

The new monetary ideology - QUANTITATIVE easing, which almost no one had heard of five years ago, is the great new discovery in macroeconomic policy. Policymakers put their faith in it as the engine of recovery; variations in the quantity of money supplied by the central bank has graduated from an emergency measure to a permanent tool. As Adam Posen recently put it, given the failure of interest-rate policy alone to determine the economy’s credit conditions, future central bank governors ‘will have to make unconventional monetary policy conventional’.  This new enthusiasm for unconventional monetary policy is the more remarkable in that no one is quite sure how it works. There are several possible transmission mechanisms from money to prices (or nominal income) – notably the bank lending channel and the portfolio rebalancing channel. They have been extensively tested, with inconclusive results. All of this led John Kay to wonder why so much attention was given to unconventional monetary policies ‘with no clear explanation of how they might be expected to work and little evidence of effectiveness?’ His answer: they are helpful to the financial services and those who work in them.

A Few More Comments on the Taylor Rule and the Fed - To review, I recently suggested that based on Janet Yellen’s version of the Taylor rule (really, my slightly tweaked version of her version), the Fed should be following the accommodative stance suggested by Bernanke last week as opposed to the slightly more hawkish view he sorta kinda espoused the week before. John Taylor, he who derived the rule in the first place, shot back saying that in fact, his 1993 version of the rule recommends that the Fed funds rate (ffr) should be positive right now.  I responded by saying, in so many words, that Taylor ’99 is more appropriate right now that Taylor ’93, the difference being that John’s later version upweights the output gap which seems important today. A few further points to consider:

  • –In the most recent quarter, even Taylor ’93 would set the ffr at just about zero (-0.1); moreover, the recent deceleration of PCE inflation and the still large GDP output gap (as measured by CBO’s potential GDP series) have driven the output of the ’93 equation from a recommended ffr of around 2% in the second half of 2011 to one of about zero today.
  • –As numerous analysts have noted, the Taylor rule may provide less useful guidance in unusual monetary times, like when the ffr us up against the zero lower bound, and when asset purchases and forward guidance are also affecting interest rates, growth, and expectations.
  • –Finally, and this seems quite important to me, the fact that the Federal Reserve itself has consistently had to mark down their GDP forecasts suggests that their own internal expectations have been too sunny.

Why Fed Has Failed to Lower U.S. Unemployment - The Federal Reserve has a dual mandate to promote price stability and ensure full employment. It has yet to achieve either. It has set an annual inflation target of 2 percent, yet the consumer price index rose only 0.1 percent in May after falling 0.4 percent in April, and it was up only 1.4 percent in the 12 months ending in May.  The Fed’s preferred metric, the personal consumption expenditures price index excluding food and energy, rose just 1.1 percent in June from a year earlier.The central bank hasn’t defined what it would consider full employment, even when it pledged to continue buying $85 billion in securities each month “until the outlook for the labor market has improved substantially.”  After record-low interest rates failed to induce banks to lend and creditworthy borrowers to borrow, the Fed and other major central banks embarked on a novel, and by their own admission, uncertain, course of stimulus known as quantitative easing, involving huge purchases of government and other securities. It had been tried by the Bank of Japan for years without notable success, but Western central banks have become increasingly desperate as they cast around for ways to create jobs.  Central banks can raise or lower short-term interest rates, and buy or sell securities. That’s it. Those actions are a long way from creating more jobs. In contrast, fiscal policy can be surgically precise, aiding the unemployed by extending and fattening unemployment benefits.

Larry Summers on QE - The FT’s Robin Harding with the scoop: Lawrence Summers made dismissive remarks about the effectiveness of quantitative easing at a conference in April, raising the possibility of a big shift in US monetary policy if he becomes chairman of the Federal Reserve. “QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.… the people who have discussed policy with him say Mr Summers regards fiscal policy as a more effective tool than monetary policy. “More of what will determine things going forward will have to do with fiscal policy and that there is less efficacy from quantitative easing than is supposed,” he said in his Santa Monica remarks.  Mr Summers said that while QE does little good it also does little harm. “If QE won’t have a large effect on demand, it will not have a large effect on inflation either,” he said.

Why Larry Summers Should Not Be Permitted to Run Anything More Important than a Dog Pound - Yves Smith  - I’ve been gobsmacked to see that not only is Larry Summers on various short lists of candidates to become the next Fed chairman, but that Summers is also supposedly closing in on the favorite, Janet Yellen. In early 2012, Summers was lobbying hard to become the head of the World Bank and didn’t get the nod. The fact that he is now under consideration for a bigger job should set alarm bells off. While Paul Krugman weighs in on both, concluding that Yellen would be the better pick, he’s still far kinder to Summers than the Harvard economist deserves. The big problem with Summers is not his record on deregulation (although that’s bad enough) or his foot-in-mouth remarks about women in math, or for suggesting that African countries would make for good toxic waste dumps. No, it’s his appalling record the one time he was in a leadership position, as president of Harvard. Summers was unquestionably the worst leader in Harvard’s history.  Summers, unduly impressed with his own economic credentials, overruled two successive presidents of Harvard Management Corporation (the in-house fund management operation chock full of well qualified and paid money managers that invest the Harvard endowment). Not content to let the pros have all the fun, Summers insisted on gambling with the university’s operating funds, which are the monies that come in every year (tuition and board payments, government grants, the payments out of the endowment allotted to the annual budget). His risk-taking left the University with over $2 billion in losses and unwind costs and forced wide-spread budget cuts, even down to getting rid of hot breakfasts. The Boston Globe provided an overview:

Is the interest rate on reserves holding the economy back? - Martin Feldstein claims to have solved the puzzle of why Quantitative Easing has not resulted in higher inflation: The link between bond purchases and the money stock depends on the role of commercial banks’ “excess reserves.” When the Fed buys Treasury bonds or other assets like mortgage-backed securities, it creates “reserves” for the commercial banks, which the banks deposit at the Fed itself...  The link between Fed bond purchases and the subsequent growth of the money stock changed after 2008, because the Fed began to pay interest on excess reserves. The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.  As a result, the volume of excess reserves held at the Fed increased dramatically from less than $2 billion in 2008 to $1.8 trillion now. But the new Fed policy of paying interest on excess reserves meant that this increased availability of excess reserves did not lead after 2008 to much faster deposit growth and a much larger stock of money. This explanation seems highly dubious to me.

The Death of High Inflation - Paul Krugman -- As a number of people have been reminding us lately, talk of high inflation, nay hyperinflation, has been widespread ever since the Fed began trying to fight the Great Recession. And the failure of the predicted high inflation to appear has done nothing to shake their conviction that they have the truth, and that those of us who have been right are nonetheless wrong. So, one thing I wonder about is the extent to which this attitude is reinforced not just by the usual crank tendencies, right-wing leanings, and so on, but also by the fact that economists love — looooove — to talk about runaway inflation, precisely because it’s something that’s so easy to explain: you run the printing presses to cover your deficits, and off you go. Yet this is getting awfully stale.Not only has the promised high inflation failed to appear here in America, but high inflation has largely vanished everywhere. I did a quick calculation using the IMF’s World Economic Outlook Database, which runs back to 1980. Year by year, how many countries had triple digit inflation in any given year? It looks like this:

Inflation stays low and raises concerns for central bankers - Inflation is the most capricious of economic variables and central banks are cursed with the responsibility for it. It has defied all predictions in the US during the past five years and, once again, inflation’s general perversity is complicating life for the Federal Reserve. The Fed’s problem is that its preferred guide to inflation – catchily known as the price index for personal consumption expenditures excluding food and energy, or core PCE – is up by only 1.1 per cent on a year ago compared with its stated objective of 2 per cent. If this reflected a collapse towards deflation it would be a big problem. Rather than slow its $85bn a month in asset purchases, as the Fed plans to later this year if the economy keeps growing, it would need to do the opposite. In reality, Fed officials think it will move back to target – but the fickleness of inflation makes them wary of their own confidence. As a result, if inflation does not show signs of a pick-up soon it will start to factor more heavily in the Fed’s calculations. There are three main reasons not to worry about the low level of inflation right now. First, as Ben Bernanke noted in recent testimony to Congress: “This softness reflects, in part, some factors that are likely to be transitory.” Looking at other measures, it is not even clear that inflation is so weak. The core consumer price index is up by 1.6 per cent on a year ago. The median CPI – which strips out items with big price changes for a more stable picture – is up by 2.1 per cent. Among other differences, the CPI puts more weight on housing and the PCE puts more weight on healthcare.

Chart Of The Day: How Much US GDP Growth Is Thanks To The Fed? - By now even the most confused establishment Keynesian economists agree that when it comes to economic "growth", what is really being measured are liabilities (i.e., credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system which were just over $15.5 trillion in the same period. What, however, few if any economists will analyze or admit, and neither will financial pundits, is the asset matching of these bank liabilities: after all since there is no loan demand (and creation) those trillions in deposits have to go somewhere - they "go" into Fed reserves (technically it is the reserves creating deposits but that is the topic of a different article). It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth.

Chicago Fed: "Economic Activity Slightly Improved in June" - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Slightly Improved in June Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.13 in June from –0.29 in May. The index’s three-month moving average, CFNAI-MA3, increased to –0.26 in June from –0.37 in May, marking its fourth consecutive reading below zero. June’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed: Economic Activity Slightly Improved in June - According to the Chicago Fed's National Activity Index, June economic activity slightly improved from May, now at -0.13, up from May's -0.29 (an downward revision from -0.30). This is the second consecutive month with "slightly improved" as the official summation. However, this index has been negative (meaning below-trend growth) for thirteen of the past sixteen months. Here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to -0.13 in June from -0.29 in May. Two of the four broad categories of indicators that make up the index increased from May, and two of the four categories made positive contributions to the index in June.  The index's three-month moving average, CFNAI-MA3, increased to -0.26 in June from -0.37 in May, marking its fourth consecutive reading below zero. June's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  The CFNAI Diffusion Index increased to -0.03 in June from -0.19 in May. Forty-one of the 85 individual indicators made positive contributions to the CFNAI in June, while 44 made negative contributions. Forty-two indicators improved from May to June, while 41 indicators deteriorated and two were unchanged. Of the indicators that improved, 13 made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

CFNAI: Headline Disguises The Supply/Demand Imbalance - At the beginning of June I wrote an article titled "The Most Important Economic Number" in which I discussed the Chicago Fed National Activity Index, which is a composite index made up of 85 subcomponents that gives a broad overview of overall economic activity in the U.S, is often ignored by the mainstream media which could be a mistake. The reason is that unlike backward-looking statistics like GDP, the CFNAI is a forward looking metric that gives some indication of how the economy is likely to look in the coming months.  The overall index is broken down into four major sub-categories which cover:

  • Production & Income
  • Employment, Unemployment & Hours
  • Personal Consumption & Housing
  • Sales, Orders & Inventories

To get a better grasp of these four major sub-components I have constructed a 4-panel chart showing each of the individual subcomponents as compared to a major economic indicator. As you can see there are historically some very close comparisons between the major economic indicators and the underlying sub-index of the CFNAI. While all four subcomponents clearly show the sharp post-recession rebound; it appears that each has also reached the mature stage of the current economic cycle. However, the lower-left quadrant showing housing starts as compared to personal consumption and housing really stood out. One of the primary arguments for the continuation of the "economic recovery" story has been the support derived from residential housing. However, within that housing component, the most critical is housing starts. Existing home sales and permits have little economic impact with respect to the amount of activity generated by the construction of a new home. From architects, to engineering, to construction and completion the building of a new home has the biggest economic multiplier of them all. The problem, as shown in the chart above, is that housing starts appear to have peaked for the current economic cycle.

The Budget Crisis in Congress's Head - A year ago, it made sense to worry about the finances of the U.S. government. At the time, the Congressional Budget Office was projecting an unsustainable long-term budget deficit of 5 percent of gross domestic product.And it made yet more sense two years ago, when the budget forecasts suggested the gap might be as high as 7 percent of GDP.  These worries should be contained if not gone. Officials now anticipate deficits of 2 percent to 3 percent in the coming years. Debt will actually fall or be steady during the next decade relative to GDP.This should change the way we think about fiscal policy. It's often said that Washington needs a forcing event -- a fiscal cliff, a debt ceiling -- to push it to make budget decisions. What's changed is that government finances are much improved because of higher tax revenue, lower spending and slower increases in health-care costs. Thank the fiscal-cliff deal for the first, the debt-ceiling deal for the second and President Barack Obama's health-care law for some of the third. No matter, we seem destined to refight a needless battle over the debt ceiling, which will need to be raised in October or November, according to the CBO. Despite the country's improved finances, we're still barreling toward the forcing events that caused past crises. Fiscal fighting has detached completely from fiscal realities.

Previewing The Bad News That’s Likely To Complicate The Debt Ceiling Battle - The gorilla in the room may sleep soundly for the rest of July and August, but expect a foul temper when he wakes up in September. At that time, Congress once again haggles over our debt ceiling. Treasury Secretary Jack Lew tells us the government can operate under its existing borrowing limit until at least Labor Day, although it’s generally assumed the limit can be stretched until October or November. Lew also called on Republicans to agree a no-strings-attached increase, but most analysts consider this hopeful request to be political posturing. More plausibly, we’ll be treated to another shining example of government dysfunction. While we await the drama, I’ll preview another upcoming development that should set the tone for the battle – release of the Congressional Budget Office’s new long-term debt projections, which typically extend 75 years into the future. These are out later than usual this year, due to the Budget Control Act spending cuts that went through in the spring. Instead of the normal June publication, the CBO says to expect its report in September. In other words, just as borrowing limit negotiations begin to heat up.

To The Brink, Again - Paul Krugman - If John Boehner is to be believed — which, admittedly, is a real question — Republicans are once again willing to push America into default and/or shut down the government if they don’t get their way. As Greg Sargent points out, this is amazing — and what’s equally amazing is how this is being treated as normal. Politics ain’t beanbag; but “I’ve got a bomb strapped to my chest, and the whole room gets it if you don’t hand over the money” is not normal tactics, especially if pursued repeatedly.What adds to the awesomeness of the whole phenomenon is the absence of any halfway plausible rationale. To the extent that there ever was an economic justification for this brinksmanship — the claim that we were on the verge of a debt crisis, the claim that slashing spending would boost the economy — that justification has collapsed in the face of declining debt projections and overwhelming evidence that austerity has large negative impacts in a slump. True, as David Firestone notes, leading Republicans seem to have a hearing problem; they are so deep into their worldview that when, say, Ben Bernanke refutes that view they simply hear him saying the opposite of what he actually said.

White House hardens stance on budget cuts ahead of showdown - Senior White House officials are discussing a budget strategy that could lead to a government shutdown if Republicans continue to demand deeper spending cuts, lawmakers and Democrats familiar with the administration’s thinking said Thursday. The posture represents a more confrontational approach than that of this spring, when President Obama decided not to escalate a fight over across-the-board reductions known as sequestration in an earlier budget battle with Republicans. The change in tone has been evident in repeated and little-noticed veto threats over the past few weeks by Obama, who has rarely issued the warnings with such frequency. He has made it clear that he will not sign into law Republican spending bills that slash domestic programs even more deeply than sequestration. If Republicans do not relent and the White House sticks to its position, a shutdown would be likely at the end of September, when Congress must authorize a new measure to fund the government.

Deficits and Interest Rates -- The History - Krugman - I occasionally see people arguing that the historical association — that is, pre-crisis — between budget balances and interest rates presents some kind of challenge to conventional macroeconomics. (Oddly, you see this from both left and right; the Wall Street Journal, for example, was very much for deficits before it was against them). But is there really any problem? Let’s start in the mid-1980s; huge changes in expected inflation make it harder to parse what went before. Here’s what you see (the fiscal balance is shown so that an upward movement is a fall in the deficit or a rise in the surplus): Clearly, the association goes the “wrong” way: bigger surpluses (lower deficits) are, on average, associated with higher, not lower, interest rates. Macroeconomics is all wrong! Or maybe not. Look at the recession bars — and bear in mind that each recession over this period was followed by an extended “jobless recovery” that felt like a continuing recession, and was met with further Fed easing. What’s really going on here is that the business cycle is driving both deficits and interest rates. The recession of 1990-91 (driven by the S&L crisis and a burst bubble in commercial real estate) drove up the deficit, and also led to Fed easing; the recession of 2001 (dotcoms and telecomms) did the same; the recession of 2007-9 (end of the world, basically) did it on a scale that pushed the deficit to record levels and interest rates down to zero.

Stiglitz, Minsky, and Obama - Paul Krugman - I haven’t commented so far on the president’s economic speech, except to mock the journalists demanding “new ideas” for a very old-fashioned economic crisis. And as many people have pointed out, there weren’t any actual policy proposals. What we got instead was a narrative, which is no small thing, since it was very much not the narrative that has been dominating Washington discourse — including Obama’s own pronouncements — for three and a half years. Gone was the deficit/Grand Bargain obsession; instead, this was about a depressed economy, suffering mainly from inadequate demand, and how to fix it. What we all agree on is that this crisis was a-building for a long time, especially through rising household debt, as shown above. But why was household debt rising?The president came down pretty much for what we might call a Stiglitzian view (although it’s widely held): debt was driven by rising inequality. The rich were taking an ever-larger share of the pie, but not spending to match, while working Americans took on ever more debt to make ends meet.What’s the alternative? Minsky: debt exploded because the Great Depression was receding into the mists of forgetfulness, and both lenders and borrowers — enabled and encouraged by financial deregulation — forgot the dangers of leverage.

Growth From the Middle Out, and How It Works - At the core of President Obama’s economics speech on Wednesday was the notion that as rising inequality diverts income growth from the many Americans in the broad middle class, their diminished buying power leads to slower growth. It’s an intuitive idea with solid theoretical backing, but is it true? The theory is simple enough and has its roots in basic microeconomics, specifically the decline in the marginal propensity to consume as incomes rise. That may sound tricky but it’s just common sense: an extra dollar that finds its way to an “income-constrained” (or “poor,” or these days even “middle-class”) person is more likely to be spent than saved. Bureau of Labor Statistics statistics show, for example, that in 2012, households with income of $40,000 to $50,000 spent 92 percent of their after-tax income. Those with incomes above $150,000 spent 53 percent of their income. Couple that fact with the fact that consumer spending as a share of gross domestic product in the United States is about 70 percent and you see both the problem and the motivation for the president’s framing.

Obama Didn't Say What Kind of Jobs - In a speech last Wednesday President Obama said, "Over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999."But is that really true? And one also has to wonder...just what kind of jobs have those businesses been creating over the past 40 months? It's not always about the quantity, but the quality as well.  Note that Obama said in the private sector. From February 2010 to June 2013 there were 6.582 million nonfarm payroll jobs gained. Of those jobs, 7.201 million were from the private sector, so in this regard Obama is correct.As Michael Hudson points out about Obama's claim on job growth, "It is not strong job growth when the jobs being created are mainly service-sector jobs paying the minimum wage or barely above it. This is not growth; it is barely keeping up with the working age population."We can verify this fact with the Atlanta Fed's jobs calculator. This shows that under the current, awful, terrible conditions, the United States needs 107,096 jobs per month to keep up with population growth. A simple back-of-the-napkin calculation of times 40 shows that to keep up with the population since February 2010, the U.S. needed to gain 4.3 million jobs. The fact is, the United States is still to this day down 2.14 million jobs --- meaning, Obama's payroll brag is quite the statistical spin on a still bad situation for the American worker. Additionally most of the private sector jobs are refusing to hire Americans --- and this is while profits are at roaring highs. Also, the rate of hiring is lower than it was a year ago.And what kind of jobs have been created over the last four years?

900,000 Jobs? Read the Letter, Paul - Here’s a way to get some more jobs in the very near term—900,000 to be precise: cancel the sequester.That’s what the CBO said in response to Rep. Van Hollen’s request for such an analysis. …canceling the automatic spending reductions effective August 1 would increase outlays relative to those under current law by $14 billion in fiscal year 2013 and by $90 billion in fiscal year 2014.Those changes would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014 (the end of fiscal year 2014) relative to the levels projected under current law, CBO estimates. The budget office goes on to say that if you didn’t replace the deficit savings, higher federal debt could lead to slower growth down he road, so if you’re worried about that, you’d want to replace sequestration with a balanced package of spending cuts and tax revenues that kick in later when the economy isn’t so demand constrained. We’ve lately been adding about 200,000 jobs per month, so CBOs telling us that by cancelling the ill-advised austerity package known as sequestration, we could add four-and-a half months of job growth. I note that the CBO letter is cc’ed to Rep. Paul Ryan.  Nice idea, but I suspect he’s gonna make like Elvis’ girlfriend did lo these many years ago.

House GOP to slash environmental, arts funding: House Republicans Monday proposed slashing cuts to environmental programs and funding for the Smithsonian Institution and the arts as they unveiled the latest legislation to implement the second year of budget cuts required under so-called sequestration. The $24 billion spending measure would gut the budget of the Environmental Protection Agency with a one-third cut and cuts the National Endowments for the Arts by almost half. Overall, the measure funding the Interior Department, EPA, national parks and federal firefighting efforts is cut by 19 percent below funding approved in March. It takes a more modest approach to the national parks with a slight increase over levels mandated by sequestration, the across-the-board cuts forced by Washington's failure to strike a bipartisan budget accord. And firefighting efforts would benefit from $1.5 billion in "emergency" funds on top of the spending limits set by the GOP's austere budget plan. The measure is the latest of 12 spending bills for the almost one-third of the federal budget funded each year by Congress in the form of day-to-day operating budgets for government agencies. Such budgets are hit the hardest by sequestration.

Taxes, Entitlements and Federal Debt: New Update - In response to a request, I've updated some charts and tables on federal taxes, entitlements and the overall trend in federal debt. My data sources are the various reports from the Congressional Budget Office (CBO).  For openers, here is a 2012 snapshot of taxes and entilements. The left column is Uncle Sam's revenue from the three major tax sources: Personal Income Tax, Corporate Income Tax and Social Insurance Tax (aka the payroll tax paid by employers and employees). Over the past 40 years big three have account for an average of 91 percent of the total revenue, the remainder being the taxes from excises, estate and gifts and customs.As we can see, 2012 entitlement costs slightly exceeded the entire tax revenue for the year — personal, corporate, and social. However, according to the Congressional Budget Office (CBO), entitlements accounted for only about 58% of 2012 spending. Defense spending took another 19%, nondefense discretionary 17%, and interest payments 6%. We ended 2012 with an on-budget deficit of $1.151 trillion. The debt held by the public at the end of the year was $11.280 trillion. Now let's put the current deficit into the larger pattern of federal spending. I created the next two charts from a combination of CBO historical data since 1971 and their budget projections for 2013-2023. The first chart shows the astonishing growth of entitlements.The next chart shows the projected gap between revenues and outlays over the next decade together with an overlay of the accelerating growth of public debt. As long as the red line is above the green, the size of the debt burden will accelerate.

Wealth Taxes - A Future Battleground - Tyler Cowen - IF you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.   The mathematical reality is that wealth is becoming more important, relative to income. In a new paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010,” Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.  Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production. Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and slow population growth have depressed income growth, but also some good news — that relative peace and capital gains have preserved wealth.  Focusing on the wealth of economies lets us reframe our recent debates about government debt in useful ways. A look at the ratio of debt to gross national product, for example, can be scary, but the ratio of debt to wealth is far less forbidding. If, say, a nation’s debt-to-G.D.P. ratio is 100 percent — often considered a dangerous level — and national wealth is 10 times yearly national income, the debt-to-wealth ratio is thus 10 percent, which is comparable to owing $100,000 on a $1 million home. Not so scary.

Wealth Taxes? Don’t Hold Your Breath - Tyler Cowen thinks that we are entering an age of debates over wealth taxes. If only.  It’s true, as Cowen notes, that national debt everywhere is a relatively small fraction of national wealth and that, therefore, “fiscal problems are best regarded as problems of dysfunctional governance.” One of our central arguments in White House Burning was that the United States obviously, easily has the ability to pay down the national debt, and how it will do so is basically a distributional issue. Even if wealth taxes make sense, that doesn’t mean they will happen. Since the beginning of the current round of perceived deficit problems in the late 1970s, tax revenues have shifted away from income taxes (especially the corporate income tax) and toward payroll taxes—at a time when real wages have been falling. This trend was accentuated by the 1997 (Clinton-Gingrich) and 2003 (Bush) tax cuts, which reduced capital gains taxes first to 20 percent and then to 15 percent. As capital gains have made up a larger and larger share of income, we have been taxing them less and less, with only a partial correction this year. Our one significant wealth tax—the estate tax—was slashed by Bush; even after the latest tax compromise, the exemption is set at $5 million and indexed for inflation, as compared to $1 million (unindexed) only twelve years ago.

 Whose Economy You Talkin’ About? -  The Tax Policy Center has added some strong new hamsters to turn the wheels of their much used income and tax model, and in doing so they’ve expanded their definition of income.  You can read all about it here, but just eyeballing their figure 1, pasted in below (you need to click on it to get a better view), I was struck by the changing patterns of income composition as you go up the scale.Like they say, where you stand is often a function of where you sit.  For example, for households in the bottom 99%, at least half of their income comes from work in the form of compensation, which includes not just wages but also employer-paid health premiums and retirement benefits.  For middle-income households, the compensation share of income is 70%. For high-income households, say those in the top 1%, compensation is just 40%, while investment income, including cap gains, accounts for 29%, compared to 4% for the middle class.Transfer payments, including Social Security benefits, unemployment insurance, and food stamps cover a large share of income—40%–for poorest households, but are only 2% for the top fifth.  (See the paper for definitions of the other income components.) Think about these differences the next time you hear a politician explaining why we need to cut taxes on corporate income or capital gains.  Or better yet, why, as in the House budget, we have to slash the safety net in order to pay for such upper-end tax cuts.

Not Spending is Not Investment - I see this logical error so constantly, almost every day, that I feel the need to reiterate. Personal saving, virtuous and useful as it is for individuals, does not increase investment. This is what I call the “lump of money” fallacy (a.k.a. the loanable funds model). Ask yourself: If you transfer $10K from your bank account to mine for a vacation package (spend), do the banks have more money to lend for investment? If you don’t transfer the $10K to my account (save), do the banks have more money to lend for investment? In which scenario am I more likely to invest in cabaña improvements? In which scenario will my employees produce more massages? A huge amount of the thinking you see out there re: spending, saving, consumption, and investment is crippled by this simple error of composition. “Saving” ≠ “Saving Resources”

Tax writers promise 50 years of secrecy for senators' suggestions - The Senate’s top tax writers have promised their colleagues 50 years worth of secrecy in exchange for suggestions on what deductions and credits to preserve in tax reform. Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel’s top Republican, Sen. Orrin Hatch (Utah), assured lawmakers that any submission they receive will be kept under lock and key by the committee and the National Archives until the end of 2064. Deeming the submissions confidential, the Senate’s top tax writers have said only certain staff members — 10 in all — will get direct access to a senator’s written suggestions. Each submission will also be given its own ID number and be kept on password-protected servers, with printed versions kept in locked safes. The promise of confidentiality was revealed just two days before the deadline for senators to participate in the Finance Committee’s “blank slate” process, which puts the onus on lawmakers to argue for what credits and deductions should be kept in a streamlined tax code. A Finance Committee aide said Baucus and Hatch were trying to prove to colleagues that they were making secrecy a priority. Officials on the panel circulated the news to senators in a memo that was dated last Friday.

Senators promised 50 years of secrecy on their tax reform proposals - There continues to be more blather about the need for "tax reform, and buddies GOP Dave Camp and skin-deep Dem Max Baucus seem to be intent on accomplishing something "big".  And that's what's worrying me. The Republicans have been arguing that we need tax reform to "simplify" the Code, but that's close to ludicrous.  Most of the complicating portions of the Code exist for two reasons:  (1) to provide some anti-abuse provisions to counter the tax avoidance techniques of wealthy, sophisticated taxpayers (including multinational corporations) and (2) to provide special tax subsidies through tax expenditures, again mostly for the wealthy (think capital gains preference) and industries with clout (consider the various subsidies for the natural resources extractive industries), accompanied by a few good ones that benefit the poor and marginalized individuals (such as the Earned Income Tax Credit).   The Baucus-Camp "blank slate" approach--now with this promise of 50 years of guaranteed secrecy for whatever particular senators support or don't support--is extraordinarily worrisome.  Secrecy to lawmakers is  travesty in a country that claims to be a democracy.  Legislation cannot be conducted behind closed doors where Senators are protected from exposure of their views.

Proposals for Cutting the IRS Budget Linda Beale -  As the  budget battles loom again in our dysfunctional Congress, one of the targets of the right is, not unexpectedly, funding for the IRS.  Sequestration is already hampering the IRS's ability to perform its functions.  See $6 collected for every $1.  But the right wants to cut funding for the IRS to a mere three-fourths of its current level.  See Rubin,  GOP Proposes Reducing IRS Budget by 24%,.It's worth thinking about what this kind of budget reduction for the IRS--one of the biggest "too big to fail" financial institutions in the country--would mean.  Remember that the IRS performs essential governmental functions--enforcing the tax laws and collecting necessary government revenues.  In connection with these enforcement and collection functions, the IRS has implement a number of congressional policies (often with very little guidance) and, working with others in Treasury, provide guidance in the form of revenue rulings and regulations for many different types of taxpayers, as well as internal procedural guidelines for revenue officers.  It has to determine eligibility of numerous organizations for the various "tax-exempt" categories Congress has created.  It has to track information received from the myriad tax-reporting provisions.  It has to ferret out tax scams and shelters invented by high-paid accountants and law firms and in-house counsel.  It has to examine and audit and negotiated with taxpayers who are often better resourced and therefore able to "outgun" the agency.  It has to provide information and testimony to Congress.  It has to interact with tax lawyers in their professional organizations, such as the ABA Tax Section and the NYSBA Tax Section.  And, to do its job decently well, it must spend considerable effort recruiting and training employees and overseeing them. 

Can The G20 Make Multinationals Pay Tax? - Can the G20 make multinationals pay tax? Finance ministers adopted an ambitious action plan to partially rewrite current international rules to prevent mostly American multinational corporations from avoiding tax in countries where they do business. Is this a serious effort or an attempt to paper over problems? It’s a little of both. Back in February, the OECD Centre for Tax Policy and Administration essentially admitted that its policies and treaty network enabled corporate tax avoidance. The OECD put out a report describing common avoidance methods. That was an admission against interest for this mostly European organization, whose stated purpose is to facilitate commerce. Yes, paying no taxes does indeed facilitate commerce, as 17th-century British pirates understood.

Why It’s Absurd that America Doesn’t Tax Wall Street’s Transactions - Yves here. The post below from Paul Buchheit makes a persuasive layperson’s case for a financial transactions tax. There is an equally sound case to be made from a financial markets viewpoint. The idea of a financial transactions tax started with James Tobin (they are often referred to as “Tobin taxes”). Before the US went off the Bretton Woods standard, exchange rates were fixed. Tobin recognized that the post-Bretton Woods world of floating currencies would encourage currency speculation which if it became excessive would produce undue volatility. Currency volatility is a Bad Thing because it makes it difficult to plan. In the old days, when Italy had the lira, if you an Italian businessman wanted to export to England, you’d need to see if you could earn enough money based on what you’d assume the sales price range would be in pounds. Obviously, you’d need to anticipate price movements within a certain range, but if prices were so variable that you couldn’t make a reasonable forecast of the range of expected pound/lira movements, you probably could not go ahead, since you’d be taking too much risk in gearing up the additional production and investing in marketing in England. To put it more simply, too much volatility hindered trade, and thus commerce. (And if you don’t think currency traders create volatility, I have a bridge I’d like to sell you. I’ve sat on currency desks and watched interbank traders push the markets around. And a very few were good enough to make money consistently doing it. Andy Kreiger was famed throughout the industry for his ability to fake out other traders (we have a short description of his ruses in ECONNED). So the point of a transaction tax is to dampen volatility by increasing the cost of trading.

Congress to Fed: End Too-Big-to-Fail Already! - Between 2007 and 2009, the Federal Reserve doled out $16 trillion in massive, super-cheap loans to save flailing Wall Street banks. The 2010 Dodd-Frank financial reform act called for the Fed to limit its emergency lending powers so too-big-to-fail banks wouldn't count on the central bank saving them again. But three years after Dodd-Frank became law, the Fed still has not budged to curb its bailout powers—and Congress is losing its patience. One section of Dodd-Frank requires that any future emergency lending by the Fed has to be backed by good collateral, can't be used to bail out insolvent firms, and can't go to a single institution. The law also places time limits on the Fed's emergency loans to banks. But the Fed still hasn't crafted these general provisions into specific regulations.  Some members of Congress are so fed up that they're trying to force the Fed's hand; in April, Brown and Sen. David Vitter (R-La.) introduced a bill that would place far stronger limitations on emergency assistance from the central bank.

CNBC Strikes Out with Elizabeth Warren - Senator Elizabeth Warren appeared on CNBC's "Squawk Box" last Friday to discuss her proposed update of the Glass-Steagall Act and the big banks --- but the station's hosts didn't appear to be willing participants --- they almost sounded hostile. The interview was later posted at Elizabeth Warren's YouTube channel and the website Upworthy.Com helped make the video go viral. Then CNBC filed a copyright complaint against Warren --- and the video was since removed from her YouTube channel. (What didn't CNBC want the general public to see?)Warren co-sponsored a bill with Senators John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine). The bill is aimed at reining in risk at the nation's biggest banks by separating traditional banks that offer checking and savings accounts insured by the FDIC from riskier financial institutions. The latter category includes companies such as Goldman Sachs, AIG and others that are involved in investment banking, insurance, credit default swaps (derivatives), hedge funds and private equity. The bill would essentially roll back the 1999 Gramm-Leach-Bliley Act, the bill that Republican Senator Phil Gramm helped introduce, and that President Bill Clinton signed into law. Warren's bill would reinstate provisions of the Glass-Steagall Act. CNBC has posted the video of Warren's interview on their web site, but when informed that their embed system didn't work on mobile devices and tended to break sites, they uploaded the clip to their own YouTube channel. (Further below is the embedded video.)

Conservatives and Libertarians should Support the Return of Glass-Steagall -  William K. Black - Glass-Steagall prevented a classic conflict of interest that we know frequently arises in the real world.  Commercial banks are subsidized through federal deposit insurance.  Most economists support providing deposit insurance to commercial banks for relatively smaller depositors.  I am not aware of any economists who support federal “deposit” insurance for the customers of investment banks or the creditors of non-financial businesses. It violates core principles of conservatism and libertarianism to extend the federal subsidy provided to commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations.  Absent Glass-Steagall, banks could purchase anything from an aluminum company to a fast food franchise and (indirectly) fund its acquisitions and operations with federally-subsidized deposits.  If you run an independent aluminum company or fast food franchise do you want to have to compete with a federally-subsidized rival? Deposit insurance is a material federal subsidy, but it pales in comparison to the implicit federal subsidy we provide to systemically dangerous institutions (SDIs) (so-called “too big to fail” banks).  The SDIs are precisely the banks most likely to purchase non-commercial banks.  The general creditors of SDIs are protected against all loss so they funds to SDIs at a substantially lower interest rate than smaller competitors.  The largest SDIs are commercial banks that get both the explicit subsidy of federal deposit insurance and the larger subsidy unique to SDIs.

Guy Walks Into Citigroup Branch, Loses $40,000 -- If the senators are going to persuade Congress to bring back Glass-Steagall, they should show examples of real, sympathetic people. This brings me to the story of Philip L. Ramatlhware, an immigrant from Botswana who went to a Citigroup Inc. (C) branch in downtown Philadelphia one day five years ago to open a regular bank account. He was 48 years old at the time and disabled, after being hurt in an accident as a passenger on a Greyhound bus. His English wasn’t good, he had no college education and his last job had been at a fast-food kiosk at the Philadelphia airport. In April 2008, he received $225,000 in a settlement for his injuries, part of which went to pay legal fees. He was holding the settlement check when he walked into the branch. Arbitration Claim Immediately he was referred to a broker for a “financial consultation,” according to an arbitration claim he filed against Citigroup. The broker assured him the money would be invested in “guaranteed” funds and that he could have access to them whenever the need arose, the complaint said. Ramatlhware gave him $150,000 to invest. The broker put $5,000 into a bank certificate of deposit, bought a $133,000 variable annuity and invested the rest in a series of mutual funds. Less than six months later, Ramatlhware had lost $40,000, according to the complaint. Citigroup settled the case in 2010 for $22,500, without admitting liability, according to a report on the case by the Financial Industry Regulatory Authority.

Does Dodd-Frank work? We asked 16 experts to find out - Sunday is the third anniversary of the Dodd-Frank Act. To get a sense of how implementation has been going, I asked 16 people at the forefront of the debate to answer two questions: What has gone better than you had expected? And what has gone worse? –

The Great Derivatives Scam - It is hard to overstate the impact of megabank derivatives trading on our economy. Although three years after Dodd-Frank they remain a virtually dark market, experts estimate that the derivatives market may now exceed $1.2 quadrillion. A Quadrillion has 15 zeros and looks like this: 1,000,000,000,000,000. Another way of thinking about that huge number is that it amounts to 20 times the entire global economy. While that huge number is only the notional amount it still represents a huge commitment of the world's capital resources--perhaps as much as $10 to $20 trillion dollars. All this capital is committed to a an enormous zero sum game that carries an enormous risk of blowing up the financial system as occurred in 2008. As Michael Sivy points out, even a small move either way in the value of the huge notional amount of derivatives would wipe-out even well-capitalized banks. The size of the market necessarily implies huge problems and risks.  First, I contend that much of the so-called "money printing" of the Federal Reserve is dedicated to to derivatives trading with nearly zero resulting credit expansion at the megabanks. Second, much of the trading is the direct result of accounting fraud--specifically the accounting rules allow both counterparties to the same trade to recognize gains and this allows the megabanks to pump up their earnings accordingly. Third, a huge percentage of the trading occurs only because the megabanks can sell their too big to fail status to counterparties which in turn encourages more risk throughout the economy. Fourth, derivatives trading is heavily subsidized by depositors who now stand behind derivatives counterparties if a megabank fails. Thus, the next financial crisis will demonstrate that derivatives still pose a lethal risk to the global economy.

The Missing Cohen Criminal Charges on SAC Capital Insider Trading Indictment - The headlines blaze criminal charges for SAC Capital Advisors, a wayward hedge fund.  Yet if one reads the Southern district of New York indictment, it is fairly obvious the owner is getting off the hook.The criminal charges are for insider trading from 1999 to 2010.  Seems SAC Capital and their subsidiaries hired managers and analysts based on their industry contacts and pushed to get the inside scoop on these various companies in order to profit from trades. We have seen big headlines on various civil and criminal Wall Street evil doings previously and in the end, those not well connected might get some jail time, but for the most part, the fees will be slaps on the wrist in comparison to the profits made.  In the indictment itself, we already have a hint that penalties will be in the millions by the claim of damage done by SAC Capital's insider trading scheme.  The predictable and foreseeable result as charged herein was systematic insider trading by the SAC ENTITY DEFENDANTS resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.  Most of the indictment is for underlings, managers, traders, analysts who already plead guilty and this investigation has been ongoing for over six years.  Managers and research analysts were prized for who they knew getting the inside scoop on everything from drug trials and their confidential interim results to the latest innovations and business roadmaps inside tech companies.

Shocking Things Wall Street Financiers Say Off the Record About Their Bloated, Corrupt Industry - In a shocking new survey commissioned by the Labaton Sucharow law firm, Wall Street insiders say that breaking the law, screwing your clients and covering up crimes is a way of life on Wall Street. The shock is not that cheating is going on. We all know that. The shock is that these financiers would actually admit it on a survey. This should tell us that the Wall Street culture is so brazenly corrupt, so confident of not getting caught, so certain that a passive public won't fight back that those surveyed didn't even bother to lie about the fact that they were living, breathing sociopaths. Here are some of the key findings of this sample of 250 traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisors, asset managers and stock brokers.

The Leverage Ratio regulation will hurt liquidity, introduce risks - New bank regulation focused on the so-called Leverage Ratio is expected to do major damage to the US repo market. The measure is a blunt tool that does not permit any netting. That means if a client has a repo trade with a bank and an offsetting (reverse repo) transaction, the two can not be offset. Furthermore, the Leverage Ratio will show double the exposure by grossing up the transactions.According to JPMorgan, this inability to offset positions will result in some $180bn of new capital requirements for major banks.  JPMorgan: - The inability of banks to offset repos against reverse repos could increase the denominator of the Leverage Ratio by up to $6tr. Applying the 3% minimum capital requirement to this $6tr potentially results in additional capital of $180bn across G4 banks. That is expected to shrink the market considerably. And lower repo balances will reduce trading and liquidity in the underlying securities - the two markets are closely tied.

Why new leverage ratio rules could stifle repo markets - Earlier this month the Fed, together with the Office of the Comptroller of the Currency and the FDIC, proposed a leverage ratio rule for big US banks.JP Morgan says it is now worried about the punitive effects such ratios might have on repo. They explain that implementation of the leverage ratio requirement has already begun, with bank-level reporting to supervisors of the leverage ratio and its components from January 1, 2013.The most significant impact, however, is likely to be on repo markets because it would cut down on the practice of netting — reducing the number of repos that currently offset each other or which lie off-balance sheet. These would now have to be independently haircutted or collateralised instead. From their note last Friday:As with derivatives, the proposals do not allow netting of collateral, i.e. repos are accounted for on a gross basis in the calculations of the Exposure Measure. Effectively both derivatives and repos are accounted for as loans on a gross basis rather than a securitized net product. In fact the revised guidance is even more punitive for repo transactions as it not only forbids netting of collateral but it does not allow netting of exposure either, i.e. repos and reverse repos cannot be offset against each other.

U.S. SEC urges money funds to be prepared for tri-party repo defaults (Reuters) - U.S. securities regulators are warning the $2.6 trillion money market fund industry to be careful of the risks in the so-called repo market, part of the unregulated shadow banking system that large investment banks use to fund their business. The U.S. Securities and Exchange Commission on July 17 quietly issued new guidance to money funds that spells out the risks they could face if borrowers in the tri-party repurchase market collapse. "There are a variety of ways in which a money fund and its adviser may be able to prepare for handling a default of a tri-party repo held in the fund's portfolio," the SEC wrote. "Such advance preparation could be part of broader efforts by the money market fund and its adviser to follow best practices in risk management." In a four-page document, the SEC urges funds and advisers to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance. It also calls for funds to consider the operational aspects of managing a repo, and to contemplate whether there are any legal issues that could arise in the event of a repo default.

 Deutsche Bank set to shrink to achieve leverage target - Deutsche Bank plans to shrink its vast balance sheet by as much as a fifth in order to comply with incoming stricter rules for financial soundness.In a big strategic step by Germany’s largest lender by assets, Deutsche is expected to tell investors that it aims to achieve a minimum 3 per cent ratio of overall equity to loans by the end of 2015, people briefed on the plans said. Such a clear timetable, likely to be announced with its second-quarter results at the end of the month, will address investors’ concerns that Deutsche Bank has one of the lowest leverage ratios of large banks globally. It is also considering issuing at least €6bn in hybrid equity capital such as convertible bonds – debt instruments that can convert into shares – once the German banking regulator has clarified which instruments will be recognised under a new global capital regime for banks. Rival bankers and analysts have long carped that Deutsche has operated at much lower capital levels throughout the financial crisis than some peers, complaints that have intensified as European competitors from UBS to BNP Paribas have drastically cut back their balance sheets. The German lender’s estimated ratio of equity to assets stood at 2.1 per cent at the end of the first quarter, the second-lowest of 18 banks ranked by Morgan Stanley analysts. European regulation based on the Basel III global rule book calls for the minimum ratio of 3 per cent to be achieved only in five years’ time. But the topic has risen on investors’ agenda after UK, Swiss and US regulators have drawn up plans for either stricter timetables or higher ratios.

A Shuffle of Aluminum, but to Banks, Pure Gold — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.  The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again. This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country. Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.

How Goldman Made $5 Billion By Manipulating Aluminum Inventories (and Copper is Up Next) - Yves Smith - What sexual favors were exchanged so that the New York Times blunted the impact of an important, detailed investigative story on Goldman profiteering? On a high level, the story sets forth a simple and damning case. Not all that long ago, banks were prohibited from being in operating businesses. But the Federal Reserve and Congress have loosened those rules and big financial players have gone full bore backward integrating from commodities trading into owning major components of the delivery and inventorying systems. This doesn’t just give them a big information advantage by having better access to underlying buying and selling activity. It allows them to manipulate inventories, and thus, prices. And Goldman’s aluminum henanigans increased prices all across the market, not just for the customers who chose to use them for warehousing and delivery. The article A Shuffle of Aluminum, but to Banks, Pure Gold tells us that the newly-permissive rules allowed Goldman to buy Metro International Trade Services, a concern in Detroit with 27 warehouses that handles a bit over 25% of the aluminum available for delivery. And here’s where the fun and games begin:Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back–and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country…

Banks’ influence over raw materials supply chain under scrutiny - Wall Street banks’ rise as merchants of oil, natural gas, coal and industrial metals is under threat as a US regulator revisits a string of permits for trading physical commodities issued over the past decade. Senior officials at the Federal Reserve have in recent weeks discussed with bank executives the question of whether to bar banks from owning physical commodity assets, according to people familiar with the talks. A move to curtail the freedom to ship tankers of oil or fill pipelines with gas could pressure a historically lucrative niche for banks including Barclays, Goldman Sachs, JPMorgan Chase and Morgan Stanley. JPMorgan spent $1.6bn just three years ago to acquire the global oil, metals and coal divisions of RBS Sempra Commodities in an explicit push into physical trading. US law allows banks to trade commodity derivatives such as futures contracts. In 2003, the Fed expanded this authority by granting Citigroup permission to also own the tangible oil, gas and grains underlying derivatives. Several other banks then received similar approvals through 2008. These permits are now under question. “The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” the Fed said.

The Great Aluminum Heist - The NYT has a nice piece on how Goldman Sachs has gotten into the aluminum business in a big way in recent years. The discussion of how it uses its control over inventories to jack up prices is fascinating. There are several interesting take-aways. First, the piece suggests that the impact on price is limited (7 percent, if their estimates are right), but worth a huge amount given the volumes involved. This is what I had always assumed about the extent to which this sort of speculation can affect the price of products. Speculation might add 20-30 cents to the price of gas, but it can't explain why we are paying $4.00 a gallon rather than $1.50 a gallon. Second, there is nothing unique to financial firms that allows them to speculate in this way. Yes Goldman Sachs has lots of money, but so does Alcoa and many other non-financial companies. If a company can corner the market in major commodities then it indicates a failure first and foremost of anti-trust regulation. Third, this should reinforce the argument for a new Glass-Steagall. The guarantees provided by the FDIC and Fed to commercial banks reflect their unique importance in maintaining the system of payments in the economy. There is no reason that banks should be able to exploit these guarantees to assist themselves in raising the money needed to corner the aluminum market.

Should Wall Street Banks Own (Hoard) Oil and Metal? Sherrod Brown Drills Down This Tuesday - “The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.” The unexpected statement from the Fed came just two business days before Senator Sherrod Brown will drop a few more bombshells in the direction of Broad and Wall. Brown chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, which will hold a hearing tomorrow titled: “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?” Does that question even have to be asked given the 2008 to 2010 taxpayer bailout of these banks? Don’t feel badly if you thought banks weren’t allowed to own commercial businesses; much of the investing public and Congress will be flabbergasted to learn what’s been going on behind their backs for the past nine years – all courtesy of the Federal Reserve’s inability to say “no” to Wall Street.

Commodities and banks, a recap - The New York Times ran a big piece on the ongoing commodity shuffle this weekend. The one FT Alphaville (and others) have been writing about for a long while now, and which applies to both metals and energy markets. The story followed a Reuters article reporting that the Fed was now “reviewing” a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets. It was this, we always noted, that allowed for the emergence of a so-called physical loophole for a number of top Wall Street institutions active in commodity markets. The fact that they were swap dealers with physical exposures ensured they were eligible for exemptions (on such things as position limits) whilst other financial institutions were not. In this case contango-yield positions ended up working very much like repo-to-maturity positions in the bond world. During a contango there is an exploitable arbitrage for anyone who can buy the underlying commodity, warehouse it and simulatenously forward sell it at a premium and then sit back and collect yield until it has to be delivered (at which point the trade can either be rolled on or liquidated). It is fundamentally a two-leg trade (though sometimes it is bolstered by another two legs further up the curve). Providing your warehousing and financing costs don’t eat into your forward-carry profits — or that margin calls on your physical and futures legs don’t become unsustainable — the trade is a lucrative one for as long as futures remain in contango, or begin moving into backwardation. The former allows the trader to profit from a standing position that’s held to maturity, while the latter allows him to liquidate the position early, profiting from the respective moves of the two legs of the trade.

Do Commodities Speculators Make Things Cost More? - But the suspicion that commodities trading is dominated by wretched hucksters or worse has never gone away, with David Kocieniewski's epic examination in Sunday's New York Times of an aluminum storage business owned by Goldman Sachs offering the latest bit of evidence. Kocieniewski describes forklift drivers moving aluminum from warehouse to warehouse in Detroit to profit from rules set by an overseas metals exchange, while delivery times to actual users of aluminum have stretched to 16 months and aluminum prices have been pushed up by the equivalent of a tenth of a U.S. cent per aluminum can. The article is less clear about what brought this on. Is it bad rules set by the London Metal Exchange? The involvement of banks such as Goldman and J.P. Morgan in the metals trade? Or is the problem simply that speculators have taken over the market for a crucial commodity? It is certainly true that investors, dismayed at the prospect of low returns for stocks and bonds for years to come, have poured money into commodities over the past decade. Markets that existed mainly for the convenience of industry have become dominated by exchange-traded funds, hedge funds, and investment banks.

Biggest Banks Face Fed Restoring Barriers in Commodities - The Federal Reserve’s review of its decision to let banks store, transport and trade raw materials signals a potential rebuilding of the wall between banking and commerce that legislation and rulemaking have eroded. The central bank said July 19 that it’s reviewing a decade-old decision that physical commodities are “complementary” to banking, allowing lenders such as Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) to operate in both industries. Goldman Sachs Group Inc. (GS) and Morgan Stanley may be less at risk from the review as some businesses owned before the firms became bank holding companies in 2008 are grandfathered.The move into physical commodities exposed the biggest banks to additional risks and allegations of price manipulation, creating potential legal liabilities and threatening to damage their reputations. The shift also weakened the barrier between government-insured banks and other commerce established by the 1956 Bank Holding Company Act.

US watchdog acts on metals warehousing - demanding they preserve records, in a sign of a looming regulatory probe of their storage practices. Warehouses where metals such as aluminium, copper and zinc are stored have been a target of consumers from Coca-Cola to General Motors, who complain that long queues to remove metal distort prices. Ownership of the London Metal Exchange warehouse network is concentrated among a handful of companies, including Glencore and Trafigura, the commodities trading houses; Goldman Sachs and JPMorgan Chase, the Wall Street banks; and the independent C Steinweg of the Netherlands. Industrial metals including copper are also traded on CME Group’s Comex exchange in New York. In the past two years, warehouses have accumulated towering stocks of industrial metals. But the quantity of metal that warehouses must deliver out each day is limited by LME rules. Bottlenecks have created delivery delays at some warehouses of as much as a year. These queues have helped to drive up physical premiums – the cost of metal over and above the LME benchmark – to record levels, creating a disconnect between the LME price and the physical market. The Commodity Futures Trading Commission has sent ‘do not destroy’ letters ordering warehouse owners to retain documents related to their operations in recent days, people familiar with the matter said. A CFTC spokesman declined to comment.

Wall Street’s Metals Cartel On Trial Today in the Senate -  If you think Wall Street’s rigging of foreclosures to struggling homeowners, or rigging interest rate swaps sold to municipalities, or rigging the Libor interest rate benchmark is the extent of its cartel activities, think again. Today, in U.S. Senate chambers, expert witnesses will make the case that the London Metal Exchange (LME) has become little more than  a rigged Wall Street game to benefit a handful of powerful Wall Street firms while costing consumers and the economy greatly. The Senate Banking Subcommittee on Financial Institutions and Consumer Protection, chaired by Senator Sherrod Brown, which will hold a hearing titled: “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?” Timothy Weiner, Global Risk Manager of the giant beer brewer, MillerCoors LLC, has told the Senate in his written statement that his company’s concerns about the London Metal Exchange are shared by many other companies, including The Coca-Cola Company, Novelis, Ball Corp., Rexam, Dr. Pepper Snapple Group, D.G. Yuengling Brewing Company, North America Breweries, Rogue Brewery and Reynolds Consumer Products, among others. All of these companies need easy access to aluminum for beverage cans or other consumer products.

Elizabeth Warren Wants To Take This Goldman Sachs Aluminum Story And Run Right Over Wall Street With It - Today the Senate Banking Committee met to discuss Wall Street's role in the global commodities business, and as you can imagine Senator Elizabeth Warren (D-MA) was quite outspoken about the fact that she wants it majorly diminished. "...I share the concern of many of my colleagues about asset managers at huge Wall Street banks exercising control of key parts of America's infrastructure," she said. This discussion is crucial, as all of that will come up for consideration in September. Back in 2003 the Federal Reserve decided to temporarily allow banks to purchase commodities directly. That means oil, power, copper, aluminium etc. This September, that temporary regulatory relaxation is set to expire, and if it does, a big chunk of Wall Street's business will expire with it. And now that the ruling is up for discussion, Congress gets to weigh in. Wall Street be warned, if this hearing was any indication, the Senate is coming down on the side of culling the commodities business. Warren decried the idea that banks would use "other people's money" in pension and retirement savings "to pave the way for big banks to be able to control an electric plant or an oil refinery."

Banks should keep out of mines and warehouses - When Goldman Sachs bought the commodity trading house J Aron in 1981, it also took on Lloyd Blankfein, then a salesman of silver coins. Thirty-two years later, Mr Blankfein is Goldman’s chairman and chief executive and the bank owns, among other commodity assets, some aluminium warehouses near the ailing city of Detroit. The process by which some of the biggest US banks came to own not only physical commodities but infrastructure such as oil tankers and pipelines is a fine example of mission creep since they were split up by the Glass-Steagall Act of 1933. One can see how they got there, but it is a peculiar – and not very desirable – outcome. What would happen if a Morgan Stanley oil tanker ran aground (it partly owns a company with a fleet of 120 tankers), or there were a fatal accident at a Goldman coal mine (it has a stake in Colombian mines)? Most people would be baffled by what Wall Street was doing at the scene and it could easily spark a crisis of confidence at a too-big-to-fail financial institution. In September the Federal Reserve will have a choice of whether to allow banks to carry on as before, or roll back the boundaries of what they do. It should employ common sense and keep them out of activities that have only a tangential relationship to banking.

Insight: Wall Street reshapes commodities business to fend off regulation (Reuters) - Wall Street's most powerful banks have accelerated efforts to transform the structure and focus of their commodity trading desks to preserve their multibillion-dollar empires from tightening regulation. Scrutiny of their activities in electricity markets, metals warehousing and oil trading is reaching fever pitch ahead of a Federal Reserve decision in September that may decide how deeply banks can delve into the world of gasoline tankers, piles of copper and power plants. Mounting regulatory and political pressure has already forced Morgan Stanley, Goldman Sachs Group Inc, and JPMorgan Chase & Co, the three Wall Street banks known for their commodities trading prowess in the past decade, to openly consider exiting key businesses. Morgan Stanley explored selling its vaunted commodities trading desk last year; Goldman Sachs has already sold off its power plant division, and both Goldman and JPMorgan Chase are now considering a sale of their metal warehousing firms, sources said. Wall Street firms have also adopted more subtle maneuvers, reconfiguring operations to placate regulators, expanding into new markets, and trying to find ways to preserve the value of their investments if they are forced to sell or spin them off, according to a Reuters review of regulatory filings and more than a dozen interviews with top traders and bankers.

Commodity warehousing, the interest rate connection - There are three things that must be remembered when it comes to banks, trading houses and warehousing plays.

  • One is that banks and trading houses would not have an incentive to store commodities if the forward market did not compensate them for doing so — meaning speculators are as much to blame as anyone for the hoarding problems, because they are basically the ones donating money to ensure stocks of commodities are built up during times of plenty on the assumption that seven years of scarcity will follow, making it all worthwhile.
  • Second, there would be no incentive to hold commodities as stock, even during a contango, if regular risk-free financial investments offered a better return. Contango is meaningless unless the yield that can be extracted from the forward markets more than compensates for your financing and warehousing costs.
  • None of this is necessarily the product of a sinister plot. If there is manipulation, it is the result of collective responses to market dynamics that present exploitable arbitrage opportunities to intelligent agents. It is unwitting manipulation at worst. The question we should be asking is whether banks (who have fiduciary duties, unlike traders) consciously exploit or mislead institutional clients and investors in the process.

Trying to Pierce a Wall Street Fog - BACK in 2009, the Justice Department said it was investigating the large Wall Street banks for possible collusion in the huge and opaque credit default swaps market. The question was whether the big financial institutions had worked to keep transactions in these insurance-like instruments closed to competitors and more profitable for themselves.  Not much has come out on the case since then, leading some participants in the market to wonder whether this is yet another matter the Justice Department has let slide. A Justice Department spokesman said its investigation was continuing.  Thankfully, though, we may yet learn what actually went on behind the scenes in this trillion-dollar market. Investigators for European regulators are hot on the trail and a handful of pension funds have recently filed two suits against the big banks dominating the swaps arena. These investors contend that they overpaid when they bought and sold the instruments — to the tune of billions each year — because of the banks’ control of the market.  Credit default swaps were at the center of the financial crisis. These instruments allow holders of bonds or other debt to hedge their risks in those positions. But the swaps also let speculators bet on a debt issuer’s default. The swaps almost felled the American International Group, the insurance giant, and were embedded in some of the stinkiest mortgage securities ever wrought.

The trend in US corporate profits is what you think it is - Rebecca Wilder - In my research for an article about the cross section of national income, I ran across this piece in Forbes by Tim Worstall. In this article, he He uses proprietary Bloomberg and WSJ data for 2012 corporate offshore cash holdings to assess that corporate profits abroad are driving a reasonable share of the increase in the BEA’s measure of corporate profits: (see my post from Monday, or Ed Dolan’s post from June): “there’s a simple enough explanation for at least part of it: simply globalisation. Now what is it that we know about American companies and their profits? Something that has rather changed over the past decade or so? Yes, that’s right, we’re in a huge period of globalisation. So much so that US companies are now making very large profits outside the US economy. Apple is making phones (or having made for it) in China and selling them in Europe. This isn’t, in any real sense, part of the US economy. The same goes for Google, Microsoft and however many other companies you want to study. Profits are being made offshore, out there in the global economy.” But this is just wrong. According to the Bureau of Economic Analysis (see Table 12 of the BEA Q1 2013 release), aggregate corporate “rest of the world” profits – i.e., large US corporations with earnings abroad – declined $8.9 billion in 2012.

U.S. Firms Holding $1.8 Trillion in Liquid Assets - U.S. firms are holding $1.8 trillion in liquid assets: that is, either cash or marketable securities. What's going on here?  Laurie Simon Hodrick tackles the question, "Are U.S. Firms Really Holding Too Much Cash?" in a July 2013 Policy Brief written for the Stanford Institute for Economic Policy Research.For background, here are a couple of figures. The first shows cash and marketable securities of firms over time--that is, "liquid assets"--rising rapidly. The second shows these liquid assets as a share of the short-term liabilities of firms. Of course, firms always like to have some cash on hand, but historically, that has been about 30% of all short-term liabilities. In the last few years, liquid assets have climbed to almost half of all short-term liabilities.The argument usually heard for holding additional liquid assets is that the last few years have been times of considerable uncertainty about the economy and economic policy, so firms need a bigger cushion. This explanation has some truth in it, but it's not all of the truth. This need for additional liquid assets is not affecting all firms or all industries equally, but instead is affecting a smaller number of highly profitable companies. ... As Hodrick explains: "... [C]ash holdings are concentrated among highly profitable firms, many in the technology and health care sectors."There's a long tradition in the economics and corporate finance literature of being suspicious about firms that hold large amounts of cash. After all, large amounts of cash on hand might help the job security and emotional comfort of the managers, but not necessarily be in the best interests of shareholders. There's an argument that cash-heavy firms should either have a plan for at least potentially investing that cash in a project that will increase future company profits... Saying that you need a cash reserve to take advantage of unexpected opportunities sounds great--but after a few years of doing this, shouldn't firms be able to point to a series of actual unexpected opportunities of which they did take advantage?

QE ineffectiveness is playing out on banks' balance sheets - Cash holdings are an increasingly large component of US commercial banks' balance sheets. This demonstrates the fact that thus far the Fed's monetary expansion is not producing the "optimal" result. Banks are not growing the non-cash portion of their balance sheets fast enough to offset these rising reserves. A more optimal policy would be able to take that into account.In fact the latest data shows that the non-cash component is declining.For those who are interested, the Fed recently published a technical paper (here) indicating that a massive QE program in the face of a "large and persistent adverse demand shock" is suboptimal. The data on credit expansion (above) seem to support that argument.

Unofficial Problem Bank list declines to 734 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 19, 2013.  Changes and comments from surferdude808:  With the OCC releasing its actions through mid-June 2013 on Friday, there were many changes to the Unofficial Problem Bank List this week. For the week, there were 11 removals and three additions leaving the list at 734 institutions with assets of $267.2 billion. A year ago, the list held 905 institutions with assets of $349.7 billion. This week the OCC and Federal Reserve terminated actions against 10 institutions. One has to go back to the week of April 27, 2012 when there were 11 terminations to find a week this busy. There is some news on Capitol Bancorp, Ltd. to pass along, a U.S. Bankruptcy judge will allow the company to sell its remaining seven banks at an auction. No other details on the auction have been made public. Next Friday, we anticipate for the FDIC to release its actions through June 2013.

Local banks still weighed down by commercial real estate - While the media and politicians have been focused on large commercial banks and their activities, it is often the smaller US banks that continue to struggle with capitalization and stressed/distressed assets. A big part of the issue with small banks is their outsized exposure to commercial real estate. At its peak, nearly 30% of small banks' balance sheets consisted of loans backed by commercial property. Large banks peaked at 11%. Large banks have since reduced (as % of assets) their commercial real estate exposure by 35% (from the peak), while small banks have cut it by 24%. As far as their non-performing real estate-backed loans, the bigger banks have largely cleaned up that portion of their balance sheets while many regional and smaller banks have kicked the can down the road. And numerous loans that were restructured in 2011 and 2012 are once again delinquent. The chart below shows the evolution of troubled loans at small and regional banks. Compared to the money center banks, regional and local banks have a long way to go to resolve their commercial real estate problem.

Regulators Fold; Lift 'Skin-In-The-Game' Rules To Keep Housing Bubble Dreams Alive -- Following the debacle of free-and-easy mortgage money to anyone who could fog a mirror in the run-up to the last housing bubble (remember that was just 6 years ago), regulators proposed 'skin-in-the-game' rules which forced banks to hold certain amounts of the loans they made (as opposed to securitizing and selling off that yieldy risk to the next greater fool). Makes sense. However, in a major U-turn, with interest rates rising, mortgage rates spiking, and home prices now collapsing once again, it would appear the very same congress has folded. As the WSJ reports, more stringent lending standards on top of the market environment leave the watchdogs, which include the Fed and the FDIC, wanting to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors (representing a victory for an unusual alliance of banks and consumer advocates that opposed the new rules). Undermining the initial goal of imposing market discipline, former FDIC Chair Sheil Bair noted, "My sense is that Washington has lost its political will for serious reform of the securitization market." Indeed it has, Sheila.

Where should US mortgage risk be held? -From the most recent 10-Qs:

  • Fannie Mae mortgages on B/S, $3T.
  • Freddie Mac ditto, $1.5T, plus $500B ‘mortgage related investments’.

So, very roughly, Freddie and Fannie have between them $5T of US mortgages: they also finance roughly 90% of new US resi mortgages. Now what is very clear is that if you wanted to wind down the two agencies, you would need a home for a lot of mortgages. What percentage of the total mortgage stock outstanding? Roughly half it seems: a quick and dirty calculation from the flow of funds data suggests that there are $10T total US home loans. So where are trillions of dollars of loans going to go? Bank balance sheets are constrained, and we know what happened the last time the MBS market expanded dramatically (although of course this time it could be different).  It’s a dilemma. Fannie and Freddie are simply to big to wind down on less than a multi-decade basis, without a firm plan for what will replace them, how that thing(s) will be funded, and what consequences that will have for US housing market.

UBS to Pay $885 Million to Settle U.S. Mortgage Suit - UBS, Switzerland’s largest bank, agreed to pay $885 million to Fannie Mae and Freddie Mac to settle claims that it improperly sold them mortgage-backed securities during the housing bubble, a U.S. regulator said.  The Federal Housing Finance Agency claimed Zurich-based UBS misrepresented the quality of loans underlying billions of dollars in residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac. The firms have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

OccupyHomes Rallies Around Homeowners Facing Foreclosure - Retired postal clerk Jaymie Kelly of Minneapolis, Minnesota, is holding onto her home by a thread, despite having paid five times its value in ballooning monthly payments. She received a letter from the attorney general dated in May agreeing to delay eviction for 30 days past her redemption period, which expired April 24. The next day Freddie Mac filed an eviction summons, and shortly thereaftershe appeared in court with representatives from activist group OccupyHomes Minneapolis (OHM), which managed to convince Freddie Mac's attorney to back off temporarily. "I've been on the block I'm living on for 58 of my 63 years," Kelly told Truthout. "This is my neighborhood. It's my everything. I really feel like I'm invested in this community. I have no plan B. Without [OccupyHomes] I would be homeless. It seems to me that it makes more sense for the bank to work with me."

LPS: Mortgage Delinquency Rate increases in June - According to the First Look report for June to be released today by Lender Processing Services (LPS), the percent of loans delinquent increased in June compared to May, and declined about 8% year-over-year. Also the percent of loans in the foreclosure process declined further in June and were down 29%% over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 6.68% from 6.08% in May. Note: Some of the increase in short term delinquencies in June is seasonal, although the uptick this year was larger than normal. The normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 2.93% in June from 3.05% in May. The number of delinquent properties, but not in foreclosure, is down about 8% year-over-year (274,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 29% or 903,000 properties year-over-year. LPS will release the complete mortgage monitor for June in early August.

Freddie Mac: Mortgage Serious Delinquency rates declined in June, Lowest since early 2009 - Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 2.79% from 2.85% in May. Freddie's rate is down from 3.45% in June 2012, and this is the lowest level since May 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  These are mortgage loans that are "three monthly payments or more past due or in foreclosure".   Earlier this week, LPS reported that total delinquencies increased in June - but that was mostly due to an increase in short term delinquencies (seasonally delinquencies increase every June). Freddie Mac is reporting serious delinquencies only. (graph)

Distressed Residential Real Estate: Dimensions, Impacts, and Remedies - New York Fed -  On October 5, 2012, the Federal Reserve Bank of New York and the Rockefeller Institute of Government co-hosted the conference “Distressed Residential Real Estate: Dimensions, Impacts, and Remedies.” This post not only makes available a compendium of the findings of the conference, but also updates and extends some of the analysis presented. In particular, we look across states to assess the differential impacts of judicial and non-judicial processes to resolve the foreclosure crisis. Controlling for the peak percentage of loans that were seriously delinquent, we find that non-judicial states are much further along in reducing the backlog of loans in foreclosure. In addition, controlling for the magnitude of the decline in home prices from peak to trough, we observe that home prices have recovered considerably more in the non-judicial states.

Mapping the Sequester's Impact on Low-Income Housing - In April, Doug Rice, senior policy analyst at the Center on Budget and Policy Priorities, released a paper that described some of the ways people would be affected by sequestration cuts to local housing agency budgets, including: up to 140,000 fewer low-income families receiving rental assistance vouchers, higher rent for people who can’t afford it and a rise in homelessness.  “These kinds of cuts are really unprecedented,” said Rice, noting that this was just the third time in thirty-nine years that Congress failed to sufficiently fund housing agencies so that they could renew all current vouchers. “Here we are in 2013 looking at severe cuts in the number of families that receive assistance, even at a time when the number of families in need has been rising sharply.”  Rice said that most local housing agencies would likely “shelve” Section 8 rental assistance vouchers, meaning vouchers would no longer be reissued to families on waiting lists when current recipients leave the program. He said that many people receiving new vouchers would have them rescinded as they searched for apartments. Maintenance and inspection of units would be deferred, and affordable housing stock would be jeopardized.

Watchdog: Borrowers in Obama housing program re-defaulting - Borrowers who received help through the government's main foreclosure prevention program are re-defaulting on their mortgages at alarming rates, a federal watchdog said in a report released Wednesday. Nearly 1.2 million mortgage modifications have been completed since the Home Affordable Modification Program (HAMP) was first launched four years ago. Yet more than 306,000 borrowers have re-defaulted on their loans and more than 88,000 are at risk of following suit, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) found in its quarterly report to Congress. In addition, the watchdog found that the longer a homeowner stays in the HAMP modification program, the more likely they are to default. Those who have been in the program since 2009, are re-defaulting at a rate of 46%, the inspector general found. HAMP, which was launched by the Treasury Department at the height of the foreclosure crisis, aimed to help as many as 4 million borrowers avoid foreclosure by making their payments more affordable through reduced interest rates, extended loan terms or, in some cases, reduced mortgage principals. Not only has the program fallen far short of that goal but with each year of the program, a growing number of homeowners have re-defaulted, the inspector general found.

Report: 26% of HAMP Borrowers Redefaulted, Rate Continues to Worsen - Upon closer examination, the Home Affordable Modification Program (HAMP) has not helped as many borrowers as it may seem, according to a report from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). HAMP, a government loan modification program created to prevent foreclosures, has provided about 1.2 million modifications to distressed borrowers since its inception in 2009. Of those borrowers, 306,538 fell behind on their payments by three months, which means in actuality, 865,100 are still actively in the program, the taxpayer watchdog agency revealed. Borrowers who miss three consecutive payments become disqualified from the program. Of the redefaulters, 22 percent have entered into the foreclosure process. SIGTARP also found the percentage of modified homeowners who end up as redefaulters has steadily increased over time. At the end of 2009, the share stood at 1 percent and has since risen to 26 percent as of April 2013. The likelihood of falling out of the program also seems to increase over time. For example, among oldest HAMP modifications, the redefault rate was 46 percent. For loans modified in 2010, the redefault rate averaged 38 percent. On the other hand, homeowners who received modifications in early 2013 have a redefault rate of less than 1 percent. The report also found states with a smaller numbers of HAMP borrowers tended to have higher redefault rates. Mississippi, which has provided just over 4,500 HAMP modifications, has a redefault rate of 35 percent, the highest out of any other state. Alabama was close behind with a default rate of 33 percent, followed by Tennessee, Delaware, Louisiana, and Missouri, where the rate was 32 percent for each state.

Obama's HAMP Program a Stunning Success - Obama had lofty goals of helping 4 million Americans keep their homes with his Home Affordable Mortgage Program (HAMP). Here are some quick facts:

  • HAMP modified 1.2 million mortgages (70% less than the target)
  • 306,000 re-defaults
  • Another 88,000 at risk
  • The re-default rate is an alarming 30%
  • The re-default rate of those in since 2009 is 46%
CNNMoney has additional details in Watchdog: Borrowers in Obama housing program re-defaulting. Borrowers who received help through the government's main foreclosure prevention program are re-defaulting on their mortgages at alarming rates, a federal watchdog said in a report released Wednesday.  Nearly 1.2 million mortgage modifications have been completed since the Home Affordable Modification Program (HAMP) was first launched four years ago. Yet more than 306,000 borrowers have re-defaulted on their loans and more than 88,000 are at risk of following suit, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) found in its quarterly report to Congress. In addition, the watchdog found that the longer a homeowner stays in the HAMP modification program, the more likely they are to default. Those who have been in the program since 2009, are re-defaulting at a rate of 46%, the inspector general found.

Easing of Mortgage Curb Weighed - Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation. The plan, which hasn't been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago.

Higher Rates Aren't Enough to Stall Housing - The U.S. housing recovery that began unfolding early last year faces its first serious test: In the span of just two months, mortgage rates have jumped by a full percentage point, something that has happened only twice since 1994. Mortgage rates, which at the beginning of May stood at 3.59% for the average 30-year fixed-rate loan, jumped to 4.68% during the first two weeks of July, the latest available data, according to the Mortgage Bankers Association. That is the highest level in two years. Economists say that even at a 4.5% or 5% mortgage rate, housing is still affordable by historical standards—and that rates could rise to 6% or prices could rise an additional 20% before housing would become unaffordable relative to historical levels. The spike nevertheless represents a big payment shock for would-be buyers. Many shop for a home based on their monthly mortgage payment. The monthly payment of principal and interest—and not including taxes and insurance—on a $200,000 home with a 10% down payment just went up by more than $100, to $925, while the monthly cost of a $450,000 home just went up by around $250, to $2,095.

House Price Indexes: FHFA up 7.3% YoY, Zillow up 5.8% YoY - Two more house price indexes ... the FHFA is for May, Zillow is for June. From the FHFA: FHFA House Price Index Up 0.7 Percent in May U.S. house price appreciation continued in May 2013, rising 0.7 percent on a seasonally adjusted basis from the previous month, according to the Federal Housing Finance Agency (FHFA) monthly House Price Index (HPI). The May HPI change marks the sixteenth consecutive monthly price increase in the purchase-only, seasonally adjusted index. The previously reported 0.7 percent increase in April was revised downward to a 0.5 percent increase. The HPI is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac. Compared to May 2012, house prices were up 7.3 percent in May. The U.S. index is 11.2 percent below its April 2007 peak and is roughly the same as the January 2005 index level.  Zillow: 2013 Spring Selling Season Was Hottest Since 2004, As Recovery Accelerates & Widens On an annual basis, the Zillow Home Value Index (ZHVI) rose 5.8% from June 2012 levels. Monthly appreciation remains strong with national home values growing by 0.9% from May. Not only did the pace of home value appreciation quicken in the second quarter, but the recovery also fully took hold nationwide. Markets in some areas of the Northeast, Midwest and Southeastern U.S., such as Atlanta, Chicago and St. Louis, that had previously been slow to turn the corner began to appreciate, which helped boost the overall national market. All of the top 30 largest metro areas covered by Zillow experienced annual appreciation in home values as of the end of the second quarter, and all have hit their bottom. Overall, national home values are back to August 2004 levels, down 17.2% since their peak in May 2007.

US Housing Prices Within 7% of 2007 High – That’s Not A Bubble? - The NAR reported existing home sales in June of 501,000 units, a decline of 13,000 from May, as about 4% of contracts that were due to settle in June apparently failed due to the rise in mortgage rates. Contracts reached in April and May, which would normally have closed in June projected a sales rate of approximately 520,000 units. Sales were up by 38,000 or 8.2% versus June 2012. This was significantly slower than the breakneck annual pace of 14.7% in May, but well within the range of year to year gains of the past 18 months. The data on June contracts will tell us more about whether the higher mortgage rates are dampening demand. Much of the rise in rates had already occurred by May, and there was no sign of a slowdown in demand in the May contract data. The bubble was still going strong at that time. Why do I call it a bubble? Prices have now risen 13.5% in the past 12 months to a median price of $214,200. Prices have risen by 21%, not seasonally adjusted, over the past 4 months. Those are bubble numbers. These price gains were driven by the Fed’s subsidized mortgage rates, which have led to a buying panic amid restricted supply. Prices are now within 7% of the highest prices reached in the great housing bubble of 2003-2007. If that was a bubble, and it was, then so is this.

Existing home sales hit a speed bump in June - Sales of existing homes stumbled in June after hitting a three and a half year high in May. The number of sales dipped 1.2% to an annual rate of 5.08 million in June from a downwardly revised 5.14 million in May, according to the National Association of Realtors. However, sales were up 15.2% compared to June, 2012. Rising mortgage rates may have taken some of the steam out of the market, according to NAR's chief economist, Lawrence Yun.  "We're still dealing with a large pent-up demand," he said. "However, higher mortgage interest rates will bite into high-cost regions of California, Hawaii and the New York City metro area market."  A lack of inventory is also holding sales back. In some places, buyers simply could not find suitable homes. In June there was a 5.2-month supply at the current sales pace, up from 5.0 months in May. That's 7.6 percent below a year ago, when there was a 6.4-month supply. "Inventory conditions will continue to broadly favor sellers and contribute to above-normal price growth," said Yun.

Existing Home Sales Drop -1.2% for June 2013 - The NAR reported existing home sales declined -1.2% from last month and May figures were revised down by 40,000 annualized units.  The revision gives a 3.4% monthly May gain instead of the 4.2% originally reported.   Inventories are still a very tight 5.2 months of supply, a 4.0% increase from last month's five month supply and a -18.8% annual drop in supply for existing sales demand.  Inventories increased 1.9% from last month but are down -7.6% from a year ago.   Existing homes sales nationwide have increased 15.2% from a year ago.  Volume was 5.08 million against May's 5.14 million annualized existing home sales.  The national median existing home sales price, all types, is $214,200, a 13.5% increase from a year ago.  Median price has been above $200,000 for two months now.  Even more eerie, the last time there were 16 consecutive months of median existing home price increases was also the height of the housing bubble, March 2005 through May 2006.  The average home price for May was $261,100, a 9.6% annual increase.  The bubble like price increases that may very well have much to do with the Federal Reserve mortgage backed securities purchases, known as quantitative easing.  Distressed home sales are basically over with foreclosures and short sales being 15% for June and hitting the lowest percentage since October 2008.  This is when NAR started tracking foreclosures and short sales as a percentage of existing home sales.  Distressed sales were 18% in May and 26% in June 2012.  NAR claims the decline in distressed home sales accounts for part of the soaring prices since foreclosures and short sales prices are significantly lower.  From NAR:Eight percent of June sales were foreclosures, and 7 percent were short sales. Foreclosures sold for an average discount of 16 percent below market value in June, while short sales were discounted 13 percent.Yet all cash buyers are still high with 31% of sales being all cash.  In May all cash sales were 33%.  NAR reports individual investors are clearly still around, purchasing 17% of the sales in June.  Investor buys were 19% of all existing home sales in June 2012.

Sales of Existing Homes in U.S. Unexpectedly Decline - Sales of previously owned houses unexpectedly dropped in June, hurt by a lack of supply and rising mortgage rates that will slow the rebound in the U.S. real-estate market. Purchases fell 1.2 percent to a 5.08 million annualized rate, the National Association of Realtors reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 5.26 million pace. The pace of the demand was the second strongest since November 2009 following May’s downwardly revised 5.14 million rate. The number of houses for sale at the end of last month was the fewest for any June since 2001 as rising prices depleted the number of cheaper houses on the market. Federal Reserve Chairman Ben S. Bernanke last week said housing was one of the bright spots for growth and added that policy makers will monitor the recent jump in interest rates to ensure it won’t derail the nascent recovery. “What’s holding sales down is just that there’re just not a lot of homes for sale,”. “We’re not expecting really strong numbers for the rest of the year even though the housing market is getting hot. What you’re seeing is this pent-up demand show up in higher prices, not in higher sales.” He projected a June sales rate of 5.12 million. Estimates in the Bloomberg survey of economists ranged from 4.99 million to 5.5 million. The prior month’s pace was revised from a previously reported 5.18 million.

Existing Home Sales in June: 5.08 million SAAR, 5.2 months of supply - The NAR reports: June Existing-Home Sales Slip but Prices Continue to Roll at Double-Digit Rates - Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dipped 1.2 percent to a seasonally adjusted annual rate of 5.08 million in June from a downwardly revised 5.14 million in May, but are 15.2 percent higher than the 4.41 million-unit level in June 2012. Total housing inventory at the end of June rose 1.9 percent to 2.19 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, up from 5.0 months in May. Listed inventory remains 7.6 percent below a year ago, when there was a 6.4-month supply. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in June 2013 (5.08 million SAAR) were 1.2% lower than last month, and were 15.2% above the June 2012 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.19 million in June up from 2.15 million in May. Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Housing Recovery Increasingly Prices Out First-Time Buyers - First-time home buyers, long a key underpinning of the housing market, are increasingly getting left behind in the real-estate recovery. Such buyers, typically couples in their late 20s or early 30s, have accounted for about 30% of home sales over the past year. They represented 40% of sales, on average, over the past 30 years, and accounted for more than 50% in 2009, when recession-era tax credits fueled the first-time market, according to data from the National Association of Realtors.The depressed level of first-time buyers could prove to be a drag on the housing rebound and the broader economic recovery over the longer haul. First-time home buyers are the foundation of the real-estate market and are major contributors to their local economies, often buying up older homes, revitalizing communities and spending money on furniture and renovations. Once they have built some equity, they often move to more expensive residences. "First-time buyers are important to get the housing market to move to a new plateau," "Without them, you just get stuck at a marginal recovery environment."

No Country For First-Time Home Buyers - There was a time when the US housing market was not "driven" by hedge funds armed with government-subsidized, "REO-to-Rent" loans loading up on distressed properties, by banks refusing to release foreclosed properties into the market (thus creating a market subsidy) or by foreigners eager to park their "tax-evaded" wealth with the Anti Money-Laundering exempt National Association of Realtors. Instead, the main driver of US housing were first-time home buyers, "typically couples in their late 20s or early 30s" who historically have accounted for about 40% of home sales. Alas, last year, and all throughout the New Normal, this number has been about 25% lower, or representing just 30% of all sales (except for a brief spike to 50% in 2009 courtesy of recession-era tax credits). Then again, what 30 year old needs a home when one can now get an E-trade terminal under the bridge to generate "the wealth effect"? The WSJ's take: "The depressed level of first-time buyers could prove to be a drag on the housing rebound and the broader economic recovery over the longer haul. First-time home buyers are the foundation of the real-estate market and are major contributors to their local economies, often buying up older homes, revitalizing communities and spending money on furniture and renovations."

More Americans Living in Others' Homes -The analysis on missing households, performed using census data by Jed Kolko, chief economist of real-estate website Trulia Inc., suggests that four years into the U.S. recovery, slow household formation remains an obstacle to a more robust economy. It is damping demand in the housing market, where home sales have been rising but remain below historical levels.Young adults “have not regained confidence in the economy enough to start moving out of their parents’ homes,” Mr. Kolko said. “Even people with jobs are choosing the security…of living under their parents’ roof rather than forming their own households”.Multiple factors lie behind slow household formation. Unemployment remains high, and wages stagnant, particularly for young adults. Many of them lack the down-payments and credit histories needed to qualify for mortgages. High rents, due to rising demand and tight inventory, also are likely limiting household formation. Also, Americans are waiting longer than previous generations to start families, a trend that began well before the recession…Economists say household formation is closely linked to home construction: If the 2.4 million “missing households” took the leap and entered the housing market—either as renters or buyers—overall housing demand would increase, leading to a pickup in construction…“This key measure of the housing recovery is still near the worst point of the recession,”

Existing Home Sales Fall By Most In 2013, Biggest Miss In 12 Months - Existing home sales dropped 1.2% month-over-month - the biggest drop in 2013 - against expectations for a 1.5% rise. Critically though, this is for a period that reflects closings with mortgage rates from the April/May period - before the spike in rates really accelerated. Inventory rose once again to 5.2 months of supply (vs 5.0 in May) and you know the realtors are starting to get concerned when even the ever-optimistic chief economist of the NAR is forced to admit that 'stunningly' "higher mortgage rates will bite." With mortage applications having collapsed since May, we can only imagine the state of home sales (especially as we see all-cash buyers falling) for July.

Comments on Existing Home Sales: Solid Report, Inventory near Bottom -  First, the headline sales number was no surprise and not bad news (see Existing Home Sales: Expect Below Consensus Sales). Second, I usually ignore the median price. The median price is distorted by the mix, and with more conventional sales - and more mid-to-high end sales - the median is increasing faster than actual prices (as reported by the repeat sales indexes). The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 1.9% in June from May, and is only down 7.6% from June 2012.  This fits with the weekly data I've been posting. This is the lowest level of inventory for the month of June since 2001, but this is also the smallest year-over-year decline since June 2011. The key points are: 1) inventory is very low, but 2) the year-over-year inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.   Right now I'm guessing inventory will be up year-over-year in September or October.   Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

U.S. Mortgage Rates Fall as Homebuying Gains -  U.S. 30-year mortgage rates fell to the lowest in three weeks, reducing borrowing costs for homebuyers as the residential-property market strengthens. The average rate for a 30-year fixed mortgage dropped to 4.31 percent in the week ended today from 4.37 percent, McLean, Virginia-based Freddie Mac said in a statement. The average 15-year rate slipped to 3.39 percent from 3.41 percent.Federal Reserve Chairman Ben S. Bernanke is expected to begin trimming monthly bond-buying in September, according to half of the economists in a July 18-22 survey by Bloomberg News. Mortgage rates for 30-year loans have decreased after jumping to the highest level in two years earlier this month on speculation the Fed will begin to pare its purchases. Higher rates have pushed up borrowing costs for homebuyers who are competing for a tighter inventory of properties. “Markets have become more accustomed to the idea that the Fed is going to remove the extraordinary supports that have been in place sometime soon,” The 30-year rate is below the average of about 5.3 percent for the past 10 years, according to data compiled by Bloomberg.

Four Headwinds to the US Housing Recovery from naked capitalism -Yves here. This post from MacroBusiness describes three risks facing the American housing recovery, and I thought I’d add a fourth, which is the open question of how much longer private equity funds and other speculators will continue to bid up housing prices. No one knows for sure how much they’ve contributed to demand, since in the hotter markets, there are flippers who are buying properties and then reselling them within months to PE investors. The assumption is that a big proportion of the “all cash” buyers are investors as opposed to homeowners. At the end of May, we posted on how single family home rents had already started to fall in some major markets, including Chicago, Orange County, and Washington. Some recognized-as-astute property players such as Carrington have said they’ve stopped buying homes for rent because too much “stupid money” is chasing this trade.  Reader Scott send us further confirmation by e-mail from his buddy George N, which he took from the website of Silver Bay Management Company: Take a look at the number of houses for rent in Phoenix. This is from Silver Bay, one of many Wall Street REO to rental companies, not to mention all the private big and small investors. The snap shot above was taken today off their website. How the hell can they be making money when there are so many empty houses cooking in the desert sun? How can they possibly generate those double digit cap rates? Sooner or later, these Wall Street OPM is going to lose interest. I like to see how Bernanke is going to carry the pump all by himself to inflate this real estate recovery story.

Why Housing “Recovery” Spurring Economic Growth Is A Lie - Earlier this week we saw clear evidence of raging inflation in the bubble in existing home sales. But “recovery” it ain’t, in terms of the single family housing development industry. While builders have expressed that they think the market is doing just great, the truth revealed today in the Commerce Department’s new home sales data for June is that the market is only back to 2008 levels. The market was in the late stages of the housing crash then. Then we called it a crash or collapse. Today the Wall Street media establishment calls those same levels “recovery.”  That establishment seeks to hook you via its use of such propaganda terms. It is critical to look beyond Wall Street’s puffery at the actual data in ways that tell a clear story of what is really going on. Yes, the direction of housing development is up, but from a minuscule base. Historically, the level of sales activity is terrible. Contrary to the conventional Wall Street wisdom that housing is driving the “recovery,” the housing development industry’s contribution to the economy, while positive, is too small to be significant.  Maybe the economists are talking about all those realtor commissions spawned by the bubble activity in existing home sales. Here are a few charts that reveal the tall tale being told by Wall Street conomists, charlatans, shills, and CNBC bullshitters, that housing is driving the US economic recovery. Median and average sale prices dropped sharply in June after reaching new all time highs in May. Chartists will recognize this as a pullback to the base breakout which is a classic bullish pattern if the pullback holds around this level.

Weekly Update: Existing Home Inventory is up 18.4% year-to-date on July 22nd - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.  There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.The Realtor (NAR) data is monthly and released with a lag (the data this morning was for June).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

U.S. New Home Sales Jump to Highest Level in 5 Years - Americans snapped up new homes in June at the fastest pace in five years, a sign the housing recovery is strengthening. The Commerce Department says sales rose 8.3 percent last month to a seasonally adjusted pace of 497,000. That’s up from 459,000 in May, which was revised lower. While sales are still below the 700,000 pace consistent with healthy markets, they have risen 38 percent in the past 12 months. That’s the biggest annual gain since January 1992. Housing has helped drive economic growth at a time when other parts of the economy have languished. While new-home sales make up only a small part of the market, each home built creates an average of three new jobs and spurs more spending at furniture and home supply stores.

New Home Sales at 497,000 Annual Rate in June -- The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 497 thousand. This was up from 459 thousand SAAR in May (May sales were revised down from 476 thousand). March sales were revised down from 451 thousand to 443 thousand, and April sales were revised down from 466 thousand to 453 thousand.   The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in June 2013 were at a seasonally adjusted annual rate of 497,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent above the revised May rate of 459,000 and is 38.1 percent above the June 2012 estimate of 360,000."The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 497 thousand. This was up from 459 thousand SAAR in May (May sales were revised down from 476 thousand). March sales were revised down from 451 thousand to 443 thousand, and April sales were revised down from 466 thousand to 453 thousand. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in June 2013 were at a seasonally adjusted annual rate of 497,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent above the revised May rate of 459,000 and is 38.1 percent above the June 2012 estimate of 360,000."

New Home Sales Increase 8.3% for June 2013 -- June New Residential Single Family Home Sales increased 8.3% to 497,000 in annualized sales.  This change is well within the statistical error margin of ±20.5%.   New Single Family Housing inventory is at a 3.9 month supply low.  New single family home sales are now 38.1% above June 2012 levels, but this figure has a ±22.0% margin of error.   A year ago new home annualized sales were 360,000.  Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year.   These figures are seasonally adjusted as well.  Beware of taking these monthly percentage changes in new home sales to heart, for most months the change in sales is inside the statistical margin of error and will be revised significantly in the upcoming months. The average home sale price was $295,000, a -4.0% decline from last month's average price of $307,400.   These prices are still clearly outside the range of what most wages can afford.  From June 2012, the average home sale price has increased 18.5%. June's median new home price also declined by -5.3% to $249,700.  From June 2012, the median new home sales price has also increased by 7.4%. Median means half of new homes were sold below this price and both the average and median sales price for single family homes is not seasonally adjusted.

New U.S. home sales climb in June to 497,000 rate - Sales of new U.S. homes rose 8.3% to an annual rate of 497,000 in June to mark the highest level in more than five years, the government said Wednesday. Economists polled by MarketWatch forecast sales to edge up to a seasonally adjusted 483,000. Sales in May, however, were revised down to a 459,000 annual rate from an initially reported 476,000, based on more complete information collected by the Census Bureau. Demand in June was strongest in the Northeast, where sales climbed 18.5%. Sales were also brisk in the South and West, falling only in the Midwest. The median price of new homes dropped 5% to $249,700 last month from $262,800 in May but they remained elevated. The supply of new homes on the U.S. market fell to 3.9 months at the current sales pace from 4.2 months in May, matching the lowest level of the year. New home sales are 38.1% higher compared to one year ago

Sales of new U.S. homes highest in 5 years - Sales of new homes in the U.S. surged in June to reach the highest level in more than five years, a sign that a spike in interest rates may have done little to deter buyers.  Sales of new homes last month rose to a seasonally adjusted annual rate of 497,000, a level of demand last seen in May 2008, the Census Bureau said Wednesday. Economists polled by MarketWatch had forecast sales to rise to an annual rate of 483,000. Yet sales in May were revised down to a 459,000 annual rate from an initially reported 476,000, based on more complete information. And sales for April and March were also marked slightly lower.  New-home sales are 38% higher compared to one year ago, reflecting an ongoing recovery in the real-estate market after sales fell to a modern record low in 2011. Ultra-low interest rates, a pickup in hiring and a gradually improving economy have all helped to drive demand. Even a spike in mortgage costs since late spring — interest rates have jumped nearly a full percentage point — doesn’t appear to have stanched the flow of would-be buyers. It’s possible some buyers moved up their purchases to lock in attractive rates before the rose, analysts say. Read more about the recent trend toward ARMs.  In any case, economists point out that interest rates remain extremely low by historical standards: less than 4.5% for a 30-year fixed mortgage compared to 6%-plus over the past half-century.

New Home Sales Rise As Average, Median Home Prices Drop To 2012 Levels - First the bad news (which for the market is good news): the revised May New Home Sales number was 459, down from 476K, which means last month's beat of expectations of 462K was actually a miss which would have sent the S&P soaring. Now the good news (which for the market is bad): the June New Home Sales seasonally-adjusted annualized number was 497K: the highest since May 2008 (even if far below the prior housing bubble peak) represented by an unadjusted June number of 48K actual houses sold, with more than half of it coming from the 26K new homes sold in the south. So good right right? Not really: the reason why there was a pick up in volume was not because there was far greater demand, but for the usual Economics for Dummies reason why there is demand: prices plunged.

A Few Comments on New Home Sales - As I noted over the weekend, the key number in the existing home sales report is not sales, but inventory. It is mostly visible inventory that impacts prices. However, for the new home sales report, the key number IS sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts). So sales in June at 497 thousand SAAR were very solid (the highest sales rate since May 2008).  The housing recovery is ongoing. Looking at the first half of 2013, there has been a significant increase in sales this year.  The Census Bureau reported that there were 244 new homes sold in the first half of 2013, up 28.4% from the 190 thousand sold during the same period in 2012. This was the highest sales for the first half of the year since 2008.  And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate. And an important point worth repeating every month: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years.

Vital Signs Chart: More New Homes Sold - Americans are buying more new homes despite higher mortgage rates. The pace of new-home sales rose 8.3% in June from a month earlier and was up 38% from a year ago, the biggest year-over-year increase since the recovery began. Builders had 161,000 new homes for sale at the end of June, enough to supply the market for 3.9 months at the current sales pace.

Negative Feedback Loops? - Earlier this week, we were greeted with news that new homes sales posted a solid increase in June: Calculated Risk has more here and here, with the conclusion that is was "a solid report even with the downward revisions to previous months." More interesting, though, is that the gains came amid a spike in mortgage rates. This could be taken as evidence that the rate rise has had only minimal impacts on housing markets, thus clearing the way for the Fed to scale back asset purchases sooner than later. That said, today we learned this, via Bloomberg:Rising mortgage rates contributed to increased cancellations and a dropoff in traffic in June, according to Fort Worth, Texas-based D.R. Horton.....Homebuyers are “shocked and disturbed” rates have moved up so fast..."  But not everyone in the industry is singing the same tune: Richard Dugas, PulteGroup’s chief executive officer, said on a conference call today that the higher mortgage rates haven’t hurt demand and buyer traffic remained consistent throughout the quarter and into July. “We’re in the camp that if higher rates reflect improving economic conditions we’d expect a housing recovery to remain on track,” Dugas said. “As an industry, we can sell more houses if more people have jobs, even with modestly higher rates.” On the margin, some buyers were certainly impacted by the sharp gain in rates, but rates are only one part of the buying decision - factors like job growth also matter. The initial sticker shock might only be temporary. And perhaps even higher rates are necessary to make a significant dent in the housing market.

Lawler on Publicly-Traded Home Builder Results, "Good Chance for Downward Revision in New Home Sales" -  Of the results released so far, “most surprising” was the weakness in net order growth at the two largest US home builders, D.R. Horton (up just 12.2% YOY) and PulteGroup (DOWN 12.4% YOY). D.R. Horton’s sales cancellation rate was 24%, up from 19% in the previous quarter and 23% a year ago. An official cited rising mortgage rates as contributing to the rise in cancellations. Last quarter’s sales cancellation rate was down from a year ago, however, at Meritage, M/I, NVR, and Ryland. D.R. Horton, of course, relies more on the first-time home buyer market than these other builders. Pulte does not report its sales cancellation rate in its press release, though an official said that cancellation rates were “little changed.” Of course, comparing home builder reports with Census SF home sales estimates is “challenging.” First, Census does not treat sales cancellations the same as do home builders. Second, historical data suggest that the timing of the recognition of a “sale” by Census lags that of home builders. Third, there can be substantial quarterly swings in market share. And fourth, preliminary Census estimates are subject to substantial revisions, partly because preliminary estimates include “imputed” data, because the survey data used to estimate sales are based on a permit being issued. Many homes may have a sales contract signed prior to a permit being issued, and Census must “guesstimate” such sales using some “historical trends” model (that has often been changed

Are lumber futures pointing to stabilization in residential construction? - Lumber futures turned out to be a good predictor of US housing starts. The large decline earlier this year (see post) translated into weaker than expected residential construction in June (see post). That means we should certainly pay close attention to lumber as a leading indicator. And July is showing a steady increase in prices, potentially pointing to improving demand.After a disappointing result in June, is construction picking up this month ? Many economists think so. The key data that researchers point to is the Homebuilders' survey, which is at the highest levels since 2006.The index had certainly diverged from housing starts in the past, but the combination of this survey and higher lumber prices may be pointing to an improvement in residential construction for July. The US economy could certainly use it.

AP’s Rugaber Fails to See Past Seasonally Adjusted Numbers, Misses Troubling 9% June Drop in Single-Family Permits- I was going to leave this alone because the original item involved goes back to last week. But Christopher Rugaber at the Associated Press brought it up again in his report today on existing home sales, so it’s fair game again. The final sentence of his dispatch refers to last week’s Census Bureau data in the new home market, and claims that “In June, they (builders) applied for permits to build single-family homes at the fastest pace in five years.” Not really — in fact, not at all — as will be seen after the jump. Below are the past 6-1/2 years of seasonally adjusted (expressed as an annual rate) and not seasonally adjusted (i.e., actual) results for building permits:  Actual building permits issued fell by almost 9% in June to 56,900 from May’s 62,400. Yet somehow, after seasonal adjustment, June’s result annualized came out as a slight improvement.That doesn’t appear to make sense in the context of the past five years which are supposed to be the basis for seasonal calculations. Last year’s May-June change was downward, but by less than half as much percentagewise, and it led to a smaller seasonally adjusted gain compared to May. The 2011 May-June change was a positive 4%-plus, and again the seasonally adjusted May-June gain was smaller than this year.Looking back further, there is no clear trend of actual (i.e., not seasonally adjusted) increases or decreases in May-June time periods going back to 1959. There were 29 increases and 25 decreases before this year. A big actual May-June decrease would thus be expected to generate a seasonally adjusted decrease. This time it didn’t.

AIA: "Architecture Billings Index Stays in Growth Mode" in June - This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Stays in Growth Mode The Architecture Billings Index (ABI) remained positive again in June after the first decline in ten months in April. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the June ABI score was 51.6, down from a mark of 52.9 in May. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 62.6, up sharply from the reading of 59.1 the previous month.  This graph shows the Architecture Billings Index since 1996. The index was at 51.6 in June, down from 52.9 in May. Anything above 50 indicates expansion in demand for architects' services.  This index has indicated expansion in 10 of the last 11 months.

Construction Index Dips in June, Still Shows Growth - A leading indicator of U.S. construction activity dipped slightly in June, but remained in positive territory for the second-straight month, reflecting recovery in the commercial real-estate sector. The Architecture Billings Index, released by the American Institute of Architects on Wednesday, dipped to 51.6 in June from 52.9 in May. Despite the slip, the index remained in growth territory and was led by the new projects inquiry index component, which jumped to 62.6 from 59.1 the previous month. The index is seen as a leading indicator of building activity, with architect billings typically coming nine to 12 months ahead of the start of construction. A reading above 50 indicates growth in billings. The two-month sustained positive numbers come after a dip into negative territory in April, when the index fell to 48.6, the first time in 10 months the index had dropped below 50. “With steady demand for design work in all major nonresidential building categories, the construction sector seems to be stabilizing,” said Kermit Baker, chief economist for the American Institute of Architects. Billings were strongest in the Northeast, which had a reading of 55.6. The South posted a 54.8, the West 51.2, and the Midwest trailed with 48.3. The commercial and industrial sector index led with 54.7, followed by multi-family residential with 54.0. The mixed-practice segment, a combination of retail and residential space, and the institutional segment were both in positive territory.

McKinsey: US Infrastructure Underinvestment vs Other Developed Nations - (graphic) The United States must raise infrastructure spending by 1 percentage point of GDP to meet future needs. Source: McKinsey

Final July Consumer Sentiment increase to 85.1, Highest since 2007 -- The final Reuters / University of Michigan consumer sentiment index for July increased to 85.1, up from the June reading of 84.1, and up from the preliminary July reading of 83.9.  This was above the consensus forecast of 84.0 and is the highest since July 2007 (pre-recession). Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011.

Michigan Consumer Sentiment: Highest Level in Six Years - The University of Michigan Consumer Sentiment final number for July came in at 85.1, up from the 83.9 preliminary July reading and June's final of 84.1. Today's number came in above the forecast of 84.0. This is the highest level of sentiment since July of 2007, exactly six years ago. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now right at the average reading (arithmetic mean) and 1 percent above the geometric mean. The current index level is at the 43rd percentile of the 427 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us 15.8 points above the average recession mindset and 2.5 points below the non-recession average. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Final July Consumer Sentiment increase to 85.1, Highest since 2007 - U.S. consumer confidence in the economy unexpectedly rose at the end of this month, according to data released Friday. Inflation expectations moderated despite the recent jump in energy prices. The Thomson-Reuters/University of Michigan final July consumer sentiment index increased to 85.1 from a preliminary reading of 83.9 and a final June reading of 84.1, according to an economist who has seen the numbers. It is the highest reading since July 2007. Economists surveyed by Dow Jones Newswires expected the final July index to be little changed at 84. Consumers gave back some of their enthusiasm about the present economy. The current conditions index at the end of July slipped to 98.6 from a 6-year high of 99.7 earlier in the month. The expectations index increased to 76.5 from 73.8. The one-year inflation expectations reading for early July dropped to 3.1% from an early-July reading of 3.3%. Inflation expectations covering the next five to 10 years declined to 2.8% from 2.9%.

Consumer Confidence Surges To Six Year High Boosted By Soaring Gas Prices And Mortgage Rates -  Despite more than two-third of respondents expecting interest rates to rise in the year-ahead, and inflation to increase; and despite dramatically higher current mortgage rates and a surging gas price, consumers haven't been this 'happy' since July 2007. Unfortunatley for those expecting something more, it appears the slightly-better-than-expected print is not good enough to cause the market to plunge (in a good-is-bad "we've done our job" manner) and not bad enough to cause the market to soar (in a "we need moar animal spirits manner). Of course, we've seen this before (here and here) and it doesn't end well.

Vehicle Sales: Another strong month in July -- According the Bureau of Economic Analysis (BEA), light vehicle sales in June were at a 15.9 million rate, on a seasonally adjusted annual rate (SAAR) basis.  It looks like July sales will be in the same range. Here are a few forecasts: From Kelley Blue Book: Pickup Trucks, Compact Cars And Crossovers Drive July New-Car Sales Up 16 Percent In July 2013, new light-vehicle sales, including fleet, are expected to be 1,340,000 units, up 16.1 percent from July 2012 and down 4.4 percent from June 2013. The seasonally adjusted annual rate (SAAR) for July 2013 is estimated to be 15.8 million, up from 14.0 million in July 2012 and down from 15.9 million in June 2013. Due to economic improvement during the first half of the year, Kelley Blue Book is raising its sales forecast from 15.3 million to 15.6 million for 2013. Press Release: J.D. Power and LMC Automotive Report: July New-Vehicle Retail Sales -- Let the Good Times Roll Total light-vehicle sales in July 2013 are expected to grow to 1,336,700, an 11 percent increase from July 2012 [15.9 million SAAR] ... LMC Automotive is raising its forecast for both retail and total light-vehicle sales in 2013. The outlook for total light-vehicles is now at 15.6 million units—previously 15.4 million units—while the retail light-vehicle sales forecast increases to 12.8 million units from 12.6 million units. From TrueCar: July 2013 New Car Sales Expected to Be Up 15.3 Percent According to TrueCar; July 2013 SAAR at 15.8M, Highest July SAAR since 2006 For July 2013, new light vehicle sales in the U.S. (including fleet) is expected to be 1,326,035 units, up 15.3 percent from July 2012 and down 5.1% percent from June 2013 (on an unadjusted basis). The [July] 2013 forecast translates into a Seasonally Adjusted Annualized Rate ("SAAR") of 15.8 million new car sales, [down] from 15.9 million in June 2013 and up from 14.1 million in July 2012.

Number of the Week: Even Offbeat Measures Show No Inflation - The official numbers are clear. Consumer prices are rising slowly according to the two main measures: the Labor Department’s consumer price index and the Federal Reserve’s preferred gauge, the price index for personal consumption expenditures from the Commerce Department. Both are running under a 2% annual rate, considered the Fed’s target. The Fed tends to focus on core prices, which exclude food and energy. That fact often riles up critics, who note that they can’t decide not to feed their families or refuel their cars. But the central bank doesn’t ignore those prices because they’re unimportant, but because they are volatile and don’t reflect the long-term trend. Some economists have noted that perhaps excluding food and energy isn’t the best way to correct for volatility. Even alternative measures show little threat of rising prices. Some doubt those statistics because they’re provided by the government. A private group of economists at the Massachusetts Institute of Technology created a separate series called the billion prices project that tracks hundreds of online retailers’ change in pricing. That index tracks the official figures pretty closely and also shows no inflation threat.

Weekly Gasoline Update: Up Another Nickel -- It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for Regular and Premium are both up a nickel from a week ago. Regular and Premium are now 10 cents and 9 cents, respectively, off their interim highs in late February.  According to, Hawaii, Alaska, California and Connecticut are averaging above $4.00 per gallon, with Connecticut as the new addition week. Three states (Illinois, New York and Washington) are in the 3.90-4.00 range.

Best to own a business rather than work for one - Rebecca Wilder - Ed Dolan reports that corporate profits are rising as a share of gross domestic product at the expense of small business income and presents normative solutions. This redistribution of business income toward large corporations is a relatively recent phenomenon. Proprietor’s income as a share of national income peaked in the mid 2000s and has broadly declined; but before that point, proprietor’s income (green line) and corporate profits (purple line) jointly trended higher as a share of national income while gross employee compensation declined (blue line). It’s the business employees that are the real losers in this cross section of income. On a relative basis, corporate profits surged since the financial crisis, reaching 13.9% of national income in Q1 2013 (2 standard deviations above its mean), while proprietor’s income retraced some of its loss after bottoming out at 8% of total income in Q2 2009. In contrast, employee compensation hit a new low in Q1 2013, representing just 61.5% of national income (2 standard deviations below its mean).This is a crisis of labor income. Where and when will the redistribution occur away from corporate profits and retained earnings and toward employee wages? I hope some miraculous investment in labor occurs soon, but the current state of the labor market doesn’t portend that a shift is imminent.

Richmond Fed: Regional Manufacturing Activity Weakens - From the Richmond Fed: Manufacturing Activity Weakens - Outlook Remains Optimistic Manufacturing activity in the central Atlantic region declined in July, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments, new orders, backlogs, and capacity utilization fell this month. Vendor lead-time remained virtually unchanged, while finished goods inventories rose more quickly. On the employment front, hiring and the average workweek flattened. Average wages rose more slowly than in June. ... The seasonally adjusted composite index of manufacturing activity—our broadest measure of manufacturing—fell eighteen points in July to a reading of −11. Among the components of that index, shipments dropped twenty-six points to −15 in July. The new orders index also fell to −15; the previous reading was 9; and the gauge for the number of employees remained at 0 for a second month in July. The index for the number of employees settled at 0, matching last month, and the gauge for the average manufacturing workweek slowed to 2 from June's reading of 11. Average wages also grew somewhat more slowly, with the index shedding two points to end at 8 in July.

Richmond Fed Manufacturing: A Most Surprising Decline - The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to nation's Central Bank. The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Today the manufacturing composite dropped back into contraction with a surprising 18 point decline to -11. had forecast continuing expansion at 7. Because of the highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends, now at -1.7, in mild contraction.Here is the Richmond Fed's overview. Manufacturing activity in the central Atlantic region declined in July, according to the most recent survey by the Federal Reserve Bank of Richmond.* Shipments, new orders, backlogs, and capacity utilization fell this month. Vendor lead-time remained virtually unchanged, while finished goods inventories rose more quickly. On the employment front, hiring and the average workweek flattened. Average wages rose more slowly than in June.

Mid-Atlantic Manufacturing Activity Goes Negative - Manufacturers in the central Atlantic region say activity deteriorated this month, the Federal Reserve Bank of Richmond reported Tuesday. The Richmond Fed’s manufacturing current business conditions dropped to -11 in July, from a downward revised 7 in June, which was the first positive reading since March. Numbers above zero indicate expanding activity. Factories in other parts of the U.S. had shown signs of improvement this month. Similar reports from other regional Fed banks have come in broadly upbeat, with business-activity indexes in Philadelphia and New York each advancing further into positive territory. Subindexes in the Richmond report reflected widespread pullback this month. The new orders index this month dropped to -15, from 9 in June. The shipment index this month fell to -15 from 11. Demand for labor stalled. The employment index held at zero, while the workweek index slipped to 2, from 11. The wage index fell back to 8, from 11. The current prices paid index inched up to 1.60, from 1.13 in June, while the prices received index rose to 1.02 from 0.62. Despite discouraging present conditions, manufacturers appeared to remain optimistic looking out over the next six months. The shipments-expectations index ticked up to 24 from 21 last month, and the orders-expectations index rose to 24 from 21 as well. The employee expectations slipped to 5 from 9 in June. Activity on the service side also weakened in July. The Richmond survey’s revenues index fell to -6, from 12 in June.

Richmond Fed Prints Biggest Miss In 7 Years As New Orders Collapse - Thanks to a total and utter collapse in new order volume (from +9 to -15 - worst in 2 years) and order backlog (-1 to -24), the Richmond Fed manufacturing survey just printed at -11 (against expectations of an exuberant +8). This is the biggest miss since May 2006. Wages plunged; the average work-week plunged; capacity utlization plunged; but on the bright-side, the number of employees was flat (at 0). Perhaps more concerning is the outlook that sees prices paid rising notably more than prices received and capacity ultization dropping notably.

Factory Activity Rebounds in Plain States -- Factory activity in the Plains states is rebounding this month but expectations eased, according to a regional Federal Reserve bank report released Thursday. The Kansas City Fed’s manufacturing composite index increased to 6 in July–the highest reading since August 2012–after dropping to -5 in June, a contraction that was weather-related. A reading below zero denotes contraction. On a year-over-year comparison, the composite index slipped to 2 from 3. “Production and shipments rebounded after being disrupted by storms last month,” said Chad Wilkerson, a Kansas City Fed economist. “And while some firms remain hesitant to expand, overall capital spending and hiring plans remain positive.” The production index, on a month-over-month comparison, jumped to its highest level since June 2011, rising to 21 in July after plunging to -17 in June. The shipments index bounced back to 19 from -16. The new orders index increased to 5 in July from -10 in June. The exports orders index improved to 2 from -5. The demand for labor remains weak. The employment index dropped to -2 from -1 last month, and the workweek index stood at -6 from -13. The prices-paid index increased for the third consecutive month, rising to 16 from 14. The prices-received index dropped to 0 from 3.

Kansas City Fed: Regional Manufacturing expanded in July - From the Kansas City Fed: Tenth District Manufacturing Survey Rose Moderately: The Federal Reserve Bank of Kansas City released the July Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity rose moderately, although producers' expectations for future activity eased somewhat. “We saw several positive things in this month's survey. Production and shipments rebounded after being disrupted by storms last month," said Wilkerson. "And while some firms remain hesitant to expand, overall capital spending and hiring plans remain positive.” The month-over-month composite index was 6 in July, up from -5 in June and 2 in May ... Most other month-over-month indexes also improved. The production index increased from -17 to 21, its highest level since June 2011, and the shipments and new orders indexes also rose markedly. ... In contrast, the order backlog index edged lower from -4 to -7, and the employment index also eased slightly So far all of the regional surveys - except Richmond - showed improvement in July. The Dallas Fed regional survey will be released next Monday, and the ISM index for July will be released Thursday, August 1st.

PMI Data Shows That Mfg Sector Grew At A Faster Rate In July -- The US manufacturing sector grew at a moderately faster pace in July, according to today’s initial estimate of Markit Economics purchasing managers index (PMI). "The U.S. manufacturing sector picked up momentum again in July, with output, order books and employment all growing,” says Markit’s chief economist, Chris Williamson, in a press release (pdf). “The goods-producing sector acts as a bellwether of the wider economy, and the upturn in July therefore bodes well for the pace of GDP growth to have picked up again in the third quarter after a likely easing in the second quarter."It’s interesting to note too that for the second time in the past year, the Markit PMI data provided a more reliable measure of the trend vs. the ISM Manufacturing Index, a competing benchmark. Last November, the ISM data dipped slightly below the neutral 50 mark, suggesting that the manufacturing sector was poised to contract in the months ahead. But Markit’s PMI reading remained well above 50 and actually increased in November 2012 vs. the previous month. As subsequent updates for both the PMI and ISM numbers revealed, the manufacturing sector did in fact continue to grow.

Early Indicator Suggests Strong July for Factories - The U.S. factory sector is picking up steam this month, according to an early reading of July activity released Wednesday. The flash purchasing managers’ index compiled by data provider Markit advanced to 53.2 in July from a final June reading of 51.9. Markit said the flash July PMI reading, which is based on about 85% of the usual number of monthly replies, is the highest reading in four months. A reading above 50 indicates expansion. Factories around the U.S. continue to stage a choppy recovery, with the latest regional readings from the New York and Philadelphia federal reserves reporting expansion in their areas, while the Richmond Fed said Tuesday activity in the Mid-Atlantic is contracting. The Markit subindexes broadly improved this month. The flash-output index increased to 54 from 53.5 in June. The new-orders index rose to 55.1 in July from 53.4, while new-export orders jumped to 52.3 from 46.3. The employment index also swung into expansion territory, rising to 52.6 from 49.9 in June.

US manufacturing follows the same pattern for the 4th year - US manufacturing rebounded in July, as it follows the pattern repeated over the past four years. Markit's report however emphasized caution: - The U.S. manufacturing sector picked up momentum again in July, with output, order books and employment all growing. The goods-producing sector acts as a bellwether of the wider economy, and the upturn in July therefore bodes well for the pace of GDP growth to have picked up again in the third quarter after a likely easing in the second quarter. The pace of manufacturing growth nevertheless remains well below that seen at the start of the year, in part reflecting weaker demand from many export markets, notably China and other emerging economies. Employment growth is disappointingly weak as a result, as firm focus on cost-cutting to boost competitiveness.This stabilization in manufacturing will add to the ammunition for the more hawkish members of the FOMC, who will argue for a reduction in securities purchases starting in September.

Increase in Goods Orders Points to U.S. Factory Rebound: Economy - American factories received more orders for automobiles and machinery in June, pointing to a pickup in manufacturing that will help propel the world’s largest economy in the second half of 2013. Bookings for goods meant to last at least three years rose 4.2 percent, three times the median forecast of economists surveyed by Bloomberg, according to data from the Commerce Department issued today in Washington. Other reports showed consumer confidence last week matched a five-year high and jobless claims climbed as carmakers retooled plants.Rising demand for vehicles and equipment contributed to a fourth consecutive increase in orders for capital goods that signals business investment will rebound following a second-quarter slump. Gains in housing, household sentiment and employment are benefiting companies such as Ford Motor Co. (F) and Whirlpool Corp. (WHR), brightening the prospects for a more durable economic expansion. “What you’re going to see is a stronger second half, a stronger third quarter,”

June Durable Goods: Overall, +5.2%; Excluding Transportation, +0.1% -- Business Insider’s prediction: “Economists predict total orders rose 1.4% in June after advancing 3.7% in May. Nondefense capital goods orders excluding aircraft (a.k.a. “core capex”) are expected to have risen 0.6% in June after gaining 1.5% in May.” Result (Census Bureau link):  New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. That’s the good news, and it is good, especially the upward revision to May from 3.6%. The not-so-good news (see Page 2 at the Census link for the specific number, which is +0.1%), as Business Insider notes in its post-release write-up: “Durable goods orders excluding transportation, however, were flat on the month. Economists had expected 0.5% growth here after an upward-revised 1.0% gain in May.”

June Durable Goods Orders Beat Forecasts... But Not If You Exclude Transportation - The July Advance Report on June Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders:New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. Excluding transportation, new orders increased slightly. Excluding defense, new orders increased 3.0 percent.  Transportation equipment, also up four of the last five months, led the increase, $9.9 billion or 12.8 percent to $87.1 billion. This was led by nondefense aircraft and parts, which increased $6.5 billion. Download full PDF  The latest new orders number at 4.2 percent was well above the forecast of 1.3 percent. Year-over-year new orders are up 10.9 percent, the highest YoY in 16 months. However, if we exclude transportation, "core" durable goods were essentially flat MoM (up 0.03 percent to two decimal places) and 4.9 percent YoY. was looking for a 0.5% MoM increase. If we exclude both transportation and defense, durable goods were down 2.2 percent MoM but up 8.1 percent YoY. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation..

Durable Goods 4.2% Headline Increase Belies the Bad News for June 2013 -- The Durable Goods, advance report shows new orders increased by 4.2% for June 2013.  While the headline number sounds great, not so fast, the gains are on volatile aircraft new orders.  Shipments did not change.   Aircraft and parts new orders from the non-defense sector increased 31.4%.  Aircraft & parts from the defense sector increased 18.7%.   Excluding all transportation, which includes aircraft, new orders came in at zero.  In other words, without transportation new orders didn't grow at all.  Below is a graph of all transportation equipment new orders, which increased by 12.8% for the month.  Motor vehicles & parts grew by 1.3%. Core capital goods new orders increased 0.7% for June, which is a much better indicator overall for economic activity.  Machinery increased 2.4% in new orders.  Computers & electronics dropped -2.6% in new orders.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves. To put the monthly percentage change in perspective, below is the graph of core capital goods new orders, monthly percentage change going back to 2000.  Looks like noise right?  That's why one advance report does not an economy make. Yet over and over again Wall street trades on these figures and even worse, just the magic new order monthly percentage change.

Ugly Durable Goods Number Masked By Second Monthly Surge In Boeing Orders -  One look at the June headline Durable Goods number today would have been enough to send algos into a buying spasm: printing at 4.2% it was three times greater than the forecast 1.4%, and followed an upward revised 5.2% (previously 3.6%). However, as always, there was a footnote: the entire Durable goods number was due to one thing: Boeing aircraft orders and other transportation equipment which have risen by a whopping $20 billion in the past two months, from $67 to $87 billion, or growth rates of 14.8% and 12.8%. Put another way, of the $21 billion increase in overall Durable Goods since April (from $223 billion to $244 billion), $20 billion is due to transportation equipment (from $67 billion to $87 billion). Sure enough, the June Durable Goods order ex-transports missed expectations of a 0.5% increase and was flat compared to May.

Durable Goods - Seen and Unseen (the Good, the Bad, the Ugly) - Inquiring minds are digging into the latest Durable Goods Report by the Census Bureau. New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. Excluding transportation, new orders increased slightly. Excluding defense, new orders increased 3.0 percent. Transportation equipment, also up four of the last five months, led the increase, $9.9 billion or 12.8 percent to $87.1 billion. This was led by nondefense aircraft and parts, which increased $6.5 billion.Note how orders for aircraft can skew the overall numbers. A closer look at the "New Orders" components will show precisely what I mean. New Orders:

  • Total +4.2%
  • Excluding Transportation +0.0%
  • Primary Metals -0.2%
  • Fabricated Metals +0.1%
  • Machinery +2.4%
  • Computers and Electronic Products -2.6%
  • Computers Related Products -2.1%
  • Communications Equipment -11.7%
  • Electrical Equipment -1.8%
  • Transportation Equipment +12.8%
  • Motor Vehicles and Parts +1.3%
  • Non-Defense Aircraft and Parts +31.4%
  • Defense Aircraft and Parts  +18.7%
  • Other Durable Goods +0.1%

But what about the "not-so" easily seen? I am talking about constant revisions and the overall use of the report in general.

Vital Signs Chart: Slowing Business Investment -- Business investment is slowing. Shipments of core capital goods, a measure that excludes the volatile defense and aircraft sectors, fell in June from May and were nearly unchanged from a year earlier. Thursday’s report was the latest evidence that economic growth slowed in the second quarter. But new orders rose in June, suggesting investment could pick up in coming months.

The "Real" Goods on the Latest Durable Goods Data - Earlier today I posted an update on the July Advance Report on June Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data.Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods. Now we'll leave Transportation in the series and exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at a more concentrated "core" durable goods orders. Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

The troubled promise of reshoring - Horsehead, struggling with high electricity prices and the cost of new environmental regulations, failed to get tax incentives it wanted from the state of Pennsylvania to reduce its costs. The company is economizing – sending its prime western zinc plant operations to North Carolina, and downsizing to only one zinc oxide plant in Canada, close to Michelin's operations. The diaspora of manufacturing jobs is an old story in the American landscape – but, as President Obama's optimistic speeches about the rebirth of manufacturing have shown, the old dream dies hard. Since 2010, a new buzzword has taken root: reshoring.  This bit of corporate jargon captures the hope that the golden age of factories will return with a bounty of well-paid union jobs and thriving local economies. There is a lot of lost ground. The manufacturing industry's share of GDP stands at a meager 11.5% – down from 28% in the 1950s – and it employs half the number of people it did in the 1980s. During the US recession of 2007 to 2009, manufacturing jobs were the hardest hit, with 2 million jobs lost in just 15 months.

Have the robots come for the middle class? - Computers and cyborgs aren’t about to render the American worker obsolete. But they’re tilting the nation’s economy more and more in favor of the rich and away from the poor and the middle class, new economic research contends.Despite rising fears of technology displacing huge swaths of the workforce, there remain huge classes of jobs that robots (and low-wage foreign workers) still can’t replace in the United States, and won’t replace any time soon. To land the best of those jobs, workers need sophisticated vocabularies, advanced problem-solving abilities and other high-value skills that the U.S. economy does a good job of bestowing on young people from wealthy families — but can’t seem to deliver to poor and middle-class kids. That is the alternatively optimistic and bleak picture of the domestic labor market sketched by economists Frank Levy of MIT and Richard J. Murnane of Harvard, who conducted a detailed study of what jobs have been lost to automation in recent years and which jobs are likely to be lost as technology keeps advancing. They wrapped their findings into a new paper for the centrist Democratic think tank Third Way, in which they argue, “For the foreseeable future, the challenge of ‘cybernation’ is not mass unemployment but the need to educate many more young people for the jobs computers cannot do.”

Machines are labor, but they don’t buy gifts - CNBC has a video on youtube about the concern over machines replacing people. They actually touch upon many relevant aspects of the issue… high unemployment, increasing corporate profits, productivity of machines, rising real GDP, stagnating median household incomes, low minimum wages and even social instability. Replacing people with machines, like paying lower real wages, is a fallacy of composition  It can be more profitable for an individual business to replace people with machines and pay less wages, but if more and more businesses do this, people overall will have less income and less purchasing power to buy the finished goods of production.Production seeks demand. Demand depends on people getting paid for producing. So even though there may be a balanced trade off in production as utilization of capital rises and utilization of labor falls, production will be progressively limited by weaker demand. The United States has a demand-constrained economy.  The fact that some people are being replaced by machines is only part of the story. We will explore the subject of macro-economic demand here on Angry Bear blog in future posts.

Strongest Since 1999? - “Add it all up, and over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999.” So said President Obama in a speech in Illinois on Wednesday. And by one measure he has the facts to back him up, at least for now. But those facts could easily be revised away next week, when the July jobs report comes out. And no one reading that statement should overlook that he said “private sector.” First, the 7.2 million number is accurate. Private-sector employment hit bottom for the recent cycle in February 2010, at 106,850,000. In June, it was 114,051,000, or 7,201,000 higher. Over the same stretch, governments have reduced employment by 619,000, leaving the total gain at 6.6 million. As for the strongest start since 1999, that is also accurate, at least if you use the number of jobs, rather than the percentage change. But comparing gross numbers can be misleading. This year’s gain of 1.0938 percent is not as good as the 2011 gain over the same period, which was 1.12 percent, or 1,209,000 jobs. And on a percentage basis it was also a smidgen below the 2005 first half, when 1,211,000 jobs, or 1.0942 percent, were added. Even by Mr. Obama’s preferred way of counting, those two years could be better if the July report revises the June figure down by 26,000 jobs. On a percentage basis, by the way, every first half from 1993 through 1999 was better than the 2013 first half.

Michael Hudson Shreds Obama’s Orwellian Speech on Middle Class Prosperity - Yves Smith -- Michael Hudson was so incensed by what he called a “Blairesque” speech by Obama on Wednesday that he took it upon himself to comment on its all-too-frequent sleights of hand and outright fabrications. However, you’ll also notice that the speech contained so much bullshit (in the Harry Frankfurter sense of  indifference to the truth) that eventually Hudson’s comments thin out a bit. The original speech is in black. Hudson’s remarks are in red. You’ll see he took mercy on you and edited the speech down a bit and also bolded some of the, erm, remarkable parts. I’ve added a few observations, in blue. I hope readers in comments will join in the fun by extracting sections or phrases from the speech and explaining what they really mean. The worst is that Obama apparently plans a series of Big Lie speeches on his “vision for rebuilding an economy that puts the middle class — and those fighting to join it – front and center.” That’s at best an afterthought, since he’s given the economy over to an at best indifferent and at worst predatory elite that have no interest in giving it back.

The Depressing Tale of How Greedy Financial Titans Crushed Innovation and Destroyed Our Economy - Lynn Parramore - Whatever happened to innovation in America? President Obama told us that our future depends on it. Across the political spectrum, everyone pretty much agrees that innovation is vital to prosperity. So why aren’t we getting the job done? Clearly, we’re in desperate need of clean technology that won’t poison us. Our information and communications systems are not up to snuff. Our infrastructure is outdated and crumbling before our eyes. We’re not investing enough in these areas, and it shows. Yet they’re necessary not only for America’s economic health, but for stability and prosperity around the globe. The U.S. used to be the envy of the world when it came to innovation, making things that dazzled the world and enhanced the lives of millions. But the Information Technology & Innovation Foundation, a bipartisan think-tank that ranks 36 countries according to innovation-based competitiveness, tells us we’re getting pushed aside on the global innovation stage. In 2009, to the surprise of those conducting the study, the U.S. ranked #4 in innovation, behind Finland, Sweden and Singapore. In 2011, the U.S. ranking was unchanged. Worse, the U.S. ranked second to last in terms of progress over the last decade. Research by the Organization for Economic Cooperation and Development (OECD) also shows that the U.S. is not making as many cutting-edge products as it used to, and that other countries with strong investment in the foundations of innovation, like education and research and development, and fewer of the things that hinder it, like income inequality, are making greater strides than we are.

The Multinational Equation on Jobs - In his speech on Wednesday, President Obama said: This year, we are off to our strongest private-sector job growth since 1999. And because we bet on this country, foreign companies are, too. Right now, more of Honda’s cars are made in America than anywhere else. Airbus will build new planes in Alabama. Companies like Ford are replacing outsourcing with insourcing and bringing more jobs home. Is it true that foreign companies are “betting” on the United States, and that American multinationals are returning jobs here in large numbers? The most recent Bureau of Economic Analysis data available on multinational companies’ employment in the United States is for 2011, unfortunately. But those data do show that the total number of people working for American affiliates of foreign companies rose 3.3 percent that year, up to 5.6 million workers from 5.4 million in 2010. That rate of increase was higher than that for total American private industry employment that year, which was 1.8 percent.  Even so, total employment at these American affiliates of foreign companies had fallen sharply during the recession, and so its 2011 level was about the same as it was in 2002 through 2008, when the population was smaller.

Legacy of Long-Run Unemployment - The US labor market has been improving from dismal to sluggish, and the overall unemployment rate has been drifting down. But it's worth remembering that after five years of sustained high unemployment, the  unemployed are disproportionately those who face the issues of long-run unemployment in a way that the U.S. economy  has not seen in its post World War II experience. Here's a snapshot of the unemployment rate over time, generated with the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The sharp rise in unemployment during the Great Recession is striking, but what I want to focus on here is the amount of time that the U.S. economy has been experiencing an unemployment rate above 7.5%. Draw a mental line across the graph at 7.5% and take a look. The unemployment rate was above 7.5% for (almost all of) 26 months from January 1975 to February 1977. It was also above 7.5% for (almost all of) 51 months from May 1980 to August 1984. But since the unemployment rate rose above 7.5% in January 2009, it's now been above that level for 54 months and counting. One result is that a far higher share of the unemployed have been unemployed for 27 weeks or more than at any time since the end of World War II. In the past, the long-term unemployed typically made up 20-25% of total unemployment during recessions. In the Great Recession, the long-term unemployed were about 45% of the total unemployed, and the share of total unemployment accounted for by the long-run unemployed remains historically high.

The New Sick-onomy? Examining the Entrails of the U.S. Employment Situation -The headline jobs numbers—while still failing, five-and-a-half years later, to close the gap of 8.7 million jobs lost from the pre-Great Recession high of 138 million non-farm jobs (January 2008), have been very sprightly indeed, growing by just over an average of 200,000 jobs a month over the past six months. But notwithstanding the creation of some 1.2 million jobs this year, the pool of those eligible for work—the so-called Civilian Non-Institutional Population—has grown by a like amount. Thus, the employment-population ratio has languished at 58.7 percent (where is has been more or less stuck since September of last year), down sharply from its pre-recession high of 63.4 percent. Nevertheless, 1.2 million more people are “working,” even as the number of idle citizens and those working part time who would rather have a full time job, increased by over 750,000 during H1 2013. “Yeah, yeah,” you say. You’ve heard all the stuff about the low employment-population ratio before, and some say it’s a merely structural phenomenon tied to retiring baby boomers and the like. Sure, we may not have recovered all of the jobs lost to the Great Recession, but we’ve made up for 75 percent of them over the past 40 months. The official (U-3) unemployment rate has fallen to 7.6 percent from a recession high 10 percent in October 2009. Clearly, America is on the mend . . . right? I suppose if all you knew were the headline numbers and ignored the underlying components thereof, you would easily arrive at the foregoing conclusion. But the fact is that the U.S. employment situation is more of a wounded beast than a bull. And it is a wounded beast whose entrails tell a different story, indeed—one that ties far more convincingly into the anemic sub-2 percent GDP growth rate of the U.S. economy and the sluggish retail sales data we have seen of late. This recently led to the Federal Reserve’s chairman, Ben Bernanke, conceding that he is puzzled by the lack of growth in an economy that is producing about 200,000 jobs per month.

What is the story of wages and growth? -- Run 75411 reacts to Daniel Alpert at Economonitor. : It appears much of the job growth has been in low wage opportunity which forces people to do with less and detracts from demand led economic growth. The economic bump in taking a lower wage paying job is just not that great; average Unemployment Wages ($12.86/hr) as opposed to a Retail Opportunity at $15.80/hr. “less taxes say about $80—or the paltry sum of $4,160 per year of additional consumption.”Daniel AlpertInteresting comment on falling Participation Rate being tied to baby boomers retirement: “The Labor Force Participation Rate has also declined and is, more or less, continuing to decline—but its downward trend began well before the Great Recession. There is therefore a correlation between the falling LFPR and certain ongoing demographic changes in the CNIP. Chiefly, such demographic changes arise from an aging U.S. population with growing longevity—typified by the ongoing aging-out of the enormous baby boom cohort from the labor force. But as real as those changes may be, the fact remains that the LFPR declined by all of 1 percent—to 66 percent from around 67 percent between 2000 and the beginning of the Great Recession. Since 2009, however, the LFPR has fallen nearly an additional 3 percent. This acceleration of the earlier trend is unlikely to merely be a demographic phenomenon.”Daniel Alpert And what if the PPACA is behind much of the low wage and temp job growth?

Fewer Americans Will Work: What That Means for the Economy - The ratio between those considered in the labor force and the total working-age population is known as the “labor-force-participation rate.” And the reason why the unemployment rate has been able to fall from more than 10% in 2009 to 7.6% today despite middling job growth is that more and more Americans are dropping out of the labor force altogether. As you can see from the chart below, this decline in the labor-force-participation rate is a trend that’s been going on for many years now. The primary driver of the overall trend is the aging workforce — many of those dropping out are simply retiring at around the normal age. But the trend accelerated during the recession, suggesting that many more people dropped out of the workforce than otherwise would have if the economy were in better shape. As the economy improves, however, should we expect to see the participation rate bounce back? According to new analysis from Macroeconomic Advisers, it’s not likely. They estimate that roughly 45% of the recent decline in labor-force participation is a result of a weak economy, and the rest because of demographic factors. But as the economy improves, the workforce is going to continue to age, meaning that by 2015, when the Federal Reserve expects the economy to be back near full employment, the participation rate will remain where it is today.

The depressing reality of ‘the recovery’: Americans aren’t getting jobs. They’re retiring.: For most of his presidency, President Obama has been focused on the economic short run — which makes sense, given that he took office in the midst of the biggest recession since the 1930s. With his big economic speech today, he’s shifting to the long-run, talking about the structural changes he thinks the economy needs to see for the U.S. to prosper going forward. But anyone who thinks that the short-run battle is over should take a look at a new report by Daniel Alpert over at the Century Foundation. Alpert notes that while the headline unemployment number is well below its recession-era peak, that’s almost 100 percent due to declines in the labor force participation rate — that is, the share of the population that’s either employed or actively looking for work. Don’t believe him? Take a look at this chart: You see that solid blue line? That’s the employment/population ratio, or the number of employed people divided by the civilian noninstitutional population (aka everyone over 16 who’s not in prison, a mental institution, the military, or a nursing home). It’s barely changed since the nadir of the recession. The share of adults who are working isn’t going up; it’s stagnating. More people aren’t working.

The Time of the Season: June is the month of the year when graduates emerge from the cocoon of high school and college.  And, every year, without fail, this metamorphosis results in a surge in the U.S. civilian labor force in June. As a matter of fact, on a non-seasonally adjusted (NSA) basis, the civilian labor force has increased (in June) for each of the last 66 years; or, ever since, the Bureau of Labor Statistics (BLS) has been keeping track of this annual demographic migration. This influx of new entrants to the labor force occurs regardless of how the economy is faring in any particular year. Because the academic year, in most school districts and for most universities, runs from September to June, this cycle varies from the January to December calendar year used for economic statistics. Consequently, a mismatch occurs, introducing a pronounced seasonality in the monthly ups and downs of the civilian labor force. In a typical year, June's surge is matched by a small aggregate net decline or increase for the remaining eleven months. A seasonal adjustment is necessary to smooth out this wave, assigning a portion to the other months in the calendar year.How large is this blip? Very large. In June, the civilian labor rose by 1.4 Million on a non-seasonally adjusted basis. In comparison, the civilian labor force contracted by 650,000 over the prior eleven months — from July 2012 to May 2013. This period is not anomalous. In June 2012, the labor force rose by 1.4 Million. And, it rose by a net 460,000 over the prior eleven months — or, just 42,000 per month.

Weekly Initial Unemployment Claims increase to 343,000 - The DOL reports: In the week ending July 20, the advance figure for seasonally adjusted initial claims was 343,000, an increase of 7,000 from the previous week's revised figure of 336,000. The 4-week moving average was 345,250, a decrease of 1,250 from the previous week's revised average of 346,500. The previous week was revised up from 334,000. The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 345,250. The 4-week average has mostly moved sideways over the last few months. Claims were close to the 341,000 consensus forecast.

Jobless Claims Rise to 343K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 343,000 new claims number was a 7,000 increase from the previous week's 336,000 (an upward revision from 334,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell by 1,250 to 345,250. Here is the official statement from the Department of Labor: In the week ending July 20, the advance figure for seasonally adjusted initial claims was 343,000, an increase of 7,000 from the previous week's revised figure of 336,000. The 4-week moving average was 345,250, a decrease of 1,250 from the previous week's revised average of 346,500.  The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending July 13, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending July 13 was 2,997,000, a decrease of 119,000 from the preceding week's revised level of 3,116,000. The 4-week moving average was 3,023,250, an increase of 2,500 from the preceding week's revised average of 3,020,750.  Today's seasonally adjusted number was slightly above the forecast of 340K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

First Time Unemployment Claims Weaken Drastically, Putting The Trend of Improvement In Jeopardy - The latest weekly jobless claims data were substantially weaker than the trend, which could be a red flag that the economy has radically slowed in July. Initial claims for unemployment compensation declined at an annual rate of just 0.3%. Stock prices remain extended relative to the claims trend. Stocks could break through resistance and make that extension even more extreme. That would play into the hands of FOMC hawks who want to cut back the rate of Fed purchases under QE. However, if the stock market corrects, and that is joined by signs of economic weakening in the data for July, the arguments of the doves would be strengthened and the Fed would probably extend QE at its current pace for as long as the economic data was weaker. That would be bullish. The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment was 343,000, an increase of 7,000 from the previous week’s revised figure of 336,000 (was 334,000) in the advance report for the week ended July 20, 2013. The consensus estimate of economists of 340,000 for the SA headline number was too optimistic (see footnote 1), a reversal of the prior week’s overly pessimistic estimate, in the game of pin the tail on the jackass. The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in the current press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 338,1400 in the week ending July 20, a decrease of 71,879 from the previous week. There were 340,780 initial claims in the comparable week in 2012.” [Added emphasis mine] See footnote 2.

Postal Service to End At-Door Delivery - Struggling with an antiquated business model, the US Postal Service is looking to make delivery more efficient.CNN Money (“Postal Service looks to end at-your-door mail“): If you’re moving to a newly built house, say goodbye to mail delivery at your door. And if some House Republicans get their way, all door-to-door mail delivery will go away. The U.S. Postal Service is marching towards a more “centralized delivery,” where residents pick up their own mail from clusters of mail boxes located in their neighborhood. Local postmasters are sending hundreds of letters to fast-growing communities, warning that cluster boxes will be the way mail will be delivered to new developments. In the past year, the cash-strapped Postal Service has been asking companies in industrial parks and shopping malls to also adopt this form of mail delivery.But Rep. Darrell Issa, the California Republican leading the House effort to save the postal service, wants more. He has made doing away with doorstep delivery a key part of his bill, which would require everyone to get mail at a curbside box or from a cluster box.

An Analysis Of Long-Term Unemployment, With Some Help From Dilbert…: Much of the concern over the productivity of people who have been out of work for a long time appears to take this form:  Given this, it’s not surprising that the hiring (and not hiring) of workers who have been unemployed for long stretches of time is of concern to economists. Of particular interest is whether human capital actually depreciates in the way that these cartoons would suggest- if it does, then it could be reasonable (read, efficient) for employers to be more hesitant to hire workers who had been out of work for longer stretches of time. Similarly, it would be reasonable for employers to behave in this way if workers who are unemployed for longer periods of time are somehow less motivated in ways that also affect job performance. This approach to hiring is problematic, however, both because it’s unclear whether the conventional wisdom regarding worker quality and length of unemployment actually holds in practice and because, even if the wisdom is true on average, decisions based on group characteristics are a form of statistical discrimination, which has inefficient consequances.

The New Economics of Part-Time Employment, Continued - A revised definition of part-time employment may have some popular appeal, but it will not repair the Affordable Care Act’s disincentives for full-time employment or its extra costs for taxpayers. Part-time employment rarely includes health benefits. The lack of health benefits and the lower pay for part-time work have traditionally discouraged people from taking part-time jobs rather than full-time jobs, but both of those attributes of part-time jobs are about to change. I explained in an earlier post how, in many cases, the Affordable Care Act would almost entirely eliminate these two shortcomings of part-time employment by offering access to generously subsidized health insurance to part-time employees while denying it to most people who work full time. Two senators, Joe Donnelly, Democrat of Indiana, and Susan Collins, Republican of Maine, are proposing to tweak the Affordable Care Act by changing the definition of part-time work to include any work schedule of 39 hours a week or less. Although it may be true that their proposal would prevent cuts in hours for those now working, say, 35 hours a week, it would be likely to cause cuts for employees working 40 to 45 hours a week, because staying short of the 40-hour threshold would be closer to their current work schedule than staying short of the law’s 30-hour threshold

Payroll Employment for Age Group 18 to 29 Shows Fewer Full-Time Employment "Regardless of Education" -

A Gallup Poll on US Payroll Employment for Age Group 18 to 29 shows Fewer Young Adults Holding Full-Time Jobs in 2013Fewer Americans aged 18 to 29 worked full time for an employer in June 2013 (43.6%) than did so in June 2012 (47.0%), according to Gallup's Payroll to Population employment rate. The P2P rate for young adults is also down from 45.8% in June 2011 and 46.3% in June 2010.The lack of new hiring over the past several years given a recovering economy seems to have disproportionately reduced younger Americans' ability to obtain full-time jobs. On the other hand, Americans aged 30 to 49 this June were, at 61.4%, about as likely to have a full-time job as they were in June of each of the prior three years. The percentage of Americans aged 50 to 64 who have a full-time job increased in June 2013, to 48.2%, from 46.6% a year ago and 45.7% in June 2010. Similarly, 8.4% of Americans 65 or older had a full-time job in June 2013, compared with 7.2% in June 2012 and 6.2% in June 2010. The slow economy of recent years has limited new hiring. This has likely increased the percentage of older Americans with jobs, as companies may be placing a greater value on their experience and productivity and as older workers decide to continue to work when given the opportunity to do so. It also may suggest that far fewer workers are retiring voluntarily. In turn, this may imply that the current labor participation rate will increase, as those who involuntarily left the workforce return in greater numbers than expected once the U.S. economy begins to grow significantly.

China Imports Punish Low-Wage U.S. Workers Longer - By now, most economists agree that the surge of Chinese imports into the U.S. has taken a toll on American workers. But a new study suggests that the brunt of the blow of competition from cheap Chinese imports is borne by low-income U.S. workers. American factory workers with high wages generally took an initial sharp financial hit when the “trade shock” of Chinese goods hit their industry between 1992 and the beginning of the recent financial crisis, according to a paper published by the National Bureau of Economic Research. Yet those high-earning workers tended to migrate successfully to different jobs and suffered less financial harm over the years than low-wage U.S. workers, who generally faced reduced pay and higher unemployment for years, according to the study, authored by David Autor and other economists. In earlier research, the economists had measured the effect of China trade competition on the local level, finding that the U.S. counties most exposed to China trade lost more manufacturing jobs and saw employment decline.

Prison Labor Booms As Unemployment Remains High; Companies Reap Benefits - The American government has been critical of China's forced-labor policies, but the United States has a burgeoning prison labor pool of its own. Russia Today filed a report on Sunday that said hundreds of companies nationwide now benefit from the low, and sometimes no-wage labor of America's prisoners.Prison labor is being harvested on a massive scale, according to professors Steve Fraser and Joshua B. Freeman."All told, nearly a million prisoners are now making office furniture, working in call centers, fabricating body armor, taking hotel reservations, working in slaughterhouses, or manufacturing textiles, shoes, and clothing, while getting paid somewhere between 93 cents and $4.73 per day," the professors write. And some prisoners don't make a dime for their work, according to the Nation, which notes that many inmates in Racine, Wis. are not paid for their work, but receive time off their sentences.The companies that do pay workers can get up to 40 percent of the money back in taxpayer-funded reimbursements, according to RT. That not only puts companies that use prison labor at a distinct advantage against their competitors, but, according to Scott Paul, Executive Director of the Alliance for American Manufacturing, it means American workers lose out.

The Disutility of Work - Why do we work? Just for the money? Or do we also work for other reasons such as the ability to socialise with friends and to use and develop skills? According to recent research, we work simply for the money it brings. When we are at work, our thoughts are on the things we could be doing instead and we long for the time when our work is done. In the language of economics, work is a "disutility" that all of us would prefer to do without.   This view of work as a painful activity raises certain issues, however. There is no doubt that much work is experienced as a pain, but to classify all work as painful seems to be stretching things a little too far. Did the authors of the above research really experience their work as all toil and trouble? Or were there periods when they enjoyed the challenges thrown up by their work? During such periods, work may well have proved more alluring than leisure.

Washington Push for Higher Minimum Wage for Workers Has Walmart Balking - An attempt by the City Council to force profitable chain stores to pay much higher wages than the city’s minimum has infuriated Walmart, which is threatening to pull out of up to six planned stores.  Mayor Vincent C. Gray, who worked hard to lure Walmart, finds himself caught in the middle, and many residents sound less than grateful to lawmakers.  “Those big people in government, they don’t understand my situation,” said Fred Reaves, 45, who is unemployed and said he would gladly take a job at the current city minimum, $8.25.  “You can start paying some bills. It will help you to come off public assistance.”  On July 10, the City Council passed a “living wage” measure that would require Walmart to pay at least $12.50 an hour, saying it was fighting to protect struggling residents in what has become a high-cost city.  Supporters of the measure say that Walmart, whose revenues in 2012 were $469 billion, can well afford to pay workers more.

Why Won't Obama Pay His Interns: At some point in the near future, an intern could be standing over a hot photocopier spitting out White House talking points on the president’s campaign to raise the minimum wage — and getting paid exactly $0.00 per hour to do so.  “The White House is fighting for a raise in the minimum wage while still taking on, at any one time, dozens of staff at $7.25 below the minimum wage.”No one knows for sure how many interns there are in the federal government, but advocates estimate the number at around 20,000 to 30,000 each summer, the vast majority of whom don’t receive paychecks. While rules are changing to require most of the private sector to pay everyone who does work for them, special loopholes allow the federal government to maintain a massive, unpaid intern workforce that fills every corner of government and virtually every congressional office. And while Washington’s annual “intern season” is the subject of snickering among the city’s full-time political class, most will acknowledge that D.C. institutions heavily rely on the free labor.

The 300 Billionth Burger - With total revenue that exceeds the gross domestic product of Ecuador, McDonald’s is virtually a culinary country of its own. Not surprisingly, it has become a recurrent focus of political contention. This year’s protests against the low pay of its employees reflect larger concerns about the decline of good jobs in the United States, and the company’s recently published personal budgeting advice reflects remarkably widespread disregard for people trying to get by on poverty-level wages.  A company that can sell 300 billion burgers clearly knows how to respond to consumer concerns. Last year, the company took the lead in a commitment to post calorie counts for every item. Of course, the company’s nutritional impact is influenced by policies over which it has little direct control. In the United States, Big Macs cost less than a salad largely because our agricultural policies subsidize the price of meat far more generously than the prices of fresh vegetables and fruits. The low wages the company pays its workers also reflect the economic environment. In this country they average less than $8 an hour, reflecting a federal minimum wage that has been stuck at $7.25 an hour for four years. If the minimum wage were adjusted to correct for inflation, its 1968 peak would amount to about $9.42 today. More than 88 percent of those who would benefit from a higher minimum are over the age of 20.

Even as economy rebounds, income inequality festers - Whatever growth in GDP or reductions in unemployment, most Americans think the economy stinks. According to a new CBS News poll, more than 60 percent of people polled rate the economy as "bad." And well they should: For the vast majority of Americans, economic gains during the recovery have almost entirely gone to the people at the very top. The "Great Recession" officially ended in June 2009. At the same time, income inequality has surged. Economists Emmanuel Saez and Thomas Piketty found that from 2009 to 2011, 121 percent of income gains went to the richest 1 percent of the population. The 99 percent beneath that select group saw their incomes fall by about a half a percent over the same period. The trend seems all the more maddening given that it takes place against a backdrop of steeply rising employee productivity. Even as workers function more efficiently, in other words, they are rewarded less.  The reasons for the yawning inequality are varied but ultimately rooted in policy -- and politics. In his economic address Wednesday, President Barack Obama described a "winner-take-all" economy in which the gains of the top 1 percent has quadrupled while the rest of the country has barely budged.

Inequality, Mobility and the Policy Agenda They Imply - In making the critical connection between high inequality and diminished mobility, I’ve often cited the work of economist Miles Corak, who had a fine commentary on the topic in The New York Times on Sunday.  I wanted to highlight a few key points but then spend a moment on his policy solutions, which struck me as inadequate.  Professor Corak wrote about the increasingly robust opportunities available to the children of the wealthiest 1 percent of households relative to children from less privileged backgrounds, partly because of nepotism and networks.  No news there, of course, but Professor Corak emphasizes that while this phenomenon is common across countries, the outcomes for children in other rich countries are less tied to their birth than they are for children here. Part of that difference stems from the fact that policies to offset inequalities at the starting gate face far less aggressive opposition in other advanced economies. For years, economists of all political stripes have argued for quality preschool to counteract the extreme and lasting disadvantages faced by children who start life in poverty in this country, poverty that is far deeper in terms of material deprivation than in most other advanced economies.  The lifelong impact of starting out under these difficult circumstances means that quality interventions have a high benefit/cost ratio to society.

Yes, Virginia, Rich People Are Not the Same as You and Me. They Cheat More. - Yves Smith - When middle class and low income people complain about the lousy ethics among what passes for our ruling classes, they usually shrug it off as jealousy, class warfare, and/or the sensationalism.Guess what? Conventional wisdom is right.  The video below from PBS (hat tip Scott) presents research by Dacher Keltner, Paul Piff, and other academics at UC Berkeley into absolute and relative poverty. They that found in a number of different setting that affluent individuals were more likely to cheat than less well off people, even over things like candy and points in a game of chance. Admittedly, which the plural of anecdote is not data, I’ve had the experience they depict in one of their experiments, that people in fancy cars more likely to enter pedestrian crosswalks when pedestrians are in them than other drivers. In addition, the researcher replicated the “better off is correlated with worse behavior” even in a game setting. When one participant was given advantages relative to another, they got ruder in subtle and sometimes overt ways.

The American dream: Survival is not an aspiration - On June 12, 2013, Low Pay Is Not Okay, a group fighting to raise wages for fast food workers, released a video criticising a budgeting guide created by McDonald's. The guide showed that McDonald's workers cannot survive on a McDonald's salary. Aside from including dubious figures - $20 a month for health care, $0 for heating - the guide left out essentials like child care, food, and clothing. Low Pay Is Not Okay noted that even by McDonald's' own calculations, workers would need at least $15 per hour to make ends meet. The video went viral, and the guide was widely criticised. But some argued that the guide was reasonable. "When I lived in St. Louis, my roommate and I each paid $425 per month [in rent]," wrote the Washington Post's Timothy B. Lee, ignoring that St. Louis fast food workers are on strike because they cannot afford to live on their current wages. He praised the guide for "offering practical advice on how to live on a modest income", a sentiment echoed by Mother Jones' Kevin Drum, who deemed it "an extremely conventional collection of good financial advice".Defenders of the McDonald's budget use the same word to describe it: realistic. (Both Drum and Lee use this term.) The logic is that if people can literally survive on minimum wage - that is, not drop dead - then their wages are justified. Ignored in the plea for realism is the day-to-day reality of McDonald's workers - not whether they can live, but how. In one of the wealthiest countries in the world, privation should not come with the job description, and survival should not be an aspiration.

Over 15% of America was on Food Stamps in April 2013 - Food stamp usage has leveled off in growth yet is still alarmingly high.   As of April 2013, 47,548,694 people were on food stamps.  That is 1 out of every 6.64 persons in the United States..  This means that 15.05% of all people living in America are on food assistance.   The United States population in middle of April 2013 was 315,928,000 and this figure includes everyone, including Americans overseas.  Food stamp usage has increased 2.8% from April 2012. Since October 2007, food stamp usage has increased 76.06%.  The population has increased 4.3% during the same time period.  It is clear America has not recovered from the great recession and is obviously still hurting.   Graphed below is the monthly percentage change in individual food stamp usage.  Below is the percent change from one year ago in food stamp usage by individuals.  We can see even though the recession was declared over in July 2009, food stamp usage is still rising annually, although not at the soaring rates as seen in 2010 and 2011.  The continued increase is actually not a surprise for the unemployment rate is still high with an estimated 20 million needing a job.  On top of this wages are repressed, so many who are working still fall below the poverty line and thus qualify for food stamp benefits. Below is the yearly percent change in food stamp usage per state.  As we can see with the recession claimed to be over in July 2009, in most states even more people are going on food stamps.  In the past year, the total population increased 0.7%.

Food Stamps: Profits from Poor at Risk - Consider the irony of companies like Walmart that economically forces their employees to apply for food stamps, and then profits from their food stamp dollars. That's not more public welfare, that's more corporate welfare. But now those profits are at risk, because the GOP's current version of a farm bill includes ZERO for food stamps --- meaning, 1 in 6 Americans could also go hungry.  To qualify for SNAP, an individual can not have a gross income over $1,211 a month ($14,532 a year). The USDA reports that as of July 2013, 47.7 million Americans rely on SNAP (food stamps), averaging $133 a month in benefits. Over 15% of Americans relied on food stamps to eat in April 2013 (go here to see the data and analyses). But that shouldn't come as shocking news, considering 50 million wage earners (33% of the U.S. labor force) only nets $12,457 a year or less.America's two largest private sector employers are Walmart, who pays an average wage of $8.81 an hour, and McDonald's, who pays an average wage of $7.65 an hour. And a great many of those jobs are part-time. Over 8 million Americans work part-time jobs who would prefer full-time work; and about 7 million work multiple jobs to pay their bills. Not to mention the millions of Americans who are either:

  • retired seniors averaging $1,230 a month in Social Security benefits,
  • disabled workers averaging $1,130 a month in SSDI benefits,
  • unemployed workers (if eligible) averaging $1,290 in UI benefits ($300 a week),
  • and older long-term unemployed workers (that employers aren't hiring) who aren't old enough to retire and have no income at all.

The big lie behind food stamps - McDonald's released an unintentionally hillarious instructional video about managing a budget. If you haven't already seen this, please watch how lowpayisnotok breaks it down.  Once you've recovered from the laughing fit, you might realize that there are a few other implications from this message. The average wage for a McDonald's worker is $7.72 an hour.  Walmart, which pays its workers an average wage of $8.81 an hour, recently gathered a few headlines when it threatened to cancel construction on three stores in Washington D.C. after the city council wanted to force them to pay a living wage of $12.50 an hour.  What does McDonald's and Walmart have in common? They both push their workers onto public services and food stamps. Walmart's wages and benefits are so low that many of its employees are forced to turn to the government for aid, costing taxpayers between $900,000 and $1.75 million per store, according to a report released last week by congressional Democrats.  Congress is currently busy arguing about cutting food stamps. The Paul Ryan budget would cut $33 Billion over 10 years. The theory is that programs like food stamps discourage work.  As McDonald's budget demonstrated, it isn't a question of having a job or not. 47% of SNAP participants are under the age of 18. Another 8% are over the age of 60. 36% were white (non-Hispanic), the largest group.   But the really big number is 58%. That's how many SNAP recipients lived in a household with earnings from a job. Increasingly the face of someone getting food stamps is a working poor family.

Philly Fed: State Coincident Indexes increased in 29 States in June - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for June 2013. In the past month, the indexes increased in 29 states, decreased in seven states, and remained stable in 14, for a one-month diffusion index of 44. Over the past three months, the indexes increased in 42 states, decreased in six, and remained stable in two, for a three-month diffusion index of 72. Note: These are coincident indexes constructed from state employment data. From the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

In Climbing Income Ladder, Location Matters - The team of researchers initially analyzed an enormous database of earnings records to study tax policy, hypothesizing that different local and state tax breaks might affect intergenerational mobility.  What they found surprised them, said Raj Chetty, one of the authors. The researchers concluded that larger tax credits for the poor and higher taxes on the affluent seemed to improve income mobility only slightly. The economists also found only modest or no correlation between mobility and the number of local colleges and their tuition rates or between mobility and the amount of extreme wealth in a region.  But the researchers identified four broad factors that appeared to affect income mobility, including the size and dispersion of the local middle class. All else being equal, upward mobility tended to be higher in metropolitan areas where poor families were more dispersed among mixed-income neighborhoods.  Income mobility was also higher in areas with more two-parent households, better elementary schools and high schools, and more civic engagement, including membership in religious and community groups.  In previous studies of mobility, economists have found that a smaller percentage of people escape childhood poverty in the United States than in several other rich countries, including Canada, Australia, France, Germany and Japan. The latest study is consistent with those findings.  Whatever the reasons, affluent children often remain so: one of every three 30-year-olds who grew up in the top 1 percent of the income distribution was already making at least $100,000 in family income, according to the new study. Among adults who grew up in the bottom half of the income distribution, only one out of 25 had family income of at least $100,000 by age 30. Yet the parts of this country with the highest mobility rates — like Pittsburgh, Seattle and Salt Lake City — have rates roughly as high as those in Denmark and Norway, two countries at the top of the international mobility rankings. In areas like Atlanta and Memphis, by comparison, upward mobility appears to be substantially lower than in any other rich country, Mr. Chetty said.

A Steeper Climb for Single Parents - For single parents, every step on the climb up the income ladder can come with additional complications. Taking a job with a long commute can be impossible, because it leaves no back-up plan when a child gets sick. Working late can be similarly difficult.  On top of all these concrete difficulties are the psychological ones. Married parents trying to build a better life for themselves and their children can talk to each other every night about the difficulties. Single parents, notes Jamie Lackey, a program director at Catholic Charities Atlanta, which works with low- and middle-income families, are “doing it in isolation.” It is hardly surprising that family structure was one of the four factors with a clear relationship to upward mobility in a large new study comparing mobility across metropolitan areas. In areas with a higher divorce rate and higher share of single-parent families, the odds of climbing into the middle class or beyond were lower.  For more details on earlier research about family structure, I recommend my colleague Jason DeParle’s in-depth article on the subject from last year.

Inequality of Opportunity Begins at Birth - The graph below is from a presentation by Angus Deaton which reported data from the National Health Interview Survey. The horizontal axis is the logarithm of family income in 1982 dollars, running from about $3600 to over $80,000. The vertical axis is self-reported ill-health (higher numbers reflect worse health). The parallel lines represent different age groups of respondents. There are three important facts packed into this slide. First, the lines stack up in order of increasing age, meaning that older people reported worse health than younger people. Second, all the lines slope downward, meaning that the poorer you were, the more likely you had poor health. These facts are unsurprising, until you notice how powerful the income effect is. The leftmost point of the youngest (turquoise) line is above the rightmost point of the oldest (purple) line. This means that the poorest teenagers reported themselves as less healthy than rich middle-aged people. Lastly, notice how the age lines are much more dispersed on the left (poorest) side of the graph than the right (richest) side of the graph. This means that health deteriorates more quickly with age among the poor than among the rich.

The Complex Story of Race and Upward Mobility - As my colleagues and I were working on our recent article and graphics about a new study on upward mobility, we found ourselves wondering how big a role race played. When you look at our interactive map showing upward-mobility rates by metropolitan area, you can see why. Many of the areas where climbing the economic ladder is most difficult are also the areas with the largest concentration of African-Americans. The metropolitan areas with the highest percentage of African-Americans are clustered in the southeast and the industrial Midwest. So are the metropolitan areas where low-income children have the longest odds of making it into the middle class.Mecklenburg County in North Carolina – the heart of the Charlotte region, which ranks dead last in upward mobility among the 50th largest metropolitan regions, according to the study – is 32 percent black. Georgia’s Fulton County – home to Atlanta, which ranks 49th in mobility among the 50th biggest metropolitan regions – is 45 percent black. Indiana’s Marion County – site of Indianapolis, which ranks 48th – is 27 percent black. In areas like these, fewer than one in 20 children born into a family into the bottom fifth of the income distribution in the early 1980s has made it to the top fifth as adults, the study found. By contrast, in the regions with the highest mobility, the chances can exceed one in 10. Those regions include some of the whitest parts of the country, like Utah, Idaho, Minnesota, the Dakotas and upper New England.

ATL v. BOS - Paul Krugman -- As many people have pointed out over the years, the most obvious comparison among major US metro areas is between Boston, still relatively traditional in urban structure, and Atlanta, the Sultan of Sprawl; not long ago the cities were about the same population, although Atlanta is growing much faster. A comparison looks like this: where the CO2 number comes from Glaeser and Kahn (pdf). In brief, incomes are lower in dollar terms in Atlanta, but people are moving there all the same for the cheap housing. This sounds like a win, but you can argue that it actually reduces national income. Also, the Atlanta model — with only about 1/4 Boston’s weighted population density — arguably leads to substantial external costs: more greenhouse gas emissions, in part because of slightly longer commutes, in part because of much lower use of public transit. And maybe lower social mobility, because sprawl leaves low-income workers stranded away from the jobs.Of course, if you believe with George Will that the only reason liberals like public transit is because it diminishes individualism and makes us ripe for collectivism,and if you believe climate change is a gigantic hoax, and if you believe that social mobility is entirely about individual virtue as opposed to the economic environment, you won’t see this as problematic at all.

Penn Study Finds Safety in Cities, More Risk in Rural Areas - New research from the University of Pennsylvania's Perelman School of Medicine has yielded an unexpected finding on personal safety. "If you consider safety as your risk of injury overall, we found that you're actually safest in larger cities and get less safe as the areas become more rural," said Sage Myers, the lead author of a study published Tuesday in the Annals of Emergency Medicine. That's right, Myers says: The big, bad city is less deadly than the suburbs or small-town America. Myers, a physician at the Children's Hospital of Philadelphia and an assistant professor at Penn's medical school, crunched the data from nearly 1.3 million injury-related deaths in the U.S. from 1999 to 2006, excluding the terrorist attacks of 9/11. The study found that motor vehicle crashes, firearms and poisoning were the top causes of injury-related deaths. As for the relative safety of cities, Myers says she was "a little surprised." "If you look at everything together, cities actually seem kinda safe," she said. The study confirmed that murder rates are higher in more urban areas, but fatal car crashes are far more common, especially in more rural areas. The greater magnitude of those unintentional-injury deaths (i.e., car crashes, falls, etc.) gave cities the statistical edge on safety. Myers' research team had to obtain special permission from the National Vital Statisitcs System to access the trove of data from the nation's 3,000-plus counties.

Did Sprawl Kill Horatio Alger? - Paul Krugman - I wrote yesterday’s post suggesting that sprawl may have killed Detroit without knowing either about David Leonhart’s forthcoming article on how sprawl seems to hurt social mobility or the study on which it is based — a study, by the way, not yet available at David’s link, although the underlying data are there. What Leonhart suggests, and apparently the still unavailable study also suggests, is that sprawling cities that put the poor far away from job opportunities tend to have low upward social mobility. I did a bit of data-crunching here. I took my favorite measure of sprawl, population-weighted density in thousands per square mile, versus the new study’s measure of upward mobility, the probability of children born in the bottom quintile making it into the top quintile; the data points are the top ten metro areas by population, not including New York, which is so much denser than anyone else that including it would scrunch everyone into the lower left corner:

Detroit bankruptcy: Is it a warning sign of things to come? --What if Detroit isn't a blip? What if, instead, the city's decision to enter bankruptcy proceedings is a sign of things to come? Crazy talk? Maybe. But that was the prediction in a recent book by Wall Street financial analyst Meredith Whitney, best known for being one of the very few mainstream analysts to foresee the 2008 banking meltdown.Interestingly, she also predicted this week's Detroit bankruptcy.That may seem less impressive now that it has happened. On the other hand, the screams of outrage from lenders who are being offered 10 cents on the dollar for their billions in bonds by Detroit show that it wasn't obvious to them.

Detroit’s Bankruptcy Reveals Dysfunction Common in Cities - No city was hit as hard by the recession as Detroit, America’s one-time industrial capital whose decades-long decline cut its population in half and left $18 billion in debt it can’t afford to pay. Even so, the pressures that pushed Detroit into the largest municipal bankruptcy in U.S. history are playing out on a smaller scale around the nation. Diminished tax revenue and rising labor costs have left four cities insolvent since 2007. Service cuts were made by others such as Detroit, where street lights are dark and police are scarce.“None of the other cities are as far along, but there are dozens, if not hundreds of cities that have similar issues,” said Alan Mallach, a senior fellow at the Brookings Institution, a public-policy research organization in Washington. “Every other industrial city has problems that could send them down the same path.” U.S. municipalities have recovered slowly from the 18-month recession that ended four years ago, depressing property-tax revenue and leading to investment losses for pensions that many cities haven’t fully funded for years. Projected pension and health-care obligations for the 61 biggest cities will top assets by about $217 billion, according to a study by the Pew Charitable Trusts, a Philadelphia-based research and public-policy group.

A Plan for All the Detroits Out There -  Detroit is the canary in the coal mine, but it’s symptomatic of a bigger problem, which is the lack of jobs and decent demand in the economy. The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community.  So they’ll be all of this talk about “incentive zones”, we’re sure for Detroit.  And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans. He told a Labor Day crowd in Detroit a few years ago that he wants to match the more than 1 million construction workers with an infrastructure-related rebuilding program to improve the nation’s roads and bridges. That is an improvement over his efforts to date, but it falls far short of the 20-plus million jobs we need.  So what should be done?  Well, the three of us (and others) have long proposed a longer term solution to deal with all of the Detroits that are out there: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

Michigan Governor Doesn't Want Bailout For Detroit - NPR: Michigan Gov. Rick Snyder says he's not expecting the federal government to offer a bailout for bankrupt Detroit and doesn't think it would be a good idea anyway.Speaking on CBS' Face the Nation on Sunday, Snyder said of a Washington bailout of the Motor City: "I don't expect one."Last week, the city of Detroit, facing some $18.5 billion in debt and liabilities, declared bankruptcy under Chapter 9, the federal code that allows municipalities to seek protection from creditors. At the time, Snyder approved the dire move, saying "Only one feasible path offers a way out."On Sunday, Snyder reiterated his position, saying, "bankruptcy is there to deal with the debt question.""It's not just about putting more money in a situation," he said. "It's about better services to citizens again. It's about accountable government."

Balkinization: The River of Purchasing Power Dries Up at Detroit -- If only Detroit were a big bank, Treasury officials would be working round the clock this weekend to save it. Alas, this city is no Citi. It lacks a "winning business model" (like lobbying and bonuses for key federal officials). So municipal bankruptcy is on the horizon. Detroit was chronically mismanaged, and the victim of unforgiving political geography. But the decline of jobs there is also a bellwether for the rest of the country. As Juan Cole observesThis rise of [robotized manufacturing] violates the deal that the capitalists made with American consumers after the great Depression, which is that they would provide people with well-paying jobs and the workers in turn would buy the commodities the factories produced, in a cycle of consumerism. If the goods can be produced without many workers, and if the workers then end up suffering long-term unemployment (as Detroit does), then who will buy the consumer goods? Capitalism can survive one Detroit, but what if we are heading toward having quite a few of them?

100 Abandoned Houses - The abandoned houses project began innocently enough roughly ten years ago. I actually began photographing abandonment in Detroit in the mid 90’s as a creative outlet, and as a way of satisfying my curiosity with the state of my home town. I had always found it to be amazing, depressing, and perplexing that a once great city could find itself in such great distress, all the while surrounded by such affluence...As the number of images grew, and a documentary style emerged, I switched from mostly black and white, to color, and decided to name the series 100 Abandoned Houses. 100 seemed like a lot, although the number of abandoned houses in Detroit is more like 12,000.

Detroit bankruptcy is unconstitutional - On Friday, a circuit court judge in Ingham County ruled that Detroit's federal bankruptcy filing violated a part of Michigan's constitution that protects union pensions. She ordered it withdrawn, a day after Detroit became the largest U.S. city in history to file for chapter nine bankruptcy. Judge Rosemary Aquilina also said the filing did not honor President Barack Obama's work for the city, who she said "took [Detroit's auto companies] out of bankruptcy." Aquilina said she would send a copy of her order to Obama.  “It’s cheating, sir, and it’s cheating good people who work,” the judge told assistant Attorney General Brian Devlin. “It’s also not honoring the (United States) president, who took (Detroit’s auto companies) out of bankruptcy.” The Detroit News reported "attorneys representing the pension boards hurried into Aquilina’s court to ask for a restraining order" on July 18, but Michigan Gov. Rick Snyder (R) and Detroit's emergency manager Kevin Orr "beat them by a few minutes" in filing for bankruptcy. The filing did not deter lawyers for union pension boards, who can use "court maneuvers to slow down federal bankruptcy proceedings."

What's Happening in Detroit - Already the Detroit bankruptcy is producing a interesting bit of litigation about the interaction between state and federal law. Federal bankruptcy law sets up this problem because among the requirements for a municipality to file for Chapter 9 bankruptcy is that the municipality:  is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter.  Michigan law requires that the governor approve a municipal bankruptcy filing.  The governor of Michigan has approved Detroit's bankruptcy filing, but a Michigan state court found that his approval violated the Michigan state constitution, namely a provision thatThe accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.  Presumably the governor's authority is always bounded by the state constitution--to the extent he acts ultra vires, his actions are not valid, and given the pre-filing constitutional challenge, it's hard to claim any sort of apparent authority. Still, it's not clear to me why this provision would render the governor's approval of the bankruptcy filing unconstitutional, as bankruptcy law itself prohibits the violation of the Michigan constitution provision at issue, so by authorizing the bankruptcy filing, the governor cannot be approving the violation of the Michigan constitution.

Detroit, the New Greece, by Paul Krugman - When Detroit declared bankruptcy, or at least tried to — the legal situation has gotten complicated — I know that I wasn’t the only economist to have a sinking feeling about the likely impact on our policy discourse. Was it going to be Greece all over again? ... Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem. Nonetheless, for a while policy discourse across the Western world was completely “Hellenized” — everyone was Greece, or was about to turn into Greece. And this intellectual wrong turn did huge damage to prospects for economic recovery.  Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded,... Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal...So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.

Detroit Taxes and the Laffer Curve - Detroit’s Emergency Manager Kevyn Orr has issued a clearly written report that outlines Detroit’s situation and its improvement plan. Here are a few highlights on taxes:

  • [The] per capita tax burden on City residents is the highest in Michigan. This tax burden is particularly severe because it is imposed on a population that has relatively low levels of per capita income.
  • The City’s income tax… is the highest in Michigan.
  • Detroit residents pay the highest total property tax rates (inclusive of property taxes paid to all overlapping jurisdictions; e.g., the City, the State, Wayne County) of those paid by residents of Michigan cities having a population over 50,000.
  • Detroit is the only city in Michigan that levies an excise tax on utility users (at a rate of 5%).

Detroit taxes are high not only relative to per-capita income but also, of course, relative to the delivery of services. Forty percent of Detroit’s street lights aren’t working, the violent crime rate is the highest in the country (for cities over 200,000) and fire and police services are slow and outdated. Although taxes are high they often aren’t paid. Only 53% of city property owners, for example, paid their 2011 property taxes.

The Decline and Fall of Detroit - Yves Smith - The wreck that Detroit has become was long in the making. Even when I was a kid living in the Upper Peninsula of Michigan in the early 1970s, Detroit was in bad shape. Like many major cities, it had an advanced case of white flight. The inner metro area was seen as dangerous, decaying, and probably beyond rescuing. But it was hardly the only major city to be under stress then New York teetered on the verge of default during the 1970s recession. While the Big Apple restructured its finances, the fight over the city’s budget was an early taste of the thinking that would become more entrenched in the Reagan era: the financial markets would have a major say over what solutions were up for consideration.  Dan Hopkins at the Monkey Cage flags Thomas’ Sugrue’s pathbreaking work, The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit, as the key reference in understanding what went wrong with Detroit and other major cities. In an interview in the Globe and Mail, Sugrue sketches the major factors in Motown’s decline: The first is long-term disinvestment from the city, meaning the flight of capital and jobs from Detroit beginning in the 1950s. It is employers and employees that provide the bulk of the funds for a city’s tax base. Secondly, intense hostility between the city and the rest of the state, which has a very strong racial dimension. Detroit has a long and painful history of racial conflict in local and state politics. That has contributed to the third major factor: the collapse of state and federal support for the city, which was crucial to its survival – and indeed to other cities’ survival – for a lot of the difficult times from the 1950s on forward. As a quick aside, when New York went through its fiscal crisis in the 1970s, it was bailed out by the federal government. There’s no bailout in place for Detroit today.

Detroit Bankruptcy Protections Affirmed, Snyder Shielded - Detroit can enjoy the protections of bankruptcy, including immunity from lawsuits related to the case, a federal judge ruled, extending that shield to Michigan Governor Rick Snyder. U.S. Bankruptcy Judge Steeven Rhodes in Detroit today blocked lawsuits by public employee groups and pension funds who allegd the state overreached in seeking court protection from creditors. Such claims must be heard in bankruptcy court, Rhodes said. His ruling gives the city the opportunity it said it needs to address $18 billion in debt without disruptions. Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, typically prevents creditors from taking actions against the debtor that might interfere with reorganization.  City unions and pension officials claim Snyder, 54, violated Michigan’s constitution by authorizing Orr to file for bankruptcy. Pension funds for retired city workers sued in state court to have the filing declared illegal.

Bankrupt Detroit gets $225 million to pay for new Red Wings arena - Just days after becoming the first major U.S. city to ever file for bankruptcy, Detroit's Downtown Development Authority was given approval by the Michigan Strategic Fund to use more than $225 million in taxpayer money to be part of the construction price of a new downtown arena for the NHL's Detroit Red Wings.  The arena, expected to cost $450 million, will have nearly 60 percent of the price funded by taxpayers, according to the Detroit Free Press.  Calling Detroit a "place that will be recognized across the world as a place of great value and a place to invest," Michigan governor Rick Snyder said the deal is worthwhile because it will help spur revitalization of the downtown area, of which a significant part has turned into blight.

Creditors to fight Detroit insolvency claim — The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday, culminating a decades-long slide that transformed the nation’s iconic industrial town into a model of urban decline crippled by population loss, a dwindling tax base and financial problems.Gov. Rick Snyder justified approving the historic filing by reciting a litany of the city’s ills, including more than $18 billion in debt, maxed-out tax rates, the highest murder rate in 40 years, 78,000 abandoned buildings and a half-century of residential flight. He said the city failed to provide basic services to residents or pay creditors.The filing, which has broad implications for the nation’s municipal bond market and sanctity of public pension funds, was met with outrage, disappointment and a vow to fight. Some creditors adopted a war stance, threatening a prolonged battle. Others accused Emergency Manager Kevyn Orr of failing to negotiate in good faith — an essential requirement for approval of a bankruptcy petition — during his month-long push to secure concessions from creditors, including deep cuts to pensions.“It’s war,” said George Orzech, chairman of the city’s Police and Fire pension fund.

Detroit has lots of company in long-term-debt quagmire - Detroit may be alone among the nation’s biggest cities in terms of filing for bankruptcy, but it is far from the only city being crushed by a roiling mountain of long-term debt. At the heart of Detroit’s problem is a growing unfunded debt on benefits owed to current and future retirees — some $3.5 billion, according to its emergency manager, Kevyn Orr — which mirrors a circumstance being seen across the U.S. From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center on the States, in Washington, estimated states’ public-pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010. For years, watchdog groups and public-sector analysts have warned of the threat posed by unfunded liabilities. Much like the legacy pension costs that weighed on Detroit’s automakers before the Chrysler and General Motors restructurings of 2009, the worry is that revenues can’t keep up with growing debt and that rosy predictions for market returns downplay the financial risk. As examples of the results: Chicago recently saw its credit rating downgraded because of a $19 billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. Los Angeles could be facing a liability of more than $30 billion, by some estimates.

Fall-Out from Detroit's Bankruptcy Far Too Underestimated -- By now, we all know Detroit, once a notorious manufacturing hub in the U.S. economy, filed for bankruptcy. The city defaulted on its municipal bonds simply because it didn't have the money to give its creditors. The city had three main reasons for filing bankruptcy: out-of-control budget deficits, declining revenues, and staggering pension liabilities. Detroit isn't the first city to file for bankruptcy due to a budget deficit and default on its municipal bonds. We have already seen multiple cities in California and Jefferson County, Alabama do the same thing. Unfortunately, we might see similar troubles going forward -- more cities are headed into a downward spiral due to budget deficits and pension liabilities, resulting in severe scrutiny for municipal bonds investors.A senior fellow at the Brookings Institution (a public-policy not-for-profit research organization), Alan Mallach agrees with this notion. He said, "None of the other cities are far along, but there are dozens, if not hundreds of cities that have similar issues… Every other industrial city has problems that could send them down the same path." Chicago just witnessed a downgrade in its municipal bonds by credit reporting agency Moody's Investors Service. The main reasons for the downgrade? Its budget deficit and rising pension liabilities. Analysts at the credit rating firm said, "The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city's pension obligations has precluded any meaningful financial improvements."

Meredith Whitney says Detroit will start a wave of municipal bankruptcies - Banking analyst Meredith Whitney says the effects of Detroit’s declaration of bankruptcy last week on the multi-trillion dollar U.S. municipal bond markets will be “staggering.”Whitney has faced a good deal of ridicule since her prediction late in 2010 that a wave of “50 to 100 sizeable” municipal bankruptcies would strike across the U.S. But in a commentary in the Financial Times on Tuesday, Whitney remained adamant that the fiscal structure of America’s cities is unsustainable. Whitney noted in the piece that “there are five more towns like Detroit in Michigan alone.” So far, Detroit is the most egregious example of what can happen, but the city’s bankruptcy declaration “ should not be regarded as a one-off,” she said in the FT piece.

Don’t Let Bankruptcy Fool You: Detroit’s Not Dead - On Thursday, the city of Detroit filed the largest municipal bankruptcy in American history.  Cue the panic.  The media, internet, and social media exploded with predictable stories of the city's imminent demise. There's the shrinking population, which dwindled from a peak of nearly 2 million to 700,000 in 2012. Over and over again, we heard the the long list of other woes – mass joblessness, the sky-high murder rate, street lights that don't work, unthinkably long waits for police and emergency services, huge numbers of vacant buildings, , and neighborhoods that are all but abandoned. Even Michigan's own Michael Moore seemingly admitted defeat: By Friday, a Michigan court ruled the bankruptcy unconstitutional, leaving the city's future even more up for grabs. The reality is that Detroit's fiscal woes have been a long time in the making. They are the product of the city's history finally catching up. They reflect much more than a revenue shortfall, or even incompetent and at times corrupt city politics. They are the product of a half century or more of white flight, the outmigration of industry, deindustrialization, sprawl, and the huge racial and class division between the city and the suburbs, all of which have been well-chronicled.

There's No Formula for Fixing Detroit, and That's a Good Thing - The news of Detroit's bankruptcy has brought countless explanations of what went wrong, some of them pretty interesting. But the main point of a bankruptcy — especially this bankruptcy, which has been looming for decades — is to get a fresh start. So it's been dismaying to see how little attention has been paid in the past week's news coverage to the fact that central Detroit is already in the midst of fresh start, a revitalization that feels far more organic and durable than past top-down efforts like the construction of the Renaissance Center in the late 1970s and the arrival of casinos in the late 1990s (although the casinos do appear to pay the bulk of the city's bills at the moment). Decrepit buildings in downtown and midtown are being renovated and converted into loft apartments, hotels, restaurants, and offices. Compuware and Quicken Loans have moved their headquarters and thousands of employees from the suburbs to the city. There's an incipient venture-capital and startup scene, and lots of small creative businesses. The area's pro sports teams are almost all back downtown. Young, upwardly mobile people are actually moving to Detroit. At the moment, this renaissance is almost completely disconnected from what's going on in the rest of the city. A small group of affluent, well-educated Creative Classers (and a larger number of occasional suburban visitors) has occupied an island in a sea of economic despair. One telling factoid: Detroit had been without a major chain supermarket since 2007. Now it has one in midtown, and it's a Whole Foods!

Cries of Betrayal as Detroit Plans to Cut Pensions  - Detroit wants to cut the pensions it pays retirees like Ms. Killebrew, who now receives about $1,900 a month. “It’s been life on a roller coaster,” Ms. Killebrew said, explaining that even if she could find a new job at her age, there would be no one to take care of her husband. “You don’t sleep well. You think about whether you’re going to be able to make it. Right now, you don’t really know.” Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts that led the city to file for bankruptcy last week. How it handles this problem — of not enough money set aside to pay the pensions it has promised its workers — is being closely watched by other cities with fiscal troubles. Kevyn D. Orr, the city’s emergency manager, has called for “significant cuts” to the pensions of current retirees. His plan is being fought vigorously by unions that point out that pensions are protected by Michigan’s Constitution, which calls them a contractual obligation that “shall not be diminished or impaired.”

The Great Pension Scare - Krugman - OK, this is quite amazing: Dean Baker catches the WaPo editorial page claiming that we have $3.8 trillion in unfunded state and local pension liabilities. . Except the study the WaPo cites very carefully says that it’s $3.8 trillion in total liabilities, not unfunded; unfunded liabilities are only $1 trillion.I’ll be curious to see how the paper’s correction policy works here. But how big is that $1 trillion anyway? It still sounds like a big number, doesn’t it? Dean tries to compare it with projected GDP, which is one way to scale it. Here’s another.  You see, the Boston College study doesn’t just estimate assets and liabilities; it also estimates the Annual Required Contribution, defined as normal cost – the present value of the benefits accrued in a given year – plus a payment to amortize the unfunded liability And it compares the ARC with actual contributions. According to the survey, the ARC is currently about 15 percent of payroll; in reality, state and local governments are making only about 80 percent of the required contributions, so there’s a shortfall of 3 percent of payroll. Total state and local payroll, in turn, is about $70 billion per month, or $850 billion per year. So, nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year. A $25 billion shortfall in a $16 trillion economy. We’re doomed!

Pension Deficits Get Renewed Scrutiny After Detroit Bankruptcy - The bankruptcy of Detroit, which may cut retirement benefits of 30,000 current and former city workers, is causing investors to scrutinize billion-dollar shortfalls in government pensions in other parts of the country. Chicago, Philadelphia, New York, Phoenix and Jacksonville, Florida, are among large cities that had 60 percent or less of what they need in their retirement systems to cover promised benefits, according to data compiled by Bloomberg. At least 29 public plans in 16 states are less than two-thirds funded, according to Boston College’s Center for Retirement Research. The Wall Street credit crisis that peaked in 2008 sent stocks tumbling and cut the value of pension assets, while most plans count on annual investment gains of about 8 percent. The losses are forcing governments to find ways to cut benefits and pump more money into their retirement systems, leading to disputes between unions and political leaders.

Detroit bankruptcy sets stage for national assault on public-sector pensions -  While the administration rushed to bail out Wall Street, Vice President Joseph Biden said White House officials “don’t know at this point” what they can do to help Detroit.Obama, who allowed the auto companies to dump their retiree health care obligations during the 2009 auto industry bailout, clearly sees the attack on Detroit workers as paving the way to slash benefits owed to state and municipal workers throughout the country. The Pew Center for the States has estimated that states’ public pension plans across the US were underfunded by $1.4 trillion in 2010. After decades in which the bankruptcy courts were used to gut the pensions and health care benefits of private-sector retirees in steel, airlines, auto, mining and other industries, public-sector workers are now being targeted for having supposedly unsustainable “legacy costs.”

Pro-Baby, but Stingy With Money - Conservatives have a particularly soft spot for babies. They tend to have more children than liberals and they are much more likely to oppose abortion rights. They also appreciate babies’ power... But there is an odd inconsistency in conservatives’ stance on procreation: many also support some of the harshest cuts in memory to government benefit programs for families and children. First Focus, an advocacy group for child-friendly policies, will release on Wednesday its latest “Children’s Budget,” which shows how federal spending on children has declined more than 15 percent in real terms from its high in 2010, when the fiscal stimulus law raised spending on programs like Head Start and K-12 education. Some school districts have been forced to fire teachers, cut services and even shorten the school week. Head Start has cut its rolls. Families have lost housing support. And the 2014 budget passed by Republicans in the House cuts investments in children further — sharply reducing money for the Departments of Education, Labor and Health and Human Services. ... If conservatives truly believe that the United States needs more babies, they might temper their hostility to programs that help families afford them.

Chicago CEO Club, With Rahm and Pritzkers on Board, Pushed for Chicago Bond Downgrade, Whacking Local Investors and Pension-Holders - Yves Smith - Even more so than most cities, Chicago has had the best government money can buy. In this case, the money is willing to engage in a scorched-earth policy of crushing local investors and wrecking the city budget to achieve its end of taming unions and making Chicago even easier pickings for looting via infrastructure sales. The backdrop is that the city was hit with a stunning three-ratings-notch downgrade by Moody’s last week, from AA3 to A3. Members include the union-busting Pritzers, both Penny and Thomas, a long list of current and recent corporate CEOs and chairmen, influential members of the banking and real estate industries, partners from major law firms, and Rahm as an “honorary members”. This is a Who’s Who of business Chicago. Not only was Fahner open about how aggressive the lobbying by the CEOs for the downgrade had been, and didn’t disagree with the questioner who called it irresponsible (as in “we know we are doing harm to promote what is good for us”), he said they’d had to back off because they didn’t want their handiwork to be too visible, and was exhorting people in the room to take up the campaign for him. So here we have it: city fathers working to wreck a city budget so their companies will benefit from more tractable, as in more broke, local workers.

Chicago schools budget seen sinking deeper in the red despite cuts (Reuters) - Chicago's public schools on Wednesday Ads by GoogleK12 Elementary Champion Your Child's Academic Future, Learn More Now! Scenic Tours by The world's best multi-day train vacations. Best price guarantee. forecast a record $1 billion fiscal 2014 budget deficit despite layoffs of 1,000 teachers and the expected closing of 50 schools, prompting one credit agency to downgrade its debt rating. The nation's third-largest public school district blamed the mounting red ink on an expected sharp rise in annual pension payments for teachers, because the state of Illinois has failed to curb ballooning pension costs. The district also said that salary increases negotiated last September to settle a bitter strike with the Chicago Teachers Union contributed to the budget deficit. Chicago schools said in a statement that it would slash administrative costs and tap financial reserves to help balance the 2014 budget, forecast to total $5.6 billion. In May, the Chicago Board of Education approved closing 50 schools, including about 10 percent of all elementary schools - in the largest mass school closing in U.S. history.

United Nations Urged To Take Action Following Chicago School Closures - The Midwest Coalition for Human Rights sent a “letter of allegation” to the Office of the High Commissioner on Human Rights in Geneva, Switzerland, on Tuesday, asking the organization to watch for “potential domestic and international human rights violations” in Chicago when school starts this year. The letter –- penned by University of Chicago law professor Sital Kalantry -- explains that school closures will force children to attend far away schools, where they will have to travel through violent, gang-ridden communities. “The United Nations taking this issue up and giving it serious attention will really bring home to Chicago and the United States that there are violations occurring here of human rights, potentially, not just about a budget crisis,” Kalantry told Chicago Public Radio outlet WBEZ.  The letter suggests the school closings breach principles required in a number of international treaties signed by the U.S. It argues the closings violate the right to equality and non-discrimination in education, as they disproportionately affect minority students and students with disabilities and will result in lower-quality education for those affected.

The perils of online college learning - Let it not be said that San Jose State University hasn't taught the world a valuable lesson in the promises and pitfalls of the fancy new craze for online university learning. The Cal State University campus set itself up as a pioneer in the field in January, when it announced plans to enroll up to 300 students in three introductory online courses; the fee would be $150, a deep discount from the usual cost of more than $2,000. Two weeks ago the results of the experiment came in. More than half the students flunked. San Jose's work with Udacity, the well-funded Silicon Valley start-up that set up the online program, will be suspended for the fall semester — put on "pause," as the partners say — so the courses can be retooled."We want to reduce the hype and take a scientific look at the results," San Jose State's provost, Ellen Junn, told me. That's very wise, but the chances that careful evaluation of the San Jose experiment will reduce the hype surrounding online learning are slim. Online learning is seen today as the answer to virtually every problem facing higher education, especially public higher ed.

MOOCs, their failure, and what is college for anyway? - mathbabe - Have you read this recent article in Slate about they canceled online courses at San Jose State University after more than half the students failed? The failure rate ranged from 56 to 76 percent for five basic undergrad classes with a student enrollment limit of 100 people. Personally, I’m impressed that so many people passed them considering how light-weight the connection is in such course experiences. Maybe it’s because they weren’t free – they cost $150. It all depends on what you were expecting, I guess. It begs the question of what college is for anyway. I was talking to a business guy about the MOOC potential for disruption, and he mentioned that, as a Yale undergrad himself, he never learned a thing in classes, that in fact he skipped most of his classes to hang out with his buddies. He somehow thought MOOCs would be a fine replacement for that experience. However, when I asked him whether he still knew any of his buddies from college, he acknowledged that he does business with them all the time. Personally, this confirms my theory that education is more about making connection than education per se, and although I learned a lot of math in college, I also made a friend who helped me get into grad school and even introduced me to my thesis advisor.

Just Released: Mapping Changes in School Finances - New York Fed - This morning, the New York Fed released a set of interactive maps and charts illuminating school finances in New York and New Jersey. These user-friendly graphics illustrate the progression of various school finance indicators over time. They also make clear the large variability in finances across districts and states.   The interactive maps and charts are an exciting way to dive right into the data. Not only can you explore common trends, such as funding spikes from the federal stimulus intended to combat the recession, you can also zoom in on your own school district or any other district of interest. The format also makes it easy to compare any school finance indicator across school districts and states, at a certain point in time or over time. These interactive visuals are based on data from the New York Office of the State Comptroller, the New York Department of Education, and the New Jersey Department of Education. In the coming months, we’ll be posting more in-depth analyses of these interesting and important data. In the meantime, we offer a few quick insights and suggestions for what to explore in the interactive graphics:

Sallie Mae says post-recession, parents paying less for college - It's no secret the recession wiped away many Americans' wealth and savings while altering spending habits. That has changed how many families are paying for college.A survey released Tuesday by Sallie Mae found that parents are now contributing less of their income for college than they did four years ago.  Instead, families are relying more on grants and scholarships to cover the costs of higher education. They are also cutting expenses from the traditional college experience. Fewer students are living on campus, and they are fast-tracking coursework in order to finish college sooner.  “In this post-recession environment, families overwhelmingly believe in the dream of college, yet they are more realistic when it comes to how they pay for it,” The survey found that scholarships and grants pay 30% of college expenses -- that's up from 25% in 2009.The average amount of financial aid has also increased, jumping to $6,355 from $4,859 in 2009.Parents have struggled to pay for their children's education. Now, 27% of their income goes toward paying for college. That's a drop of 10 percentage points since 2009. The recession has also placed a higher value on getting a degree, the survey found. Nearly 90% of parents said going to college is an investment. That's up from 80% in 2009.

Congress Nears Deal on Student Loan Rates. Spoiler Alert: They’re Going Up - In a moment of rare bipartisan collaboration, the Senate hammered out an agreement last week to keep rates on some new student loans from doubling, and it’s expected that a final version will be signed into law before the new academic year starts. It’s welcome progress, but here’s the rub: The compromise pretty much guarantees that rates will go up in the future.  Lawmakers said that instead of the 6.8% rate that kicked in July 1, the rates on Stafford loans, both subsidized and unsubsidized, will be set at 3.86% retroactive to July and through the 2015 academic year, USA Today and others reported. The new agreement stipulates that students will pay the current yield on the 10-year Treasury note plus 2.05%. The new loan rate isn’t too far off the 3.4% students getting subsidized Stafford loans had been paying before, but that’s going to change: Treasuries are currently at historic lows, which will all but guarantee higher loan payments for future generations of students.The GOP-led House had first endorsed the idea of a variable rate tied to Treasuries in its own version of a student loan bill, which it passed in May. Proponents of tying interest rates for loans to a market benchmark like Treasury rates say such a system is more fair because it doesn’t subject borrowers to political whims and wrangling. The Institute for College Access & Success (TICAS), though, called the deal a “missed opportunity” because it will lead to students paying more as the economy improves and Treasury rates rise.

Support for College Students and Banks: Not So Different - A bipartisan deal reached in the Senate clears the way for legislation on federal student loans to undo the July 1 increase in interest rates on new loans to 6.8 percent from 3.4 percent.  The Senate approach includes this link, pegged to yields on 10-year Treasury notes.  The rate on new loans would adjust each year up to a cap, but an individual borrower’s interest rate would be fixed over the life of the loan. This is expected to lead to relatively low interest rates on student loans in the near term and higher rates in the future as yields on Treasury bonds rebound with the economy over the next several years.Left aside in the bonhomie was a proposal from Senator Elizabeth Warren, a Democrat from Massachusetts, that would have used the Federal Reserve’s discount window lending as the benchmark for student loans while Congress worked on a “fair, long term solution.” Under what was titled the Bank on Students Loan Fairness Act, college students would get their loans from the federal government for one year at the same 0.75 percent interest rate the Fed charges banks. The proposal garnered nine co-sponsors, all Democrats, along with a long list of endorsements from the likes of university professors and administrators and organizations representing students.  Others were not as welcoming. President Obama reportedly tried to steer Senator Warren toward the bipartisan compromise, while education experts from the Democratic-leaning Brookings Institution wrote that Senator Warren’s proposal “should be quickly dismissed as a cheap political gimmick.”

Elizabeth Warren, hard-liner - Earlier this week at the White House, President Barack Obama tried to use his powers of persuasion on Elizabeth Warren, privately urging the consumer watchdog-turned-Massachusetts senator to back the student loan deal he was reaching with Senate leaders. It didn’t work. On Thursday, she went to the Senate floor to attack the plan, saying it would hurt students and benefit big banks. “I think this whole system stinks. We should not go along with any plan that continues to produce profits for the government. It is wrong,” Warren said. This wasn’t an isolated incident; after nearly seven months in office, Warren has staked out firm ground to the left of the president and Senate Democratic leaders. She has called for prosecuting the actors in the financial meltdown; urged Senate leaders to invoke the “nuclear option” to help confirm Richard Cordray as head of the Consumer Financial Protection Bureau, an agency she helped create; and was one of just four senators to vote against Obama’s U.S. Trade Representative nominee, demanding more transparency on trade agreements.

Yes, We Should Worry About Public Pensions -- In the wake of the Detroit bankruptcy, Paul Krugman has a post pooh-poohing concerns about public pensions. His conclusion:“Nationwide, governments are underfunding their pensions by around 3 percent of $850 billion, or around $25 billion a year.A $25 billion shortfall in a $16 trillion economy. We’re doomed!”(Yes, that’s sarcasm.)I know why Krugman wants to argue that this isn’t a problem. If everyone believes that public pensions are a big problem, then the austerity crew will convert that belief into a push to cut public pensions—just like they have tried to use future shortfalls in the Social Security and Medicare trust funds to insist on privatizing or voucherizing those programs.But for people who care about retirement security for middle-class Americans—and, more importantly, middle-class Americans who depend on public pensions—public pension shortfalls are a real problem. The public sector is the last major refuge of defined benefit pensions—the kind that provide a guaranteed annual income after retirement—and public employees paid for those pensions with lower wages while working. Shortfalls today mean a higher likelihood that those people will get stiffed when they retire, or at some point after they retire.

Health Law’s Success Rests on the Young - The success of the new health-care law rides in large measure on whether young, healthy people like Gabe Meiffren, a cook at a Korean-Hawaiian food cart, decide to give up a chunk of disposable income to pay for insurance.  Mr. Meiffren, who hasn't seen a doctor in more than a year, isn't sure buying insurance is worth it, despite a federal penalty for failing to buy coverage, starting in January. President Barack Obama's signature initiative rests on what Mr. Meiffren and his peers choose. If flocks of relatively healthy 20- and 30-somethings buy coverage, their insurance premiums will help offset the costs of newly insured older or sicker people who need more care. If they don't, prices across the U.S. could spike. Traditional insurance industry tools for managing risk—such as charging sick customers higher prices—are banned under the law, raising the importance of attracting young, healthy buyers. The new law employs a carrot-and-stick approach: Federal subsidies will be available to some lower-income workers. And most of those who ignore the law next year must pay an annual penalty, based on income, that begins at $95 and climbs dramatically in the years that follow. Interviews here with more than two dozen single workers of modest income between 24 and 31 years old suggest that insurance plans will be a hard sell. Subsidies for 26-year-old workers range from $118 a month for someone earning under $16,000 to less than $1 a month for one earning $26,500, according to an analysis of insurance data.

U.S. Health Spending: One of These Things Not Like Others - That the U.S spends a lot of money on health care is a refrain many Americans are familiar with, but the latest health expenditure data from the Organization for Economic Co-operation and Development still are striking. Here’s a graph of health-care expenditure as a percentage of gross domestic product for the 34 member nations of the OECD between 1980 and 2012. As you can see, there’s one country whose expenditure begins to distinguish itself from all the others — the U.S. In 2011, the most recent year in which most of the countries reported data, the U.S. spent 17.7% of its GDP on health care, whereas none of the other countries tracked by the OECD reported more than 11.9%. And there’s a debate about just how well the American health-care system works. As the Journal reported recently, Americans are living longer but not necessarily healthier. You can find the underlying data here.

The True Cost To Americans of The Medical Mafia Skim And The Failure of OCare To Bust It - Peter Schiff has posted a video regarding the US being 27th in the world in wealth per capita. I have to wonder if that’s not directly related to the US health care scam, and the drag that imposes on the US economy. The fact that the US ranks last among major industrial nations in health care outcomes is pretty well publicized, although a broad segment of Americans would prefer to ignore that fact. The fact that its health care costs are the highest in the world is well known in some quarters, not in others, where again, the preference is to be ignorant. I’ve often mentioned the fact that US health care costs absorb 18-19% of GDP, while the rest of the world is around 10-11%. The US medical industrial mafia syndicate that controls the delivery of medical services in the US skims 7% of GDP.  If you have any interest in statistics on how the US stacks up with the rest of the world in terms of outcomes and costs, this paper is chock full of them.  I just want to show something very simple in one picture. I want to to illustrate the US medical mafia skim that marks up the true cost of the service by 70% and steals 7% of our productive worth each year. Now at 17.9% of GDP, Kaiser Health says that figure will rise to 20%  in eight years. The medical mafia skim now totals $1 trillion per year, and that will only increase in the years ahead.  That’s $7,500 per year, per average US household. Every American household is paying that much to a mafia protection racket. That’s what the US medical industrial complex is, a protection racket.

Why Is The United States So Sick? - Americans die younger and experience more injury and illness than people in other rich nations, despite spending almost twice as much per person on health care. That was the startling conclusion of a major report released earlier this year by the U.S. National Research Council and the Institute of Medicine. It received widespread attention. The New York Times concluded: "It is now shockingly clear that poor health is a much broader and deeper problem than past studies have suggested." What it revealed was the extent of the United States' large and growing "health disadvantage," which shows up as higher rates of disease and injury from birth to age 75 for men and women, rich and poor, across all races and ethnicities. The poorer outcomes in the United States are reflected in measures as varied as infant mortality, the rate of teen pregnancy, traffic fatalities, and heart disease. Even those with health insurance, high incomes, college educations, and healthy lifestyles appear to be sicker than their counterparts in other wealthy countries. The U.S. Council on Foreign Relations, a nonpartisan think tank, described the report as "a catalog of horrors." Findings that prompted this reaction include the fact that the rate of premature births in the United States is the highest among the comparison countries and more closely resembles those of sub-Saharan Africa. Premature birth is the most frequent cause of infant death in the United States, and the cost to the health care system is estimated to top $26 billion a year. As distressing as all this is, much less attention has been given to the obvious question: Why is the United States so unwell? The answer, it turns out, is simple and yet deceptively complex: It's almost everything.

Doctors picking their own prices - REPORTERS PETER Whoriskey and Dan Keating have opened Post readers’ eyes to the fact that Medicare pays for physician services — a $69.6 billion item in 2012 — according to an arcane and little-known price list, over which doctors themselves exercise considerable and less-than-totally-transparent ­influence. Known as the Relative Value Update, the process consists of a 31-member committee of the American Medical Association (AMA) recommending what Medicare should pay for some 10,000 procedures — with the fees based in part on how long it takes to complete each one. This time-and-motion study often fails to take full account of changing technology and other factors affecting physician productivity, so anomalies result: For example, Medicare pays for a 15-minute colonoscopy as if it took 75 minutes.

Leaked memo reveals big pharma’s strategy to combat regulators who want drug trial results published - The pharmaceutical industry has “mobilised” an army of patient groups to lobby against plans to force companies to publish secret documents on drugs trials. Drugs companies publish only a fraction of their results and keep much of the information to themselves, but regulators want to ban the practice. If companies published all of their clinical trials data, independent scientists could reanalyse their results and check companies’ claims about the safety and efficacy of drugs. Under proposals being thrashed out in Europe, drugs companies would be compelled to release all of their data, including results that show drugs do not work or cause dangerous side-effects.The strategy was drawn up by two large trade groups, the Pharmaceutical Research and Manufacturers of America (PhRMA) and the European Federation of Pharmaceutical Industries and Associations (EFPIA), and outlined in a memo to senior industry figures this month, according to an email seen by the Guardian.

Influencing China's healthcare industry - Allegations that British drugs giant GlaxoSmithKline has paid millions of dollars in bribes to increase its market share in China have thrown the spotlight on the country's murky pharmaceutical industry. China's health spending is projected to soar from $357bn (£232bn) in 2011 to $1tn in 2020, according to a report by McKinsey, the global management consultancy group. And with sales slowing in the West, the global drugs giants want a share of the booming profits in China. But now the Chinese authorities say they are investigating up to 60 pharmaceutical firms in an effort to curb drugs prices. Chinese doctors who spoke on condition of anonymity to the BBC - fearing they would lose their jobs for speaking out - say the healthcare system is awash with corruption.

F.D.A. Says Importers Must Audit Food Safety - More than two years after Congress passed a landmark law meant to prevent the importation of contaminated food that sickens Americans, the Food and Drug Administration proposed rules on Friday that for the first time put the main onus on companies to police the food they import.  Major food importers and consumer advocates generally praised the new rules, but the advocates also said they worried the rules might give the companies too much discretion about whether to conduct on-site inspections of the places where the food is grown and processed. They said such inspections must be mandated.  The law itself was grappling, in part, with problems that have grown out of an increasingly globalized food supply. About 15 percent of food that Americans eat comes from abroad, more than double the amount just 10 years ago, including nearly two-thirds of fresh fruits and vegetables. And the safety of the food supply — foreign and domestic — is a critical public health issue. One in every six Americans becomes ill from eating contaminated food each year, Dr. Margaret A. Hamburg, F.D.A. commissioner, estimated. About 130,000 are hospitalized and 3,000 die. The F.D.A. has tried to keep tabs on imports, but, in reality, manages to inspect only 1 to 2 percent of all imports at American ports and borders.

Raw Sewage Has Turned The Hudson Into An Antibiotic-Resistant Cesspool - The Hudson River is filled with raw sewage and is teeming with antibiotic-resistant bacteria.  In a study published in the Journal of Water and Health, scientists have confirmed what you already knew — the Hudson River is really, really dirty. And filled with ampicillan and tetracycline-resistant microbes, probably thanks to the consistent presence of untreated raw sewage in the river from regular overflow and events like Hurricane Sandy, which casually released 11 billion gallons of sewage into New York and New Jersey rivers, lakes, and waterways. The bacteria was found in locations from lower Manhattan up to the Tappan Zee Bridge. Apparently the heaviest concentrations were found in Yonkers, around 125th Street, and near La Guardia Airport. According to Columbia's study, rivers incubate bacteria, allowing the transfer of drug-resistant genes to normal bacteria, which can then change into disease-causing bacteria.

American Weapons Linked To Outbreak Of Birth Defects And Cancer In Iraq - America’s war of aggression in Iraq produced many immediate casualties, but recent reports from the Iraq are citing another, longer term, cost of war. America’s use of depleted uranium shells is causing record numbers of birth defects and cancer in previous combat areas. Doctors are struggling to cope with the outbreak.The US military’s use of depleted uranium in Iraq has led to a sharp increase in Leukemia and birth defects in the city of Najaf – and panicked residents are fearing for their health. Cancer is now more common than the flu, a local doctor tells RT. The city of Najaf saw one of the most severe military actions during the 2003 invasion. RT traveled to the area, quickly learning that every residential street in several neighborhoods has seen multiple cases of families whose children are ill, as well as families who have lost children, and families who have many relatives suffering from cancer.Uranium is radioactive and a known carcinogen, but whether or not the amount present in the American ammunition used during the war is enough to cause the kind of disease present in Iraq today has yet to be proven conclusively. But if reports are correct, it would be quite a coincidence that the areas presenting the increases in birth defects and cancer are also the ones where heavy use of depleted uranium shells took place.

Pesticide Found in Meals That Killed India Children, Official Says - The free school lunch that killed 23 Indian children last week was contaminated with a concentrated pesticide that is not widely available, the district magistrate overseeing the police investigation said Sunday.  The children fell ill, vomiting and convulsing with stomach cramps, within minutes of eating a meal of rice and potato curry in their one-room school in Bihar State on Tuesday.   The meal was part of India’s school lunch program, which covers 120 million children and aims to tackle malnutrition and encourage school attendance. An initial forensic investigation found that the meal had been prepared with cooking oil that contained monocrotophos, an organophosphorus compound that is used as an agricultural pesticide, Ravindra Kumar, a senior police official, told reporters on Saturday.  The pesticide found in the oil was of a concentration more than five times that used in a commercial version, according to a forensic report.  “It is highly poisonous, it’s highly toxic and, therefore, it has to be diluted when used as commercial pesticides,” Mr. Sinha said that the concentrated form was not widely available and that the pesticide was normally sold commercially in the diluted state.  The police said Friday that they suspected the cooking oil used in the meal had been kept in a container previously used to store the pesticide. They are still looking for the headmistress of the school, who fled after the deaths.

Scientists discover what’s killing the bees and it’s worse than you thought - As we’ve written before, the mysterious mass die-off of honey bees that pollinate $30 billion worth of crops in the US has so decimated America’s apis mellifera population that one bad winter could leave fields fallow. Now, a new study has pinpointed some of the probable causes of bee deaths and the rather scary results show that averting beemageddon will be much more difficult than previously thought. Scientists had struggled to find the trigger for so-called Colony Collapse Disorder (CCD) that has wiped out an estimated 10 million beehives, worth $2 billion, over the past six years. Suspects have included pesticides, disease-bearing parasites and poor nutrition. But in a first-of-its-kind study published today in the journal PLOS ONE, scientists at the University of Maryland and the US Department of Agriculture have identified a witch’s brew of pesticides and fungicides contaminating pollen that bees collect to feed their hives. The findings break new ground on why large numbers of bees are dying though they do not identify the specific cause of CCD, where an entire beehive dies at once.

Honey bees in trouble? Blame farm chemicals, study says - Honey bees rented to out pollinate crops from apples to watermelons return to their hives with pollen containing an array of agricultural chemicals that make the insects more vulnerable to infection by a lethal parasite, according to a new study. While other research has shown certain pesticides, including insecticides known as neonicotinoids and others used to fight parasitic mites, can compromise bee health, the new study shines a light on the impact of sprays used to kill fungi and molds. "Fungicides, which we didn't expect to harm insects, seem to have a sub-lethal effect on bee health," "And that is important, of course, because there is not a lot of regulation for fungicides when they are being applied to flowering plants … so this suggests that we need to rethink and reevaluate how we write label laws for some fungicides," he added. The study, published online Wednesday in the journal PLoS One, is the first to analyze the real-world conditions honey bees encounter as they pollinate crops. The analysis revealed which flowering plants were the bees' main pollen sources and what agricultural chemicals were commingled with the pollen.

Monsanto virtually gives up on growing GMO crops in Europe - Monsanto has pretty much given up any hope (at least for now) of selling its genetically engineered seeds for corn, sugar beets, and other crops in Europe, where opposition to GMO food is overwhelming.From the L.A. Times: Monsanto Co. said Thursday it will largely drop its bid to grow some of its genetically modified crops in Europe.The world’s largest seed-maker has nine pending applications with the European Commission, the executive body for the European Union. A spokesman said the company plans to withdraw eight of those applications.The requests “have been going nowhere fast for several years,” said Brandon Mitchener, a spokesman for the St. Louis-based company’s European entity. “There’s no end in sight … due to political obstructionism.”The European Union’s stubborn resistance to transgenic crops stands in stark contrast to the welcome mat rolled out by American lawmakers for agro-giants and their most controversial products.

With declines in Ogallala Aquifer, a reflection on the politics of agricultural environmentalism - Here is an excellent, sober, persuasive, and worrisome report at Science 360 about the accelerated decline of the Ogallala Aquifer from 2011 to 2013, because of drought on the Great Plains. Climate science includes big uncertainties, but it seems likely that global climate change is causing more frequent droughts in the Great Plains.  I hope scientifically savvy and pragmatic corn farmers who rely on the Ogallala Aquifer have the political courage to resist the temptation to ally with anti-government conservatives who flirt with climate denialism.  Even though it takes some work and some compromise, and even some tolerance for cultural differences between heartland folks and city dwellers, I think farmers have a more promising long-term future allied with the pragmatic wing of the environmental movement.

Our Coming Food Crisis - The problem isn’t spiking temperatures, but a new reality in which long stretches of triple-digit days are common — threatening not only the lives of the millions of people who live there, but also a cornerstone of the American food supply.  People living outside the region seldom recognize its immense contribution to American agriculture: roughly 40 percent of the net farm income for the country normally comes from the 17 Western states; cattle and sheep production make up a significant part of that, as do salad greens, dry beans, onions, melons, hops, barley, wheat and citrus fruits. The current heat wave will undeniably diminish both the quality and quantity of these foods.  The most vulnerable crops are those that were already in flower and fruit when temperatures surged, from apricots and barley to wheat and zucchini. Idaho farmers have documented how their potato yields have been knocked back because their heat-stressed plants are not developing their normal number of tubers. Across much of the region, temperatures on the surface of food and forage crops hit 105 degrees, at least 10 degrees higher than the threshold for most temperate-zone crops.  What’s more, when food and forage crops, as well as livestock, have had to endure temperatures 10 to 20 degrees higher than the long-term averages, they require far more water than usual. The Western drought, which has persisted for the last few years, has already diminished both surface water and groundwater supplies and increased energy costs, because of all the water that has to be pumped in from elsewhere.

NASA Video: Watch US Heat Up by 2100 - The United States will be a much hotter place at the end of the 21st century, according to a new climate change visualization released by NASA this week.The video illustrates a small component of the upcoming National Climate Assessment, set to come out in 2014, which provides Congress with the most up-to-date information on the state of climate change in the country from more than 240 contributing climate scientists. The last report was published in 2009.Researchers at NASA's Goddard Space Flight Center teamed with scientists at the National Oceanic and Atmospheric Administration's National Climatic Data Center (NCDC) in Asheville, N.C., to create a new video, which compares two different climate change scenarios: One in which atmospheric carbon dioxide levels increase from today's level of 400 parts per million to 550 ppm, and a second in which carbon dioxide levels double to 800 ppm. (Parts per million means that, for example, for every million molecules of air, 400 of them are carbon dioxide.)These carbon dioxide concentrations are based on high- and low-emissions scenarios proposed by the Intergovernmental Panel on Climate Change, and are based on a variety of factors, including potential world population growth, economic development and global commitment to sustainability. The first scenario would require some kind of mitigation and curtailment of greenhouse gas emissions, while the second would occur if emissions continued to increase.

New York City Breaks Its Energy Use Record During Brutal Week-Long Heat Wave - The heat wave that blanketed parts of the East Coast in close to 100-degree temperatures and high humidity broke the daily temperature record at JFK International Airport. It was the longest heat wave in New York City in more than a decade. But it made history in another way too: New York City broke its record for energy use on Friday, as residents cranked up air conditioning in an effort to stay cool.  Friday marked the sixth of the seven-day heat wave that brought heat indexes as high as 107 degrees to parts of New York. The city wasn’t alone in its need for air conditioning: the heat wave caused New York State, too, to break its previous power record, which was set in 2006.  New York City’s last energy use record was set in July 2011, amidst another bout of extreme temperatures — a cycle of high rates of energy usage in response to high temperatures that will become more common as climate predictions continue to play out. Heat waves are already becoming more frequent and intense as temperatures rise, and duration of heat waves has increased worldwide since the 1950s. In order to find relief from the high temperatures, residents retreat to air conditioned homes and buildings, driving up the emissions that contribute to climate change. The U.S., which has long been a leader in air conditioning usage, has seen a surge in its energy useage from A.C. over the past few decades — between 1993 and 2005, the energy it took to cool U.S. homes doubled, and by 2010 it increased by another 20 percent.

D.C. Sets Record With 138 Hours Above 80°F During Brutal Nationwide Heat Wave - The heat dome that enveloped Washington, D.C. for much of the last week, so miserable it even prompted Metro to temporarily lift its ban on passengers drinking water aboard its trains, also broke a long-standing heat record.For over five and a half days, the temperature was least 80 degrees in D.C. This 138-hour streak is the longest on record, dating back to 1871, and besting the 128-hour streak of two years ago. As Jason Samenow of the Capital Weather Gang notes, this record is just the latest in an “astonishingly long list” of heat-related milestones amassed over the past four summers, including: hottest three Julys, hottest three summers, most 100-degree days in a month, and longest uninterrupted stretch above 100 degrees. Last week’s heat, combined with stifling humidity, also broke multiple records for highest minimum temperature and came close to matching the highest known dew point ever recorded. Capital Weather Gang found that “daily heat records have outnumbered cold records in the nation’s capital by a 7 to 1 ratio since the year 2000 and by nearly 16 to 1 in the past 3.5 years.”

Vulnerable Maryland weighs threat of sea-level rise -   It was scary enough that a team of experts on sea-level rise projected that Maryland’s coastal waters could rise to six feet in this century. But to hammer home the findings of a new report, they included a link to a Web tool that allows readers to make like a god, sliding a scale over pictures of state landmarks until a creeping tide washes them away. Maryland, with 3,100 miles of tidal shore along the Atlantic Ocean and Chesapeake Bay, is one of several states, including Virginia, Delaware, Louisiana and Florida, most vulnerable to sea-level rise pushed in part by global warming that has caused glaciers to melt and oceans to expand. Coastal sea-level rise for Maryland will range from slightly less than a foot to more than two feet by mid-century, and from two to six feet by the end of the century, depending on numerous factors, including glacial ice melt, according to the projections in a recent report from the Maryland Commission on Climate Change.

Pakistan Now ‘One Of The Most Water-Stressed Countries In The World’ As ‘Demand Exceeds Supply’ - With fewer than 1,000 cubic meters of water available per person, Pakistan is “one of the most water-stressed countries in the world” according to a new report from the Asian Development Bank (ADB). The report covers a range of economic concerns for the country, but its conclusion notes that “boosting agricultural productivity and strengthening food security” will require “improving the management, storage, and pricing of water for irrigation.” 80 percent of Pakistan’s farms are currently irrigated, and the report estimates that the right reforms could double their productivity.But standing in between Pakistan and that goal is a wealth of challenges. As The Atlantic reports, two-thirds of the country’s population is under 30 and has already grown enormously over the last few decades. By 2030, it’s projected to boom from 180 million residents to 256 million. Climate change is also reducing water flow in the Indus River — Pakistan’s main source of fresh water — resulting in a pincer move that’s rapidly depleting the country’s water supplies. From the ADB’s report:Water demand exceeds supply, which has caused maximum withdrawal from reservoirs. At present, Pakistan’s storage capacity is limited to a 30-day supply, well below the recommended 1,000 days for countries with a similar climate. Climate change is affecting snowmelt and reducing flows into the Indus River, the main supply source. Increases in storage capacity to manage periods of low snowmelt and low rainfall are required, as well as the rehabilitation of the distribution system to reduce losses.

North Pole Now a Lake - Instead of snow and ice whirling on the wind, a foot-deep aquamarine lake now sloshes around a webcam stationed at the North Pole. The meltwater lake started forming July 13, following two weeks of warm weather in the high Arctic. In early July, temperatures were 2 to 5 degrees Fahrenheit (1 to 3 degrees Celsius) higher than average over much of the Arctic Ocean, according to the National Snow & Ice Data Center.  Meltwater ponds sprout more easily on young, thin ice, which now accounts for more than half of the Arctic's sea ice. The ponds link up across the smooth surface of the ice, creating a network that traps heat from the sun. Thick and wrinkly multi-year ice, which has survived more than one freeze-thaw season, is less likely sport a polka-dot network of ponds because of its rough, uneven surface. July is the melting month in the Arctic, when sea ice shrinks fastest. An Arctic cyclone, which can rival a hurricane in strength, is forecast for this week, which will further fracture the ice and churn up warm ocean water, hastening the summer melt. The Arctic hit a record low summer ice melt last year on Sept. 16, 2012, the smallest recorded since satellites began tracking the Arctic ice in the 1970s.

2013 Melt Season – Arctic Ice in Free Fall Again? - The most amazing thing about 2012 in the arctic was how un-amazing it was in terms of weather and warming – yet ice last year plunged to a stunning new low, most likely because the ice has become so thin and fragile that even the wear and tear of a normal year are enough to devastate the ice pack. This year’s melt season has trended only a little below the 1981–2010 average up until about mid-June, then taken a dramatic downward turn.  If it does not level off, ice loss will soon match the 2012 pace. Washington Post: It’s not clear if 2013 levels will match 2012's astonishing record low, but – with temperatures over the Arctic Ocean 1–3 degrees above average – the 2013 melt season has picked up in earnest during July.  “During the first two weeks of July, ice extent declined at a rate of 132,000 square kilometers (51,000 square miles) per day. This was 61% faster than the average rate of decline over the period 1981 to 2010 of 82,000 square kilometers (32,000 square miles) per day,” the National Snow and Ice Data Center writes on its websiteDespite this rapid ice loss, the current mid-July 2013 sea ice extent is greater than 2012 at the same time by about 208,000 square miles NSIDC says.

Arctic shipping quadruples in past year as global warming melts sea ice. -- For years people have been speculating that the melting of Arctic sea ice due to climate change would open new shipping lanes. In fact, it’s happening now. The Financial Times reports that, as of Friday, 204 ships had received permits this year to ply the Northern Sea Route, which connects East Asia to Europe via the waters off of Russia’s northern coast. Last year, just 46 vessels made the trip. Two years ago, the number was four.  For now, the route remains more treacherous than the traditional Asia-Europe passage via the Suez Canal. But as Arctic sea ice continues to recede, it will become increasingly viable during the summer months—especially since, as the map at right shows, it’s a much shorter route. The captain of a Russian icebreaker fleet told the FT that the trip from Kobe or Busan to Rotterdam should be 23 days via the northern passage, versus 33 days via the canal. And recent studies suggest that the long-sought Northwest Passage off of Canada’s north coast is likely to open for business in the decades to come as well.

Release of Arctic methane could speed ice melting and cost $60 trillion (Reuters) – A release of methane in the Arctic could speed the melting of sea ice and climate change with a cost to the global economy of up to $60 trillion over coming decades, according to a paper published in the journal Nature. Researchers at the University of Cambridge and Erasmus University in the Netherlands used economic modeling to calculate the consequences of a release of a 50-gigatonne reservoir of methane from thawing permafrost under the East Siberian Sea.They examined a scenario in which there is a release of methane over a decade as global temperatures rise at their current pace. They also looked at lower and slower releases, yet all produced “steep” economic costs stemming from physical changes to the Arctic. “The global impact of a warming Arctic is an economic time-bomb,” “In the absence of climate-change mitigation measures, the model calculates that it would increase mean global climate impacts by $60 trillion,”

New Research Finds Melting Arctic May Cost Global Economy $60 Trillion - The rapidly melting Arctic is not only a looming climate catastrophe, but new research shows it could be an economic disaster, as well. In findings published in the journal Nature, economists and polar scientists from the University of Cambridge and Erasmus University Rotterdam found that the ripple effects of climate change in the Arctic — unlocking frozen reserves of methane that speed global warming and cause destructive and costly climactic changes across the planet — could deal a severe blow to the global economy. The release of methane from thawing permafrost beneath the East Siberian Sea, off northern Russia, alone comes with an average global price tag of $60 trillion in the absence of mitigating action — a figure comparable to the size of the world economy in 2012 (about $70 trillion). The total cost of Arctic change will be much higher. While much has been made of the coming economic boom that will result from an increasingly ice-free Arctic — shipping lanes, fisheries, and fossil fuel reserves that previously were inaccessible — little research has been done on the potential economic damage these unprecedented changes may incur.  “People are calculating possible economic benefits in the billions of dollars and we’re talking about possible costs and damage and extra impacts in the order of tens of trillions of dollars,” said Chris Hope, professor at Cambridge’s Judge Business School and report author, in an interview with Financial Times.

CIA Backs $630,000 Scientific Study on Controlling Global Climate - The Central Intelligence Agency is funding a scientific study that will investigate whether humans could use geoengineering to alter Earth's environment and stop climate change. The National Academy of Sciences (NAS) will run the 21-month project, which is the first NAS geoengineering study financially supported by an intelligence agency. With the spooks' money, scientists will study how humans might influence weather patterns, assess the potential dangers of messing with the climate, and investigate possible national security implications of geoengineering attempts.  The total cost of the project is $630,000, which NAS is splitting with the CIA, the National Oceanic and Atmospheric Administration, and NASA. The NAS website says that "the US intelligence community" is funding the project, and William Kearney, a spokesman for NAS, told Mother Jones that phrase refers to the CIA. Edward Price, a spokesman for the CIA, refused to confirm the agency's role in the study, but said, "It's natural that on a subject like climate change the Agency would work with scientists to better understand the phenomenon and its implications on national security." The CIA reportedly closed its research center on climate change and national security last year, after GOP members of Congress argued that the CIA shouldn't be looking at climate change.

House bill slashes EPA budget by 34 percent - House Republicans on Monday unveiled plans to slash the Environmental Protection Agency’s budget by 34 percent in 2014 and block federal rules to limit carbon emissions from power plants. The proposed $2.8 billion cut is twice as deep as the 17 percent reduction proposed last year by the House GOP and reflects a decision to cut domestic programs below sequestration levels in the coming year while adding money for the military. The reduction was unveiled as part of a $24.3 billion Interior and Environment spending bill coming before a House Appropriations subcommittee Tuesday. In total, the bill cuts $5.5 billion, or 19 percent, from agencies under its purview. The EPA is cut deeper in order to reduce the effects on other budgets, such as that of the National Park Service. Appropriators promised to keep parks open next year but cultural attractions will suffer under the bill. The National Endowment for the Arts and Humanities is cut by 49 percent and the Smithsonian Institution and National Gallery of Art each get a 19 percent cut.

Spain Levies Consumption Tax on Sunlight - Proving that idiocy truly has no bounds, Spain issued a "royal decree" taxing sunlight gatherers. The state threatens fines as much as 30 million euros for those who illegally gather sunlight without paying a tax. The tax is just enough to make sure that homeowners cannot gather and store solar energy cheaper than state-sponsored providers. Via Mish-modified Google Translate from Energias Renovables, please consider Photovoltaic Sector, Stunned The Secretary of State for Energy, Alberto Nadal, signed a draft royal decree in which consumption taxes are levied on those who want to start solar power systems on their rooftops. The tax, labeled a "backup toll" is high enough to ensure that it will be cheaper to keep buying energy from current providers.  Via Google translate from El Pais, please consider Spain Privatizes The Sun  If you get caught collecting photons of sunlight for your own use, you can be fined as much as 30 million euros. If you were thinking the best energy option was to buy some solar panels that were down 80% in price, you can forget about it.

Future U.S. Energy Production Threatened by Water Shortages - When we flip on a light, we rarely think about water.  But electricity generation is the biggest user of water in the United States.  Thermoelectric power plants alone use more than 200 billion gallons of water a day – about 49 percent of the nation’s total water withdrawals.Large quantities of water are needed as well for the production, refining and transport of the fuels that light and heat our homes and buildings, and run our buses and cars.  Every gallon of gasoline at the pump takes about 13 gallons of water to make.And of course hydroelectric energy requires water to drive the turbines that generate the power.  For every one-foot drop in the level of Lake Mead on the Colorado River, Hoover Dam loses 5-6 megawatts of generating capacity – enough to supply electricity to about 5,000 homes.In short, energy production is deeply dependent on the availability of water.  And, as a report released last week by the U.S. Department of Energy (DOE) makes clear, as climate change brings hotter temperatures, more widespread and severe droughts, and lower river and lake levels, the nation’s energy supply is becoming more vulnerable.

Jim Hansen Presses the Climate Case for Nuclear Energy - I encourage you to watch this short video interview with climate scientist and campaigner James E. Hansen, posted by the folks who brought you “Pandora’s Promise,” the flawed but valuable film arguing for a substantial role for nuclear energy in sustaining human progress without disrupting the climate. Hansen proves himself, as always, somewhat inconvenient for almost everyone.  To me, for example, Hansen’s far too confident about the scale at which nuclear power, particularly the new technologies that he prefers, could be deployed by the middle of this century.  But his statements pose a particularly tough challenge for those who embrace his take on the dangers attending an unabated greenhouse-gas buildup but see a fast transition to solar, wind and other renewable energy sources as the solution. Here are some excerpts, starting with a basic endorsement of nuclear power plants: I think the only hope we have of phasing down emissions and getting to the middle of the century with a much lower level of fossil fuel emissions — which is what we will have to do if we want young people to have a future — we’re going to have to have alternatives and at this time nuclear seems to be the best candidate.

'Something Like Steam' Still Billowing from Fukushima - “Something like steam” continued to billow out of Fukushima's nuclear reactor 3 building on Tuesday morning, the Tokyo Electric Power Co. said, confirming the latest omen that the ongoing nuclear catastrophe will not end any time soon.The presence of the emissions in the reactor building is the second instance in less than a week.In a worse case scenario, the steam-like substance could be the result of renewed nuclear reactions—a possibility TEPCO, the site's operator, denied but one that could mean large amounts of radioactive substances are being released.TEPCO said workers are continuing to inject cooling water into the reactor and a pool storing nuclear fuel.

Japan Utilities Seek to Raise Retail Rates as Fuel Costs Advance - Japanese electric-power companies are seeking approval to raise retail rates as increased use of liquefied natural gas drives up generation costs, a government energy adviser said. Some of the applications have already been approved by the central government after factoring in the possible lower cost of buying LNG in the future, Hiroshi Hashimoto, a senior gas researcher at the Institute of Energy Economics, Japan, said in the July report. LNG has replaced nuclear power as Japan’s primary fuel for power generation after the March 2011 earthquake and tsunami led the government to shut the country’s reactors. The nation paid 6 trillion yen ($60 billion), twice as much as the year before, for a record 87.3 million metric tons of gas imports in 2012, according to customs data.

EIA projects world energy consumption will increase 56% by 2040 - EIA's recently released International Energy Outlook 2013 (IEO2013) projects that world energy consumption will grow by 56% between 2010 and 2040, from 524 quadrillion British thermal units (Btu) to 820 quadrillion Btu. Most of this growth will come from non-OECD (non-Organization for Economic Cooperation and Development) countries, where demand is driven by strong economic growth.Renewable energy and nuclear power are the world's fastest-growing energy sources, each increasing 2.5% per year. However, fossil fuels continue to supply nearly 80% of world energy use through 2040. Natural gas is the fastest-growing fossil fuel, as global supplies of tight gas, shale gas, and coalbed methane increase. The industrial sector continues to account for the largest share of delivered energy consumption and is projected to consume more than half of global delivered energy in 2040. Based on current policies and regulations governing fossil fuel use, global energy-related carbon dioxide emissions are projected to rise to 45 billion metric tons in 2040, a 46% increase from 2010. Economic growth in developing nations, fueled by a continued reliance on fossil fuels, accounts for most of the emissions increases.

Fossil Fuels to Dominate World Energy Use Through 2040 - Global energy consumption will grow by 56 percent by 2040 with fossil fuels remaining dominant energy sources. Along with that growth will come increased carbon dioxide emissions and a continued reliance on  coal, oil, and natural gas for transportation and electricity generation, according to a new report published Thursday by the Energy Information Administration (EIA). The International Energy Outlook, which is released every two years, shows that strong economic growth in developing countries will be the dominant force driving world energy markets during that period. “Rising prosperity in China and India is a major factor in the outlook for global energy demand. These two countries combined account for half the world’s total increase in energy use through 2040,” said EIA administrator Adam Sieminski in a press release. The EIA is the Department of Energy’s statistical and analytical agency.

Rig owner eyes relief well to divert gas off coast - — The owner of a natural gas drilling rig aflame off of Louisiana’s coast said preparations were underway for the possible drilling of a relief well to divert gas from the site and bring the well under control. Adam Bourgoyne, a former dean of Louisiana State University’s petroleum engineering department, said such an effort is a complicated task that could take weeks to complete. The relief well team has to figure out questions such as where to intercept the well bore and what tools will be needed. The surface team has to figure out whether it’s safe to get onto the platform, how much debris there is and how it can be removed, he said. ‘Sometimes, if the well control blowout preventers are intact, they might be able to get on-site and put down enough water and so forth,’’ said Bourgoyne, now a consultant.  Because the well involved is a natural gas well, not an oil well, experts said the pollution threats are far less than those posed by some previous accidents. Gas wells often also have oil or other hydrocarbons as well as natural gas. Officials and scientists agree the latest mishap should not be nearly as damaging as the BP oil spill, also in the Gulf of Mexico, that sent crude oil oozing ashore in 2010.

Wyden floats fracking regs framework - Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Ore.) floated a proposal Thursday to let states regulate fracking underground while permitting the federal government to set reporting and disclosure requirements. The framework Wyden laid out would affect fracking, or hydraulic fracturing, across the country, setting it apart from an ongoing process led by the Interior Department that covers only federal land. Much of the U.S. shale energy boom has occurred on private and state land left untouched by the draft Interior rule, making Wyden's proposal a hefty one. “I want to explore the idea of giving the states a really broad berth, a really key role, on what happens below ground, while the federal government could have a leadership role on a number of the key issues above ground, such as disclosure and spill reporting,” Wyden said at a Washington, D.C., event hosted by the Bipartisan Policy Center.  The concept was one of many Wyden said he’s talking to lawmakers about regarding natural gas. Other areas of focus included smoothing the path for using natural gas in the transportation sector, upgrading pipeline infrastructure, managing exports and the environment. The fracking scheme might be one of the heavier lifts

Ron Wyden Calls for Speeding Up Pipeline Development - Senate Energy and Natural Resources Committee Chairman Ron Wyden, D-Ore., said Thursday that speeding up pipeline development is essential to cash in on North America's natural-gas boom, but that expansion must also come with a focus on reducing leaks. "We are going to work for not just building more pipelines, but we want to make sure we're building better pipelines," Wyden said. Wyden, speaking at a Bipartisan Policy Center forum in Washington, said methane leaks need to stay below 3 percent to keep the climate impact of natural gas equal to that of coal. A 1 percent goal would be a good target for future pipeline development, he said, citing technologies such as "self-healing" pipes and better leak detection. Wyden also called for a focus on improving natural-gas-based transportation and addressing development concerns like spills and hydraulic fracturing, known as fracking. He said he and Sen. Lisa Murkowski, R-Alaska, would spend the August recess reaching out to colleagues with the goal of working toward bipartisan legislation on natural gas. Stronger policies, he said, will allow the United States to expand its lead in the global "economic Olympics."

Wyden’s Next Steps For Ensuring That The Shale Gas Expansion Provides Net Benefits -Ron Wyden (D-Ore.), Chairman of the Senate Committee on Energy and Natural Resources, announced that he is seeking bipartisan agreement on a number of issues related to the expansion of shale gas production. These include the development of natural gas infrastructure and the control of methane leakage. His announcement came yesterday in a forum hosted by the Bipartisan Policy Center on the impact of natural gas on the U.S. economy and geopolitics. Given that methane is a powerful greenhouse gas –- trapping a hundred times as much heat as CO2 over a 20-year timeframe –- leakage poses a serious threat to the climate and could counteract some of the emissions benefits of substituting natural gas for coal in the generation of electricity. New natural gas plants have emissions benefits compared to new coal plants if the methane leakage rate is below 3.2 percent from well to power plant delivery. Wyden yesterday endorsed a leakage target of 1 percent for future pipelines. “I’m going to look for ways to not just build more pipelines,” Wyden said, “but to build better pipelines.”

Wyo. Fracking Study to Be Funded by Industry After EPA Pulls Out -- When the Environmental Protection Agency abruptly retreated on its multimillion-dollar investigation into water contamination in a central Wyoming natural gas field last month, it shocked environmentalists and energy industry supporters alike.In 2011, the agency had issued a blockbuster draft report saying that the controversial practice of fracking was to blame for the pollution of an aquifer deep below the town of Pavillion, Wyo.—the first time such a claim had been based on a scientific analysis. The study drew heated criticism over its methodology and awaited a peer review that promised to settle the dispute. Now the EPA will instead hand the study over to the state of Wyoming, whose research will be funded by EnCana, the very drilling company whose wells may have caused the contamination.

Is Ohio State fracking-well plan drilling for research data, or cash? - Ohio State University researchers want to install and study a working oil and gas well on university land in Noble County. The plan would open the school’s Eastern Agricultural Research Station to shale drilling and would provide an opportunity to closely examine how fracking alters the environment and assess pollution risks to the air and groundwater, supporters say. “It really comes out of the frustration that researchers have had in getting access to (drill) sites and being able to do constructive research,” said Jeff Daniels, director of Ohio State’s Subsurface Energy Resource Center. The idea is similar to a University of Tennessee plan to study fracking on 8,600 acres the school owns in that state’s Cumberland Forest. However, environmental advocates call the Tennessee project a thinly disguised effort to collect millions of dollars through a lucrative contract with drilling companies.

Welcome to Portage County, the Fracking Waste Disposal Capital of Ohio Welcome to Portage County, Ohio, the biggest dumping ground for fracking waste in a state that is fast becoming the go-to destination for the byproducts of America's latest energy boom. As fracking—pumping a briny solution of water, lubricants, anti-bacterial agents, and a cocktail of other chemicals into underground shale formations at high pressure to fracture the rock and extract trapped natural gas—has expanded in the Midwest, so has the need for disposing of used fracking fluid. That fracking waste can be recycled or processed at wastewater treatment facilities, much like sewage. But most of the waste—630 billion gallons, each year—goes back into the ground, pumped into disposal wells, which are then capped and sealed. A bunch of it ends up underneath Portage County.  Nestled in the northeast corner of Ohio, about halfway between Cleveland and Youngstown, this 500-square-mile county pumped 2,358,371 million barrels—almost 75 million gallons—of fracking brine into 15 wells last year, driving enough liquid into the ground to fill a train of tanker cars that would stretch 37 miles. Most of the waste came from out of state. According to the Akron Beacon Journal, almost 58 percent of the waste injected into Ohio wells is trucked in—much of it from Pennsylvania and West Virginia. More than 200 disposal wells dot the state, which has looser regulations than its neighbors. The Columbus Dispatch recently reported that Ohio injected just over 14 million barrels of fracking waste into disposal wells in 2012, and more than 8 million came from other states—an uptick of 19 percent from 2011.

Earthquakes: 'Do not operate' quake-linked disposal wells -- EPA draft report -- U.S. EPA officials say oil and gas wastewater injection wells that are causing earthquakes should stop operating if there's no way to stop the shaking. But there is a variety of other options to consider first, according to a "decision model" outlined in a draft report obtained by EnergyWire. That includes scaling back how much well owners can inject, requiring more data collection or public education about "the complexities of injection-induced seismicity." The 341-page document represents the main EPA response to concerns that drilling-related activities are causing earthquakes. It was provided as a result of a Freedom of Information Act appeal after agency officials declined to release it (EnergyWire, May 28). The report is designed to offer state officials suggestions for dealing with man-made earthquakes, also known as "induced seismicity." The draft specifically notes that federal law allows regulators to close down wells. And on Page 25, a diagram lays out the option when the other options haven't worked -- "Do not operate well." Little or no further guidance is offered on the topic.

Wildcatting -- Wildcatting is a stripper’s guide to boom towns like Williston, North Dakota. It’s insightful on the principal-agent problem, why natural resources aren’t a geographic blessing even when they aren’t a curse, selection effects and immigration (“ I never met a boring stripper in Williston.”) and small town life.It took a long time for things to quickly change. First, Whispers started booking four dancers. Then a second club, Heartbreakers, opened right next door, and they didn’t even cap the number of dancers that could work. Not only that, they didn’t pay the dancers — and instead charged them a whopping $120 flat stage fee. Whispers upped their game by going to six dancers at some point in 2011. The last time I got a paycheck from them was in February 2012, and then the owner told me they weren’t going to pay dancers at all anymore. So starting in 2012, instead of getting paid $250–500 a week, depending on the booking, we paid Whispers $120 a night. Instead of keeping $15 from each dance, dancers kept the whole $20.

‘Nobody understands’ spills at Alberta oil sands operation - Oil spills at a major oil sands operation in Alberta have been ongoing for at least six weeks and have cast doubts on the safety of underground extraction methods, according to documents obtained by the Star and a government scientist who has been on site.Canadian Natural Resources Ltd. has been unable to stop an underground oil blowout that has killed numerous animals and contaminated a lake, forest, and muskeg at its operations in Cold Lake, Alta. The documents indicate that, since cleanup started in May, some 26,000 barrels of bitumen mixed with surface water have been removed, including more than 4,500 barrels of bitumen.The scientist said Canadian Natural Resources is not disclosing the scope of spills in four separate sites, which have been off bounds to media and the public because the operations are on the Cold Lake Air Weapons Range, where there is active weapons testing by the Canadian military.

The Alberta Oil Sands Have Been Leaking for 9 Weeks - Nine weeks ago, an oil leak started at a tar sands extraction operation in Cold Lake, Alberta, and it's showing no signs of stopping. On Friday, the Toronto Star reported that an anonymous government scientist who had been to the spill site—which is operated by Canadian Natural Resources Ltd.—warned that the leak wasn't going away. "Everybody [at the company and in government] is freaking out about this," the scientist told the Star. "We don't understand what happened. Nobody really understands how to stop it from leaking, or if they do they haven't put the measures into place." The Star reported that 26,000 barrels of watery tar have been removed from the site. The impacted area spans some 30 acres of swampy forest, said Bob Curran, a spokesperson for the Alberta Energy Regulator (AER), which oversees these sites. According to the Star, pictures and the documents provided by the scientist show that dozens of animals, including loons and beavers, have been killed, and some 60,000 pounds of contaminated vegetation have been removed. (You can see the pictures at the Star's website.)Curran confirmed to Mother Jones that the leak was ongoing as of Tuesday afternoon and said AER was working with the company on a plan to contain the damage. He added that he couldn't make a firm assessment of what caused the leak until after AER had completed its investigation. "We don't get into probable causes," he explained. But he did say that AER was concerned, adding that the leak was "very uncommon—which is why we've responded the way we have."

Canada Oil Firm Still Unable to Stop Leaks - Canada's largest independent oil producer has been unable to stop a series of leaks from underground wells, according to regulators in Alberta, raising questions about a technology the industry has championed as less environmentally disruptive than the open-pit mining of oil sands.  Four separate leaks, the first of which was reported on May 20, comprise the equivalent of 175 barrels of oil and spread over at least 100 acres on the grounds of a Canadian air-force base in northeastern Alberta, according to preliminary figures from the chief provincial regulatory body. While the amount of oil is relatively small, it has contaminated a vast area of boreal forest, including killing some wildlife. It also represents a relatively rare case in which a producer hasn't been able to immediately identify the cause of a leak and correct it, drawing special scrutiny from regulators and environmentalists. "We don't know when they're going to get control of it," said Alberta Energy Regulator spokesman Bob Curran.Canadian Natural Resources, the operator of the troubled well sites in Northeastern Alberta, issued a statement late Thursday that didn't include figures on the amount of oil leaked, but which said the "initial impacted area" was about 50 acres. It also attributed the leak to unspecified "mechanical failures of wellbores in the vicinity of the impacted areas."  Government officials say the leak poses no threat to people, but that it has affected wildlife and vegetation native to the muskeg-covered landscape of northern Alberta. It has killed 11 birds, four small mammals such as beavers and 21 amphibians, according to CNRL and the Alberta environment ministry.

Cold Lake oil spill leaking for months: Documents - Underground oil spills at an Alberta oilsands operation have been going on much longer than previously thought, according to new documents. Files released to the Toronto Star show the spills were discovered nine weeks ago, but new documents show that bitumen has been leaking since the winter.Canadian Natural Resources Ltd. operates the Primrose oilsands facility three hours northeast of Edmonton where four ongoing underground oil blowouts have contaminated forest, muskeg, a lake and have already killed dozens animals including beavers, ducks and birds. According to a government scientist who has been to the site, neither government or industry are able to stop the spills. An engineering field visit conducted by CNRL in June to examine impacts from one of the four spills show oil staining over two feet up the trunks of trees, and some completely coated in oil. And based on winter snow coverage, CNRL itself estimates that oil has been leaking for over four months.

Oil Sands: 4,000 Environmental Infractions, 40 Punishments -- A new report out today finds that environmental infractions by companies in the Alberta oil sands are addressed with an enforcement action far less often than similar infractions reported to the United State's Environmental Protection Agency (EPA). The report [pdf], authored by the environmental non-profit Global Forest Watch, looked at more than 15 years of data on recorded environmental mishaps by oil sand's companies, tracking the follow-up actions taken and the final verdict on fines. The findings are absolutely shocking and put to shame the idea that Canadians care about their natural environment. If we do care, then this report should be a wake up call for us all. Of the more than 4,000 infractions reported, less than 1 per cent (.09 to be exact) received an enforcement action (that would be less than 40 of 4,000). Compare this the U.S. Environmental Protection Agency, who has an enforcement rate of 16 per cent for similar infractions by companies under their Clean Water Act. When it comes to environmental protection, we suck more than the Americans (even during the George W. Bush years).

Rising US Oil Production and the Disconnect at the Pump: New research from former oil industry executive Leonardo Maugeri of the Harvard Kennedy School claims that domestic shale oil production could rise to 5 million barrels per day by2017, while the Energy Information Administration (EIA) estimates 10 million barrels per day between 2020 and 2040. Maugeri predicts that the US will have 100,000 producing wells in North Dakota and Texas by 2030 (90,000 more than we have now). In terms of US oil production, the question (every summer) is why US consumers don’t seem to be benefitting from higher oil production at the gas pump. Earlier this week, Chairman of the Senate Committee on Energy and Natural Resources Ron Wyden (D-Oregon) interrogated oil experts on this question. After all, posits Wyden, crude oil prices comprise 67% of the cost of a gallon of gas, so if we have more domestically available crude, which is cheaper, combined with flat or falling gas demand, why are gas prices not falling? Their answer was that US consumers ARE benefitting from higher oil production—they just don’t know it. The rationale is that global markets, rather than a domestic rise in production, determine crude prices, and thus gas prices. “Virtually every group that I know of that’s ever studied product markets believes that product prices are being set in the global market,” Energy Information Administration head Adam Sieminski responded to Wyden. So much for expectations that increasing domestic oil production will usher in gas prices that are below $3.00 a gallon. This, the experts agreed, is likely a thing of the past.

Energy and the Economy–Basic Principles and Feedback Loops - In this post, I explain some of the basic principles as I see them:
1. Humans have evolved to be dependent on external energy.
2. Humans now supplement their own limited energy supply with external energy of various types. In general, the more external energy used, the more humans are able to control their environment.
3. Over the 1 million+ years during which humans have been able to control fire, humans have generally been in situations with favorable feedback loops, due to increasing efficiency in producing goods and services required to meet basic needs.
4. We are now reaching limits on these feedback loops. The result is feedback loops that are changing from favorable feedbacks to contraction.
5. Part of the change in feedback loops relates to the cost of energy sources, such as oil. A rise in the price of oil tends to reduce salaries of workers (because of layoffs) as well as reduce discretionary income (because of higher price of food and commuting), contributing to the trend toward contraction.
All of this is very concerning, because in the past, adverse feedback loops of this type have seem to have led to collapse.

Why Big Oil is Shifting Away from the Gulf of Mexico - A BP official who led the company before the 2010 incident in the Gulf of Mexico marked his return to the region in a $3.75 billion deal with Houston-based Apache. Apache seemingly said goodbye to the Gulf of Mexico in the deal, opting instead to focus its efforts onshore. Former BP Chief Executive John Browne helped nab 1.9 million net acres in the agreement with Apache last week. Apache's "good run" in the Gulf of Mexico may suggest assets onshore may hold more long-term value for explorers. New drilling technologies have contributed to exponential production gains for onshore oil and natural gas in the United States. The North Dakota Department of Mineral Resources said last week it produced, on average, 810,129 barrels of oil per day in May, a new all-time high and a 2 percent increase from the previous month. Oil field services company Baker Hughes said most of the new wells started during the second quarter of 2013 came from the Eagle Ford and Permian basins spread across the southern United States. Apache says it's one of the largest operators in the Permian basin with more than 12,000 wells in service. During the first quarter of the year, the Permian basin gave up more than 119,000 barrels of oil equivalent per day for Apache, a 20 percent increase year-on-year.Vital Signs Chart: Oil at 52-Week High - Oil is at a 52-week high. U.S. crude was at $108.05 a barrel on Friday, up 18% this year. Economic optimism is lifting prices to some degree. But there is a deeper reason: Booming American production created a glut within the U.S. that weighed on prices. With railroad and pipeline firms now expanding and helping oil travel farther, U.S. prices are catching up to global ones.

Brent-WTI spread disappears-- for now - On Friday the benchmark crude oil traded in the central United States (West Texas Intermediate) sold for the same price as the benchmark European crude (Brent). That's the first time that's happened in almost three years. But I don't expect the situation to persist. Brent and WTI are very similar products, and historically sold for essentially the same price. But surging production from Canada and the central United States overwhelmed capacity to transport crude out of the hub in Cushing, Oklahoma where existing pipelines carry it. The result was that U.S. refineries on the coast paid the high world price for imported crude, lacking a cheap way to access the product landlocked in Cushing. Since 2010, infrastructure for transport and delivery of crude to U.S. refiners by rail and barge has grown tremendously. This has narrowed the Brent-WTI spread, but is not enough to eliminate it, since pipelines are an economically more efficient (and environmentally more friendly) way to transport oil. Intelligence Report - There are also burgeoning rumors that OPEC could cut back oil production for the first time in five years—the last time being the global recession. Many analysts attribute this to North America’s soaring production—up more than 40% over the past five years. OPEC projects that demand for its crude will drop by about 300,000 barrels per day. Experts say Saudi Arabia will shoulder the biggest burden with a cut, followed by Kuwait and the United Arab Emirates (UAE). “The first cut would merely go some way to reverse Saudi Arabia’s increase in market share at the expense of other OPEC members in recent years”—particularly the cut in Iranian oil shipments thanks to sanctions, writes John Kemp for Gulf Business. Any cuts after this, he argues, will be difficult because other OPEC members won’t be as willing, or able, to share the burden. We’re also looking this week at the rebound in Canadian heavy oil prices as transport bottlenecks ease to boost shipping capacity. Analysts are keen on this market right now, and urging investors to get in on it before a decision is made on Keystone XL. Back in January, Canadian heavy oil was trading at only 50% of the World Brent crude price, but last month was good and this month has seen it reach about 83% of the World Brent crude price. In December, heavy oil in Alberta was trading at $48 per barrel. This month, we’re looking at over $91 per barrel, and analysts think the trend will continue strong.

The world might be drifting into an oil price shock - There are two new dimensions to international oil markets that are creating a dilemma for Opec and may be sowing the seeds of an oil price shock. The first is the fallout from the Arab uprising, which began in 2011. The second is the development and application of shale technology – horizontal drilling and hydraulic fracturing or “fracking” – to oil production. A significant consequence of the upheaval in the Middle East and north Africa is that oil-producing governments need more revenue to pay for social policies that will assuage popular unrest. This requires higher prices. For example, in 2008 it was estimated that Saudi Arabia needed about $50 a barrel to balance the books. Last year estimates put the figure closer to $95. Such high prices will produce market responses and this is where shale technology comes in. This relatively high-cost technology has led to a dramatic increase in oil production, most obviously in the US. The new Review of World Energy Statistics from BP shows that 2012 recorded the highest single-year increase in US oil production ever. At the same time, high prices will also lead to oil demand destruction. In particular the impact will be felt in the Middle East, India and China. The MICs, according to the International Energy Agency, are expected to account for 68 per cent of the increase in non-OECD oil demand between 2011 and 2035. However, all three have historically had heavily subsidised oil that encouraged oil demand growth. This has been changing. With price reform in the MICs, the higher prices needed by Opec will be paid directly by consumers. That will cut demand growth. The result is unsustainable. Higher supply and lower demand will put the high prices needed by Opec under pressure.

Peak oil lives, but will kill the economy -- Last Monday's BBC News at Ten broadcast a report by science editor David Shukman arguing that concerns "about oil supplies running dry are receding." Shukman interviewed a range of industry experts talking up the idea that a "peak" in oil production has been "moved to the backburner" - but he obfuscated compelling evidence in his own report contradicting this view. "There's still plenty of oil - we just haven't got all of it out of the ground yet. There's not a real danger of there being no fossil fuel," one oil company executive told the BBC. "There's enough oil in this country for another 100 years with our present technology and there's more around the world to be found yet." Following a chorus of industry hype on the wonders of shale gas and fracking, Shukman finally referred in passing to a new scientific paper saying that the paper "supports the assertion that a peak in oil production is 'a myth' but argues that the rising cost of extraction could itself provide a limit, and may act as a brake on economic growth." He then closed his report with the following quote from a leading industry figure: "The era of cheap oil is over, but we're a long way from peak oil - costs will go up but the technology will respond." But Shukman's characterisation of the new Eos paper is a combination of falsehood and half-truth. Far from describing peak oil as a myth, the paper's conclusions are far more nuanced, and point to an overwhelming body of evidence contradicting the industry hype that the rest of his report parrotts uncritically.

Iran Gets Creative Over Energy Payments from Turkey and Pakistan - Yves here. Although this post is nominally about how Iran is currently working around America’s and the EU’s sanctions, it points out that for the US to tighten the noose further would likely undermine some of America’s other geopolitical aims. The other part that struck me is that it really does look like Iran is having to go through major hoops to get around the sanctions. In the bad old days of my youth, I doubt it would have been as difficult. You had powerful, shady intermediaries like Marc Rich and Adnan Khashoggi who would arrange barter trades for a very large haircut. But then again, Marc Rich & Co’s successor firm Glencore was giving Iran a helping hand until EU sanctions were about to kick in.

US plans to bring Iran oil exports down to zero  – The US House of Representatives will vote next week on legislation aimed at slashing Iran’s ability to export any oil. With 360 co-sponsors in the 435-member body, the bill will pass, and is expected to be matched in the Senate after Congress’s August recess. The sanctions bill requests that the US president, under his authority provided by the International Emergency Economic Powers Act, come up with a strategy within two months to cut Iran’s remaining export sales of roughly a million barrels a day. After a year, exemptions granted to countries such as China, Japan, Turkey and South Korea – which continue to import Iranian oil – will no longer be granted. Companies in those countries doing business with Iran previously given a pass will be cut off from the US economy.

Copper costs up, grades down: Metals Economics Group - SNL Metals Economics Group, a major provider of global mining industry information and analysis, says global copper production in 2012 was characterized by higher costs and lower grades. Capital and operating costs are up due to increases in energy bills, taxation, royalties and environmental approval costs. Meanwhile ore head grades are falling, the company reported in a recent study titled “Strategies for Copper Reserves Replacement Study." The study tracked average capital costs for new copper mines and found that they increased by an average of 15% per year over the past 20 years – particularly in 2008. "Cash operating costs at major mines also increased significantly, more than tripling over the past ten years, to an average of almost $1.50/lb in 2012," the report says. Despite discovering 100 additional copper sites between 1998-2012 – with almost 395 million mt of the metal – mining companies have only converted one-tenth of these deposits into reserves. SNL associates this with high costs, political roadblocks and poor market conditions. Latin America accounted for a great majority of new discoveries.

China Coal-Fired Economy Dying of Thirst as Mines Lack Water - At first glance, Daliuta in northern China appears to have a river running through it. A closer look reveals the stretch of water in the center is a pond, dammed at both ends. Beyond the barriers, the Wulanmulun’s bed is dry. Daliuta in Shaanxi province sits on top of the world’s biggest underground coal mine, which requires millions of liters of water a day for extracting, washing and processing the fuel. The town is the epicenter of a looming collision between China’s increasingly scarce supplies of water and its plan to power economic growth with coal.“You can’t reconcile targets for coal production in, say, Shanxi province and Inner Mongolia with their water targets.” Coal industries and power stations use as much as 17 percent of China’s water, and almost all of the collieries are in the vast energy basin in the north that is also one of the country’s driest regions. By 2020 the government plans to boost coal-fired power by twice the total generating capacity of India. About half of China’s rivers have dried up since 1990 and those that remain are mostly contaminated. Without enough water, coal can’t be mined, new power stations can’t run and the economy can’t grow. At least 80 percent of the nation’s coal comes from regions where the United Nations says water supplies are either “stressed” or in “absolute scarcity.”

China Plans To Spend $275 Billion To Combat Pollution Crisis - China’s air pollution levels have reached dire levels, even breaking the upper limits of the Air Quality Index earlier this year. In a sign the government is serious about tackling this crisis, The China Daily announced Thursday that China will spend $275 billion over the next five years to reduce emissions and launch anti-pollution programs.  The funds, which exceed the total economic output of Hong Kong last year, will target emissions in the densely populated area surrounding Beijing, where residents have suffered through off-the-charts pollution and all its accompanying illnesses. Air pollution caused more than 1.2 million premature deaths in China in just one year, while some Beijing schools are building air-purified domes over playgrounds so children can play “outside” safely. Anti-pollution protests have grown more and more prevalent all over the country. These unsustainable conditions are directly linked to China’s rapid industrialization. Most of Beijing’s pollution stems from factories and power plants outside the city. China’s coal production has tripled in the past ten years as the nation’s energy consumption has exploded. The Chinese government, up til this year, has aggressively encouraged economic growth at the expense of the environment and public health. But now that the environmental repercussions cannot be ignored, the government has done a hard about-face. New promised anti-pollution measures include speedy installation of pollution control equipment on coal-fuelled refineries, restrictions on high energy consumption industries like steel, cement, and glass, and use legal action to force industries to upgrade their emissions standards.

China Manufacturing PMI Declines at Quickest Pace Since Last August - The HSBC Flash China Manufacturing PMI shows China Manufacturing PMI Declines at Quickest Pace Since Last August. Key points:

  • Flash China Manufacturing PMI™ at 47.7 (48.2 in June). Eleven-month low.
  • Flash China Manufacturing Output Index at 48.2 (48.6 in June). Nine-month low.
Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking. This adds more pressure on the labour market. As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth.”

Flash PMIs, another China data disappointment - The China flash manufacturing PMI for July is 47.7, the lowest number in 11 months and a decent step down from June’s final figure of 48.2. It also was well short of consensus expectations that July would maintain the 48.2 level. The employment sub-index was fell to 47.3 from 47.6 in June, its lowest since March 2009, and there’s very little to be upbeat about the breakdown — apart from diminishing inventories:The ‘new orders’ component was sharply lower at 46.6 compared to 47.6 in June. Perhaps another bullish sign is that new export orders rose to 47.7 from 44.9, but that remains well within the sub-50 range of below trend growth.  Of course, the overall index is still well short of 2009-era lows: Cue the calls for stimulus. HSBC’s Hongbin Qu thinks it will happen because the pressure on the labour market, and Premier Li’s recent comments about the minimum acceptable level of growth: As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth.

More bad news on China's economy - The widely followed Markit PMI report of China's manufacturing for July was disappointing, coming in at an 11 months low. Growth across developing economies has become a problem, and China is no exception. HSBC: - The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking. This adds more pressure on the labour market. As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth. The "fine-tuning" that HSBC is referring to is some type of stimulus from Beijing. The PBoC however has trouble introducing additional liquidity. The central bank views such action as conducive to more shadow banking, which the authorities have been trying to curb (see post). Any significant "fine-tuning" is therefore unlikely - in fact money market rates are no longer declining (chart below). With exports remaining weak (see post) and no central bank easing, growth is expected to be anemic - at least by China standards.

Some Thoughts on Recent Chinese GDP Growth - It’s an understatement to say there has been a lot of dismay at the drop in Chinese year-on-year GDP growth, from 7.7% to 7.5%. Figure 1 below, from the IMF’s Article IV report released on July 17, shows data only through 2013Q1, although the forecast for 2013Q2 looks about right to me. The blue line year-on-year number for 2013Q2 appears about right (and hence the staff forecast for q/q growth as well, although I can't find a 2012Q2 q/q estimate on the National Bureau of Statistics website; Roubini says NBS reports 1.7% q/q SA, vs. 1.6% in Q1).  I think it’s useful to consider the IMF’s assessment before predicting a wholesale collapse in growth. Despite weak and uncertain global conditions, the economy is expected to grow by around 7.75 percent this year. Although first-quarter GDP data were sluggish, the pace of the economy should pick up moderately in the second half of the year, as the lagged impact of recent strong growth in total social financing (a broad measure of credit) takes hold and in line with a projected mild recovery in the global economy. High-frequency indicators have been mixed recently, with infrastructure spending and retail sales showing more resilience than exports and private nonresidential investment .

The Truth and Worldwide Risk Behind China's Big Slowdown - Troubles in the Chinese economy are mounting as the economic slowdown in the world's second-biggest economy takes its toll -- troubles that could wash ashore here in North America sooner than most expect. The Flash China Manufacturing Purchasing Managers' Index (PMI) registered at 47.7 for July -- a new eleven-month low. Any reading below 50 on the PMI represents contraction in the manufacturing sector. The Chinese economy is heavily focused on manufacturing, so a contraction of this magnitude indicates a severe economic slowdown for the country. And that's not all... Gross domestic product (GDP) for China's economy is quickly slowing. After growing for years at 10% per annum, in the first quarter of this year, China's economy grew at only 7.7%; in the second quarter, the rate slowed further to 7.5%. (Source: MarketWatch, July 23, 2013.) Growth of 7.5% per year for the Chinese economy is embarrassing when compared to its historical average. So why would an economic slowdown in China's economy be a problem for us here at home? China's economy is the third-biggest destination for U.S. exporters.As the economic slowdown in the Chinese economy strengthens, demand for goods and services within the country will decline. American exporters will face more downward pressures on profits as they export less to China. And U.S. GDP will get hit as exports are considered one of the major factors in its calculation.

China PMI Plunges To 11-Month Low, Employment Weakest In Over 4 Years - Missing expectations badly, HSBC's Flash China PMI for July printed at its lowest in 11 months (a dismal 47.7) making this the worst 4-month collapse in the manufacturing indicator in three years (and diverging dramatically from the fence-sitting unreality of the Chinese government's own PMI index). Under the surface things were even worse. The employment sub-index plunged to 47.3 - its lowest in 52 months. Weaker new orders confirm the "continuous slowdown" in China's manufacturing sector, and as HSBC's chief China economist Hongbin Qu, said: "the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth." 'Fine-tuning' seems like a major understatement given this reality. One wonders whether the recent outperformance of gold prices has been front-running the coming shift from 'fine-tuning' to outright RRR cuts - bringing with it that 2011 deja vu that sent gold to an all time high - domestic inflation.

Worries about China -- Paul Krugman is among those starting to be concerned about an economic downturn in China. Here are my thoughts on this issue. Let me begin by clarifying that I am not reacting to the recent modest slowdown in China's growth rates. If the issue is whether China's real GDP is "only" going to grow at a stunning 7% rate, there's not much to be concerned about. What rings alarm bells for me is the recent sharp spikes in interbank lending rates. Despite the official explanations, such moves could definitely be signaling some financial fragility. Paul Krugman writes: Suppose that those of us now worried that China's Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why? I'd group this under three headings:

  • 1. "Mechanical" linkages via exports, which are surprisingly small.
  • 2. Commodity prices, which could be a bigger deal.
  • 3. Politics and international stability, which involves some serious risks.

To Paul's list, I would add a fourth: financial linkages. If there are significant disruptions to China's system for funding credit, that could have implications for anyone borrowing from or lending to Chinese entities.

The complete case against a Chinese financial crisis — in 200 words - Mike Darda: There also seems to be a gathering fear that China could be headed for a major financial crisis/deflationary crash. Further, some argue that any effort to stop such a crisis only will magnify “imbalances,” leading to an even larger collapse in the future. We believe these fears are both overblown and overly “Westernized” (i.e., made to fit neatly into a 2008 European/U.S. box that seems a bit too familiar and simple to be a major risk factor, in our view). Critically, China has does not have a significant volume of foreign currency denominated debt, but does have a tremendous volume of foreign exchange reserves. This alone renders the risk of an “external crisis” like those in Latin America and Asia during the late 1990s and early 2000s moot, in our view. An internal debt deleveraging crisis is of course possible, but would require a large, sustained nominal GDP shock, which means it would require the PBoC to preside over an excessively tight monetary policy. Now that the enormous costs of the Fed taking its eye off NGDP in 2008 and the ECB also doing so, but twice (2008 and 2011) are more fully recognized, the PBoC at least should know what not to do in an environment where leverage needs to fall.

Richard Koo On Why Labor Tension In China Is Now Set To Explode - In his latest note, Nomura economist Richard Koo turns his attention to China, which is probably the source of the most economic interest and mystery these days. Just last night we got more data confirming that the Chinese economy is slowing, and people are asking whether this is "it", the big hard landing that people have been predicting for years. The topic is so multi-faceted, that there's no one answer, let alone one question. But Koo, in his note, comes down clearly on the side that says China is in urgent need of real structural reform (a diagnosis he certainly isn't advising to the US, Europe, or Japan, where he famously argues for more fiscal stimulus). Koo says academics are referring to the last decade, under Hu Jintao, as China's "lost decade". Unlike Japan though, this is not the result of mediocre growth, but rather the lack of reform. One fascinating chart that Koo points to, which he says is ominous for China, looks at the rate of migration into Tokyo, from several decades ago, and the frequency of labor disputes (strikes). As the pace of migration into Tokyo began to slow, workers gained more bargaining power, and as such, the number of strikes exploded.

China capitulates - Once again, China has concluded that it is too dangerous to let the Ponzi Scheme collapse. First we had an article in Xinhua saying that growth below 7pc would “not be tolerated”. Now we have a clear statement from Premier Li Keqiang that growth must not fall below the government’s “lower limit” of 7.5pc for 2013, and 7pc thereafter. Already we hear talk of more investment on railway projects, social housing, infrastructure, green energy, sewage, broadband and G4, the tried and tested levers of fiscal stimulus. Ting Lu from Bank of America calls it the “Li Keqiang Put”. That is certainly what it looks like. Moves last week to liberalise interest rates were seen by many in China – though not all – as a disguised way to lower borrowing costs and avert a wave of bankruptcies. So there we are, the on-again off-again credit boom may soon be on once more, even though each extra yuan of credit now generates less than 0.2 yuan of growth compared to 0.85 before the Great Recession.

China Orders Production Cuts in Some Industries - China‘s government has ordered companies to close factories in 19 industries where overproduction has led to price-cutting wars, affirming its determination to push ahead with a painful economic restructuring despite slowing growth. The industry ministry issued orders late Thursday to more than 1,400 companies to cut excess capacity that has led to financial trouble for manufacturers. It also applies to producers of copper and glass and requires some companies to close outright. Communist leaders are trying to reduce reliance on investment and trade. But a slowdown that pushed China’s economic growth to a two-decade low of 7.5 percent in the latest quarter prompted suggestions they might have to reverse course and stimulate the economy with more investment to reduce the threat of job losses and unrest. “This detailed list shows the government is serious in its efforts to restructure the economy and is prepared to tolerate the necessary pain,” said Nomura economist Zhiwei Zhang in a report. “This reinforces our view that aggressive policy stimulus is unlikely in 2012 and that growth should trend down.”

China shutters factories to fight price-cutting - China's government has ordered companies to close factories in 19 industries where overproduction has led to price-cutting wars, affirming its determination to push ahead with a painful economic restructuring despite slowing growth. The industry ministry issued orders late Thursday to more than 1,400 companies to cut excess capacity that has led to financial trouble for manufacturers. The affected industries include steel, cement, copper and glass. It requires some companies to close outright. Communist leaders are trying to reduce reliance on investment and trade. But a slowdown that pushed China's economic growth to a two-decade low of 7.5 per cent in the latest quarter prompted suggestions they might have to reverse course and stimulate the economy with more investment to reduce the threat of job losses and unrest. "This detailed list shows the government is serious in its efforts to restructure the economy and is prepared to tolerate the necessary pain,"

China Orders Ban on New Government Buildings - — China issued a directive on Tuesday banning the construction of government buildings for the next five years, the latest in a series of initiatives by President Xi Jinping to discourage corruption and foster frugality at a time of broad popular resentment against high-living bureaucrats.The central government authorities in Beijing have periodically tried to rein in the widely mocked penchant for grandiosity among local officials who order offices for themselves. A few of these projects have been slowed or stopped, including the nearly Pentagon-size headquarters started by a local government several years ago in an impoverished corner of Anhui Province in central China. But until now, such isolated cases have done little to dissuade other local officials from their own pharaonic ambitions. The government of Jinan, the capital of Shandong Province, attracted critical attention across China last fall after beginning construction of what was initially planned as Asia’s largest government building. But Tuesday’s joint directive by China’s cabinet and the Chinese Communist Party went much further than prohibiting the construction of buildings: it also banned a long list of strategies that local leaders have used to circumvent previous, more informal efforts to discourage them. Expanding or restoring existing government compounds in the name of street repairs or urban planning? Not allowed. A new training center or hotel? Also forbidden. Multiple offices for the same official? Prohibited.

Fighting the taper in China - China is leaking. It’s probably America’s fault. China is, after all, the the most exposed to the quantity effect of liquidity withdrawal due to QE tapering and may have the most difficulty dealing with it. From Nomura on Monday, for example: Foreign exchange purchases by financial institutions dropped by RMB41bn, despite the high trade surplus of USD27bn and strong FDI inflows of USD14bn. This shows that China experienced strong capital outflows in June, which is a sharp reversal from early 2013 (from January to April, foreign exchange purchases rose by an average of RMB377bn each month). It rose only by RMB66bn in May, as growth concerns emerged and the government started to crack down on illegal capital flows. And from BofAML’s Bin Gao on the quantity impact of QE on liqudity and why China is suffering more than most: China relies on FX for base money creation and this is reflected by the fact that 83% of the assets on the PBoC’s balance sheet are FX reserves, as of May 2013. Since the Fed balance sheet expanded by US$2.59tn, China’s FX reserve holding had gone up by US$1.62bn. Except the initial period when the market was in a tailspin, China’s FX reserve accumulation is highly correlated with Fed’s balance-sheet change, with the monthly level and change correlation at 91% and 23%, respectively, since January 2011 (Chart 2).

China Maneuvers To Take Away US' Dominant Reserve Currency Status - It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency. China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:

World Trade Volume Fell by 0.3% in May - The volume of world trade fell in May, while industrial production was unchanged, an indication that the global economy has yet to embark on a strong recovery. In its monthly report, the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Wednesday said the volume of exports and imports fell 0.3% from April, having risen 1.3% in that month. The decline in trade volumes was spread across the globe, although was sharpest in Central and Eastern Europe. The CPB’s figures are watched closely by policy makers, including a number of central banks, because they provide the earliest available measure of global trade. The CPB’s May trade figures are consistent with other indicators of economic activity, which have recently pointed to a sluggish global economy. Earlier this month, the International Monetary Fund cut its forecast for world growth this year to 3.1% from 3.3%. It also cut its forecast for world trade growth, which it now expects at 3.1%, down from 3.6% in April. World trade flows collapsed in the wake of the 2008 financial crisis, but rebounded rapidly in 2010. Since then growth has been very slow both reflecting and contributing to the patchy and weak global economic recovery. The CPB also provides a measure of world factory output, which was unchanged in May, having risen 0.2% in April.

Abenomics has worked wonders but can it save Japan? - Japan refuses to go quietly into genteel decline. The revolutionary policies of premier Shinzo Abe have done exactly what they were intended to do – a triumph of political will over the defeatist inertia of Japan's establishment. "Abenomics is working," says Klaus Baader, from Societe Generale. The economy has roared back to life with growth of 4pc over the past two quarters – the best in the G7 bloc this year. The Bank of Japan's business index is the highest since 2007. Equities have jumped 70pc since November, an electric wealth shock. "Escaping 15 years of deflation is no easy matter," said Mr Abe this week, after winning control over both houses of parliament, yet it may at last be happening. Prices have been rising for three months, and for six months in Tokyo. Department store sales rose 7.2pc in June from a year earlier, the strongest in 20 years.

Japan’s Entry Into Trade Talks Draws Concerns - Japan’s official entry Tuesday into trade talks with Asian and Pacific countries is already drawing some concerns in the U.S. After the U.S., Japan is now the second-biggest economy in the Trans-Pacific Partnership, or TPP, a group of countries that is seeking to finish negotiations on a wide-ranging trade deal as early as this year. But bigger economies can bring along bigger unresolved trade problems, and a coalition of auto makers and a congressman from Michigan complained on Wednesday about U.S. access to the car market in Japan. U.S. officials are eyeing Japan’s auto market, currently dominated by Japanese cars, and its traditional agriculture sector as potential growth markets for U.S. firms Some 80,000 auto workers from Chrysler Group LLC Ford Motor and General Motors signed a petition criticizing Japan for what they called its “closed” market for cars, according to the American Automotive Policy Council, an alliance to promote international trade and economic policies. Rep. Sandy Levin, the ranking member of the House Ways and Means Committee, said in a speech Tuesday that any elimination of tariffs on car imports into the U.S. should be tied immediately to the “opening of the Japanese auto market.” An immediate connection between U.S. duties and access to the Japan car market is better than a phased tariff elimination envisioned in the TPP, he said.

A Better Way to Think About Trade - Simon Johnson - Representative Sander Levin of Michigan, the senior Democrat on the Ways and Means Committee, which has jurisdiction over many trade issues, proposed this week that the United States make a significant change in its approach to international trade. The United States is in the middle of trade negotiations that, while still somewhat under the political radar and seldom on the front pages, have the potential to affect the economy – and many people’s jobs – in ways that could be quite negative or somewhat positive. Mr. Levin, in remarks earlier at the Peterson Institute for International Economics, laid out a set of issues that are entirely reasonable and could well draw bipartisan support, even in the House of Representatives. (I’m a senior fellow at the institute, but I was not involved in organizing this event.) The Obama administration should pay attention, particularly as any trade deal ultimately needs Congressional support.Mr. Levin made three main proposals that are directly relevant for the negotiations between the United States and countries on the Pacific Rim, aiming to sign a Trans-Pacific Partnership Agreement. (For a primer on that agreement, I recommend the book “Understanding the Trans-Pacific Partnership” by my colleagues Jeffrey J. Schott, Barbara Kotschwar and Julia Muir – the introduction and two other chapters are free.) The same principles are relevant for other potential trade deals.

RBI's battle with currency weakness inverts the yield curve; will cost India's economy dearly - The Reserve Bank of India decided it has had enough of rupee weakness and capital flight out of the country. The central bank is dealing with the problem by tightening liquidity conditions in the domestic money markets. By making it more expensive to borrow rupees, it reduces investors' ability to short the currency. Reuters: - The central bank tightened liquidity further and made it even harder for lenders to access funds with measures including lowering the amount banks can borrow or lend under its daily liquidity window. The latest moves come a week after its initial steps steadied the rupee somewhat, but left the currency still within sight of a record low of 61.21 hit on July 8. The RBI's move has some similarities to what had recently occurred in China, as the PBoC tightened liquidity conditions there (see post). As a result of these actions, interest rates spiked - particularly on the short end. The chart below shows the dramatic jump in 1-year government bond yield.

Poverty level in India drops to 22%: - Poverty in India declined to a record 22% in 2011-12, the Planning Commission disclosed on Tuesday. Over the last decade, poverty has witnessed a consistent decline with the levels dropping from 37.2% in 2004-05 to 29.8% in 2009-10. The number of poor is now estimated at 269.3 million, of which 216.5 million reside in rural India. While the trend is not surprising, the extent of the decline has opened up a debate on the factors that have led to it. The numbers themselves may be debatable but they are reflective of a broader trend.

Linking Funding and Quality to Improve Higher Education in India - Against a backdrop of rapid enrollment growth, declining education quality, and increasing financial pressure, India's key policy document for economic development through 2017 — the 12th Five-Year Plan — has recommended that the country's higher education institutions be granted more autonomy over curriculum, staffing, and programs offered. RAND researchers developed a course of action to help India implement policies and reforms that link education quality to funding in a way that will hold the country's newly autonomous institutions accountable for their performance, encourage greater innovation, and contribute to national goals.India's higher education system is one of world's largest, enrolling nearly 22 million students in more than 46,000 institutions. The system's rapid and recent expansion has increased concerns about declining quality, however. Reinforcing these concerns are poor infrastructure, underprepared faculty, unwieldy institutional governance, and other obstacles to innovation and improvement. Funding has been a continuing challenge, with public investment unable to keep up with expanding enrollment numbers and an inefficient process for allocating funds across the system. India's key policy document for economic development through 2017, the 12th Five-Year Plan, suggests that the country's higher education institutions should be granted more autonomy over curriculum, staffing, and programs offered. In return, these institutions would be more accountable for their performance and subsequent funding levels.

Cooking the numbers in Buenos Aires - Argentina's official economic growth surprised analysts with a 7.8% year over year jump in May. MercoPress: - Argentina's economic activity jumped 7.8% in May from a year earlier, according to the country’s questioned stats office, Indec. President Cristina Fernandez had anticipated the news earlier in the week in a televised speech. ...The monthly EMAE economic activity index is a close proxy for GDP, which is reported quarterly.  Cristina Fernandez should be congratulated for this incredible achievement in the face of numerous adversities faced by the nation. But can the growth numbers be trusted? MercoPress: - Argentina is widely accused of manipulating inflation data and, to a lesser extent, growth data. It faces potential sanctions by the IMF, which has issued a “declaration of censure” against Argentina over the quality of its statistics.Even though the inflation number is heavily "understated", the growth numbers reported by the offficials should be more reliable? But this 7.8% number is meant to approximate the "real" instead of the "nominal" measure of the GDP growth. Which means that inflation numbers are key to this determination. The official inflation rate reported by the same government agency is 10.5%, while the actual number is more than double that amount. Computed using a more accurate inflation measure, the real GDP is likely to be negative.

Mexico's Sluggish Economic Progress: According to  World Bank estimates, Mexico's total GDP ranked 14th among the countries of the world in 2012, just behind Spain and just ahead of South Korea--and with an economy more than double the size of Sweden, Poland, or Argentina. But while Mexico is a light-heavyweight in the world economy as measured by total size of its economy, it's also an economy that has had disappointingly sluggish growth in recent decades. Jesús Cañas, el al summarize the results of a conference held last fall at the Federal Reserve Bank of Dallas on these issues in "Will Reforms Pay Off This Time? Experts Assess Mexico’s Prospects," published in the Second Quarter 2013 issue of Southwest Economy. As a starting point, here are some background figures. The top line shows the path of output in Mexico since 1950: note the sharp rise from 1950 up to about 1980, the proverbial "lost decade" for Mexico's economy in the 1980s, and the modest rebound since the mid-1990s. The other lines show the underlying causes behind those patterns: Mexico's economy basically tracks the path of productivity growth, which has been sluggish for the last few decades.

Africa to own the world’s demographic future - The Washington Post has published a terrific report drawing on the latest United Nations (UN) population projections for the world’s economies. According to the Washington Post, Africa is expected to dominate population growth over the next 90 years as populations in many of the world’s developed economies and China shrink:  [Africa's] overall population is expected to more than quadruple over just 90 years, an astonishingly rapid growth that will make Africa more important than ever… Asia will continue to grow but its population growth, already slowing, is expected to peak about 50 years from now then start declining… Europe will continue to shrink, which is worsening its economic problems. South America’s population will rise until about 2050, at which point it will begin its own gradual population decline. North America is the least ambiguous success story: it will continue to grow at a slow, sustainable rate, surpassing South America’s overall population around 2070…A look at projections for the five most populous nations is interesting. China’s population is soon expected to go into decline as the One Child Policy bites, whereas India’s is expected to grow strongly for another 50 years, and the United States’ and Indonesia’s populations are projected to grow steadily. The scariest proposition is Nigeria, whose population is expected to explode eight-fold this centrury:

The New (Ab)normal: When 200 People Have More Wealth Than 3,500,000,000 - The following brief video created by, using data sourced from this website, is the latest vivid demonstration of the most adverse (and dangerous) side effect of nearly five years, and counting, of global monetary intervention by central banks: a world in which the poor get poorer, the rich get richer, and the middle class disappears. The video's punchline "The richest 300 people on earth have as much wealth as the poorest 3 billion" is not exactly correct: in truth the situation is even worse: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5 billion people, who have only $2.2 trillion combined.

Canada's High House Prices Held Up By Phony Appraisals -- Taxpayers On Hook, Report Says - The “securitization” of mortgages that many economists blame for the housing collapse and subsequent financial crisis in the U.S. is now a runaway problem in Canada, says a new study that also casts doubt on whether Canadians can trust the house price information they are seeing. The study from Canso Investment Counsel, a corporate bond management firm, says mortgage securitization — bundling mortgages together and selling them to investors — has spiralled out of control in Canada in recent years. Many economists blamed the process for the collapse of the U.S. housing market, because lenders didn’t have to worry about the ability of borrowers to pay in the long term — they would simply unload the risk onto other investors. (A concept known among economists as “moral hazard.”) In Canada, the securitization of government-backed mortgages (mortgages that have been insured by the CMHC, or other insurers such as Genworth) has exploded since the early 2000s, when the Canadian Mortgage Bond program was created and the CMHC lifted its $250,000 ceiling on insured mortgages, allowing banks to securitize most of their mortgages, the report said.

Spending on Government Assistance to Fall Slowly - With economic growth set to remain weak, and unemployment rates stubbornly high, spending by governments on unemployment assistance and other income support is to remain above precrisis levels this year, the Organization for Economic Cooperation and Development said Thursday. A sharp rise in unemployment in the wake of the 2008 financial crisis saw social spending–largely assistance to the jobless and other benefits–rise to an average of 22.1% of annual economic output in the OECD’s 34 members in 2009 from 19% in 2007. The Paris-based research body said that figure is likely to decline to 21.9% of gross domestic product this year. While social spending has risen in most of the developed economies that make up the OECD’s membership, austerity programs in some European countries have limited the scale of the increase, while Greece recorded the largest fall. Its spending on unemployment assistance and other social benefits is expected to fall to 22% of GDP this year from 24% in 2009, despite a rise in the unemployment rate to 26.8% in March, the highest in the 17-member euro zone. The OECD said France devoted the largest share of economic output to social spending, at 33% of GDP this year, while Belgium, Denmark and Finland also devote more than 30% of GDP. In the U.S., social spending is likely to account for 20% of GDP this year, up from 17% in 2008.

Eurozone debt burden hits all-time high in Q1 - Europe's debt dynamics keep getting worse in spite of years of cost-cutting and tax hikes designed to return public finances to health. Official figures showed Monday that the debt burden of the 17 European Union countries that use the euro hit all-time highs at the end of the first quarter even after austerity measures were introduced to rebalance the governments' books. Eurostat, the EU's statistics office, said government debt as a proportion of the total annual gross domestic product of the eurozone rose to a record 92.2 percent in the first quarter of 2013, from 90.6 percent the previous quarter and 88.2 percent in the same period a year ago. Battered by a global recession, a banking crisis and in some cases lax financial management, a number of euro countries have been forced to take remedial action to deal with their debts, some in return for multibillion bailout loans. One side-effect of the austerity measures has been to keep a lid on economic growth — government spending is a key component of the economy while tax rises can choke consumption and investment. Many euro countries are actually in recession — shrinking economies can make the debt-to-GDP ratio look less favorable. Coupled with the fact that countries continue to add to their debt mountains by ongoing, albeit smaller, budget deficits, the overall debt burden of the eurozone has continued to rise.

Greek debt at 160.5% of GDP in 2013 Q1 after biggest y-o-y rise in EU - Greece’s public debt stood at 305.3 billion euros, or 160.5 percent of GDP, in the first quarter of this year after posting the highest rise in the European Union over the preceding 12 months, according to figures released by Eurostat on Monday. This represented a slight rise from the fourth quarter of 2012, when the general government debt was at 303.9 billion euros, or 156.9 percent of GDP. In the first quarter of last year, the amount reached 280.4 billion euros, or 136.5 percent of GDP, meaning Greece’s debt grew 24.1 percentage points over a year. This was the largest rise in the EU, which saw the debt of 24 out of 27 member states increased over the 12-month period. As a proportion of national output, Greece’s debt remains the highest in the Unio . It is followed by Italy, which saw its debt reach 2.03 trillion euros, or 130.3 percent of GDP. Portugal (127.2 percent) and Ireland (125.1 percent) follow Italy. Estonia has the least debt as it reaches just 10 percent of its economic output. At the end of the first quarter of 2013, the government debt to GDP ratio in the euro area stood at 92.2 percent, compared with 90.6 percent at the end of the fourth quarter of 2012. In the EU, the ratio increased from 85.2 percent to 85.9 percent. Compared with the first quarter of 2012, the government debt to GDP ratio rose in both the euro area - from 88.2 percent to 92.2 percent - and the EU, from 83.3 percent to 85.9 percent.

The Annotated Wolfgang Schäuble (PR Versus Reality, European Periphery Edition)  Yves here. Yanis Varoufakis performs the important service of translating what is effectively a formal communication from Germany on its stance towards subject states, meaning the Eurozone periphery. On 19th July Mr Wolfgang Schäuble, Germany’s finance minister, published an article in The Guardian entitled We Germans don’t want a German Europe. The article was written hours after Mr Schäuble left Athens, following a controversial visit during which he told Greeks to expect no relief and to stick to the script written three and a half years ago. Below, you will find Mr Schäuble’s article (in black) annotated liberally by yours truly.

About that Austerity in Spain: There Isn't Any - I have long contended there is little austerity in Spain and there certainly isn't much reform either. I now have some numbers to back that up.Via Mish-modified Google-translation from El Economista, please consider personnel costs rise despite full state salary freeze. Despite the 5% snip in public salaries in 2010, the subsequent wage freeze in 2011, the elimination of extra pay in 2012 and the current freeze in Administration salaries, the overall payroll became cheaper by a only 2.1% year-over-year to December last year.The budget of expenses and monthly payments, which has been updated recently by the General Comptroller of the State Administration (IGAE), casts doubt on the effectiveness and / or proportionality of adjustments labor. For example, until the end of May, the state paid 14.17 million euros to its temporary staff, an increase of 9.5% over last year. This upward trend in payments to temporary staff is constant from the beginning of this exercise. since, January 31, 2013, these state payments increased 21.3 percent (4.13 million total) about 3.4 million higher than the same month a year earlier.It may seem paradoxical, but in the last two two years, the State Administration has virtually the same costs for temporary staff. What it cut one year, it added back the next, in nearly the same amount.

Worthless land could prolong Spanish banks' property woes - Spanish banks may have to swallow more losses to shake off the legacy of a property crash, real estate experts warn, as they struggle to sell plots of land that have ended up on their books and which are now worth less than many have accounted for. Lenders were forced by the government to take billions of euros in provisions against losses last year after property values collapsed in 2008, with the steepest writedowns destined to cover land they were saddled with as developers went bust. The weakest lenders were bailed out with European money and others posted steep losses as the result of the clean-up, which was supposed to draw a line under the property problem, as banks try and cope with a deep recession also dragging on earnings. But much of the old farm land and fields on city outskirts snapped up by construction firms during a decade-long building boom are failing to find buyers even at big discounts, real estate advisers and bank insiders said.

Spain taps social security reserve fund to pay pensions - Spain tapped its social security reserve fund for the second time in a month on Monday, the Labour Ministry said, to help with extra summer pension payments as unemployment and retirement costs deplete government funds. The government turned to the fund for 3.5 billion euros ($4.6 billion) on July 1 then for a further 1 billion euros on Monday. Spanish pensioners receive two cheques in summer and two over the Christmas holidays. Spain was forced to tap the reserve for the first time last year to help pay pension costs, using some 7 billion euros. Record high unemployment, which hit over 27 percent in the first quarter, and a growing number of retirees on a state pensions have put an unprecedented strain on Spanish social security funds. The fund was worth 59.3 billion euros, or 5.65 percent of gross domestic product, after the operation on Monday, the Ministry said.

99% Believe the Economic Situation in Spain is Bad; How Much Worse Can This Get? - According to the latest Eurobarometer, 99% believe that the economic situation in Spain is bad.Via Google translate from La Vanguardia.  79% of Spanish unemployment considered as the main problem of the country and 99% believe that the economic situation in Spain is bad, according to the latest Eurobarometer survey published today. In comparison, 51% on average in the European Union (EU) believes that the main challenge for the country is 72% unemployment and the economic situation is bad.Regarding the future, almost half of the Spanish respondents, 46%, believes that the country's economic situation will remain the same over the next twelve months, compared to 15% who think it will improve and 37% who think it will be worse.62% do not believe that the economic crisis has already had its biggest impact on the labor market and therefore the economy is recovering slowly, and, on the contrary, they think that "the worst of the crisis is yet to come".The good news is 99% negative consensus has little room to drop. However, 15% think the economy will improve, 37% think it will worsen, and 46% think it will remain the same. 2% don't know.

Dutch housing bust intensifies - I have noted previously (here, here, and here) how the Netherlands housing system all but guarantees unaffordable housing and a susceptibility to housing bubbles, via:

  1. ridiculously easy credit, with a third of mortgages guaranteed by the government;
  2. mortgage interest tax relief and generous subsidies offered to home buyers;
  3. a dysfunctional rental market that encourages households to strive for owner-occupation; and
  4. severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.

Now the Dutch are paying the price for its bubbly housing policy, with home values continuing to decline. According to the National Statistics Agency, Dutch house prices fell by nearly 10% in the year to June 2013 to be down more than 20% since prices peaked in 2008. Nominal prices are now back at levels not seen since mid-2004 (see next chart).

Europe Extends and Pretends -- As I’ve been covering over the last few months the data coming out of Europe of late has been slowly getting better, and last nights’ PMI continued the trend. Eurozone stabilises as PMI hits one-and-a-half year high

• Flash Eurozone PMI Composite Output Index at 50.4 (48.7 in June).18-month high.
• Flash Eurozone Services PMI Activity Index at 49.6 (48.3 in June). 18-month high.
• Flash Eurozone Manufacturing PMI at 50.1 (48.8 in June). 24-month high.
• Flash Eurozone Manufacturing PMI Output Index at 52.3 (49.8 in June). 25-month high.

The Markit Eurozone PMI Composite Output Index rose above the 50.0 no-change level in July for the first time since January 2012, according to the flash estimate. The PMI rose for the fourth successive month, up from 48.7 in June to 50.4.  Manufacturers reported the largest monthly increase in output since June 2011, registering an expansion for the first time since February of last year. Service sector activity meanwhile fell only marginally, recording the smallest decline in the current 18-month sequence and showing signs of stabilising after the marked rates of decline seen earlier in the year.

About That PMI: Unemployed French Rise To New Record - French bonds are rallying; French stocks are rallying; French PMI is rising (though still below 50); so everything must be great in the Gallic nation. Despite a Brit having won the Tour de France for the 2nd year in a row, however, it seems the dismal reality on Main Street is that the number of unemployed French people has reached yet another all-time record high. As Les Echos noted previously, this casts even greater doubt on President Francois Hollande's pledge to reverse a long-running rise in joblessness. As we have explained in great detail (here and here most recently) France's economic fortunes remain depression-like and today's Jobseeker data merely goes to confirm this.

Italy's Grillo slams Merkel, calls for debt restructuring -Italian opposition leader Beppe Grillo on Tuesday accused politicians of having "sold their soul to the German devil," and said the only way out of recession was leaving the euro or defaulting. "Today we have to decide whether to restructure our debt while staying in the euro or returning to the lira," wrote Grillo, in a blog post called "the devil wears Merkel." "It is the only way in which Italy can see the light again," wrote the satirist-turned-activist, who is the leader of Italy‘s biggest opposition party. The eurozone‘s third-largest economy is experiencing a record-length recession while dealing with austerity measures recommended by the European Union. Youth unemployment is close to 40 per cent. Grillo‘s Five Star Movement (M5S) rose to prominence in February, when it won a quarter of votes in general elections. It is now the most vocal critic of Prime Minister Enrico Letta‘s coalition government. Grillo - who did not run for parliament and sets the party line via his blog - wrote that fixed exchange rate systems such as the euro benefit "strong countries" like Germany, helping them to achieve the "economic annexation" of weaker states. "Italian politicians have sold their soul to the German devil in return for their survival, at the expense of the people, who have to suffer from austerity and deflation," Grillo said.

IMF fears Fed tapering could ‘reignite’ euro crisis - The tapering of stimulus by the US Federal Reserve risks reigniting the eurozone debt crisis and pushing the weakest countries into a "debt-deflation spiral", the International Monetary Fund has warned. "The macroeconomic environment continues to deteriorate," said the Fund in its annual `Article IV' health check on the eurozone. "Recovery remains elusive. Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high. Mounting social and political tensions pose an increasing threat to reform momentum." The report warned that the onset of a new tightening cycle in the US had already led to major spill-over effects in the eurozone, pushing up bond yields across the board. Early tapering by the Fed "could lead to additional, and unhelpfu, pro-cyclical increases in borrowing costs within the euro area. This could further complicate the conduct of monetary policy and potentially damage area-wide demand and growth. Financial market stresses could also quickly reignite," it said. The Fund said the European Central Bank must take countervailing action to prevent "a vicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, and purchasing a targeted range of private assets.

The OECD’s International Tax Plan: The First Step on a Long Road --Last week, the OECD proposed a major new initiative aimed at cracking down on tax avoidance by multinational corporations. The 40-page report follows widespread international criticism of aggressive tax planning by high-profile U.S.-based firms such as Starbucks, Apple, and Google. The OECD report, called the Action Plan on Base Erosion and Profit Shifting, makes 15 recommendations including:

  • Cracking down on transfer pricing, especially for intellectual property and other intangible assets. This practice allows firms to shift assets and expenses among its subsidiaries in a way that maximizes revenue in low-tax jurisdictions and maximizes deductible expenses in high-tax countries.
  • Requiring additional transparency by firms. Companies would have to disclose their profits, sales, and taxes on a country-by-country basis.

The plan has already kicked off an important discussion. But chances of many of these proposals ever being adopted are slim. The OECD timeline calls for the group to gradually turn its framework into specific recommendations by the end of 2015. After that, each member country would have to approve the proposals for them to have the force of law.

One Recession or Many? Double-Dip Downturns in Europe - The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12.  The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was now erased from the history books — and that the Conservative government would take a bit of satisfaction from this fact.    But it should not.    Similarly, in April of this year, Britain was reported to have narrowly escaped a second quarter of negative growth, and thereby escaped a triple dip recession.   But it could have saved itself the angst. The right question is not whether there have been double or triple dips; the question is whether it has been the same one big recession all along.  As the British know all too well, their economy since the low-point of mid-2009 has not yet climbed even halfway out of the hole that it fell into in 2008:  GDP (Gross Domestic Product, which is aggregate national output) is still almost 4% below its previous peak, as the first graph shows.   If the criteria for determining recessions in European countries were similar to those used in the United States, the Great Recession would probably not have been declared over in 2009 in the first place.  

GDP up 0.6%, and growth across the board - The second quarter rise of 0.6% in gross domestic product was bang in line with expectations, including those of the Bank of England. There was a rise in output in the quarter in all the main sectors of the economy, with services up 0.6%, production also 0.6% (and manufacturing 0.4%), construction a healthy 0.9% and even agriculture - despite the poor spring - up 1.1%.This is, of course, a day to roll out all the cliches about there being a long way to go - GDP is still 3.3% below pre-crisis levels pending revisions - and the economy not being out of the woods yet. But given where expectations were just a few months ago and the optimistic noises coming out of the surveys, these figures should be welcomed. More here.