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

Saturday, July 6, 2013

week ending July 6

U.S. Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week with additional holdings of Treasury debt, Fed data released on Friday showed.The Fed's balance sheet liabilities, which are a broad gauge of its lending to the financial system, stood at $3.450 trillion on July 3, compared with $3.436 trillion on June 26.The Fed's holdings of Treasuries rose to $1.943 trillion as of Wednesday, from $1.928 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) were $1.208 trillion, little changed from the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $69.180 billion compared with $70.658 billion the previous week.The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $36 million a day during the week versus $24 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 5, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

NY Fed’s Dudley: Fed In No Rush To Tighten Monetary Policy - A leading policy maker at the Federal Reserve said Tuesday that even as the economy’s underlying fundamentals improve, the central bank isn’t yet ready to begin tightening monetary policy. William Dudley, President of the Federal Reserve Bank of New York, said that while it is likely the Federal Open Market Committee will begin phasing out a bond-buying program later this year, such a move should not be taken as a signal it plans to move forward any increase in short-term interest rates. He also sought to emphasize that a tapering of the Fed’s stimulus program is not “hardwired,” and will depend on the performance of the economy. In the years since the financial crisis ended, the Fed has consistently been too optimistic about the recovery, Mr. Dudley said, highlighting the importance of avoiding an abrupt withdrawal of monetary support before the economy is on a strong footing. “As long as the FOMC continues its asset purchases it is adding monetary policy accommodation, not tightening monetary policy,” Mr. Dudley said. His comments reinforced the message he sent last week in a press briefing, when he indicated that markets had gotten ahead of themselves in raising expectations that short-term interest rates might rise as early as next year.

Chart of the day, Fed-tightening edition - This chart comes from Gavyn Davies’s excellent post on Fed tightening, which ought to be required reading for all members of the FOMC. He demonstrates the effect of the Fed’s tapering warnings in two ways: by showing that the expected short-term interest rate in mid-2016 is now about 100bp higher than it was at the beginning of May; and also, with the chart above, by showing that the market is now expecting rates to start rising much earlier than it had previously anticipated. This chart isn’t, strictly, a tapering chart: it shows when people expect the Fed to start raising interest rates, rather than slowing down on QE. But that all-important first rate hike now has a 65% probability of taking place in 2014, according to the market — up from less than 15% in the NY Fed’s April survey. Which raises the trillion-dollar question: given that the Fed hasn’t changed its messaging on rate hikes at all, what has caused this enormous change in expectations? Davies explains: The markets have rationally taken the Fed statements on tapering as a signal that their thinking on monetary policy is changing. This signal of Fed intentions may be more powerful than the other forms of forward guidance they have given about their intentions.

The Fed's Communication Problem - Since early May, real and nominal long-term bond yields have risen in the United States. The most stark depiction of this is in the following chart, which shows the 10-year TIPS yield - which has risen by roughly 100 basis points since early May - and the breakeven rate (nominal 10-year yield minus the TIPS yield) - which has fallen by about 50 basis points over the same period.  I think it's fair to say that this was not the Fed's intent. The Fed thinks that "accommodation" is what is appropriate, and the way it sees that working is through low real bond yields and high anticipated inflation. But apparently real bond yields have risen, and anticipated inflation has fallen. Further, I think it's also fair to say that the bond price movements since early May have been driven primarily by the interpretation by financial market participants of public statements by Fed officials - principally Ben Bernanke. On Thursday, Narayana Kocheralakota was interviewed on CNBC, and tried to make sense of this. Narayana thinks that the key problem was that the markets were (are) misinterpreting statements about QE (quantitative easing) as statements about the future path of the policy rate. That's in the right ballpark, but doesn't quite get at the essence of the problem. While the Fed took some pains to to make public statements about how QE was just normal policy (ease by moving long rates down rather than short rates), they have consistently segmented QE from forward guidance (statements about the future path of the fed funds rate), particularly in the FOMC statement. QE and forward guidance are typically described by the Fed as two different tools - like a hammer and a saw. But it should be clear to anyone - and I think it is - that these two elements of policy are somehow related.

How the Fed Is Creating Harmful Uncertainty  - Thoma - Ben Bernanke’s term as chairman of the Federal Reserve ends on January 31, 2014. Any uncertainty over whether he would be reappointed by President Obama was eliminated when the president said recently that Chairman Bernanke has “already stayed a lot longer than he wanted or he was supposed to.” But while uncertainty over Bernanke’s future at the Fed has been eliminated, there are several ways in which the Fed is creating uncertainty that could hold back the recovery: Chairman Bernanke has worked hard to try to change the way the Fed operates so that no one person, even the chair, has a dominant voice in policy. It’s the institution that matters the most, not the individuals within it.  But despite this attempt to refocus attention away from the chair, the outside world believes that policy is largely dictated by the chair’s wishes. Thus, uncertainty over who will be the next Fed chair translates into uncertainty about how policy will be conducted, and that uncertainty could harm the already too slow recovery. Anyone who has been following the Fed recently knows that it has fared poorly in its attempts to provide guidance on when quantitative easing will begin tapering off, and this has translated into uncertainty over both interest rate and quantitative easing policies. The Fed does not seem to understand how anxious it has appeared to return policy to normal over the last several years. One of the reasons people believe the Fed can’t wait to return policy to normal is that it has continually adopted overly rosy forecasts that avoid the tough decision to do more to help the economy. Better times are just around the corner, we are told, and if anything we need to think about exit policies.

Historic Mistake Watch - Paul Krugman - When the Fed began its talk of “tapering” asset purchases, I warned that it might turn out to be a “historic mistake”. I guess the historic bit is still up in the air; but the mistake aspect is now glaringly obvious. Bond prices have plunged, and the Fed’s attempts to inform markets that they’ve got it all wrong have only modestly mitigated the impact. What went wrong? The Fed grossly misunderstood the nature of the relationship between its statements and market expectations. It believed that the market was listening closely to the details of what it said. In fact, the market doesn’t — and probably shouldn’t. Instead, it listens to the tone of Fed statements, and also Fed actions; it’s more a matter of character judgment than mathematics. And what the Fed conveyed with the tapering talk was a sense that its heart really isn’t in this stimulus thing. Right now, the Fed is doing two things in an attempt to boost the economy: it’s promising to keep short-term rates, which it controls, low; and it’s trying to reduce long-term rates directly, through bond purchases. But as Gavyn Davies shows, the market responded by sharply marking up its expectations for future short-term rates. In April, the market thought there was almost no chance the Fed would raise rates next year; now such a rise is considered more likely than not.

The all-powerful Fed - The conventional wisdom is that the big jump in interest rates since the beginning of May is the result of a poorly conceived or poorly communicated shift in policy by the U.S. Federal Reserve. The conventional wisdom is wrong. Prior to the Great Recession, I thought we had all agreed on the practical limits on the Fed's capabilities. We understood that to some extent the Fed could control the short-term interest rate by changing the supply of reserves available to the banking system. But we also understood that the Fed's influence over longer-term interest rates was much less immediate and direct. You would think that in an environment in which the primary instrument of monetary policy is useless, the Fed has less, not more, control over long-term rates than it used to.But somehow many observers seem to have persuaded themselves otherwise, thinking of the current interest rate on a 10-year Treasury bond as if it were a direct policy choice of the Federal Reserve. Among those who take this view, retirees have been mad at Bernanke for making the interest they earn on bonds so low, while many other observers are upset with Bernanke for now raising rates too quickly, threatening the struggling economic recovery.

Fed Ready for September Taper After Shocking Market, Meyer Says - Federal Reserve policy makers are ready to start tapering bond purchases in September after Chairman Ben S. Bernanke shocked markets by announcing a conditional timetable, said former Fed Governor Laurence Meyer.  “They have made a decision virtually to go in September unless the data disconfirms their expectations of the continued improvement of the economy,” Meyer said of the Fed policy makers’ meeting on June 18-19. “That was the shock of the meeting to have a schedule thrown out at this time with three months of employment data still ahead.” If tapering does start in September, “why should there be any response? Everybody expected it,” Meyer said today in an interview on “The Hays Advantage” on Bloomberg Radio with Kathleen Hays and Vonnie Quinn. The Fed has been making $85 billion in monthly bond purchases and holding the key interest-rate target near zero to spur job growth and faster U.S. economic expansion. The central bank will probably taper its asset purchases later in 2013 and may stop them around mid-2014 as long as the economy performs in line with the Fed’s projections, including a substantial improvement in the labor market

Fed Watch: A Pledge To Be Responsible - Since the June FOMC meeting and subsequent press conference with Federal Reserve Chairman Ben Bernanke, monetary policymakers have bent over backwards to convince financial market participants that tapering quantitative easing does not imply an earlier date for the lift-off from the zero interest rate policy. It has been a hard message to sell. Gavyn Davies on the expectations shift: One possibility is that the shock caused by the policy change has led to deleveraging by investors in panic selling of futures contracts. If so, the impact should reverse itself as the market calms down. But another possibility is that the markets have rationally taken the Fed statements on tapering as a signal that their thinking on monetary policy is changing. This signal of Fed intentions may be more powerful than the other forms of forward guidance they have given about their intentions. When I read the latest speech by New York Federal Reserve President William Dudley, it seems evident to me that there has indeed been a shift in monetary policy. The key sentence is this: Taken together, the labor market still cannot be regarded as healthy. Numerous indicators, including the behavior of labor compensation and household assessments of labor market conditions, are all consistent with the view that there remains a great deal of slack in the economy. The Fed adopted a 7% unemployment trigger for ending quantitative easing despite full recognition that a wide array of labor market indicators reveal a persistently weak and under performing labor market. Moreover, they adopted the trigger in the face of decidedly weak inflation data. Why act to reduce accommodation when the Fed is missing so badly on both sides of its dual mandate? Presumably because happier days are on the horizon.

Taper Paradox - Note that tapering talk implies that (1) the Fed, which may have better information than we do, is more optimistic than we thought and (2) if you were nearly convinced that the depression is over, you had to make up your mind and act on your belief as quickly as possible, or you would lose the opportunity to profit from it.  Given the existence of multiple equilibria, it’s quite possible that the Fed’s tapering talk has had the paradoxical effect of accelerating the recovery, which would explain why markets now seem to expect the Fed to start raising short-term rates sooner than the Fed itself has implied. Do I think the Fed did the right thing by strategically engaging in verbal tightening at just the time that it would have a paradoxical effect?  No.  For one thing, the Fed obviously didn’t anticipate this response, and in any case the interpretation I’ve suggested here is highly speculative.  And even if my interpretation is right, and even if the Fed is cleverer than we think and actually intended it this way, I still don’t think they did the right thing.  Accelerating the recovery is a good thing, all other things equal, but it’s not the most important thing.  The most important thing is for the Fed to assure us, in no uncertain terms, that it will continue to support the recovery until there is no ambiguity left.  My guess is that, given what I imagine the Fed’s preferences to be, starting to tighten (verbally) now will turn out to have been the right thing to do.  But my guess, even if it is the best guess based on the information I have, is subject to a lot of uncertainty.  From the point of view of the recovery, mentioning the taper last week was a risky move, and even if the risk pays off, I don’t think it’s a risk the Fed should have taken.

How many Jobs are Needed to Reach Fed's December Unemployment Rate Target for QE3 Tapering? - This is a common question, and I suggest using the Atlanta Fed's Jobs Calculator tool to estimate how many jobs per month will be needed to reach a certain unemployment level. As an example, for the unemployment rate to decline to 7.3% in December (the high end of the Fed's forecast), with the participation rate staying steady at 63.4%, would require about 150,000 jobs per month for the next seven months.  This seems very possible. If the participation rate increases to 63.6%, than the economy would need to add 210,000 jobs per month for the unemployment rate to fall to 7.3% in December (this is just an estimate). You can put in your own assumptions to the calculator. Another frequent question is when will the unemployment rate fall to 6.5% (the Fed's threshold, but not trigger, for raising the Fed's funds rate). If the participation rate stays steady, the unemployment rate will fall to 6.5% in December 2014 if the economy adds around 185,000 jobs per month.   This is consistent with the Fed not raising rates until 2015 or later.

Merrill Lynch on Taper Timing - A few excerpts from a research note by Ethan Harris and Michelle Meyer: Fed officials must be scratching their heads in regards to the sharp reaction of markets to recent tapering talk. Every “core” member of the Committee has been saying tapering is data dependent: this assumes signs of a pick up in both growth and inflation.In our view, both the markets and economists have not internalized the Fed’s reaction function. Even before the recent downward revisions, most economists surveyed by Bloomberg had weaker growth forecasts for this year than the Fed and yet more than half say tapering starts in September. ...Why does data seem to matter so much to the Fed, but not to Fed forecasters? We think the Fed has convinced many forecasters that September tapering is a done deal. In May, Bernanke testified that the Fed could taper “in the next few meetings”; that is, by September. Then at his post-FOMC press conference he said he was “deputized” to lay out a specific exit plan: if our forecast is correct, he said, we will taper later this year and end QE by the middle of next year with an unemployment rate of 7%. In our view, he was describing a sensible reaction that will only be realized if their forecast is correct. By contrast, the market interpretation seems to be: “if they are being this specific and not offering any alternative paths, they must be fairly determined to start tapering.” ...  But we disagree with the market interpretation. Data dependent means data dependent. ...

A Solid But Not Spectacular Employment Report - The June employment report came in ahead of expectations with generally solid numbers, but was hardly a blow-out report.  Still, bond market participants were apparently positioned for a much weaker number.  Bonds tumbled on the news, spiking the yield on 10-year Treasuries by almost 20bp as everyone forgot - or simply didn't believe - the Fed's promise to hold to the zero lower bound into 2015.  Expect dovish talk as policymakers try to rein in expectations, but I suspect the damage is done, the genie is out of the bottle.  If the Fed wants to regain credibility, they will need to stop talking and start doing by making clear the taper is not going to happen this year.  That however, is not going to happen.  At this point, it is pretty unlikely the data will come in sufficiently weak to postpone a September cut in the pace of asset purchases. Nonfarm payrolls gained 195k compared to expectations of 161k rise.  The previous two months were revised up, tacking on another 70k jobs.  The 12-month moving average is now just below 200k jobs/month:

Implications for Monetary Policy - Market watchers appear to have concluded from Friday’s better-than-expected jobs report that the Federal Reserve will soon start to taper its purchases of long-term assets.  I am heartened by the data showing an improving labor market, but am not so sure that the Fed is on the verge of backing away from its third round of quantitative easing. As I wrote last week, I see a pick-up in growth a year or two ahead.  But the near-term evolution of the economy remains uncertain, and it is this outcome on which monetary policy depends. Friday’s report was decent on the whole, with a total of 265,000 net new jobs, including 195,000 gained in June and 70,000 from upward revisions to April and May.  The unemployment rate held steady at 7.6 percent even as more people joined the labor force looking for work (and finding it).  Perhaps the most encouraging aspect of the report was that wages rose by 2.2 percent growth over the past year and finally appear to be outpacing inflation (we’ll find out for sure with the release of June inflation data on July 16). More jobs and higher wages together mean increased total labor income. This will support consumer spending, which was relatively anemic in 2012 and strengthened only modestly in the first quarter of 2013. Other details of the report, however, are less positive.  While jobs were added, the average gain of just under 200,000 a month from April to June was a slight letdown from the pace of job creation in the first three months of 2013. Job creation in June tilted heavily to part-time employment, and average weekly hours for each worker did not expand as might be expected as a prelude to stronger hiring by employers who push their existing workers a bit harder before bringing on more employees. This was a good jobs report, but not amazing.

A Quick Independence Day Weekend, Post-Employment Report Update - Atlanta Fed's macroblog -- From what I gather, a lot of people took notice of this statement, from Chairman Bernanke’s June 19 press conference: If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program. That 7 percent assessment to which the Chairman was referring comes, of course, from the outlook summarized in the Summary of Economic Projections, published following the June 18–19 meeting of the Federal Open Market Committee.  Here are the unemployment forecasts specifically:  So, how do things look after the June employment report? As is our wont, we turn to our Jobs Calculator to answer such questions, and come up with the following. If the U.S. economy creates 191,000 jobs per month (the average for the past 12 months), and the labor force participation rate stays at 63.5 percent (its June level), and all the other important assumptions (such as the ratio of establishment survey to household survey employment) remain the same, then the economy’s schedule looks like this:

J.P. Morgan, Goldman Sachs Now See Fed ‘Taper’ In September - June hiring strength makes it more likely the Federal Reserve will slow its bond buying program in early autumn, rather than at the close of the year, economists at two top Wall Street banks said Friday.Saying the June hiring news was “not too shabby,”J.P. Morgan economist Michael Feroli told clients in a note that he now expects the central bank to trim what is currently an $85 billion per month bond buying program in September. Before the jobs report, Mr. Feroli had expected the Fed to set in motion the bond buying slowdown in December. “The Fed has made clear that at the end of the day it is employment which will call the tune,” Mr. Feroli said. “Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting.” Meanwhile Goldman Sachs also penciled in a September slowdown in Fed bond buying, from December. Noting the June jobs data was better than expected, they liked the payrolls growth, revisions to prior months’ data and the increase in earnings. They downplayed the unchanged unemployment rate amid favorable changes in the number of workers relative to the size of the broader population and overall labor force.

US bond yields soar on robust jobs growth as QE tapering expected - Robust US employment figures sent bond yields soaring on Friday as the labour market showed it was healthy enough for the Federal Reserve to slow its $85bn a month in asset purchases later this year. The yield on 10-year Treasuries rose 22 basis points to 2.72 per cent – the highest since July 2011 – after payrolls rose by 195,000 in June, comfortably beating expectations. Revisions to recent data added another 70,000 jobs to the total. The figures take average payrolls growth this year to 202,000 a month – meeting Fed chairman Ben Bernanke’s standard of “continuing gains in labour markets” for a “tapering” of quantitative easing. September is seen as the likely date for the US central bank to consider such a change. The shift in bond prices spilled across the Atlantic and helped push British 10-year yields up by 11 basis points to 2.49 per cent, more than reversing Thursday’s declines, which had followed dovish signals from the Bank of England. 

Fed QE exit will be divided into five steps - Exit for the Fed easing monetary policy steps and timetable, I believe that, in view of the process of improving U.S. jobs and economic recovery trend, the Fed’s loose monetary policy exit process may end up in five steps. First step, to reduce the amount of each asset purchased. In the current fourth quarter, the Fed will reduce the purchasing agency debt started in 2014 to stop the quantitative easing. Second step, to take reverse reverse operation. Second half of 2009, or early today, the Federal Reserve in determining the trend of the economy remains good, you may use reverse reverse operation, that long-term bond holdings, while holdings of short-term bonds. Third step, return of funds from the financial market. As the economy continues to improve, the Fed will take deposits alternate tool, repurchase, reverse repurchase agreements to control the duration of recovery of mobility and pace, better regulation of the financial market liquidity. Fourth step, gradually raise the benchmark interest rate. Currently, the U.S. banking system, there are plenty of reserves, the federal funds market has been a dramatic drop in the federal funds rate adjustment difficult to influence short-term interest rate movements. Thus, short-term interest rates on excess reserves will replace the federal funds rate as the Fed’s policy rate. Fifth step, gradually realize the normalization of the Fed’s balance sheet. Currently, the Fed’s total assets over three trillion U.S. dollars, a record high, but also by the pre-crisis asset structure of short-term, medium-term debt mainly transformed into long-term bonds, mortgage-backed securities (MBS) and federal agency debt based. 

Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination” - I suggested more than three years ago that helicopter drops are fiscal operations (printable version here), in contrast to the more traditional view that they were monetary policy operations (e.g., “Helicopter Ben”).  My argument was based almost entirely on accounting and, therefore, on the actual balance sheet effects of a money drop.  True helicopter drops of money raise the net financial assets (via income increases) of the non-government sector, which is exactly what fiscal policy does but not what monetary policy does. MMTers have explained for years that fiscal policy provides income and net financial assets for the non-government sector, whereas monetary policy (whether it be lower interest rates or—for true believers in Monetarism and “hot potato effects”—more “money”) can only stimulate the economy via increased spending by the private sector out of existing income. And now we see virtually everywhere there are calls for helicopter drops of money, only this time the proposal is for the Treasury to deficit spend while the Fed buys government bonds in the secondary market equal to the deficit spending.  This is referred to as Treasury/Central Bank or Fiscal/Monetary “coordination.” This is all fine as far as it goes, and I certainly don’t want to stand in the way of more fiscal policy, so my critique here is more about the details of operations as they are understood by those pushing “coordination” than it is of the overarching policy advice per se.  In my view, a more precise understanding of monetary operations helps to better understand available policy options, and therefore my own perception that there are shortcomings in using the “coordination” language to describe helicopter drop is more than just a semantic point.

The Farbissen Faction - Paul Krugman - A farbissineh (think clenched teeth) is someone who not only isn’t enjoying herself, but is determined to make sure that nobody else has any enjoyment either. All this came to mind as I contemplated the increasingly loud campaign demanding that the Fed stop its bond purchases and indeed start raising interest rates. It’s a chorus coming from Martin Feldstein, the Bank for International Settlements, Raghuram Rajan, John Taylor, and more. I believe that this chorus has already had significant malign effects; it effectively bullied the Fed into talking about “tapering” despite a total absence of economic justification, and this — by leading markets to believe that the Fed was turning more hawkish in general — has led to higher long-term interest rates. The question is, what lies behind this campaign? It’s remarkably hard to explain in terms of any coherent logic; as David Glasner says, the members of this group seem to believe, somehow, that the Fed is powerless to boost the real economy yet retains vast power over real interest rates.

The Rise Of Real Yields - It was obvious as far back as this past April that the positive connection between stocks and the Treasury market's inflation forecast in recent years was coming apart. As the weeks rolled on and the divergence persisted, it was also clear that the break signaled a substantial change in the macro-market outlook. Exactly what was changing wasn't conspicous early on, but it now appears that we're finally at the point of transitioning to something approximating normality. It's been a long time coming. It looks like the end of the world to some, but the apocalyptic narrative in this case is one more overbaked view of the future until the numbers tell us differently. Yes, there are caveats, as always. But for now, there are signs of stabilization. That starts by noting that inflation expectations (defined by the yield spread between the 10-year Treasury and its inflation-indexed counterpart) are no longer falling, which is a good thing. But that's only been true for the last few trading sessions and so any final conclusions remain premature. That said, the stock market has perked up over the past week, rising a bit after stumbling for most of the past month or so.

Bill Gross Discusses the "Tipping Point" For Bonds; Does He Miss the Boat? - Bill Gross did not see this major selloff in bonds coming. He discusses the setup in his recent Investment Outlook called The Tipping Point. Gross says "Markets just had too much risk, and in PIMCO’s opinion, too much hope for a constant QE and for the growth that it would produce. In effect, the ship was top heavy with too little ballast. Guess I should have known, huh?" That's water over the dam at this point so the question Gross asks now is "Well where does the ship go from here?" Here is a snip of Gross' explanation.
1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth. The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales.

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace. The Fed has told us that they “target,” “ target” 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction. 

Vital Signs Chart: Core Consumer Prices -- Consumer prices, excluding food and energy, rose a seasonally adjusted 1.1% in May from a year ago, as measured by the core personal consumption-expenditures price index. That is well below the Federal Reserve’s 2% inflation target over the long term. The Fed pays attention to other inflation gauges, such as the consumer-price index, but core PCE tends to be its preferred measure.

Deflation By Any Other Name Would Smell As Foul - Over the past two weeks or so, we've been seeing a very clear portrait of how sick our economies are. Not that you would know it from reading the press. The term deflation pops up only very cautiously. Could that be because people don't understand what's going on? Or are they simply afraid of the word? This is the real thing, guys. And it's going to hurt. Money (actually: credit) has shifted out of emerging markets by the trillions. So where did it go? Not into bonds, stocks or precious metals. Money shifted out of there too, and also by the trillions. Money isn't going anywhere, it's going "poof". It's vanishing and will never be seen again.Markets may still rise at times to some extent, but only if and when more stimulus is flooded into the system, or people think it will be. Markets have simply been undead for the past 5 years - or so -, as long as central banks have issued stimulus. Take that away and all you're left with is zombies. Central banks' longer term control of either has always been no more than an illusion. And as for another illusion: you can't call something a "recovery" if you pay for it with more debt, that doesn't make nearly enough sense. People think they can find the reason behind the vanishing trillions in money/credit in things Ben Bernanke may or may not have said, and perhaps in a hard stance by the Chinese central bank. But they are merely small parts of a bigger story. The problem is not that the Fed hints at tapering, it's that the US economy is too sick to stand up straight without constant and/or increasing credit infusions. A zombie economy propped up with zombie money. And that can't last. It never could.

Inflation, Deflation, or Discontinuity? - It seems to me that economies operate on two kinds of escalators–an up escalator, and a down escalator. The up escalator is driven by a favorable feedback cycle; the down escalator is driven by an unfavorable feedback cycle. For a long time, the US economy has been on an up escalator, fueled by growth in the use of cheap energy. This growth in cheap energy led to rising wages, as humans learned to use external energy to leverage their own meager ability to “perform work”–dig ditches, transport goods, perform computations, and do many other tasks that machines (powered by electricity or oil) could do much better, and more cheaply, than humans. Debt helped lever this growth up even faster than it would otherwise ramp up. Continued growth in debt made sense, because growth seemed likely for as far in the future as anyone could see. We could borrow from the future, and have more now. Unfortunately, there is also a down escalator for economies, and we seem to be headed in that direction now. Such down escalators have hit local economies before, but never a networked global economy. From this point of view, we are in uncharted territory.

Government debt, Inflation and Money - Do budget deficits cause inflation? Let me be a little more specific: does raising the level of debt and keeping it there when the economy is at full employment raise the price level? The conventional answer is: not if the central bank controls inflation. Sometimes economists say the same thing in a different way: not if the debt is not monetised. High debt may be problematic for other reasons (e.g. crowding out of private capital, default risk, increasing distortionary taxation), but not because it must cause inflation. This post is about explaining this conventional view. The two ways of giving the answer reflect two different ways to describe the conventional view, and I think that tells us something interesting - although perhaps controversial - about the role of money.

From the Bubble Economy to Debt Deflation and Privatization - Michael Hudson - The Federal Reserve’s QE3 has flooded the stock and bond markets with low-interest liquidity that makes it profitable for speculators to borrow cheap and make arbitrage gains buying stocks and bonds yielding higher dividends or interest. In principle, one could borrow at 0.15 percent (one sixth of one percent) and buy up stocks, bonds and real estate throughout the world, collecting the yield differential as arbitrage. Nearly all the $800 billion of QE2 went abroad, mainly to the BRICS for high-yielding bonds (headed by Brazil’s 11% and Australia’s 5+%), with the currency inflow for this carry trade providing a foreign-exchange bonus as well. This financial engineering is not your typical bubble. The key to the post-2000 bubble was real estate. It is true that the past year and a half has seen some recovery in property prices for residential and commercial property. But something remarkable has occurred. So in this new debt-strapped low-interest environment, Hedge funds and buyout funds are doing something that has not been seen in nearly a century: They are buying up property for all cash, starting with the inventory of foreclosed properties that banks are selling off at distress prices. In a bubble economy, falling interest rates (e.g., from 1980 to today) almost guarantee capital gains. But today’s near-zero interest rates cannot fall any further. They can only rise, threatening capital losses. That is what is panicking today’s bond and stock markets as the Fed talks about ending QE3’s near-zero interest rate regime. So there is little incentive for bond buying. Once interest rates rise, we are in an “anti-bubble” economy. Instead of capital gains driving “wealth creation” Alan Greenspan style, we have asset-price deflation.

Large Downward Revisions to GDP (graphs) The Bureau of Economic Analysis announced here that real GDP in the first quarter increased at a seasonally adjusted annual rate of 1.8%, revised down from the second estimate of 2.4% and the advance estimate of 2.5%. This revision, down 0.6 from the second estimate, is quite large historically. As can be seen here, the average revision from the second to the third estimate (without regard to sign) for real GDP from 1983-2009 is 0.2 with a standard deviation of 0.2.The weakness of current real GDP growth compared to other recoveries can be seen in the graphs below. First, in the GDP Growth chart below, the current value of gdp growth, 1.8% is highlighted in red. The visual makes it pretty clear that the current recovery lies below that of the earlier periods going back to 1995. That is, the year-over-year change (the blue line) is mostly higher from 1995-1999 than it was 2002-2006; and 2002-2006 looks to be higher than 2009-2013.The graph below shows that over the period 1947-1983 average real gdp growth was 3.64%; since 1983 it has been 2.72%. The latter period has been referred to as the Great Moderation as it is evident that the volatility in gdp growth has been, well, more moderate compared to the earlier period. Evidently the Great Moderation has also witnessed a moderation in average growth.The graphs below show how this recession and recovery compares to others. Typically, 22 quarters past the previous peak we are about 15% above the previous peak–in the current recovery we are less than 5% above. In all of the graphs below, what is evident is that the rate of growth for every statistic is lower than that of all previous recessions and recoveries since the 1970′s, i.e., the slope of the dark blue line is flatter than any of the other lines. This underscores the fact that the weakness of the recovery is pervasive.

Update: Recovery Measures - By request, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. These graphs show that most major indicators are still below the pre-recession peaks. This graph is for real GDP through Q1 2013. Real GDP returned to the pre-recession peak in Q4 2011, and has hit new post-recession highs for six consecutive quarters. At the worst point - in Q2 2009 - real GDP was off 4.7% from the 2007 peak. This graph shows real personal income less transfer payments as a percent of the previous peak through the May report. This measure was off 11.2% at the trough in October 2009. Real personal income less transfer payments returned to the pre-recession peak in December, but that was due to a one time surge in income as some high income earners accelerated earnings to avoid higher taxes in 2013. Real personal income less transfer payments declined sharply in January (as expected), and were still 3.3% below the previous peak in May.The third graph is for industrial production through May 2013 - although production growth has slowed recently. Industrial production was off over 17% at the trough in June 2009, and has been one of the stronger performing sectors during the recovery.The final graph is for employment and is through May 2013. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions. Payroll employment is still 1.8% below the pre-recession peak and will probably be back to pre-recession levels in 2014.

June Showers Could Bring July Flowers For The Economy -- June saw extreme weather across the U.S. Deadly tornadoes touched down across the Plain States, record-breaking rains flooded the East Coast. Toward the end of the month, wildfires devastated parts of the West.  To be sure, the drags are not as massive as those from hurricane Katrina or superstorm Sandy. But the timing adds support to the forecast of a weak spring economy followed by slightly stronger growth in the third quarter. Weekly retail reports show shopping fell off early in June. Many people saw little need to buy swimsuits or pool equipment when storm clouds were overhead. Sales picked up in the latter part of the month, but according to Redbook Research, they still lag the June targets set by retailers. Businesses in New York also seemed swamped by one of the rainiest Junes on record. The Institute for Supply Management-New York’s survey of businesses, released Tuesday, shows activity contracted last month at the fastest pace in four years. While the survey does not connect weather with the contraction, it’s worth noting that 19% of respondents cited weather as an impediment to business, up from 6% saying that in May and April. The Federal Reserve Bank of Kansas City also suggested weather was a reason for a June retrenchment among manufacturers in the Plains States.  To be sure, the negative effects are on the margin. But in an economy that struggled to grow anywhere close to 2% last quarter, even a marginal drag hurts.

Claims Data Charts Show Fed’s QE Did Not Help, Government’s “Fecal Cliff” and “Secastration” Did No Harm - The latest weekly jobless claims data remains on trend, declining at an annual rate around -9%. The Fed’s QE program that it began late last year has had no impact on them. The rate of improvement was the same before and after the beginning of this round of QE. By the same token fiscal cliff tax increase in January or the government spending sequester that took effect in March have had no negative impact on joblessness. The annual rate of change in claims is similar before and after these things took effect. Anybody who says otherwise is either ignorant or lying to support an agenda. Meanwhile, QE has managed to push stocks to bubble levels, from which they’ve been correcting, mostly for reasons that have nothing to do with QE being tapered or not, depending on which day of the week it is and which Fedhead is blowing it out his or her ass.The Labor Department reported  that the seasonally adjusted (SA) representation of  first time claims for unemployment  fell by 9,000 to 346,000 from a revised 355,000 in the advance report for the week ended June 22, 2013. The consensus estimate of economists of 345,000 for the SA headline number was almost on the mark for a change.  Economists adjust their forecasts based on the previous week’s number, leading to them frequently getting whipsawed.  Reporters frame it as the economy missing or beating the estimates, but it’s really the economic forecasters who are missing. The economy is what it is.

Disturbing Charts: I find the following charts to be disturbing. These charts would be disturbing at any point in the economic cycle; that they (on average) depict such a tenuous situation now – 49 months after the official (as per the 9-20-10 NBER announcement) June 2009 end of the recession – is especially notable. These charts raise a lot of questions. As well, they highlight the “atypical” nature of our economic situation from a long-term historical perspective. All of these charts (except one, as noted) are from the Federal Reserve, and represent the most recently updated data. The following 8 charts are from the St. Louis Federal Reserve: Housing starts (last updated 6-18-13): - The Federal Deficit (last updated 4-19-13): - Federal Net Outlays (last updated 4-19-13): - State & Local Personal Income Tax Receipts (% Change from Year Ago)(last updated 3-28-13): - Total Loans and Leases of Commercial Banks (% Change from Year Ago)(last updated 6-28-13): - Bank Credit – All Commercial Banks (% Change from Year Ago)(last updated 6-28-13): - M1 Money Multiplier (last updated 6-20-13): - Median Duration of Unemployment (last updated 6-7-13): - Click for a larger image - This last chart is of the Chicago Fed National Activity Index (CFNAI, and its 3-month moving average CFNAI-MA3) and it depicts broad-based economic activity (last updated 6-24-13):

A New Period of Uncertainty and Volatility Has Begun - Roubini - Until the recent bout of financial-market turbulence, a variety of risky assets (including equities, government bonds, and commodities) had been rallying since last summer. But, while risk aversion and volatility were falling and asset prices were rising, economic growth remained sluggish throughout the world. Now the global economy’s chickens may be coming home to roost. Japan, struggling against two decades of stagnation and deflation, had to resort to Abenomics to avoid a quintuple-dip recession. In the United Kingdom, the debate since last summer has focused on the prospect of a triple-dip recession. Most of the eurozone remains mired in a severe recession—now spreading from the periphery to parts of the core. Even in the United States, economic performance has remained mediocre, with growth hovering around 1.5 percent for the last few quarters. And now the darlings of the world economy, emerging markets, have proved unable to reverse their own slowdowns. According to the IMF, China’s annual GDP growth has slowed to 8 percent, from 10 percent in 2010; over the same period, India’s growth rate slowed from 11.2 percent to 5.7 percent. Russia, Brazil, and South Africa are growing at around 3 percent, and other emerging markets are slowing as well.

On The Political Economy Of Permanent Stagnation - Krugman - I’ve been having a strange reaction to recent news about economic policy. Stuff is happening: the Fed bungled its communications, doing its bit to undermine modest economic progress; the European Commission is sorta kinda relaxing its demands for austerity; the Bank of England appears to have issued forward guidance that it’s going to issue forward guidance; and so on. But with the possible exception of Abenomics, it’s all pretty small-bore stuff. And that’s disappointing. We had what felt like an epic intellectual debate over austerity economics, which ended, insofar as such debates ever end, with a stunning victory for the anti-austerity side — and hardly anything changed in the real world. Meanwhile, the pain caucus has found a new target, inventing dubious reasons for monetary tightening. And mass unemployment goes on. So how does this end? Here’s a depressing thought: maybe it doesn’t.  I think many of us used to believe that sustained high unemployment would lead to substantial, perhaps accelerating deflation — and that this would push policymakers into doing something forceful. It’s now clear, however, that the relationship between inflation and unemployment flattens out at low inflation rates. We can probably have high unemployment and stable prices in Europe and America for a very long time — and all the wise heads will insist that it’s all structural, and nothing can be done until the public accepts drastic cuts in the safety net.

Does Debt Matter? - "Does Debt Matter?” is the question posed by The International Economy to 20 commentators: My response:     Yes, debt matters.   I don’t think I know of anyone who believes that a high level of debt is without adverse consequences for a country.  There is no magic threshold in the ratio of debt to GDP, 90% or otherwise, above which the economy falls off a cliff.    But if the debt/GDP ratio is high, and especially if the country’s interest rate is also high relative to its expected future growth rate, then the economy is at risk.  One risk is that if interest rates rise or growth falls, the economy will slip onto an explosive debt path, where the debt/GDP ratio rises without limit.  In the event of such a debt trap, the government may have no choice but to undertake a painful fiscal contraction, even though that will worsen the recession.  (The resulting fall in output can even cause a further jump in the debt/output ratio, as it has in the periphery members of the eurozone over the last few years.)      None of that means that austerity in the midst of a recession is a good idea.  Reinhart and Rogoff never said it was, either in their research or in their policy advice. Rather, as Keynes said, the time for fiscal austerity  is during the boom, not during the recession.  Indeed, a good reason to reduce the debt/GDP ratio during a boom is precisely to create the space for budget deficits during downturns.

Another Item for the Annals of Innumeracy (and PoMo Math) - In response to what I thought were straightforward renditions of the data indicating reductions in government spending, reader W.C. Varones writes: “Cutting government spending" is a real stretch.” In a (perhaps vain) attempt to convince him that indeed spending is declining, I present data from BEA and CBO (I am hoping that he hasn’t joined the Jack Welch view of government statistics gathering). Note that these government spending figures pertain to spending on goods and services, as well as transfers (and interest payments). Sure looks like the gradient is negative to me, regardless of normalization. And despite protestations about the decline being relative to a high point, I will merely observe that the current ratio to potential GDP of 0.324 is less than that recorded in 1986Q3 (under President Reagan). Sometimes, I wonder If we can't agree that down is down, what hope is there?

Warren Mosler, a Deficit Lover With a Following - Washington’s debts would have soared, of course. But Mr. Mosler sees no problem with that. A failed Senate candidate in Connecticut with unorthodox but attention-grabbing economic theories, he says he believes the United States should be running much bigger deficits and that the last thing the government needs to worry about is balancing its budget.  Mr. Mosler’s ideas, which go under the label of “modern monetary theory,” or M.M.T., are clearly on the fringe, drawing skeptical reactions even from many liberal Keynesian economists who agree with some of his arguments. But they have attracted a growing following, flourishing on the Internet and in a handful of academic outposts, as he and others who share his thinking have made the case that austerity budgeting in the United States and in Europe is doing irreparable harm.  Like many Keynesian economists, Mr. Mosler and other modern monetary theorists are particularly disturbed by the longstanding campaign articulated and financed by Peter G. Peterson, a former commerce secretary who co-founded the Blackstone Group private equity fund, to reduce the deficit or else.  “There’s a whole deficit lobby of Peterson-funded groups arguing we’re turning into Greece,” said James K. Galbraith, an economist at the University of Texas at Austin. “They’re blowing smoke and the M.M.T. group has patiently explained why.”

The Buzz Over MMT -- The blogosphere and Twittershpere are buzzing over today’s NYT article on Warren Mosler and the proponents of Modern Money (or Monetary) Theory (MMT).  This isn’t the first time MMT has been featured by a high-profile mainstream media outlet (see here, here, here) and, as usual, there are some editorial inaccuracies.Warren has responded to the mistakes that affect him personally, and Randy Wray followed with some quick thoughts of his own.  I spent close to 30 minutes on the phone with the journalist who wrote the latest NYT piece, so let me offer a further correction of (and for) the record.  I was quoted as saying:These ideas definitely aren’t disseminated through published academic journals. It’s all on the Internet.Um, no.  What I said is that we — the academics who helped develop the literature on MMT — started blogging as a way to get our ideas out more quickly than through traditional channels, where it is customary to wait two years or more before an article is finally published.  The notion that MMT has no academic footprint is astonishingly inaccurate, for there are, quite literally, hundreds of publications including: peer-reviewed articles, books, chapters in edited volumes, encyclopedia entries, working papers, policy briefs, etc. in print.  Suggesting otherwise supports the general tenor of the NYT piece — i.e. MMT is an Internet phenomenon that hasn’t been vetted through traditional peer-reviewed channels. That is patently false.

Reconciling Modern Monetary Theory with the Wisdom of Mark Thoma - Dean Baker - The NYT had a brief discussion of Modern Monetary Theory (MMT) today in the context of a profile of Warren Mosler, one of its major proponents. The profile includes a dismissive comment from Mark Thoma, a professor at the University of Oregon and the creator of the blog, The Economist's View: "They deny the fact that the government use of real resources can drive the real interest rate up ... I think it’s just nuts." This description is not exactly right. MMT advocates would say that the Fed can keep real interest rates from rising by targeting the interest rate, printing whatever amount of money is needed to keep the interest rate (even a long-term interest rate) at the targeted level. In a context of excess demand, this would quickly lead to a serious problem with inflation.The MMT remedy for inflation would be to increase taxes and thereby reduce demand. If this is done successfully then the government's demand for resources is offset by reduced private sector demand. In that situation there need not be any upward pressure on interest rates.

Off-balance-sheet federal liabilities - Here's the abstract for a paper I recently completed on Off-Balance-Sheet Federal Liabilities: Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008. What follows is a brief summary of the paper.

State Department bureau spent $630,000 on Facebook ‘likes’ -  State Department officials spent $630,000 to get more Facebook "likes," prompting employees to complain to a government watchdog that the bureau was "buying fans" in social media, the agency's inspector general says. The department's Bureau of International Information Programs spent the money to increase its "likes" count between 2011 and March 2013."Many in the bureau criticize the advertising campaigns as 'buying fans' who may have once clicked on an ad or 'liked' a photo but have no real interest in the topic and have never engaged further," the inspector general reported. The spending increased the bureau's English-language Facebook page likes from 100,000 to more than 2 million and to 450,000 on Facebook's foreign-language pages.

 Zero-Based Tax Reform -In the 1970s, there was a management fad called “zero-based budgeting”. The theory was that every government program needed to justify itself annually, rather than being automatically renewed. The idea never caught on because the payoff turned out to be small and it required a great deal of paperwork and data collection that complicated the budget process, according to a recent review by the Government Finance Officers Association. Now, the chairman and ranking member of the tax-writing Senate Finance Committee, Senators Max Baucus, Democrat of Montana, and Orrin Hatch, Republican of Utah, have proposed zero-based tax reform. Their idea is to wipe out every tax expenditure – deductions, exclusions and credits that reduce tax liability – and start from scratch, requiring tax-expenditure supporters to justify each one as if it were being proposed for the first time. Presumably, tax rates would be reduced, but the proposal does not say how much. Critically, the senators say they will maintain the existing progressivity of the tax code. This puts a severe constraint on their efforts, because tax expenditures are not evenly distributed across income classes, nor is the burden of taxation. What appears fair at first glance may be grossly unfair when thinking the issue through.

The Blank Slate Tax Reform Trap - I’ve not paid much attention to the latest disturbance in the tax reform force: the zero-based plan by Senators Baucus and Hatch to wipe out all tax expenditures and insist that advocates argue the merits of each one if they want them put back in the tax code.  They call it a “blank-slate” approach to tax reform. Why have I not entertained my readers with information on this idea, one seen most recently, btw, in Bowles-Simpson’s original budget proposals?  In part, because as Bruce “Pull-No-Punches” Bartlett puts it today: The idea that we can wipe the slate clean and start from scratch is ridiculous pie-in-the-sky thinking and an abrogation of responsibility by the Senate’s two principal leaders on tax issues. They ought to be willing to exercise some judgment and put forward a specific proposal of tax expenditures they think are worthy of abolition in order to clean up the tax code and lower rates. That’s what Ronald Reagan did in 1985, which led to enactment of the Tax Reform Act of 1986. Until a specific proposal on the table can be discussed, analyzed and amended, tax reform isn’t going anywhere. Senators Baucus and Hatch are not helping; they are just wasting time. Also, in the benighted dystopia known as DC tax reform, one must always be aware that the tax-reform trap articulated by Marr and Huang lurks around every corner.  Read the link, but the idea is that if lawmakers promise to broaden the base and lower the rates without locking in a new, higher revenue targets first, we’re likely to get lower rates and…and…nothing in terms of revenues.

Another Reason to Ditch the Capital Gains Preference--Games Lawyers (and Hedge Funds) Play - Bloomberg today covers a story about another tax-shelter ploy by hedge fund billionaires to make themselves even richer at the expense of ordinary Americans who will have to pony up more (or be beset by a bigger deficit) when the billionaires don't pay their fair share of taxes.  See Zachary Mider & Jesse Drucker, Simons Strategy to Shield Profit from Taxes draws IRS Attack, Bloomberg (July 1, 2013). As the article notes, the IRS is challenging a tax-lawyer alchemy for converting ordinary hedging income to preferentially treated capital gain income by using a bank as an accommodation party to a derivative transaction--the bank buys the portfolio that the hedge fund wants to own, the bank then hires the hedge fund to manage the portfolio just as the hedge fund would do if it were the legal owner rather than the beneficial owner (which it probably should be considered under general tax principles, with the result that the hedge fund "manages" the purported bank portfolio by engaging in almost daily trades, as is a hedge fund's practice, and then the bank purports to sell an option on the portfolio to that very same hedge fund (surprise! :) !) and then the hedge fund exercises that option (quelle surprise!) more than a year after its purchase and claims thereby to have converted its trading gains (ordinary income) into an investment contract gain (Ipreferentially taxed capital gains).

New Study: The Wealthy are more Unethical - It's been said that money is the root of all evil. But does money really make people more likely to lie, cheat and steal? New research released by the Proceedings of the National Academy of Sciences says "yes".Seven studies using experimental and naturalistic methods, reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were also more likely to:

  • exhibit unethical decision-making tendencies (study 3),
  • take valued goods from others (study 4),
  • lie in a negotiation (study 5), 
  • cheat to increase their chances of winning a prize (study 6),
  • and endorse unethical behavior at work (study 7) than were lower-class individuals.

Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

The US Government- Spending Millions To Collect American’s Financial Information…(The Government Wants to Know Why You’re in Foreclosure in Florida) -- Why does the US Government need to know what I’m purchasing on credit cards? Why is the US Government spending hundreds of millions to help private companies increase their surveillance of private citizens? Apparently, the domestic security of the United States is threatened if the US does not collect and store all my credit card transactions…. Records from the Consumer Financial Protection Bureau (CFPB) that Judicial Watch recently obtained reveal the agency has spent millions of dollars collecting and analyzing Americans’ financial transactions—at least some of it without their knowledge. Judicial Watch obtained the records through a Freedom of Information Act filed on April 24, 2013 following testimony by CFPB director Richard Cordray before the Senate Banking Committee on April 23. Those documents include overlapping contracts with multiple credit reporting agencies and accounting firms to gather, store, and share credit card data worth $2.9 million, along with a nearly $5 million paid to Deloitte Consulting LLP for software instruction. MORE HERE

Big U.S. corporations only pay one-third of tax rate: report – For U.S. corporations the top federal income tax rate is 35 percent, but large, profitable companies on average paid only about a third of that in 2010, a report by the investigative arm of Congress said on Monday. As corporate lobbyists seek to preserve business tax breaks and cut the corporate tax rate, the Government Accountability Office said big companies with earnings paid just 12.6 percent of their worldwide income in taxes in 2010. The GAO report came at a time of tight government budgets and increased attention among lawmakers to corporate tax avoidance in Europe and the United States. While U.S. companies often complain about the 35 percent top tax rate being among the world’s highest, “what they don’t like to admit is that hardly any of them pay anything close to it,” said Senator Carl Levin, a Michigan Democrat, in a statement. The GAO report – which did not name specific companies – said that earlier studies had found U.S. companies paid 20 percent to 30 percent of their income in taxes.

Large U.S. Firms Paid a 16.6 Percent Federal Tax Rate - A new analysis by the Government Accountability Office finds that in 2010 large U.S. corporations paid an average effective tax rate on their worldwide income of 22.7 percent and U.S. federal tax of only about 16.6 percent.  The federal rate was less than half of the 35 percent statutory rate.Large firms that made a profit that year paid an even lower effective rate—an average of 16.9 percent in worldwide taxes and only 12.6 percent in U.S. federal tax.  It isn’t news that these firms pay low effective tax rates. Journalists and academic researchers have been reporting this for years. But for the most part they have been hamstrung by limited access to good data. Publically available financial statements include information about taxes, but there is often a huge gap between what firms report on their public books and what they actually pay. And when asked about their true tax liability, firms mostly respond with a curt, “none of your business.”But GAO has access to new IRS data from a form called the M-3. That schedule requires firms with assets of $10 million or more to reconcile their book and tax reporting in a way that gives a much clearer picture of their actual tax liability. These data are still not ideal. For one thing, GAO only had access to aggregate data, not firm-level information. And there are some big differences hidden behind those averages.

Corporations Never Had It So Good - The  press is covering the GAO‘s latest report on corporate taxes:  Corporate Income Tax: Effective Tax Rates Can Differ Significantly from Statutory Rate(May 30, 2013). The study, looking at income and taxes reported in financial filing statements for 2008-2010, was conducted because Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, GAO’s 2008 report on corporate tax liabilities (GAO-08-957) found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005. Id. (from “highlight”). The report looks  good for corporations.  The GAO report shows that corporate taxes paid to the US are going down, down, down.  Corporations paid 15.3% in 2008, 13% in 2009 and only 12/6% in 2010–that’s less than have the corporate tax rate of 35% for each of those years! The proportion of federal revenues raised from corporate taxes has been decreasing over the years as well–the GAO reports that for 2012 it is estimated that corporate taxes will have raised only 242 billion, compared to 1.1 trillion in individual taxes and 845 billion in payroll taxes.

Former Top Regulators Tell Congress to Rein in Big Banks - Jaisal Noor of the Real News Network interviews Dr. William R. Black, the author of The Best Way to Rob a Bank is to Own One, and an associate professor of economics and law at the University of Missouri-Kansas City. And these top regulators share one, very odd characteristic: They’re all Republicans!

Fed Approves Higher Bank Capital Standards - The Federal Reserve agreed Tuesday to raise the amount of capital that big banks must hold to prevent their collapse and reduce the threat they pose to the broader financial system. The higher capital requirements were mandated by Congress in the aftermath of the 2008 financial crisis. They are also in accordance with international standards agreed to after the downturn. Banks had lobbied to modify the requirements on higher capital, saying they could hamper their ability to lend. But experts said most big banks have already increased their capital reserves. "With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy," said Fed Chairman Ben Bernanke. But critics say the rule failed to go far enough and kept taxpayers at risk of having to bail out banks again, should they suffer the kinds of losses incurred during the crisis.

Big U.S. Banks Face Tougher Standards - Financial regulators on Tuesday stated explicitly what they have been signaling for months: More action is needed to reduce risks posed by the nation's largest banks to the broader economy. The Federal Reserve outlined a plan for reining in the biggest banks during a meeting in which it unanimously approved a new capital framework for all banks. While many of the details remain to be decided, officials said they plan to act in the coming months on four proposals aimed at the eight banks dubbed globally "systemically important," including Goldman Sachs and J.P. Morgan Chase. In sum, the proposals set out for the first time an aggressive new road map for how regulators plan to address persistent criticism they haven't gone far enough to rein in "too big to fail" banks. The push will begin next week, when the Federal Deposit Insurance Corp., the Fed and the Office of the Comptroller of the Currency plan to propose increasing a key gauge of bank health, known as the leverage ratio. Regulators are expected to raise the amount of equity these large banks hold against assets to between 5% and 6%, above a previously proposed 3%.

What Does 9.5% Mean? - This week, the Federal Reserve approved its final rule setting capital requirements for banks. The rule effectively requires common equity Tier 1 capital of 7 percent of assets (including the “capital conservation buffer”), with a surcharge for systemically important financial institutions that can be as high as 2.5 percent, for a total of 9.5 percent. That sounds like a lot, right? In school, you learn that a 9.5 percent capital ratio means that a bank can sustain a 9.5 percent fall in the value of its assets before it becomes insolvent. But that’s clearly not true, for multiple reasons. First, if a bank were to report that its capital fell from 9.5 percent of assets to 2 percent of assets, it would fail the next day as all of its short-term creditors pulled out their money in (justifiable) panic. In other words, it’s not clear how much of that capital buffer is really a buffer. Second, that’s 9.5 percent of risk-weighted assets. We all know what risk-weighting means in theory, but few people have a firm grasp on what it means for the actual numbers. As of September 2012, for example, Goldman Sachs had $949 billion in balance sheet assets, but only about $436 billion in risk-weighted assets—although that would increase to $728 billion under new risk-weighting rules. Third, and most important, there’s measurement error. As many have noted before, Lehman Brothers had something like 11 percent Tier 1 capital two weeks before it went bankrupt. What this means is that, as Steve Randy Waldman said and as I discussed in an earlier post, “Bank capital cannot be measured.”

The Fed’s New Capital Rules for Big Banks: The Devil Is In the Details -  The Federal Reserve Board yesterday announced that it had “approved a final rule to help ensure banks maintain strong capital positions,” but it was as clear as mud when or if the new rule would take effect and how it would lessen the risk of the too-big-to-fail banks and prevent another taxpayer bailout of Wall Street. After years of stonewalling on higher capital rules for banks, there was the nagging suspicion that the Federal Reserve decided to talk the talk on tougher standards after the House Financial Services Committee held a hearing last Wednesday that delivered a devastating assessment of how dangerous the largest Wall Street banks remain to the U.S. economy. Thomas Hoenig, former President of the Federal Reserve Bank of Kansas City and now Vice Chair of the FDIC, reflected the general mood at the hearing when he stated that the biggest banks are “woefully undercapitalized” and that we have a “very vulnerable financial system.” The press release from the Fed was almost as large, complex and opaque as the banks it supervises with approximately 700 unnecessary words. Adding to the confusion were more complicated and wordy statements from Fed Chair Ben Bernanke and Fed Board Governors Daniel Tarullo and Elizabeth Duke. The new rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent; it also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. There is also this: For the largest too-big-to-fail banks, “the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.”

Fed delays swaps rule for Goldman Sachs- In a major concession, the Federal Reserve on Wednesday gave Goldman Sachs Group two more years to comply with a requirement that it divest part of its derivatives business to a separately capitalized unit. The Fed said Goldman Sachs would have until July, 2015 to comply. Known as the Lincoln Rule, after former Arkansas Democrat Sen. Blanche Lincoln, the measure was set up to have riskier credit derivatives trades take place in a separately capitalized unit so that any trading failure there would not have access to the institution's commercial bank division, which is backed by insured deposits and taxpayers through the Federal Reserve's discount window. Other agencies last month reportedly notified Bank of America Corp and J.P. Morgan Chase and other institutions that they would have any additional 24 months to comply with the regulations. In addition, bipartisan bills have started to advance in the House and Senate seeking to transform the provision and allow some commodity, equity and credit derivatives tied to asset-backed securities (such as packaged mortgage securities) to take place in the federally-insured bank.

Deadline Splits an Agency on Trading Rules Abroad - Wall Street lobbyists, seeking to delay a July 12 deadline for rules that would rein in lucrative trading by banks overseas, pressed their case before a top Washington regulator last week.The regulator, Gary Gensler, the chairman of the Commodity Futures Trading Commission, had an unusual response. He summoned into his office a pregnant employee whose due date happened to be July 12. Pointing to her abdomen, she grinned and replied, “No delay.” While the message to bankers was clear, some of Mr. Gensler’s colleagues are still fighting his plan to extend the agency’s reach beyond American borders, an issue that took shape in the 2008 financial crisis. Mark Wetjen, a Democratic commissioner with an independent streak, recently called the deadline “arbitrary.” And with the agency’s Republicans pushing for a delay, Mr. Wetjen holds the swing vote. The dispute underscores a larger tension gripping the trading commission. As the deadline nears, the plan to regulate trading by American banks in London and beyond has set off a rare breakdown of decorum at an agency long known for its cordial style and unanimous votes.

Satyajit Das: The Truth of the Matter - Growth, historically, has been driven by population growth, opening up of new markets and improvements in productivity and innovation. In the later part of the twentieth century, growth was augmented by the use of debt to accelerate consumption directly. In addition, generous entitlement programs for some in many countries that were not fully funded or financed by borrowing boosted consumption indirectly as citizens spent more, assuming their health care and aging needs as well as education expenses of their children would be met by the state or other means. States too indulged in Ponzi Finance to fund these promises and, in some instances, spending programs. Global imbalances were an integral part of this process. The Global Financial Crisis exposed the weakness of this model – its Minsky moment, as some termed it. When The Money Runs Out and Democrisis provide solid if unremarkable narratives of the causes and history of the crisis. Both conclude that the rapid growth and increase in prosperity was probably extraordinary, mistakenly assumed by citizens and policy makers as the new normal rather than an anomaly caused by a favourable confluence of events.

Asset Reflux Disease: Explaining Koo to Krugman Or: Why Banks Aren’t Like People - Steve Roth - Steve Keen does a good job of addressing Paul Krugman’s befuddlement with Richard Koo’s balance-sheet-based thinking, here, with detailed models showing how funds flow and stocks change over time. I’d like to address it more succinctly and I hope intuitively, by pointing out a simple misunderstanding that Paul shares with Scott Sumner, Nick Rowe, and many other very smart people who I don’t think have really internalized the notion of “endogenous money.” Let’s start with Nick. I often spend years thinking about his posts. One that I’ve been worrying at forever, have read at least half a dozen times, is this one: All money is helicopter money. Against the Law of Reflux It’s about the idea that money supply in excess of what people want to hold “refluxes” to the issuer, which Nick doesn’t believe. (Emphasis here and throughout, mine). This very old debate over the Law of Reflux is what is at the root of the very modern debate about whether Quantitative Easing can work.Nick’s cutting to the crux, as is his wont. I’ve finally decided that the post makes no sense at all, that all its very smart equilibrium thinking is obfuscatory rather than illuminative. Why? Because it’s based on a fundamentally flawed understanding: People will pick it up whether they want to hold it or not. If they don’t want to hold it they will spend it, to try to get rid of it in exchange for something they do want to hold. Ye Olde Hot Potato. This is exactly the notion that Scott Sumner bruits here, calling it the concept that lies at the heart of money/macro”:

Blackrock: ETFs are the true market -- Interesting. Blackrock has issued an open letter in the spirit of investor reeducation about its products, no doubt in response to the terrible reporting that’s been going on about its err… recent NAV discounts. You can read the full open letter (complete with lots of bolding emphasis by Blackrock just to make sure you get the point) but a critical extract we think is the following (Blackrock’s emphasis). The last few weeks have highlighted an underlying trend that merits broader public appreciation. More and more ETFs are becoming the true market, particularly when market sentiment shifts fast. ETFs are increasingly becoming the place where investors of all sizes can see the market price for a given investment exposure, and act on what’s really happening now in the markets. In a rapidly moving market, the reported prices of individual underlying assets may become stale. The ETF price can become the true price for that market, and the underlying assets may eventually catch up with any gap between the two (called a “premium” or “discount”). This is a main reason that so many investors large and small opted to use ETFs during the last month’s volatility. So they’re saying “ETFs are becoming the true market”, which clearly must not be misinterpreted as “ETFs have become bigger than the market” — even though that’s kind of what it means. They also emphasised that they depend on 45 wonderful institutions for market-making their products:

Justice for Big Business - — THE Supreme Court’s momentous decisions last week on affirmative action, voting rights and same-sex marriage overshadowed a disturbing trend: in the final two weeks of its term, the court ruled in favor of big business and closed the courthouse doors to employees, consumers and small businesses seeking remedy for serious injuries. A majority of the justices seem to believe that it is too easy to sue corporations, so they narrowly construed federal laws to limit such suits. These decisions lack the emotional resonance of the cases involving race and sexuality, but they could have a devastating effect on people who have been wronged by companies. The three cases involved many different areas of law but shared much in common. The five most conservatives justices — Samuel A. Alito Jr., Anthony M. Kennedy, Antonin Scalia, Clarence Thomas and Chief Justice John G. Roberts Jr. — were in the majority in all cases. All strongly favored big business. First, the court made it much harder for victims of discrimination to sue. Second, the court affirmed that it consistently favors manufacturers over consumers.  Third, the court continued to sharply limit class-action suits against companies.

CEO Salary Justification Season Is Open - Proxy season is over. Then comes the annual compilation of executive compensation data. Equilar and the Times, for example, reported that the compensation of the median CEO at a large public company was more than $15 million in 2012. This means that now we are into the season of justifying these stratospheric numbers—and particularly the high rate of growth of those numbers. (2012 median compensation was 16 percent higher than in 2012.) For example, there was Steven Kaplan’s unconvincing attempt to justify high CEO pay by comparing it to . . . high pay among the top 0.1% (see Brad DeLong for a summary). This ground has been trodden over a million times, and there’s little new that anyone can say about the issue. The common defense of high CEO pay is that it’s a justifiable investment given the market for talent.  Let’s pause for a moment to note that “$30–50 million if he is successful” is actually a pretty miserly compensation package by today’s standards. The 2012 median compensation of $15 million reflects the current value of stock and option grants, not their value “if he is successful,” which is much higher. And $15 million is the median annual compensation, not the total for the CEO’s tenure.

An Unstoppable Climb in C.E.O. Pay - WHEN we made our annual foray into the executive pay gold mine in April, chief executives’ earnings for 2012 showed what appeared to be muted growth on the year. The $14 million in median overall compensation received by the top 100 C.E.O.’s was just a 2.8 percent increase over 2011, the figures showed.  Well, what a difference a few months and a larger pool of C.E.O.’s make. According to an updated analysis, the top 200 chief executives at public companies with at least $1 billion in revenue actually got a big raise last year, over all. The research, conducted for Sunday Business by Equilar Inc., the executive compensation analysis firm, found that the median 2012 pay package came in at $15.1 million — a leap of 16 percent from 2011.   So much for the idea that shareholders were finally getting through to corporate boards on the topic of reining in pay. At least the stock market returns generated by these companies last year exceeded the pay increases awarded to their chiefs. Still, at 19 percent in 2012, that median return was only three percentage points higher than the pay raise.  In other words, it’s still good to be king.

Golden Parachutes Are Still Very Much in Style -  Executives who choose to retire — or are forced to retire — often receive millions when they leave. And despite years of public outcry against such deals, multimillion-dollar severance packages are still common.  In 2012, the biggest package went to James J. Mulva, who stepped down as C.E.O. of ConocoPhillips after 10 years, according to an analysis by Equilar of the 10 largest exit packages. His total: about $156 million. As with all C.E.O.’s on the list, his exit sum is on top of salary, bonus and other compensation received while working for the company.  “We calculated severance pay as the total of any amounts given in connection with end of service as C.E.O.,” said Aaron Boyd, director of governance research at Equilar.  ConocoPhillips said that the pay packages were fully disclosed to shareholders and that they were “the same pension and benefits programs as described in the proxy statement as any other retiring executive.”  Among Equilar’s top 10, four were former chief executives of large oil and gas companies, including Sunoco and the El Paso Corporation. In some cases, retiring chief executives will continue to receive millions years after their retirement. In addition to his exit package of $46 million in 2012, Edward D. Breen, formerly the chief of the conglomerate Tyco International, received deferred shares, valued at $55.8 million, in 2013. Mr. Breen, who remains chairman, will also receive $30 million more as a lump-sum pension payment in 2016 as part of his employment agreement, Equilar said.

'Unprecedented' $80 Billion Pulled From Bond Funds -- A record amount of money poured out of exchange-traded and mutual bond funds in June, according to a fresh report by TrimTabs, nearly double the amount pulled out of bond funds at the height of the financial crisis in October 2008. Investor fears over the scaling back of the U.S. Federal Reserve's bond purchasing program has seen the yield on 10-year Treasurys rise sharply to 2.5 percent as $80 billion left bond funds in June, according to the research. "The herd is scrambling for the exit this month as bond yields back up across the board and central bankers hint that they might provide less monetary stimulus in the future," TrimTabs CEO David Santschi said in a research note on Sunday. "We estimate that bond mutual funds have lost $70.8 billion in June through Thursday, June 27, while bond exchange-traded funds have lost $9.0 billion."

How The "Taper Tantrum" Cost US Banks $25 Billion In Q2 Net Income - Despite best effort to immunize banks from rate swings and debt MTM risk, a substantial amount of duration exposure has remained with the glorified hedge funds known as FDIC-insured bank holdings companies under the designation of “Available For Sale” (AFS) or those which due to their explicit short-term trading fate, would have to be subject to mark to market moves. It is the bottom line impact of these securities that threatens to crush bank earnings in the just concluded second quarter by an amount that could be as large as $25 (or more) billion.

U.S. Bond Funds Have Biggest Redemptions Since 2007 - Fixed-income mutual funds in the U.S. had their biggest weekly redemptions in more than six years as investors fled bonds amid signs the U.S. Federal Reserve will scale back its asset purchases. Bond funds had $28.1 billion in net redemptions in the period ended June 26, the Washington-based Investment Company Institute said today in an e-mailed statement. That’s the biggest withdrawal since the trade group started tracking weekly numbers in January of 2007. Taxable bond funds had redemptions of $20.4 billion and municipal bond funds saw $7.68 billion pulled.Bond funds worldwide saw withdrawals last month after Fed Chairman Ben S. Bernanke told Congress on May 22 that the U.S. central bank may start reducing its bond purchases. Bernanke told reporters June 19 that policy makers may start decreasing the Fed’s asset purchases later this year and end them by mid-2014 if the economy meets expectations. Money flowing into equity funds slowed, as the category attracted an estimated $169 million for the week, compared with $1.98 billion in the prior period, according to the ICI. Individual investors typically own bonds through mutual funds. While investors who hold bonds until they mature don’t lose money unless the issuer defaults, mutual funds can suffer losses when interest rates rise.

Bond Funds Losing $60 Billion Foreshadow Risk of Fed Exit -- Investors have pulled about $60 billion from U.S. bond funds since Federal Reserve Chairman Ben S. Bernanke rattled markets by outlining his plan to end the central bank’s unprecedented asset purchases. The redemptions foreshadow what’s in store for asset managers when the central bank eventually scales back the $85 billion in monthly purchases of bonds and mortgage securities that investors have come to rely on. Bond funds had $28.1 billion in net redemptions in the week ended June 26, the Washington-based Investment Company Institute said yesterday. Retail investors, who fled volatile stock markets to pour about $1 trillion into the perceived safety of bond funds since the beginning of 2009, reversed that pattern in the past month in anticipation of rising rates. Casey, Quirk & Associates LLC, a consulting firm, in May warned that money managers that rely on bonds could face a difficult future as investors shift $1 trillion away from traditional fixed-income strategies.

As Bond Market Tumbles, Pimco Seeks to Reassure Investors - As investors prepare for a long-term shift in interest rates, few large financial firms are as vulnerable as the giant money manager Pimco. Over the last 30 years, the company has been one of the biggest beneficiaries of steadily falling interest rates, which have made bonds, and Pimco’s trademark bond mutual funds, into star investments, and gave its leader, William H. Gross, an aura of invincibility. Now, as interest rates have surged in the last two months, the company is showing several signs of stress. Three-quarters of the company’s popular exchange-traded funds have experienced outflows during June, with two of them losing nearly 40 percent of their holdings, according to data from Lipper. At the same time, nearly 70 percent of Pimco’s mutual funds and E.T.F.’s have been underperforming their benchmarks, data from Morningstar shows. Two of its top executives have written articles in the last week comparing their customers to passengers afloat in treacherous waters, with reassurances as to why they will survive.

Is The Load of Cash Fannie and Freddie Dumped On The US Treasury Coming Back To Investors? - On Friday Fannie and Freddie paid a dividend of $66 billion to the US Treasury. This is a huge windfall for the government and the US taxpayer. Normally when the Treasury gets a tax windfall it pays down debt over the next couple of weeks. Those paydowns are cash credits to the accounts of the holders of the paper, often Primary Dealers or large investors. Those paydowns are usually immediately put back to work in the markets. The reduction of Treasury supply in the weeks of the paydowns also means that there’s insufficient supply to absorb all the Fedbucks being pumped through dealer accounts under QE. It’s a case of all that cash with no place to go. So typically asset prices rally in those weeks. The fair haired child asset class this year has been US stocks.

Loan Rates Surge on 43% of Debt as Lenders Balk - Junk-rated companies agreed to boost interest rates on more U.S. loans than any time since at least 2011, as lenders extracted more compensation with prices of the floating-rate debt tumbling from a six-year high. Drug distributor Valeant Pharmaceuticals International to toothbrush-maker Water Pik Inc. were among companies that sweetened terms on $17.7 billion of loans in June, accounting for 43 percent of total deals, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data. That’s 10 times greater than in May and the highest in data going back to January 2011. Twenty issuers failed to get loan financing, versus 22 for the first five months of the year, as the average price of the senior-ranking debt fell by the most since May 2012. Investors are demanding more in interest to fund the $550 billion market for leveraged loans after Federal Reserve Chairman Ben S. Bernanke indicated the central bank could slow the pace of its stimulus if economic growth keeps pace with its forecasts. The comments triggered a surge in debt yields, causing a drop in loan prices as high-yield fund managers dumped the debt to mitigate losses on junk bonds.

CMBS Sales to Be Cut in Half as Rates Rise, Bank of America Says -- Sales of commercial-mortgage bonds will be reduced by half during the last six months of 2013 as rising interest rates impede new lending, according to Bank of America Corp. The bank reduced its forecast for the year by $10 billion to $65 billion, analysts led by Alan Todd said in a June 28 report. Sales of securities linked to property loans have been rising, with dealers arranging $40.6 billion in new transactions this year, compared with about $41.2 billion in all of 2012, according to data compiled by Bloomberg.Wall Street firms are charging landlords higher rates on loans to be sold off as commercial-mortgage backed securities as signs that the Federal Reserve may begin tapering its stimulus program roil credit markets. That’s making CMBS lenders less competitive with insurers and other real estate investors that hold loans on their books, slowing the pace of originations, the Bank of America analysts wrote. CMBS originators may be pushed to loosen loan terms to win business to make up for being less competitive on rates, according to Bank of America. Issuance in the $550 billion commercial-mortgage bond market is poised to falter as concern that the central bank will pare its $85 billion in monthly bond purchases this year sends bonds tumbling.

The So-Called Credit Crunch, Again Some More - It’s really hard to kill this meme. Note the label on this graph from today’s Free Exchange post: [business lending]  Now change that heading to read “Business borrowing.” Sort of gives a different impression, right? The idea that the problem’s on the supply side is pervasive, and false or at least wildly overblown. Lending rates are at historic lows. But the credit-crunch storyline gives very effective aid and cover to the financial industry in justifying its inordinate size and power. I tried to drive a stake through the heart of this vampire squid back when we saw that first dive, back in 2009, and the situation is much the same today. (See also Related Posts at the bottom of The Sky Is Falling! Business Lending Down 1.2 Percent!.)

Unofficial Problem Bank list declines to 749 Institutions, Q2 Transition Matrix - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 28, 2013.  Changes and comments from surferdude808:  With the FDIC releasing its enforcement actions through May 2013, there were many changes to the Unofficial Problem Bank List. For the week, there were seven removals and five additions that leave the at 749 institutions with assets of $273.3 billion. For the month of June, the list fell by a net 12 institutions after seven additions, seven action terminations, six unassisted mergers, five failures, and one voluntary liquidation. Assets fell by $4.02 billion, which is the smallest decline since a $3.99 billion in November 2012. In addition, there was a noticeable slowdown in action terminations, which were last at this level in November 2011. As promised last week, we have updated the transition matrix with the passage of the second quarter of 2013. Full details may be found in the accompanying table. As depicted, there have been a total of 1,644 institutions with assets of $811.4 billion that have appeared on the list. A little more the 54 percent of the institutions that have appeared on the list have been removed. A total of 895 institutions are no longer on the list. Since the publishing start of this list in 2009, failure has been the primary manner of exit; however, at this point, terminations are now responsible for more removals at 377. Close behind are failures at 363 while finding a merger partner has been responsible for 144 removals. While failures have slipped as the primary form of exit from the list, the amount of assets removed for failure total $292.6 billion, which dwarfs $164.4 billion in assets from institutions where actions were terminated.

A Revealing Episode in DC Groupthink - David Dayen: Last week I was asked by a DC-based publication to give a comment on Corker-Warner, the flavor-of-the-month proposal to abolish Fannie and Freddie and reform mortgage finance. I basically take the same position as Yves on this issue: all of these GSE 2.0 plans assume a private label MBS market the way the proverbial economist on a desert island assumes a can opener. So off I went to write that up. Consistent with the typically frustrating pace of back-and-forth editing, this went through several drafts, refining my general point (which you will see below). On the day I expected this to run, I get an email saying that the piece was rejected. The same individual who requested the piece in the first place did the rejecting. And I think I need to go through the nature of the complaint to give you a sense of this: The whole point of the guarantee structure created by Corker-Warner is to lure investors and private capital back into the market by insuring them against losses. The fact that there IS no explicit government “wrap” right now is why private capital has abandoned the market (or at least that’s the CW)! I guess this is not allowed in certain circles, but I don’t agree with the CW. Note the blind faith in the pronouncements of, I assume, the Very Serious People, and the resistance to anything that deviates from the party line. I guess this is not allowed in certain circles, but I don’t agree with the CW. Private capital has abandoned the market because they were abused, routinely, and in fact are still being abused (you’ll see in the piece below I note the petty theft from servicers, who continue to collect fees on mortgages that have been paid off, to say nothing of foreclosing on homes where the loans could be modified, at a loss to the investor).

Murky Language Puts Homes Underwater -- Revelations from Bank of America whistleblowers show widespread and ongoing abuse of homeowners seeking loan modifications to avoid foreclosure. Customer service representatives were told to lie about pending modifications and were given bonuses for pushing homeowners into default. The allegations mirror continued complaints about “dual tracking,” a practice where mortgage servicers pursue foreclosure while deciding whether or not to grant a loan modification. Servicers at the five biggest banks were required to pay $25 billion in fines and agree to dozens of new guidelines to curb these abuses as part of last year’s National Mortgage Settlement. While the banks argue that they have fixed any outstanding problems, a recent report from the settlement’s oversight monitor, Joseph Smith, showed continuing violations in several key areas, though not to the degree that housing advocates claim.The restrictions state that servicers cannot pursue foreclosure once a homeowner turns in a “completed” application for a loan modification. However, the rules do not meaningfully define “completed.” Does this mean the initial delivery of forms and financial documents? Do all documents have to be authorized by the bank? What if documents are lost? What if servicers are missing just one piece of information? It sounds wonky, but banks have exploited these ambiguities for financial gain, and it has led to people losing their homes.

More details on REITs - The handy chart above, from a new note by Fitch Ratings, shows the process by which mortgage real estate investment trusts are funded. It includes the latest estimates of the average repo yields and collateral haircuts in the financing market for fixed-rate agency REITs.Given this market’s growth in the past two years, it’s understandable that regulators have increased their scrutiny: More detail from the note: Since end-2009, total residential mREIT assets have grown to approximately $460 billion as of 1Q13 from about $160 billion at end-2009. Over this same period, the portion of the mREIT sector that invests primarily in fixed-rate agency MBS has grown to about $343 billion as of 1Q13 from $78 billion at end-2009. Consistent with this asset growth, total REIT repo borrowing has grown four-fold over the past few years to a 1Q13 level of $319 billion from $79 billion as of end-2008, according to the Federal Reserve flow of funds data.

Mortgage Bond Prices Collapse By Most Since 1994 'Bond Market Massacre' - "What just occurred [in the mortgage-backed-securities (MBS) market] is indicative of just how important QE is," as government backed US mortgage bonds suffer their largest quarterly decline in almost two decades. As Bloomberg reports, the $5 trillion market lost 2% in Q2, the most since the 'bond market massacre' in 1994 (when the Fed unexpectedly raised rates) as wholesale mortgage rates spiked by the most on record in the last two months. The reason these bonds have been hardest hit - simple - fear that the Fed's buying program is moving closer to an end. "The Fed, at times during this period, was the only outlet in terms of demand for securities," explains one head-trader, as the Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing. With Fed heads talking back what Bernanke hinted at, there was a modest recovery in the last 2 days in MBS but the potential vicious cycle remains a fear especially now that “what was once deemed QE Infinity is no longer viewed that way."

MBA: Mortgage Refinance Applications Decline as Mortgage Rates Increase in Latest Weekly Survey - From the MBA: Mortgage Applications Decrease as Rates Reach Two-year High in Latest MBA Weekly Survey The Refinance Index decreased 16 percent from the previous week and is at its lowest level since July 2011. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. “Mortgage rates reached their highest point in two years last week. At these rates, many fewer homeowners have an incentive to refinance, and refinance application volume declined more than 15 percent. With this decline in volume, the refinance share dropped to its lowest level in more than two years. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.58 percent, the highest rate since July 2011, from 4.46 percent, with points increasing to 0.43 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index.With 30 year mortgage rates above 4.5%, refinance activity has fallen sharply, decreasing in 7 of the last 8 weeks. This index is down 48% over the last eight weeks. The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the 4-week average of the purchase index is up almost 10% from a year ago.

Mortgage Apps Plunge At Fastest Rate In Over 3 Years - We were promised by the cognoscenti of PhD economists that higher mortgage rates would not affect the so-called housing recovery. They devoutly prayed to the god of momentum that "rates were still low historically" and "housing is on a self-sustaining path" and numerous other truisms that always fail at the turning points. Well, it appears from mortgage application data that things are not looking so hot. Whocouldanode that smashing interest rates higher at the margin (remember its the marginal impact - not absolute since the majority who can have refi'd or purchased down to new low rates with their fixed cash flow and this bid up house prices via their new found affordability) would crush the dreams of an organic (not 'hedgie-driven flip-dat-house REO-to-Rent'-based) recovery. And don't forget the drag from these higher rates to come, and what happened the last two times mortgage rates spiked at this pace. This collapse year-over-year in mortgage apps is as bad as that in 2006 when the last bubble burst...

MBS Clobbered and Treasury Yields Soar Following Purportedly Good Job Numbers - Curve Watchers Anonymous notes that treasury yields surged higher and mortgage backed securities (MBS) had a steep selloff following purportedly good job numbers.  Beneath the surface, the economy actually shed 326,000 full-time jobs. In the short-term what matters is the reaction, so let's take a look at how treasury yields reacted to the news. Yield on the 10-year treasury note is up 21.8 basis points to 2.719%. The yield is up 110 basis points (1.1 percentage points) since the May low of 1.614%. $TYX: 30-Year Treasury Yield. Yield on the 30-year long bond is up 18.2 basis points on the day to 3.679%. The yield is up 86.9 basis points since the May low of 2.81%. $FVX: 5-Year Treasury Yield. Yield on the 5-year treasury note is up 18.6 basis points on the day to 1.86%. The yield is up 95.7 basis points since the May low of .641%. Historical Perspective. Charts were captured at slightly different times (minutes apart) so yields on two sets of charts do not match precisely.

First signs of rate-driven weakness in the housing sector - Today Citi and some other banks quoted the 30-year conforming mortgage rate at 4.625%. Others are quoting the rate even higher (see national averages below). Once again, it's a low rate by historical standards, making many economists think that the housing sector is unlikely to be impacted. The markets say otherwise. Over the past three months, the Philadelphia Housing Index has underperformed the S&P500 by 9%.  For the first time in a while, US homebuilders are becoming concerned. While sales expectations continue to be strong (given demographics-driven housing demand), the ISI Homebuilders Sales Survey turned down in recent weeks. These higher rates may already be showing up in the employment numbers. In spite of the strong US employment report today, on a seasonally adjusted basis almost no new jobs have been created in residential construction in June (chart below).

Existing Home Inventory is up 16.7% year-to-date on July 1st - 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 most recent data was for May).  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.

Home Prices Jump In May By Most In 7 Years: -- U.S. home prices jumped 12.2 percent in May from a year ago, the most in seven years. The increase suggests the housing recovery is strengthening. Real estate data provider CoreLogic said Tuesday that home prices rose from a year ago in 48 states. They fell only in Delaware and Alabama. And all but three of the 100 largest cities reported price gains. Prices rose 26 percent in Nevada to lead all states. It was followed by California (20.2 percent), Arizona (16.9 percent), Hawaii (16.1 percent) and Oregon (15.5 percent). CoreLogic also says prices rose 2.6 percent in May from April, the fifteenth straight month-over-month increase.Prices are still 20 percent below the peak reached in April 2006, according to CoreLogic. Sales of previously occupied homes topped the 5 million mark in May for the first time in 3 1/2 years. And the proportion of those sales that were "distressed" was at the lowest level in more than four years for the second straight month. Distressed home sales include foreclosures and short sales. A short sale is when a home sells for less than what is owed on the mortgage.

CoreLogic: House Prices up 12.2% Year-over-year in May - The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic Report Shows Home Prices Rise by 12.2 Percent Year Over Year in May Home prices nationwide, including distressed sales, increased 12.2 percent on a year-over-year basis in May 2013 compared to May 2012. This change represents the biggest year-over-year increase since February 2006 and the 15th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 2.6 percent in May 2013 compared to April 2013. Excluding distressed sales, home prices increased on a year-over-year basis by 11.6 percent in May 2013 compared to May 2012. On a month-over-month basis, excluding distressed sales, home prices increased 2.3 percent in May 2013 compared to April 2013. Distressed sales include short sales and real estate owned (REO) transactions. The CoreLogic Pending HPI indicates that June 2013 home prices, including distressed sales, are expected to rise by 13.2 percent on a year-over-year basis from June 2012 and rise by 2.9 percent on a month-over-month basis from May 2013. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.The index was up 2.6% in May, and is up 12.2% over the last year.  This index is not seasonally adjusted, and this is usually the strongest time of the year for price increases. The index is off 21% from the peak - and is up 18.7% from the post-bubble low set in February 2012.The second graph is from CoreLogic. The year-over-year comparison has been positive for fifteen consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit). This is the largest year-over-year increase since 2006.

Trulia: Asking Home Prices increased in June - This was released earlier today: Trulia Reports Asking Home Prices Up 10.7 Percent Year-over-year Nationally as Mortgage Rates Rise Nationally, asking home prices rose 10.7 percent year-over-year (Y-o-Y) in June. Even excluding foreclosures, prices jumped 11.4 percent Y-o-Y, signaling that the current rise in prices is not primarily driven by the shift away from foreclosure to non-distressed homes for sale. However, asking prices will eventually slow down as mortgage rates rise, inventory expands, and investor demand falls. Nationally, asking home prices bottomed in February 2012 – but the turnaround has been uneven. Prices first rebounded two years ago in San Jose, Phoenix, Denver, Miami, and a few other housing markets where job growth or bargain buying started boosting prices earlier. Meanwhile, prices continued to fall in several East Coast and Midwest markets until three to six months ago. Now with the housing recovery in full swing, asking prices rose in 99 of the 100 largest metros. Marking its biggest Y-o-Y increase since January, rents rose 2.8 percent Y-o-Y nationally in June. Rents climbed most in Houston, Miami, and Tampa-St. Petersburg, but fell where asking prices are up more than 30 percent: Las Vegas, Oakland, and Sacramento. In fact, home prices outpaced rents in 22 of the 25 largest rental markets. Only in Houston, New York, and Philadelphia did rents rise faster than home prices.

Why It’s Not Correct That Real Estate Can’t Be Analyzed In Real Time and Why It’s Important - The other day in response to the release of the Case Shiller Index I posted a link on Barry Ritholtz’s blog to my article about why I think Case Shiller is  a horseshit indicator . The Case Shiller Index had just been released. One commenter responded that it didn’t matter if a housing indicator was 4 months late.  Case Shiller is in fact 5 1/2 months late.  He has a  point if  you are buying your “forever dream house.” Another asked, “How can RE be analyzed in real time?” to which Barry Ritholtz responded “It can’t.” But sure it can! Any experienced appraiser working in the market does it every day. I did it for 23 years in the business and continue to do it as an outside analyst. Commercial real estate analysts are quite capable of recognizing current market conditions. In fact, it is absolutely required of them.   You must consider the current contract on the subject property, and current contracts on comparable properties. You must consider current listings!  Realtors have real time market data. They don’t release it to the public. CoreLogic has access to real time contract data and they use that to publish a “pending sales price index with about a 3o day lag. Listing price trends are public and real time, and they are accurate reflectors of the market’s direction. You can find them published at They are above the absolute price level, but the ask is as good a market indicator as the bid. Sellers in the aggregate are not all greedy idiots. Serious sellers get direct market feedback and price their properties to sell. Asking prices rise and fall with the bids. The subsequently reported sales prices have consistently confirmed the accuracy of listing price trends. The spread is even relatively consistent at around 10% give or take a point or two.  If you know listing prices are rising or falling right now, are you willing to wait 5 1/2 months for confirmation?

Distorted Housing Market Gives False Hope - The housing market's rebound is being misconstrued as a real recovery, and there's more here than meets the eye, especially as unemployment is stubbornly high, even without the negative contribution of the shrinking labor force participation rate. The housing data is being taken at face value, and as recently as May of this year, Fed members wanted out of the mortgage business. A trio of hawkish regional Federal Reserve officials are calling for the U.S. central bank to stop buying mortgage-backed bonds, citing the recent improvement in the housing market. The strongest foundation supporting Bernanke's confusing hint of a QE pull back can be found in the FOMC's June 19 statement indicating that "the housing sector has strengthened further." Markets responded in kind, further frustrating the Fed. But Bernanke didn't explain "Why," the fifth "W" that is often left out of a well constructed question sequence - Who, What, Where and When. Looking at the most recent National Association of Home Builders/Wells Fargo housing-market index, the increase to 52 in June from 44 in May - the first time the index reached positive territory since April of 2006 - feeds into the assumption that the less than reliable linear economic theory, a Fed favorite, will prevail.

U.S. Construction Spending up 0.5 Percent in May - Spending on residential housing rose in May to the highest level in 4½ years, helping to send overall construction spending higher despite a big drop in nonresidential activity. The Commerce Department says construction spending rose 0.5 percent in May compared with April when spending was up 0.1 percent. Private residential construction rose 1.2 percent to the highest level since October 2008, further evidence of a rebound in housing. Spending on nonresidential projects fell 1.4 percent, dragged lower by declines in office building and the category that includes shopping centers. Public construction rose 1.8 percent with state and local activity up 1.6 percent and federal spending rising 0.6 percent. Total construction rose to a seasonally adjusted annual rate of $874.9 billion in May, 5.4 percent higher than a year ago.

Construction Spending increased in May - The Census Bureau reported that overall construction spending increased in May:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2013 was estimated at a seasonally adjusted annual rate of $874.9 billion, 0.5 percent above the revised April estimate of $870.3 billion. The May figure is 5.4 percent above the May 2012 estimate of $830.4 billion...Spending on private construction was at a seasonally adjusted annual rate of $605.4 billion, nearly the same as the revised April estimate of $605.7 billion. .. In May, the estimated seasonally adjusted annual rate of public construction spending was $269.5 billion, 1.8 percent above the revised April estimate of $264.7 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.Private residential spending is 52% below the peak in early 2006, and up 41% from the post-bubble low.Non-residential spending is 32% below the peak in January 2008, and up about 26% from the recent low.Public construction spending is now 17% below the peak in March 2009 and was up slightly in May. The second graph shows the year-over-year change in construction spending.A few key themes:
1) Private residential construction is usually the largest category for construction spending, and is now the largest category once again.  Usually private residential construction leads the economy, so this is a good sign going forward.
2) Private non-residential construction spending usually lags the economy.  There was some increase this time for a couple of years - mostly related to energy and power - but the key sectors of office, retail and hotels are still at very low levels.  I expect private non-residential to start to increase soon.

Deutsche Bank: Pace of Construction Hiring to increase in 2nd Half of 2013 - From the Financial Times: US construction hiring poised to explode (says Deutsche) [A]ccording to economists at Deutsche Bank ... if the volume of housing starts accelerate as they expect, construction industry will need about 300,000 new workers in the second half of the year.Earlier articles on construction employment:
• From Michelle Meyer at Merrill Lynch: Construction Coming Back
• From Kris Dawsey and Hui Shan at Goldman Sachs: Housing Sector Jobs Poised for a Comeback
• From Jed Kolko at Trulia: Here are the “Missing” Construction Jobs
• From Professor Tim Duy at EconomistsView: Employment Report Nothing If Not Consistent
This graph shows total construction employment as reported by the BLS (not just residential).Since construction employment bottomed in January 2011, construction payrolls have increased by 369 thousand.    Historically there is a lag between an increase in activity and more hiring - and it appears hiring should pickup significant in the 2nd half of 2013 (Merrill estimates 20 thousand construction jobs per month will be added this year, Goldman estimates 25 to 30 thousand jobs per month, Deutsche Bank around 50 thousand jobs per month in the 2nd half).

Supersizing Strikes Back: Homes and TVs Get Bigger, Sales of Yachts, RVs, Trucks Rise - A sizeable portion of the population seems to have regained a stomach for spending in recent times. Not only has there been a noticeable increase in luxury spending, sales have risen in a few key supersized categories. McMansions become standard again. According to the Census Bureau, the average size of a newly built home in 2012 was 2,505 square feet—up from 2,480 square feet in 2011 and near the all-time high (2,521) in the pre-recession days of 2007.  We’re buying trucks by the truckload. It’s been a very strong year for auto sales in general, but the rebound of the housing market and (somewhat) stabilized gas prices seems to be driving a dramatic rise in pickup truck sales. As Reuters reported, the Ford F-series, Chrysler Silverado, and Chrysler Ram all saw sales increases of more than 20% in May.  Mega yacht sales make waves.  In 2009, boat sales fell 35% and the industry experienced over 100,000 job losses, leading the federal government to extend a special financing program for small boat dealerships. After years of slow sales and deep discounting, however, yacht sellers now tell the Sun Sentinel that business has picked up substantially in 2013, especially for custom-built luxury vessels that are 80 feet or longer.RV sales are climbing. Like boats, sales of recreational vehicles drove off the cliff during the recession. Sales dropped 58% from 2006 to 2009. Thus far in 2013, however, shipments to dealers are up 13% over last year, and the industry is on pace to sell 307,000 units this year—the most since 2007.

Reis: Regional Mall Vacancy Rates unchanged in Q2 -- Reis reported that the vacancy rate for regional malls was unchanged in Q2 at 8.3%, the same is in Q1. This is down from a cycle peak of 9.4% in Q3 2011. For Neighborhood and Community malls (strip malls), the vacancy rate declined slightly to 10.5% in Q2, down from 10.6% in Q1. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011. Comments from Reis Senior Economist Ryan Severino:  [Strip Malls] During the second quarter vacancy declined by yet another 10 bps. This is the sixth time in the last seven quarters that vacancy fell by 10 bps.  On a year‐over‐year basis, the vacancy rate declined by 30 bps. [New construction] With demand for space so meager, there exists no real catalyst for new construction in the market. Consequently, new construction continues to hover near record‐low levels. 914,000 square feet were delivered during the second quarter, versus 1.124 million square feet during the first quarter. This is a slight slowdown compared to the 1.171 million square feet of retail space that were delivered during the second quarter of 2012.  The national vacancy rate was unchanged during the quarter, this first time this segment of the market did not register a decline in vacancy since the third quarter of 2011 when mall vacancies reached their all time high of 9.4%. Asking rent growth was also unchanged versus last quarter, growing by another 0.4%. This was the ninth consecutive quarter of asking rent increases and on a year‐over‐year basis, rent growth slightly accelerated.This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.  In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

RBC Consumer Outlook Index Slips - After confidence hit a near six-year high in June, consumers gave back some of their enthusiasm as July neared, according to data released Wednesday. The Royal Bank of Canada said its U.S. consumer outlook index fell to 50.7 from 51.8 in June. Both levels are historically high. The June and latest July indexes, respectively, are the highest and second highest readings since December 2007. “U.S. consumer outlook is strong, and continues to improve. This month saw a slight across-the-board dip in confidence, but this was almost to be expected given last month’s record-high scores,” the report said. The RBC current conditions index fell to 41.9 from 42.2 in June. The expectations index declined to 58.8 from 60.7. The past gains in stock prices, rising home values and sturdier job markets are supporting confidence. A record high 19% view their current financial situation as “strong,” says RBC. One third of respondents, 33%, think the economy and their own financial situation will improve in the next year, up from 29% saying that in June.

This $1.2Bn Crime Affects YOU!  -- That's how much was stolen from US consumers this week by the crooks who run their usual scam at the New York Mercantile Exchange (NYMEX) - the traders who set the price of our nation's oil and gasoline.  The genius of the crime is that you, the American Consumer, only lose about $10 per week - so who's going to notice?  Who's going to complain?   And that, my friends, is how they get away with it!   Americans used 10% LESS oil and gasoline than we used last year, when oil was $85.04 per barrel.  Refineries used the same amount of oil as they used last year to stock up for the holiday weekend, despite the fact that we have 31M MORE barrels of oil in inventory than we did last year.   The refiners supplied 1.7Mb LESS refined products than they did last year but, somehow, there was a net draw in inventory reported of 14.7Mb (almost 10x) and that was the excuse they used to send oil prices back to $102 per barrel at yesterday's close.  That's another $6 higher than the $11.32 higher than the $85.04 we paid last July 4th so now it's $15 PER WEEK being stolen from you - and THAT's assuming $85 a barrel is a fair price in the first place!   Of course, if you have two cars, then you're losing $30 a week and that's $1,560 a year - do you care now? 

Weekly Gasoline Update: Prices Fall Further - 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 was down eight cents and Premium seven cents. Since their interim high in late February, Regular is down 29 cents and Premium 27 cents.  According to, only Hawaii is averaging above $4.00 per gallon, down from three states last week. Two states (California and Alaska) are in the 3.90-4.00 range.

U.S. Factory Orders Rise 2.1 Percent - Orders to U.S. factories rose in May, helped by a third straight month of stronger business investment. The gains suggest manufacturing may be picking up after a weak start to the year. The Commerce Department said Tuesday that factory orders rose 2.1 percent last month. April’s increase was revised higher to 1.3 percent from 1 percent. Most of the increase in May was due to a big jump in volatile commercial aircraft demand. Still, businesses also ordered more machinery, computers and household appliances. A category of orders that’s viewed as a proxy for business investment plans — which excludes the volatile areas of transportation and defense — rose 1.5 percent. That was even stronger than solid gains in the previous two months. This measure of business investment hadn’t increased for three straight months since the fall of 2011. The consecutive gains suggest U.S. manufacturing could improve in the second half of the year. U.S. factories have seen less demand for exports because of weaker global growth. And businesses reduced their investment in machinery and equipment in the first quarter. The May report showed that orders for long-lasting goods, from power generation equipment to ships and boats, rose 3.7 percent in May. Orders for nondurable goods, including paper, chemicals and oil, rose 0.7 percent. Demand for commercial aircraft surged nearly 51 percent, after an 18.4 percent gain in April and a drop of 43.3 percent in March.

Markit PMI shows "modest manufacturing expansion" in June, New export orders decline sharply - From MarkIt: Markit U.S. Manufacturing PMI™ – final data. At 51.9, the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) signalled only a modest manufacturing expansion in June. Having fallen from 52.3 in May, and dropping below the earlier flash estimate of 52.2, the PMI indicated the slowest rate of growth since last October. Firms generally linked the increase in output to larger volumes of new work, though new order growth was little-changed from May’s modest pace. Much of the increase in new work originated domestically, with new export orders falling for the second month running and dropping at the sharpest rate since August 2009. Employment in the manufacturing sector was broadly unchanged in June. This ended a 40-month sequence of increases. A number of firms commented that higher new order requirements were balanced with attempts to control costs.  “Manufacturing clearly down-shifted a gear between the first and second quarters, and is at risk of losing further momentum as we head into the second half of the year."

Factories rebound in June, but hiring down - (Reuters) - Manufacturing expanded last month, rebounding from an unexpected contraction in May, but hiring in the sector was the weakest in nearly four years, which could make the Federal Reserve think twice about how soon to scale back its stimulus. A separate report on Monday showed construction spending neared a four-year high in May, a sign that it is regaining some strength after having collapsed during the 2007-2009 recession. But even with recent consumer and housing data suggesting the U.S. economy is on a path of moderate growth, pockets of concern remain, particularly with regard to employment. The Institute for Supply Management (ISM) said its index of national factory activity rose by slightly more than expected in June to 50.9 from 49, with a reading above 50 marking expansion. The gauge for new orders rose to 51.9 from 48.8, while production jumped to 53.4 from 48.6, helping the overall index bounce back from May's contraction - the first in six months.

ISM Manufacturing index increases in June to 50.9 -- The ISM manufacturing index indicated expansion in June. The PMI was at 50.9% in June, up from 49.0% in May. The employment index was at 48.7%, down from 50.1%, and the new orders index was at 51.9%, up from 48.8% in May. From the Institute for Supply Management: June 2013 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in June following one month of contraction, and the overall economy grew for the 49th consecutive month,  "The PMI™ registered 50.9 percent, an increase of 1.9 percentage points from May's reading of 49 percent, indicating expansion in the manufacturing sector for the fifth time in the first six months of 2013. The New Orders Index increased in June by 3.1 percentage points to 51.9 percent, and the Production Index increased by 4.8 percentage points to 53.4 percent. The Employment Index registered 48.7 percent, a decrease of 1.4 percentage points compared to May's reading of 50.1 percent. Manufacturing employment contracted for the first time since September 2009, when the index registered 47.8 percent. The Prices Index registered 52.5 percent, increasing 3 percentage points from May, indicating that overall raw materials prices increased from last month. Here is a long term graph of the ISM manufacturing index. This was slightly above expectations of 50.5% and suggests manufacturing expanded in June

ISM Manufacturing Index Rebounds from May Contraction - Today the Institute for Supply Management published its June Manufacturing Report. The latest headline PMI at 50.9 percent is a rebound from the 49.0 May contraction, which followed five months of modest expansion and was only the fourth month of contraction since the end of the Great Recession. Today's number beat the forecasts of and, which were both looking for 50.5 percent. Here is the key analysis from the report: Manufacturing expanded in June as the PMI™ registered 50.9 percent, an increase of 1.9 percentage points when compared to May's reading of 49 percent. June's reading of 50.9 percent reflects the resumption of growth in the manufacturing sector for 2013, following the only month of contraction for the year in May. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.  A PMI™ in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the June PMI™ indicates growth for the 49th consecutive month in the overall economy, and indicates expansion in the manufacturing sector following one month of contraction. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through June (51.5 percent) corresponds to a 2.9 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for June (50.9 percent) is annualized, it corresponds to a 2.7 percent increase in real GDP annually."  Here is the table of PMI components. I've highlighted key expansions and contractions. In advance of Friday's big employment numbers we see that the PMI employment slipped into contraction

Manufacturing ISM Rebounds Slightly but Employment Drops; ISM at a Glance - US Manufacturing as measured by the June 2013 Manufacturing ISM Report On Business® is treading water barely above contraction.  Economic activity in the manufacturing sector expanded in June following one month of contraction, and the overall economy grew for the 49th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.  "The PMI™ registered 50.9 percent, an increase of 1.9 percentage points from May's reading of 49 percent, indicating expansion in the manufacturing sector for the fifth time in the first six months of 2013. The New Orders Index increased in June by 3.1 percentage points to 51.9 percent, and the Production Index increased by 4.8 percentage points to 53.4 percent. The Employment Index registered 48.7 percent, a decrease of 1.4 percentage points compared to May's reading of 50.1 percent. Manufacturing employment contracted for the first time since September 2009, when the index registered 47.8 percent. The Prices Index registered 52.5 percent, increasing 3 percentage points from May, indicating that overall raw materials prices increased from last month. Comments from the panel generally indicate slow growth and improving business conditions."

ISM Manufacturing - PMI 50.9% for June 2013 - The June ISM Manufacturing Survey shows PMI recovered from last month's contraction by 1.9 percentage points to 50.9%.  Manufacturing has moved into growth, but barely.   Most of the major sub-indexes switched to growth except employment, which lags new orders and production.  This is the first time manufacturing employment has shrunk since September 2009, not a welcome sign.  Comments from manufacturing survey responders said business is picking up, yet weak.  The comment which stood out was from Chemical Products as the ring of truth for the economy in general. Slow growth continues to choke the recovery. We are not out of the woods yet by any stretch of the imagination. New Orders increased a 3.1 percentage point increase to 51.9%.  Notice this is below the correlation with the Census Bureau. A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. ISM gives an ordered list of manufacturing groups who show growth to decline in new orders: The 11 industries reporting growth in new orders in June — listed in order — are: Apparel, Leather & Allied Products; Paper Products; Furniture & Related Products; Primary Metals; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Plastics & Rubber Products; Machinery; Electrical Equipment, Appliances & Components; Fabricated Metal Products; and Miscellaneous Manufacturing. The five industries reporting a decrease in new orders during June are: Wood Products; Transportation Equipment; Chemical Products; Computer & Electronic Products; and Nonmetallic Mineral Products.

June ISM Manufacturing: 50.9%, Up from 49.0% in May - Business Insider’s email had a prediction of 50.5%, or a move back into slight expansion after going into contraction at 49.0 last month. Here’s the new report, showing a small beat:  Economic activity in the manufacturing sector expanded in June following one month of contraction, and the overall economy grew for the 49th consecutive month, … The PMI™ registered 50.9 percent, an increase of 1.9 percentage points from May’s reading of 49 percent, indicating expansion in the manufacturing sector for the fifth time in the first six months of 2013. The New Orders Index increased in June by 3.1 percentage points to 51.9 percent, and the Production Index increased by 4.8 percentage points to 53.4 percent. The Employment Index registered 48.7 percent, a decrease of 1.4 percentage points compared to May’s reading of 50.1 percent. Manufacturing employment contracted for the first time since September 2009, when the index registered 47.8 percent. The Prices Index registered 52.5 percent, increasing 3 percentage points from May, indicating that overall raw materials prices increased from last month. Comments from the panel generally indicate slow growth and improving business conditions. Of the 18 manufacturing industries, 12 are reporting growth in June … Two of the three components which most directly impact GDP, Production (48.6 to 53.4) and New Orders (from 48.8 to 51.9), went from contraction to expansion, but the Backlog of Orders went into deeper contraction (from 48.0 to 46.5).

Manufacturing ISM Beats As Expected, Employment Index Drops To Lowest Since September 2009 - No surprise in today's most important economic report: just as we predicted first thing this morning, "In keeping with the tradition of Baffle with BS, we expect the ISM to come in well above expectations to offset the major Chicago PMI disappointment." Just as expected, the headline June ISM just printed at 50.9, a beat of expectations of 50.5, and up from May's 49. And just to make sure everyone is completely baffled with unbelievable BS, while the New Orders number rose from 48.8 to 51.9, and Production (+4.8), Prices (+3), Inventories (+1.5), and Deliveries (+1.3), all rose, it was the time of Employment Index to drop from 50.1 to 48.7: the first sub-50 print since September 2009. In other words, just as every week/strong economic report is offset by a matchin strong/weak economic report a few days later, expect this Friday's NFP to come in blistering and to deny the ISM weak jobs number especially since Goldman is now warning of a "disappointment" to consensus (and with that put the Taper tantrum back front and center).

Stocks Slide As Factory Orders Beat Expectations - A better than expected Factory Orders print at +2.1% (versus 2.0% expectation) and preior levels revised higher has provided just enough good is bad news to cancel the bad is good news from the ISM miss. Orders were led by a seasonally adjusted 13.7% rise in defense (sequestration?) but inventories remain flat even as shipments rise 1%. IT new orders dropped 2.9% unadjusted and computers and electronics dropped 3.7%. What a market...

U.S. Factory Orders Suggest Manufacturing Is Improving - Orders to American factories rose in May, helped by a third straight month of stronger business investment. The gains suggest that manufacturing may be picking up after a weak start to the year.The Commerce Department said on Tuesday that factory orders rose 2.1 percent in May. April’s increase was revised higher, to 1.3 percent from 1 percent. Most of the increase in May was because of a big jump in commercial aircraft demand. Still, businesses also ordered more machinery, computers and household appliances. A category of orders that is viewed as a proxy for business investment plans — which excludes the volatile areas of transportation and defense — rose 1.5 percent. That rise was even stronger than the gains in the previous two months. This measure of business investment had not increased for three straight months since the fall of 2011. The consecutive gains suggest manufacturing in the United States could improve in the second half of the year.

June ISM Non Manufacturing: 52.2%, Down from 53.7% in May and Missing Expectations of 54.2% - Predictions are for a reading of 54.4% vs. 53.7% in May. Here’s the Institute for Supply Management’s report— and we have a pretty big “oops”: Economic activity in the non-manufacturing sector grew in June for the 42nd consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. … The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. (out of 18 — Ed.) Respondents’ comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year.

ISM Non-Manufacturing Index indicates slower expansion in June – The June ISM Non-manufacturing index was at 52.2%,�down from 53.7% in May. The employment index increased in�June to 54.7%, up from 50.1% in May.�Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: June 2013 Non-Manufacturing ISM Report On Business® - Economic activity in the non-manufacturing sector grew in June for the 42nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. "The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. Respondents' comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year." This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 54.5% and indicates slightly slower expansion in June than in May.

Non Manufacturing ISM Crashes To Lowest Since February 2010, New Orders Devastated To July 2009 Levels - Baffle with BS continues: just as the June Mfg. ISM predictably beat two days ago, so today's Non-mfg ISM missed, printing at 52.2 below expectations of a 54.0 and down from 53.7. This was the lowest print since February 2010, and the biggest miss to expectations since April 2010. The New Order components was absolutely destroyed printing at 50.8, down from 56.0, and the lowest since July 2009. Furthermore, Business Activity tumbled from 56.5 to 51.7, far below consensus of 56.8, and the lowest since November 2009. The only good indicator on the face of this absolute devastation was the Employment index which mysteriously rose by 4.6 to 54.7, the highest since February: those part-time jobs must sure be accretive to businesses.

MISS: ISM Services Index Falls And Misses Expectations - The June reading of the ISM non-manufacturing (aka services) index is out and it's a miss. The headline number fell to 52.2 in June from 53.7 in May. Economists were looking for a reading of 54.0.  Here's a look at the sub-indices:

  • Business Activity Index at 51.7%
  • New Orders Index at 50.8%
  • Employment Index at 54.7%

From the report:  "The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. Respondents' comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year."

ISM Non-Manufacturing Index: Slowest Growth Since February 2010 - Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 52.2 percent, signaling slower growth than last month's 53.7 percent. In fact, it is the lowest reading since February 2010. The and forecasts were both for 54.0 percent. Here is the report summary: The NMI™ registered 52.2 percent in June, 1.5 percentage points lower than the 53.7 percent registered in May. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 4.8 percentage points lower than the 56.5 percent reported in May, reflecting growth for the 47th consecutive month. The New Orders Index decreased by 5.2 percentage points to 50.8 percent, and the Employment Index increased 4.6 percentage points to 54.7 percent, indicating growth in employment for the 11th consecutive month. The Prices Index increased 1.4 percentage points to 52.5 percent, indicating prices increased at a faster rate in June when compared to May. According to the NMI™, 14 non-manufacturing industries reported growth in June. Respondents' comments are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year.  The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator

Survey: U.S. Service Firms Grow Slower, Hire More — U.S. services firms grew at a slower pace in June from May but added more jobs. The figures offered a mixed sign for companies that employ roughly 90 percent of the workforce. The Institute for Supply Management said Wednesday that its index of service-sector growth fell in June to 52.2. That’s down from 53.7 in May and the lowest reading in more than three years. Any reading above 50 indicates expansion. The index was dragged down by steep drops in new orders and a measure of the business outlook. Still, a gauge of employment jumped to 54.7, up from 50.1 in May. That’s the first increase in five months and suggests services firms hired more briskly last month. The survey measures growth at businesses that cover most of the job market. They range from construction companies and health care firms to retail businesses and restaurants.

Immigration deal would boost defense manufacturers - The border security plan the Senate approved last week includes unusual language mandating the purchase of specific models of helicopters and radar equipment for deployment along the U.S.-Mexican border, providing a potential windfall worth tens of millions of dollars to top defense contractors. The legislation would require the U.S. Border Patrol to acquire, among other items, six Northrop Grumman airborne radar systems that cost $9.3 million each, 15 Sikorsky Black Hawk helicopters that average more than $17 million apiece, and eight light enforcement helicopters made by American Eurocopter that sell for about $3 million each.The legislation also calls for 17 UH-1N helicopters made by Bell Helicopter, an older model that the company no longer manufactures. Watchdog groups and critics said that these and other detailed requirements would create a troubling end-run around the competitive bidding process and that they are reminiscent of old-fashioned earmarks — spending items that lawmakers insert into legislation to benefit specific projects or recipients. In the past several years, Congress has had a moratorium on earmarks. The language was included in a $46 billion border security package the Senate approved last week as part of a comprehensive immigration bill. The so-called border surge — an additional $38 billion in spending — was added in the final week of negotiations to attract more GOP support for the measure, which passed with 68 votes, including 14 from Republicans.

Obama's 'Power Africa' Plan Greases Billions In Deals For General Electric - In Cape Town, South Africa over the weekend, President Obama talked about a new energy plan called “Power Africa.” He described it as “a new initiative that will double access to power in sub-Saharan Africa.” The president implied that the U.S. government will invest $7 billion in taxpayer money to help bring 10,000 mw of electricity to sub-Saharan Africa. Electricity, he said, is “the lifeline for families to meet their most basic needs and it’s the connection needed to plug Africa into the grid of the global economy. You’ve got to have power.” Providing that power could be a real boon to American (and global) companies focused on power generation and energy management. Indeed, as the president said, “my own nation will benefit enormously if you reach full potential.”One of the big partners for the president’s plan is General Electric General Electric. Among the private companies that the president said have “committed more than $9 billion in investment” to the Power Africa project, G.E. appears to be front and center. According to the White House statement on Power Africa, “General Electric commits to help bring online 5,000 megawatts of new, affordable energy through provision of its technologies, expertise and capital in Tanzania and Ghana.”

No, manufacturing jobs won’t revive the economy - In the American imagination, the phrases “the decline of the middle class” and “the loss of factory jobs” are almost inextricably linked. But the promise of a U.S. manufacturing revival has gained strength and currency in policy circles, with many arguing it’s a way to turn the economy around. President Obama has trumpeted the growth of factory jobs in speech after speech. “Think about the America within our reach,” he told his audience at last year’s State of the Union address. “An America that attracts a new generation of high-tech manufacturing and high-paying jobs!” But, for all the optimism and nostalgia for an America that once was, it’s worth asking whether factory jobs are more likely to help workers rise to the middle class today — or leave them stranded among the working poor. Overall, even as the sophistication of manufacturing jobs has grown over the past 40 years, their pay has come nowhere near keeping pace with the growth in the economy as a whole. Adjusted for inflation, the average job in the industry now pays less than it did in the mid-1970s. If there are some high-skill factory jobs, there are also plenty of low-skill ones, filled, in many cases, by a rotating cast of temps or by people whose wages never rise above the temp level.

Repairing infrastructure can help repair economy - If you have spent much time traveling around the United States, you likely have noticed that our infrastructure looks a bit worn and tired and in need of some refreshing. If you spend much time traveling around the world, however, you will notice that our infrastructure is shockingly bad. So bad that it’s not an exaggeration to declare it a national disgrace, a global embarrassment and a massive security risk.Not too long ago, the infrastructure of the United States was the envy of the world. We had an extensive interstate highway system, deep-water ports connected to a well-developed rail system and a new airport in every major city (and most minor ones). Electricity was accessible to the vast majority of the nation’s residents, as was Ma Bell’s telephone network. That was then. In the ensuing decades, we have allowed the transportation grid to get old and out of shape. Our interstate highway system is in disrepair; our bridges are rusting away, with some collapsing now and then. The electrical grid is a patchwork of jury-rigged fixes, vulnerable to blackouts and foreign cyberattacks. The cell system of the United States is a laughingstock versus Asia’s or Europe’s coverage. There are very few things that are done better by government mandate than by the free market, but cell coverage is one of them. Broadband, almost as laughable as our cell coverage, is another.

Has the U.S. Reached Peak Car? There have been a number of recent research reports addressing the notion of ‘Peak Car’ – whether driving has peaked per person in the US. So here are a bunch of interesting tidbits and nuggets I have gleaned from the reports ‘A New Direction‘ and ‘Has Motorization in the US Peaked?’, as well as an update on miles driven….it’s all downhill from here. Pedal to the Metal

–From the end of World War II to 2004 (known as ‘the Driving Boom’), Americans drove more miles nearly every year
–The driving boom coincided with the Baby Boom – a bubble of those born between 1946 and 1964
–By 2004, the average American was driving 85% more miles than in 1970
–Between 1980 and 2010, freeway capacity (measured in lane-miles) expanded by 35%

Hitting The Brakes

  • –The peak driving age group is that of 35-54 year-olds
    –The total number of 35-54 year-olds is set to tail off by the end of this decade
    –Meanwhile, the share of the population of those 65 and older is set to increase dramatically by 2040

The End Of Car Culture - PRESIDENT OBAMA’S ambitious goals to curb the United States’ greenhouse gas emissions, unveiled last week, will get a fortuitous assist from an incipient shift in American behavior: recent studies suggest that Americans are buying fewer cars, driving less and getting fewer licenses as each year goes by. The New York Times Source: Michael Sivak and Brandon Schoettle, University of Michigan That has left researchers pondering a fundamental question: Has America passed peak driving? The United States, with its broad expanses and suburban ideals, had long been one of the world’s prime car cultures. It is the birthplace of the Model T; the home of Detroit; the place where Wilson Pickett immortalized “Mustang Sally” and the Beach Boys, “Little Deuce Coupe.” But America’s love affair with its vehicles seems to be cooling. When adjusted for population growth, the number of miles driven in the United States peaked in 2005 and dropped steadily thereafter, according to an analysis by Doug Short of Advisor Perspectives, an investment research company. As of April 2013, the number of miles driven per person was nearly 9 percent below the peak and equal to where the country was in January 1995. Part of the explanation certainly lies in the recession, because cash-strapped Americans could not afford new cars, and the unemployed weren’t going to work anyway. But by many measures the decrease in driving preceded the downturn and appears to be persisting now that recovery is under way. The next few years will be telling.

Trucks Power Strongest June Auto Sales Since 2007: Are the glory days back again for the auto industry? June sales came in at a pace that was much stronger than many analysts were expecting and could hit the rate of 16 million vehicles. "I'm not surprised," said Karl Brauer, senior analyst with Kelley Blue Book. "I feel like the market continues to be strong and any sign of good news with the economy is convincing people it's time to go buy a new car or truck." While almost every auto maker reported stronger than expected sales in June, the numbers from the Big 3 and the strength of their truck sales were noteworthy. General Motors, Ford, and Ram all reported full-size pickup sales of greater than 20 percent as contractors and small business owners continue to re-stock their work fleets. Kurt McNeil, Vice President of U.S. Sales for GM is seeing exceptionally strong pickup sales in middle America. "We look at small business owners, those owners that buy four or less trucks for their small businesses and that was up 40 percent."

U.S. Light Vehicle Sales increased to 15.9 million annual rate in June, Highest since November 2007 - Based on an estimate from WardsAuto, light vehicle sales were at a 15.89 million SAAR in June. That is up 12% from June 2012, and up 4% from the sales rate last month.  This was above the consensus forecast of 15.5 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for June (red, light vehicle sales of 15.89 million SAAR from WardsAuto). This is highest level for auto sales since November 2007. After three consecutive years of double digit auto sales growth, the growth rate will probably slow in 2013 - but this will still be another solid year for the auto industry. The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Vehicle sales almost back to pre-recession normal - If it had been up to either Bonddad or me, the government would have taken a much more active role (a new WPA, huge spending on infrastructure, and allowing people 55+ to buy into Medicare early, for example) in getting us out of the Hard Times we entered in 2008. Alas, it was pretty clear by about 2010 that none of that was going to happen, and the best we could hope for was for government to at least not put obstacles (like the debt ceiling debacle) in the way of a normal recovery from a credit bust.  I mention that because Paul Krugman has said several times, although I can't find a link right now, that the way long term depressions ended before the 1930's was that stuff wore out. Even durable goods that last a long time wear out, and ultimately must be and are replaced. As that replacement cycle kicks in, the economy improves.  And yesterday's report on June vehicles sales provides evidence of exactly that. First, here's a graph of motor vehicle sales from 1998 through 2007: Notice that during that 10 year period, vehicle sales almost always were in a range that began at 16 million on an annualized basis.  Now here's Bill McBride a/k/a Calculated Risk's graph of vehicle sales starting in 2006 through yesterday. At 15.9 million vehicles annualized, June was only about 10,000 vehicle sales short of the pre-recession normal range.

U.S. Trade Gap Widened in May as Exports Weakened — The U.S. trade deficit widened in May to its highest level in six months as a sluggish global economy depressed U.S. exports. Fewer exports mean U.S. growth in the April-June quarter could be weaker than previously forecast. The trade deficit rose to $45 billion in May, up 12.1 percent from $40.1 billion in April, the Commerce Department said Wednesday. It was the largest trade gap since November. Exports slipped 0.3 percent to $187.1 billion. Sales of American farm products dropped to their lowest point in more than two years. U.S. exports have been hurt by recessions in many European countries. Imports rose 1.9 percent to $232.1 billion. Imports of autos and other nonpetroleum products hit an all-time high. The U.S. trade deficit is running at an annual rate of $501.2 billion, 6.3 percent lower than last year’s gap. A trade gap can restrain growth because it means consumers and businesses are spending more on foreign goods than companies are taking in from overseas sales.

Trade Deficit increased in May to $45.0 Billion - Catching up ... the Department of Commerce reported this morning:[T]otal May exports of $187.1 billion and imports of $232.1 billion resulted in a goods and services deficit of $45.0 billion, up from $40.1 billion in April, revised. May exports were $0.5 billion less than April exports of $187.6 billion. May imports were $4.4 billion more than April imports of $227.7 billion.The trade deficit was higher than the consensus forecast of $40.8 billion.The first graph shows the monthly U.S. exports and imports in dollars through May 2013. Imports increased in May, and exports decreased slightly.    Exports are 13% above the pre-recession peak and up 2% compared to May 2012; imports are at the pre-recession peak, and up 1% compared to May 2012 (mostly moving sideways).The second graph shows the U.S. trade deficit, with and without petroleum, through May.The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.  Most of the recent improvement in the trade deficit is related to petroleum. Oil averaged $96.84 in May, down slightly from $97.82 in April, and down from $108.06 in May 2012.   The trade deficit with the euro area was $8.9 billion in May, up from $8.7 billion in May 2012.The trade deficit with China increased to $27.9 billion in May, up from $26.0 billion in May 2012.  Most of the trade deficit is related to oil and China.

Initial Claims Beat While Trade Deficit Surges - Those expecting a massive, epic miss in Initial Claims to keep the critical Baffle with Bullshit narrative going into NFP, did not get it, with Initial Claims printing at 343K, in line with expectations of a 345K print, following the obligatory upward revision in last week's print from 346K to 348K. Continuing claims dropped from an upward revised 2987K to 2933K, below expectations of a 2958K number. And as has been the case for the past year, Americans collecting Emergency and extended claims continue to drop, with 1 million less Americans on EUCs now, at 1.66 million, compared to the 2.62 million a year ago.And while ADP and Claims were better than expected, it was the trade deficit that offset the good news, soaring 12% from a revised $40.1 billion to a whopping $45 billion, far above expectations of $40.1 billion, the worst miss in 7 months, and dragging all Q2 GDP forecasts lower with it. This was driven by a drop in exports of $0.5 billion offset by an increase in imports by $4.4 billion. The total May imports were $232 billion - the highest since March of 2012. Specifically, broken down, the April to May decrease in exports of goods reflected decreases in consumer goods ($1.2 billion); industrial supplies and materials ($0.9 billion); and foods, feeds, and beverages ($0.1 billion). Increases occurred in capital goods ($0.8 billion); automotive vehicles, parts, and engines ($0.3 billion); and other goods ($0.2 billion).The April to May increase in imports of goods reflected increases in industrial supplies and materials ($1.0 billion); consumer goods ($1.0 billion); automotive vehicles, parts, and engines ($0.8 billion); other goods ($0.5 billion); foods, feeds, and beverages ($0.4 billion); and capital goods ($0.3 billion).

Weekly Initial Unemployment Claims decline to 343,000 - The DOL reportsIn the week ending June 29, the advance figure for seasonally adjusted initial claims was 343,000, a decrease of 5,000 from the previous week's revised figure of 348,000. The 4-week moving average was 345,500, a decrease of 750 from the previous week's revised average of 346,250.The previous week was revised up from 346,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 345,500.The 4-week average has mostly moved sideways over the last few months.  Claims were close to the 345,000 consensus forecast.

Initial Unemployment Claims (071313): 343K, Down From Revised 348K Last Week; NSA Claims Down Almost 10% From Same Week Last Year -- Predictions were for 345K seasonally adjusted claims. Here the DOL annuncement: In the week ending June 29, the advance figure for seasonally adjusted initial claims was 343,000, a decrease of 5,000 from the previous week’s revised figure of 348,000. The 4-week moving average was 345,500, a decrease of 750 from the previous week’s revised average of 346,250.… The advance number of actual initial claims under state programs, unadjusted, totaled 333,920 in the week ending June 29, a decrease of 2,595 from the previous week. There were 369,826 initial claims in the comparable week in 2012. This year’s seasonal adjustment factor of 97.4 is a bit lower than last year’s factor (98.8) for the same week. If last year’s factor had been used on this year’s raw claims, seasonally adjusted claims would have been 5,000 lower (333,920 divided by .988) is 338K, rounded). This report was neutral. Especially after building in a typical 2k-3k rise after revisions, there’s no reason to believe things are getting much better or worse.

Four Years Into Recovery, Austerity’s Toll is At Least 3 Million Jobs - The official start of the recovery from the Great Recession began in June 2009. The figure below (also here) compares the current recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. The figure shows that job growth in the current recovery is slightly stronger than the job growth following the recession of 2001. However, it is slower than in the prior two recoveries and is in fact slower than in any other previous recovery dating back to World War II. Furthermore, jobs fell much further and faster during the Great Recession than in any other recession over that period, meaning that we are stuck in a much larger jobs-hole four years into recovery than in any previous business cycle. The fact that four years into the recovery we still have not yet come close to making up the jobs lost in the downturn, (much less the jobs needed to keep up with growth in the potential workforce over that time), is a grimmer situation than anything our labor market has seen in seven decades.

ADP: Private Employment increased 188,000 in June -- From ADP: Private sector employment increased by 188,000 jobs from May to June, according to the June ADP National Employment Report®. ... May’s job gains were revised downward to 134,000 from 135,000. Mark Zandi, chief economist of Moody’s Analytics, said, "The job market continues to gracefully navigate through the strongly blowing fiscal headwinds. Health Care Reform does not appear to be significantly hampering job growth, at least not so far. Job gains are broad based across industries and businesses of all sizes." This was above the consensus forecast for 165,000 private sector jobs added in the ADP report. Note:  The BLS reports on Friday, and the consensus is for an increase of 175,000 payroll jobs in June, on a seasonally adjusted (SA) basis.  Note: ADP hasn't been very useful in predicting the BLS report

ADP Employment Report Shows 188,000 Private Jobs Added in June 2013 -  ADP's proprietary private payrolls jobs report shows a gain of 188,000 private sector jobs for June 2013.  ADP revised May's job figures down by 1,000 to 134 thousand jobs.  Overall, June shows some modest improvements in the ADP job figures.  This report does not include government, or public jobs. Jobs gains were in the service sector were 161,000 private sector jobs.  The goods sector gained 27,000 jobs, the largest gain in four months. Professional/business services jobs grew by 40,000.  Trade/transportation/utilities showed strong growth again with 43,000 jobs.  This was the largest growth services sector and the highest growth in trade/transportation and utilities jobs since the start of the year.  Financial activities payrolls increased by 13,000, almost double it's preceding pace of job growth for 2013. Construction work fueled the goods sector job growth with 21,000 jobs added.   Manufacturing is still flat with only 1,000 jobs added for the month.  Graphed below are the month job gains or losses for the five areas ADP covers, manufacturing (maroon), construction (blue), professional & business (red), trade, transportation & utilities (green) and financial services (orange). ADP is reporting a general increase in hiring.  They make a note that Obamacare is not causing hiring problems.  ADP reports payrolls by business size, unlike the official BLS report.  Small business, 1 to 49 employees, fueled the private payroll gains by adding 84,000 jobs with establishments having less than 20 employees adding 54,000 of those jobs. Medium sized business payrolls are defined as 50-499 employees, added they added 55,000 jobs.  Large business added 49 thousand to their payrolls.   If we take the breakdown further, large businesses with greater than 1,000 workers, added a total of 37,000 jobs.

ADP Says US Private Payrolls Up 188k In June -- Private-sector payrolls increased by a net 188,000 last month, according to the June update of the ADP Employment Report. That’s a decent improvement over May’s tepid 134,000 advance. Today’s release implies that Friday’s official estimate on the state of the June labor market from the government will turn in a respectable gain. Considering that the ISM Manufacturing Index staged a modest revival into growth territory for June, we now have a pair of numbers that offer clues for thinking that the economy continued to expand at a modest pace last month. Make that three numbers: Today’s jobless claims report reveals that new filings for unemployment benefits last week dipped to by 5,000 to a seasonally adjusted 343,000, which is near a five-year low. In other words, there are minimal signs of labor-market stress by way of tracking layoffs through June. To be sure, it's still early to say anything definitive about the June economic profile, although we're off to a good start.

June ADP Employment Report (070313): +188K Private-Sector Jobs; See Conference Call Notes - HERE’S the announcement: Private-sector employment increased by 188,000 from May to June, on a seasonally adjusted basis. Highlights:
- Small businesses (1-49 employees) +84,000
- Medium businesses (50-499 employees) +55,000
- Large businesses (500 or more employees) +49,000

Last month was revised down by a puny 1,000 to 134,000. Mark Zandi’s comments:
- Number was “solid” — guessing at 175K for overall employment pickup in Friday’s BLS report.
- reflects what’s been happening consistently for 2 years.
- Job market is “remarkbly stable” and is “encouraging” despite “fiscal headwinds” … “quite gracefully” haven’t caused the harm expected.

- GDP could suggest weakening in jobs growth, but not yet.
- “Fiscal headwinds” should fade by year-end.
- Also expected weakening b/c of health care reform prep among smaller businesses, and there’s “some evidence of that” is certain sectors.
- He thinks the unemployment rate will drop by 0.5% during each 12-month period (June 2014 7%, June 2015 6.5%), which might signal the end of QE as Bernanke is predicting, which will cause interest rates to go up.

ADP, Jobless Claims Data Show Steady Improvement Ahead of Jobs Report - Two gauges of the labor market showed steady, if unspectacular, strength Wednesday, ahead of a payroll report Friday that could signal the immediate future of one of the Federal Reserve’s easy-money policies. Private-sector jobs in the U.S. increased by 188,000 in June, according to a national employment report calculated by payroll processorAutomatic Data Processing and forecasting firm Moody’s Analytics. Economists surveyed by Dow Jones Newswires expected ADP to report a June increase of 160,000 private jobs. The May ADP employment increase was revised to 134,000, little different from 135,000 reported a month ago. Separately, the number of U.S. workers applying for first-time unemployment benefits, a proxy for layoffs, decreased by 5,000 to a seasonally adjusted 343,000 in the week ended June 29, the Labor Department said Wednesday. Economists surveyed by Dow Jones Newswires had forecast 350,000 new applications last week. For the week ended June 22, the number of claims was revised up to 348,000 from an initially reported 346,000. Wednesday’s report showed the four-week moving average of claims, which smooths week-to-week volatility, decreased by 750 to 345,500 last week. Jobless claims touched a five-year low in late April, but have since reset at a level consistent with tepid economic growth and steady job creation.

U.S. economy creates 195,000 jobs in June - — The United States gained 195,000 new jobs in June and employment gains in the prior two months were stronger than originally reported, indicating little slowdown in the pace of hiring during the spring and early summer. The economy created an average of 196,000 jobs a month in the April-to-June period, down just slightly from the 207,000 pace in the first quarter. The rate of job creation appears to have held up better than expected given a slowdown in the U.S. economy and even weaker conditions around the globe. Economists polled by MarketWatch had expected the U.S. to add 155,000 net jobs, adjusted for seasonal variations. The Labor Department also revised employment figures for May and April to show 70,000 more jobs than previously estimated. The number of new jobs created in May was revised up 195,000 from 175,000 and April’s increase was raised to 199,000 from 149,000. In premarket action, stocks climbed. U.S. markets are not expected to be as busy as they usually are on the day of an employment report because of its publication sandwiched between the July 4 holiday and the weekend Unemployment, meanwhile, held steady at 7.6%, largely because more people entered the labor force in search of work.

U.S. Adds 195,000 Jobs; Unemployment Remains 7.6% - The economy added 195,000 jobs in June, the Labor Department reported Friday morning, slightly more than analysts had been expecting and suggesting healthier growth.  Wall Street has been feverishly awaiting the June employment report. Not only does it provide another indicator of overall economic strength, it also affects the timing of the Federal Reserve’s decision to start easing back on a major part of its stimulus efforts. Experts on Wall Street had been expecting the economy to add 165,000 jobs in June, so the better-than-expected monthly number, along with upward revisions in the number of jobs created in April and May, makes it more likely the Fed will begin stepping back in the coming months. In the first half of 2013, a better indicator than the one-month snapshot, the economy added 202,000 jobs a month, up from the 183,000 monthly pace in 2012.  “The economy continues to show some momentum,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. ‘  Along with job creation, the Fed is closely watching unemployment levels. The unemployment rate, which is based on a separate survey from the one that tracks jobs, remained at 7.6 percent, unchanged from May.  The chairman of the Federal Reserve, Ben S. Bernanke, said two weeks ago he anticipated the bond-buying program would wrap up when the unemployment rate sinks to 7 percent. The Fed estimates that could happen by the middle of next year.

June Employment Report: 195,000 Jobs, 7.6% Unemployment Rate -- From the BLS:  Total nonfarm payroll employment increased by 195,000 in June, and the unemployment rate was unchanged at 7.6 percent, the U.S. Bureau of Labor Statistics reported today. ... ... The change in total nonfarm payroll employment for April was revised from +149,000 to +199,000, and the change for May was revised from +175,000 to +195,000. With these revisions, employment gains in April and May combined were 70,000 higher than previously reported. The headline number was above expectations of 161,000 payroll jobs added. Employment for April and May were also revised higher. The second graph shows the unemployment rate. The unemployment rate was unchanged in June at 7.6%. The unemployment rate is from the household report and the household report showed a sharp increase in employment, and that meant a lower unemployment rate. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was increased to 63.5% in June (blue line) from 63.4% in May. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio increased in June to 58.7% (black line).

June Payrolls +195K Much Higher Than Expected; Underemployment Rate Soars To 14.3% - So much for any doubts about a September taper: with the street expecting a 165K NFP number for June, the actual print of 195K following an upward revised May print of 195K as well, means the Fed's September flow fade, aka Taper, is now virtually assured. On the other side, the Household Survey printed a 160K increase in jobs. The Unemployment Rate stayed at 7.6% despite expectations of a drop to 7.5%, although the real action was in the underemployment rate which exploded from 13.8% to 14.3%.

195K New Jobs Added, But Unemployment Remains Unchanged at 7.6% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:Total nonfarm payroll employment increased by 195,000 in June, and the unemployment rate was unchanged at 7.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in leisure and hospitality, professional and business services, retail trade, health care, and financial activities. Today's nonfarm number was higher than the forecast, which was for 165K new nonfarm jobs, but the unemployment rate remained unchanged at 7.6% instead of dropping to the 7.5% rate was expecting. The nonfarm jobs number for the previous month was revised upward to 195K from the original 175K.The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.34% peak in April 2010. The latest number is 2.8% -- unchanged for the past three months. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

June Employment Report Beats Expectations (8 graphs) The BLS Employment Situation report for total nonfarm employment in June indicates a 195,000 increase in employment and upward revisions to April (from 149,000 to 199,000) and May (from 175,000 to 195,000). Expectations were in the 160,000 range. Private employment increased 202,000 while government employment fell 7,000. Most of the increase in employment came from the private service producing sector, rising 194,000. The largest increase there was in leisure and hospitality, increasing by 75,000. The following two charts show how employment has behaved over the month and year, respectively. The first graph depicts the employment change over the month by sector. As mentioned above, leisure and hospitality had the largest increase, 75k. The width of each bar represents the fraction of employment in that sector as of June, 2013. For example, the largest sector in terms of employment is Trade, Transportation and Utilities, representing 19% of total nonfarm employment; Leisure and Hospitality is 10.5% of employment. The year-over-year graph below shows, in percentage terms, the growth from June, 2012 to June, 2013. Over the past year Manufacturing posted the largest percentage gain, 9.3%; and Construction was the only sector with a yearly decline. Overall, the level of employment in the private sector still lies below that seen in the previous peak, December, 2007. The employment-to-population ratio remains very low…the last time it was this low was back in the early 1980′s. Clearly, the labor market is still suffering. According to the Atlanta Fed’s job calculator, if the labor force participation remains at 63.5% and employment growth is similar to the last 3 months, say 197,000, then the unemployment should fall to 6.5% toward the end of 2014. Note that there have been indications, as mentioned in an earlier post, that the threshold for changes in monetary policy is 6.5%. This seems to jibe with other reports saying that the Fed Funds rate will remain at its current level until the end of 2014.

The Jobs Report Covering June 2013: Seasonal Factors Rule at The Summer Peak - Seasonally adjusted, June was not a bad month for jobs, and with the revisions to April and May, job creation has been near 195,000/month for the last three months. However, we need about 90,000 a month to keep up with population growth. So we are talking about 100,000 a month over and above population growth. And we are still some 2.3 million jobs below the November 2007 peak in jobs. So it would take us nearly two years of such growth to get back to where we were 5 1/2 years ago.  And then there is the ongoing crisis in the quality of American jobs. 2/3 of jobs are being created in retail trade, and the leisure and hospitality sectors. These jobs pay poorly. At the same time, leisure and hospitality jobs are heavily part time. Overall, job hours remain largely static and wages are either stagnant or falling slightly behind, despite a low inflation rate.  In real unadjusted terms, June sees a good increase in employment and an even larger increase in unemployment. This is due to the end of school and the influx of students, teachers, and staff looking for work as well as the effects of good weather on employment and employment seeking.  Full time employment fell in June, and involuntary part time employment increased. Voluntary part time work fell markedly but this was seasonal and expected. It is too early to tell, but this month’s report is consistent with a conversion of 250,000 of full time to part time work. But this month’s data could still be a fluke. We saw a somewhat similar pattern in 2011.  My measure of real unemployment improved slightly in June with real trend unemployment hitting 12.4%, compared to the official 7.6% rate. My measure of real un- and under employment rose to 17.4%, affecting some 28.688 million Americans. This increase was largely due to the increase in involuntary part time workers.

Establishment Survey Jobs +195K; Household Survey +160K; Part-Time Jobs +486,000; Unemployment Flat, U6 Unemployment +0.5 - The establishment survey showed a gain of 195,000 and that is a very respectable number. However, the household survey shows a more modest gain of 160,000 jobs. The civilian labor force rose by 177,000 thus the unemployment rate was steady at 7.6%. Digging beneath the surface, the numbers do not look so good. Involuntary part-time jobs increased by 322,000 while voluntary part-time jobs increased by another 110,000. Thus, of the 160,000 household survey gain, 486,000 of them were part-time jobs, a loss of 326,000 full-time jobs. This caused a spike of 0.5 percentage points in U6 (alternative unemployment) to 14.3%. The Participation Rate rose 0.1 to 63.5%, 0.2 higher than the low of 63.3% dating back to 1979. Last month there was no jump in part-time employment which had me wondering if the the bulk of the Obamacare effect (employers reducing hours from 32 to 25 and hiring hundreds of thousands of new employees to make up the hours) had mostly played out.This month, the trend of huge part-time employment resumed, and in a major way. June BLS Jobs Statistics at a Glance

  • Payrolls +195,000 - Establishment Survey
  • US Employment +160,000 - Household Survey
  • US Unemployment +17,000 - Household Survey
  • Involuntary Part-Time Work +322,000 - Household Survey
  • Voluntary Part-Time Work +110,000 - Household Survey
  • Baseline Unemployment Rate +0.0 - Household Survey
  • U-6 unemployment +0.5 to 14.3% - Household Survey
  • Civilian Labor Force +177,000 - Household Survey
  • Not in Labor Force +12,000 - Household Survey
  • Participation Rate +0.1 at 63.5 - Household Survey

CPS Employment Statistics Static for June 2013 - The BLS employment report shows the official unemployment rate remained a static 7.6% and the current population survey unemployment figures are an unmoving pool of little changed this month.   More people were employed, yet the number of people stuck in part-time jobs ballooned from last month and the number of unemployed also increased slightly.  Both the labor participation rate and the employment to population ratio ticked up a tenth of a percentage point.   U-6, a broader measure of unemployment, jumped up half a percentage point to 14.3%.  Overall the CPS statistics are stuck in neutral so far in 2013.  This article overviews and graphs the statistics from the Current Population Survey of the employment report.  The labor participation rate is now 63.5%, mentioned above.   The labor participation rate has declined -0.3 percentage points from a year ago.  This implies that those who were dropped from the labor force are mostly staying out of the labor force.  For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age. The number of employed people now numbers 144,058,000, a 160,000 monthly increase.  We describe here why you shouldn't use the CPS figures on a month to month basis to determine actual job growth.  These are people employed, not actual jobs.   In terms of labor flows, those employed has increased 1.61 million from a year ago.  The noninstitutional population has also increased by 2.397 million during the same time period, so this is a paltry net gain of people employed in some capacity.  The statistics from the CPS do generally vary widely from month to month, yet less than 2 million more employed per annum is simply not enough to correct the jobs crisis in America.   Below is a graph of the Current Population Survey employed.

June Jobs Report: Upside Surprise - Payrolls rose 195,000 last month, as employers hired more aggressively than expected.  Both April and May’s payrolls were revised up by a cumulative 70,000, such that average monthly job growth for the second quarter of the year was a solid 196,000.The unemployment rate was unchanged at 7.6%.  Though the household survey from which the jobless rate is derived showed added jobs, it also found the more people entered the job market.  In each of the last two months, the labor force participation rate ticked up a tenth, hinting at what may turn out to be an important reversal in that key labor market indicator as a stronger labor market draws more jobseekers back in.  That would be a positive development, though it would also take more job creation to knock down the unemployment rate. Long-term unemployment continued to tick down as well, though it remains highly elevated, as 36.7% of the jobless were without work for at least six months, compared to 41.7% a year ago. Wage growth also accelerated, up 2.2% over the past year, well ahead of consumer inflation, which was most recently seen growing at 1.5%.Almost all of the gains came from the service side of the economy—manufacturing, which lost 6,000 jobs in June has now posted small losses for three months running.  Construction added 13,000 last month and only 7,000 in May, raising the question of why the turnaround in housing hasn’t led to more construction jobs (part of the explanation is sales from inventory as opposed to new building).Other less positive indicators from the report include a spike in involuntary part-time work, leading to a large jump in the underemployment rate, which went from 13.8% in May to 14.3% in June.  And the government continues to shed jobs, with the federal sector down 5,000 in June and 65,000 over the past year.So, while there are still notable soft spots—manufacturing, government, people who can’t find the hours they want, too many long-term unemployed—this report, with its positive revisions, a whiff of increased labor force participation, and a bit of pop in wages suggests not just an improving job market, but one that’s improving a bit faster than we thought

June Private Payrolls: +202k - Today’s payrolls report for June looks quite good—for several reasons. First, the private sector created a net 202,000 jobs last month, well above expectations. Second, payrolls increased by quite a bit more in April and May than initially estimated, the Labor Department reports today. May's initially reported private-sector advance of 178,000 jobs, for instance, is now estimated as an increase of 207,000. Thirdly, the year-over-year pace of private payrolls growth is rising, which suggests that the positive momentum in the labor market is strengthening and will roll on for the near term. As always when it comes to one economic report, it’s best not to read too much into the update du jour. Revisions have been helpful lately, but they can just as easily turn negative the next time. On a somewhat more reliable note, the moderate rate of jobs creation remains intact, as today’s update reminds. Last month’s gain of 202,000 is slightly above the average for the past 12 months. Although the pessimists like to cherry pick one or two bad months to advance their cause, the broad trend has remained fairly consistent (once you look beyond the short term noise). That's been true for some time and it remains true in today's release.

June Jobs Report Positive, But Not Spectacular - At the very least, it would appear that we’ve broken the trend that we had seen over the previous three years where a strong winter/spring is followed by a slumping summer of minimal to no job market growth, and that alone is pretty good news.  Looking at the topline numbers, net nonfarm payrolls increased by 195,000 while the unemployment rate remained steady at 7.6 percent. There are a few data points of potential concern in the today’s numbers, but on the whole this was a good report that, hopefully for those who still have to find work, is the indication of a new, much more positive trend: So here’s how the Bureau of Labor Statistics put it:The number of unemployed persons, at 11.8 million, and the unemployment rate, at 7.6 percent, were unchanged in June. Both measures have shown  little change since February. (See table A-1.)Among the major worker groups, the unemployment rate for adult women (6.8 percent) edged up in June, while the rates for adult men (7.0 percent), teenagers (24.0 percent), whites (6.6 percent), blacks (13.7 percent), and Hispanics (9.1 percent) showed little or no change. The jobless rate for Asians was 5.0 percent (not seasonally adjusted), down from 6.3 percent a year earlier. In June, the number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 4.3 million. These individuals accounted for 36.7 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has declined by 1.0 million. (The civilian labor force participation rate, at 63.5 percent, and the employment-population ratio, at 58.7 percent, changed little in June. Over the year, the labor force participation rate is down by 0.3 percentage point.

Understating Job Growth - One of the many bright spots in the June jobs report was that April and May had their employment gains revised upward by a combined 70,000 jobs. In other words, job growth in those months was actually better than originally reported. Which brings me to a peculiar trend, first brought to my attention in May by Justin Wolfers: Most months during the recovery — 37 of the 47 months for which we now have a third estimate of employment — the Labor Department initially understated job gains. And most months during the recession — 13 of the 18 months — the bureau initially understated job losses. That is to say, the revisions have been largely pro-cyclical. Job changes were better than we originally thought when they were good, and they were worse than we originally thought when they were bad.I’m not sure what explains these patterns. Revisions in previous cycles do not seem to have been as heavily pro-cyclical; there was more of a balance between upward revisions and downward ones in both recessions and expansions. (If you have any potential explanations for the change — other than pure chance — please share your thoughts in the comments.)

Data Analysis: Highlights from the June Jobs Report - Employers added 195,000 jobs in June, a sign of steady improvement in the job market. Highlights from the Labor Department’s latest snapshot:

  • Big Revisions: Payrolls grew a lot more in prior months than previously estimated. April and May job growth was revised up by a combined 70,000. The numbers for the past three months look pretty good at an average of about 196,000 a month. Over the past year, job gains have averaged 182,000 a month.
  • Of course, more revisions are possible. On average, the Labor Department changes its payroll numbers by about 46,000 — up or down — from the time the first estimate comes out until the third estimate is issued two months later, as more complete data comes in.
  • Big Winner: Employment in leisure and hospitality rose by 75,000. Job gains in the category have averaged 55,000 so far this year, nearly double the pace of last year. That could be a positive sign of consumers’ willingness to spend on restaurants, hotels, travel and other non-essential services. In a similar vein, retailers also saw healthy payroll gains.
  • Big Loser: Manufacturers continued to shed jobs. The auto industry added to payrolls, but other sectors–including makers of metals and wood–appear to be struggling.
  • Sequester Signs: The government shed 5,000 jobs. Federal government employment is down by 65,000 over the past year.
  • Wages: June showed a nice jump in wages. The 10 cent gain brings average hourly earnings to $24.01. Over the past year, average hourly earnings have increased by 2.2%, outpacing the 1.4% rise in prices. Higher wages can translate into more consumer spending.
  • Fed Watch: The Federal Reserve has set key thresholds tied to the unemployment rate, which held steady at 7.6% in June as more people joined the work force.

For the Employment Rate, an Uptick - The share of American adults with jobs rose slightly in June, to 58.7 percent. That matches the highest level since the end of the recession in 2009, but remains well below the prevailing level before the recession. The chart shows the long-term trend: a sharp drop, a prolonged stagnation and maybe, just maybe, the beginning of a recovery. The employment rate has not moved much in recent years because job growth since the end of the recession has basically kept pace with population growth. The more familiar unemployment rate has declined significantly, but it counts people as unemployed only if they are looking for work. It has declined because people stopped looking, not because they started working.  Thus the importance of tracking the employment rate. Economists, including Federal Reserve officials, say they expect that as the economy continues to grow, and the unemployment rate continues to decline, discouraged workers will start seeking – and finding – work again. Until that happens, however, the recovery is incomplete.

June employment report: coming up roses with one skunk in the garden - As you probably already know, the headline report is that 195,000 jobs were added in June, and the unemployment rate remained steady at 7.6%. There were big positive revisions to April and May, and an unusually complicated more comprehensive underemployment situation.  As always for me, after the headline the next thing I want to do is look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. These were generally positive with one exception.

  • temporary jobs - a leading indicator for jobs overall - increased by 9500
  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - declined by 14,000, and is about 225,000 off its lows.
  • the average manufacturing workweek rose 0.1 hour from 40.8 hours to 40.9 hours. This is one of the 10 components of the LEI and will affect that number posivitvely.
  • construction jobs rose +13,000, adding to the evidence that the housing recovery is real.
  • manufacturing jobs, on the other hand, declined for the 4th month in a row, down -6000.
  • The average workweek for all workers was unchanged at 34.5 hours
  • overtime hours were also unchanged at 3.3 hours.
  • the index of aggregate hours worked in the economy rose strongly from last month's level of 98.4, itself revised up 0.1, to 98.6. In terms of hours if not jobs, the economy is almost back to where it was at its pre-recession peak.
  • The broad U-6 unemployment rate, that includes discouraged workers, however, rose strongly from 13.8% to 14.3%. This ia almost certainly because not only did 177,000 people enter or re-enter the workforce, but also because those working part time for economic reasons increased sharply by 322,000.

The Jobs report: why aggregate hours is so important - Every month I report on the number of working hours added to the economy, in addition to the number of jobs. This is because the number of hours added or lost is a more granular and accurate measurement of economic reality.  This month was a perfect example. As I noted in my post about this morning's report, the skunk in the garden was the increase in the U-6 rate, and the increase of 322,000 in the number of people who were employed part time for economic reasons (i.e., if there were full time work, they would take it.) Subtracting the 196,000 gain from that number gives us a loss of -126,000 jobs. As I predicted, it has already made the headlines. Here's Business Insider, reporting on GOP House Majority Leader Eric Cantor's reaction to the report:  House Majority Leader Eric Cantor focused his entire statement on the uptick in part-time jobs:  Obamacare has been predicted to be a drain on employment since before its passage and that outcome was confirmed by the Obama Administration’s delay of the employer mandate. The added costs and regulations to businesses across our nation mean less jobs and less economic growth. Cantor is wrong, and aggregate hours worked is why. If I have one employee working 35 hours a week, and I replace her with two employees working 25 hours a week, I've actually added 15 hours a week to my payroll. That's what happened this month, as shown in the below graph of the net number of part time minus full time payrolls each month (blue, showing a loss) vs. the percentage change in the number of hours of work in the economy each month (red, showing a gain):

Real Hourly Wages and Hours Worked: More Signs of Encouragement - Here is a look at two key numbers in the July monthly employment report for June:

  • Average Hourly Earnings
  • Average Weekly Hours

The government has been tracking the data for Production and Nonsupervisory Employees for decades. But coverage of Total Private Employees only dates from March 2006. Let's look at the broader series, which goes back far enough to show the trend since before the Great Recession. I want to look closely at a five-snapshot sequence. First, here is a chart of the Average Hourly Earnings. I've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward. But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, I've used the seasonally adjusted CPI, and I've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. As we see, the difference is amazing. The decline in real wages at the onset of the recession accords with our expectations. But why the rise in the middle of the recession when the Financial Crisis began unfolding in earnest? Let's add another data series to the mix: Average Hours per Week. About eight months into the recession, hours per week began to fall. The number bottomed a few months before the recession ended and then began increasing a few months after it ended. For a better understanding of the relationship between hourly earnings and the average work week, let's overlay the two. We see a striking inverse correlation during the Financial Crisis. And by the Fall of 2010, the two began to reverse their directions.

Employment Report: More Hiring, Wages Up, Still Weak Labor Market - The good news: This was the best first half for private employment gains since 1999.  Also hourly and weekly wages increased 0.4% in June, and hourly wages are now up 2.2% over the last year (weekly wages are up 2.5% year-over-year). Some bad news: the employment-population ratio for the 25 to 54 year old group (prime working age) declined, the number of part time workers (for economic reasons) increased and U-6 (an alternative measure of labor underutilization) increased to 14.3%. Some numbers: Total nonfarm employment is up 2.293 million over the last 12 months, and up 1.211 million so far in 2013 (a 2.42 million annual pace). Private employment is up 2.357 million over the last year, and up 1.234 million so far in 2013 (a 2.47 million annual pace).  The following table shows the first and second half and full year changes in private employment since 1998.Of course public payrolls are continuing to shrink (four plus years of declining public payrolls now).  Public employment was down 7 thousand in June (mostly at the Federal level), and public employment is down 64 thousand over the last year, and down 23 thousand so far in 2013 (a 46 thousand annual pace).A few more graphs ...Since the participation rate declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. The participation rate for this group also decreased in June to 81.1%. The decline in the participation rate for this age group is probably mostly due to economic weakness (as opposed to demographics) and this suggests the labor market is still very weak. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of part time workers increased in June to 8.226 million. This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.328 million workers who have been unemployed for more than 26 weeks and still want a job. This was down slightly from 4.357 million in May.

The Lagging Public Sector - Private sector employment in the United States is growing at about the same rate it did during the best days of the last decade. The difference is in the government. It continues to shed workers. The above chart shows the annual change in employment for the private sector, and for government jobs, since the end of 2002. Over the last 12 months, private sector employment rose 2 percent. That is down a little from the 2.5 percent rate early last year, but it is about the same as the rate of growth in the fall of 2005. But government employment continues to fall. It is down 0.2 percent, which is the best year-over-year showing since 2009, when the government cutbacks were starting to be felt. On a monthly basis, over the last 12 months the economy added an average of 191,000 jobs a month in the private sector, and cut public sector employment by 3,000 jobs a month. Politicians lamenting the slow pace of recovery might, logically, look for ways to increase hiring in the sector that is lagging the most.

Yes, the Sequester Is Affecting the Job Market -The across-the-board automatic federal budget cuts that began in March do not seem to be derailing the recovery so far, given that the job market over all has continued to grow. And certainly some of the scariest predictions about the sequester didn’t come true (partly because Congress stepped in to prevent their occurrence). But if you look closely at the data, the sequester still does seem to be affecting certain industries pretty badly.As my colleague Floyd Norris wrote, government payrolls have been shrinking for several years. Those declines were mostly driven by state and local layoffs at first; lately, the layoffs have gotten worse at the federal level. In the last four months, the federal government has laid off 40,000 workers. And that number doesn’t indicate the full extent to which the sequester has affected employment, as many government agencies have resorted to furloughs rather than full-blown layoffs.  Below is a chart showing the numbers of federal workers who have been working “part time for economic reasons,” a term meaning they want to be working full time, but can’t get their employer to give them full-time hours. The numbers are not seasonally adjusted, so I’ve charted the trends for 2011, 2012 and 2013 to compare the level in a given month with its level exactly one year and two years earlier.

Some Troubling Signs In June’s Jobs Report - The latest jobs report isn’t quite all roses. Behind the solid payroll gains are a few troubling signs. The number of Americans working part-time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month. As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6,″ for its data classification by the Labor Department. That measure is among the data points Federal Reserve policy makers say they follow closely. “There are several elements of today’s report which the Fed is likely to be disappointed in,” The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago. The increase in discouraged workers could be an impediment to reaching a 7% unemployment rate by the middle of next year, when the Fed said it anticipates its bond-buying programs will be completed. If the economy continues to improve, members of that group could start actively looking again, and therefore increase the number of unemployed. That could be happening to a small

What the Worst Jobs Report of the Year Means to You: On the surface, today's jobs market report looks good... 195,000 jobs were created in the U.S. economy during the month of June, with the "official" unemployment rate for the month sitting at 7.6%, unchanged from May. (Source: Bureau of Labor Statistics, July 5, 2013.) But look a little closer and this jobs market report is a catastrophe... Look at the underemployment rate, which includes people who have given up looking for work in the jobs market and those who are working part-time because they can't get full-time work—based on this number, the picture looks drastically different. In June, the underemployment rate rose from 13.8% to 14.3%—the highest level since February! That means that one out of every seven Americans who want to work can't get a job. (And the politicians keep telling me the economy is improving?) And if that wasn't bad enough... Most of the jobs created in June were part-time jobs; the number of people working part-time in the U.S. jobs market rose by 322,000 to 8.2 million. These people aren't working part-time because they want to—it's because they can't find full-time work. And there's still more... Of the jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector, and 37,000 jobs were created in the retail sector! Low-paying jobs do not create economic growth. The numbers don't lie. The jobs market report today loudly screams, "Not a lot has changed in the U.S. economy." Let's get real, politicians; the way the government creates the unemployment rate is misleading. Millions of Americans are resorting to food stamps for one reason—they can't find a job and have run out of savings.

No Manufacturing Jobs But More Waiters And Bartenders Than Ever = Even as the manufacturing jobs continue to collapse, posting their fourth consecutive monthly drop in June to 11.964 million jobs, minimum wage waiters and bartenders have never been happier. In June Restaurant and Bar employees just hit a new all time high of 10,339,800 workers, increasing by a whopping 51,700 in one month.

Where The (Low-Paying) Jobs Were In June - While we already showed that according to the Household survey the quality component of the June jobs report was absolutely abysmal, with part-time jobs representing more than all jobs added in June, we find that according to the Establishment survey things were no better. In fact, as we show month after month, the bulk of the jobs additions were concentrated in the lowest paying industries.  To wit:

  • Leisure and Hospitality - one of the lowest wage categories - added the most jobs in June, 75K, or nearly 40% of all jobs added
  • Retail Trade jobs - another ultra-low wage category - rose by another 37K, or 20% of the total
  • Education, health and temp jobs - no millionaires here either - added another 23K, accounting for yet another 12%.

In short: 70% of all job additions, or 135K of 195K, in June were for the lowest paying jobs. As for David Tepper's US manufacturing "renaissance": Down 7K in May and down another 7K in June.

A Surge in Part-Time Workers - The June jobs report saw a surge in part-time workers, and the health care law that starts coming into full effect next year might be in part responsible. The number of part-time workers for economic reasons climbed to 8.2 million in June from 7.6 million in March. The economist Casey B. Mulligan ran through the numbers on this blog earlier in the week. The Affordable Care Act gives employers an incentive to hire part-time workers rather than full-time workers, as they might be compelled to offer health coverage to the latter, but not the former. That’s why a number of big employers have started offering more temporary or part-time positions. It also makes part-time jobs more attractive for workers. Say you currently have a 20-hour-a-week job with no health coverage, and that you cannot afford to buy insurance on the private market. Soon, the government will start offering you generous subsidies to buy a plan on the new health care “exchanges” – meaning, provided your income is low enough, you get an expensive benefit with taxpayers picking up most of the tab. Granted, the Obama administration announced this week that it is delaying for one year a rule requiring big employers to cover their full-time workers or pay a penalty – that might also delay some of the shift from full-time to part-time work.

How One Month’s Jobless Fare a Month Later - Friday’s jobs report was good, but it’s worth remembering that people already unemployed are still having a terrible time finding work. This is particularly evident from the Labor Department’s flows data, which track the labor force status of individuals from one month to the next. Here’s a chart showing the flows for unemployed workers — that is, if a worker was unemployed last month, what is his or her labor status this month?  The lines show worker flows from unemployment last month into each of the following statuses in the current month: unemployment, not in labor force, employment.As you can see, the most likely outcome for someone unemployed in May was to continue being unemployed in June. The second-most-likely outcome was to drop out of the labor force entirely — that is, stop looking for work. (That’s part of the reason that today’s labor force participation rate is so low, although the biggest flow into the “not in labor force” category still comes from people who are leaving jobs rather than giving up a fruitless job hunt.)  Finally, the third-most-likely outcome was to find a job. Over all, fewer than one in five people who were unemployed in May were employed in June.

Graphs: Duration of Unemployment, Unemployment by Education, Construction Employment and Diffusion Indexes - A few more employment graphs by request ...This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The general trend is down for all categories, but only the less than 5 weeks is back to normal levels. The long term unemployed is at 2.8% of the labor force - the lowest since May 2009 - however the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining). Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". This graph shows total construction employment as reported by the BLS (not just residential). Since construction employment bottomed in January 2011, construction payrolls have increased by 377 thousand. Only 13 thousand construction jobs were added in June. Historically there is a lag between an increase in activity and more hiring - and it appears hiring should pickup significant in the 2nd half of 2013 (Merrill estimates 20 thousand construction jobs per month will be added this year, Goldman estimates 25 to 30 thousand jobs per month, Deutsche Bank around 50 thousand jobs per month in the 2nd half). The BLS diffusion index for total private employment was at 58.8 in June, down from 61.8 in May.

June Jobs: An employment report only a central banker could love - The June jobs report was strong enough that the Bernanke Fed will likely decide to begin scaling back bond purchases at its September policymaking meeting. At least that seems to be the emerging Wall Street consensus. Example: “After today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting” is how JP Morgan economists put it in a research note titled “Wake up and smell the taper.”  And here is Reuters’ chipper take on the data: Job growth was stronger than expected in June and the employment count for the prior two months was revised higher, showing the economy on solid ground and likely keeping the Federal Reserve on track to scale back its massive monetary stimulus later this year. Employers added 195,000 new jobs to their payrolls last month, the Labor Department said on Friday, while the unemployment rate held steady at 7.6 percent as more people entered the workforce. The government revised it count for April and May to show 70,000 more jobs created than previously reported. But there is plenty more to this story, as folks on Main Street surely know:

  • 1. The economy lost 240,000 full-time workers last month, according to the more volatile household survey, while gaining 360,000 part-time workers. In other words, the entire increase in the household measure of employment was accounted for by persons working part-time for economic reasons. The underemployment rate surged to 14.3% from 13.8%.
  • 2. Does Obamacare explain the poor jobs mix? From the econ team at First Trust: Given the volatility in these data series, we would not put too much emphasis on one month’s worth of data. However, it’s consistent with the large payroll gains for retail as well as restaurants & bars and probably shows some firms who would be hiring full-timers are hiring part-timers to avoid Obamacare.

Full Employment: The Big Missing Piece -- While some important parts of the current economy are showing strength — housing, energy extraction, corporate profitability — demand for labor, or “job creation” if you prefer, remains weak.  That’s a huge problem because most of us depend on our paychecks, not our stock portfolios, so the fact that there’s still about 12 million unemployed (including four million who’ve been jobless for over half a year) in addition to about eight million involuntary part-timers (who want more hours, and can’t find them) should give one pause before declaring all clear on the economic front. Weak labor demand plays an integral role in these outcomes, but too much of the rhetoric I’ve been hearing lately ignores that reality.  In the immigration debate — and I’m a longtime active supporter of comprehensive reform — advocates in both parties argue that there are lots of job slots waiting to be filled, if only we had greater labor supply.  This claim is most commonly made regarding high-skilled workers, like programmers, but one advocate recently wrote a commentary arguing that we also face a shortage of low-wage workers.  Anyone with even cursory knowledge of employment or especially wage trends among such workers knows that this is not a credible claim.

When the government outsources employment policy - America is creating jobs — but they’re not well-paid jobs, and they don’t seem to be going to the previously unemployed. Today’s headline figure is certainly impressive: 195,000 new jobs were created in June, in the wake of a super-strong 207,000 new jobs in May. But the headline unemployment rate went nowhere, stuck at 7.6%, while the broadest measure of underemployment, the U6 unemployment rate, saw a worrying and substantial rise, to 14.3% from 13.8%. Good jobs, like those in government, continue to get cut, while most of the jobs growth came in the most low-wage sectors, like hospitality. And while the data on wages was pretty healthy, remember that wage data applies overwhelmingly to people who have been employed for some time, rather than to people newly entering the workforce. Basically, if you’re employed, you’re doing OK, but if you’re underemployed, the options available to you — the new jobs being created — are pretty underwhelming. Partly as a result, the number of discouraged workers — people who have given up looking for work because they can find nothing available — has gone up, sharply, to more than 1 million. This report is going to have no visible effect on Fed policy. The Fed has no employment-growth target: the thing it cares about, on the jobs front, is unemployment. So when it comes to measures like tapering and rate hikes, the survey which matters most is the household survey — the employment status of American households — rather than the establishment survey, which measures the size of total US payrolls. Theoretically, the two surveys are two different ways of measuring the same thing, but in practice we’re seeing in the jobs report exactly the same thing that we’ve been seeing for most of the recovery: businesses reporting healthy numbers, with workers in general, and people looking for work in particular, seeing little benefit as a result.

The New Economics of Part-Time Employment - Much attention has been paid to people without health insurance, but for the purposes of understanding the entire labor market we must acknowledge that the uninsured are a minority of the population. Most of the work force has health insurance through full-time employment or through a spouse’s employment. 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. Beginning next year, the Affordable Care Act will subsidize the health expenses for non-elderly families with income of 100 to 400 percent of the federal poverty line (about half of the non-elderly population has incomes in that range), but only if they are not offered health insurance through an employer. In other words, the new subsidies will not be available to most of those who do full-time work. Because part-time workers will be eligible for the subsidies except in the rare instances in which their employer covers them, full-time work will no longer carry the advantage of access to health insurance. That by itself will encourage more people to seek part-time work. Moreover, the subsidies will many times be generous enough that workers can make as much money in a part-time position as in a full-time one. The table below illustrates what may happen.

Sequester Hits the Long-Term Unemployed - Sunday was the five-year anniversary of the Emergency Unemployment Compensation program, a federal program signed into law by President George W. Bush that initially added 13 weeks of unemployment benefits to the standard 26 weeks states already offered eligible jobless workers.  . For a while workers could receive as many as 99 weeks in some states, the longest duration of jobless benefits on record. Those benefits have been pared back over the last year and a half, though, and are being cut more severely now as a result of the across-the-board spending cuts known as the sequester. A new report from the National Employment Law Project calculates exactly how much: Of the more than $80 billion in automatic budget cuts that must occur between March 1 and Sept. 30, about $2.4 billion is being slashed from the federal emergency unemployment benefits program, says NELP, a labor-oriented research and advocacy group. The organization estimates that upward of 3.8 million unemployed workers will ultimately be affected by the cuts. The average weekly benefit check of $289 is being cut by $43, or about 15 percent. Almost every state has carried out the federally mandated cuts to its unemployment benefits at this point, but many waited until recently to do so. The longer the states took to put the cuts into effect, the sharper the reduction in each remaining weekly benefit check. For example, the 20 states that cut their benefits starting on March 31 or April 6 trimmed 10.7 percent from each weekly benefit check, whereas Maryland and New Jersey started decreasing benefits on June 30, which required slashing all future weekly checks by 22.2 percent to achieve the total required savings.

How the Sequester Savages the Long-Term Unemployed -  The sequester isn’t so scary—that’s what The Washington Post proclaimed this week. It’s an attitude many people in Washington seem to have adopted, as momentum to solve the slashing automatic cuts has almost entirely vanished. But for Sharon MacGregor, a graphic designer and medical education worker in Paterson, New Jersey, the sequester is terrifying indeed.  She is one of the 3.8 million Americans who are “long-term unemployed,” which is defined by the Bureau of Labor Statistics as being unable to find work for more than twenty-seven weeks.  Once you become long-term unemployed, you start drawing from the federal Emergency Unemployment Compensation fund, which was signed into law by George W. Bush in 2008 as the economy cratered.  But the EUC, like most federal programs, is subject to the automatic sequester cuts, and will lose $2.4 billion this fiscal year. (That represents 8 percent of the $30 billion in domestic non-Medicare budget sequester cuts.) It’s a big chunk of money—and it’s being taken away from the people who have already suffered the most during the downturn. The average resulting benefit reduction is $43 per week, out of an average EUC benefit of $289.

The Part-Timer Problem: The Obama Administration’s decision to delay for a year the penalty that employers (in firms of 50 or more employees) must pay if they don’t provide health insurance to their workers shines a light on a problem that may be even more profound than getting health coverage for every American: that is, the decline of the American job. The employer mandate was designed for an economy in which American workers were employed in what had been normal jobs. In firms of 50 or more, all workers who put in at least 30 hours a week were either to receive coverage from the firm or else the firm would have to pay the government a $2,000 yearly penalty. Problem is, fewer and fewer workers are putting in 30 hours a week. To begin with, labor-force participation is at its lowest level since women increased their work-force participation in the 1970s. It has declined even during the past four years of so-called recovery. The past four years have also seen a rise in the percentage of workers who are part-timers, who currently constitute 19 percent of the work force. Full-time work has been declining for nearly half-a-century. In 1966, the average workweek was 38.7 hours. Today, it’s 34.5. 

 New Study Shows 1/3 of Jobs Prone to Offshore Outsourcing -- The change in the skill (educational) level of jobs being moved abroad has led some to wonder whether the offshoring of service, unlike production, activities will result in college graduates facing a dwindling supply of entry-level jobs that have traditionally served as stepping-stones to higher skilled and higher paying positions.   The notion that offshoring depresses job growth in the United States appears to underlie support among some policymakers for measures meant to encourage U.S. firms to expand employment domestically rather than abroad. While some members of the public policy community also support the adoption by other countries of trade and labor policies intended to level the playing field for U.S. companies and workers in the international marketplace, still others advocate for limited government intervention as the best means of promoting economic growth.Passages in this post were excerpted from the report "Offshoring (or Offshore Outsourcing) and Job Loss Among U.S. Workers" [The extension of task fragmentation] by Linda Levine, Specialist in Labor Economics, December 17, 2012. This is a CRS Report prepared for members and committees of Congress. The full report is here in PDF. Please read this very comprehensive (and somewhat disturbing) report on the future of offshoring American jobs to low-wage countries.

How Can America Become More Dynamic? - In a recent post I discussed how labor market dynamism has declined the past few decades, with downward trends in job creation and destruction, hires, quits, separations, as well as industry and occupation switching. This raises an important question of what, if anything, can be done to make labor markets more dynamic? Importantly, research by Molloy, Smith, and Wozniak has shown that declining labor market dynamics are related to to declining geographic mobility. Evidence for this can be seen in the graph below, which shows how changes in the interstate mobility from the 1980s to 2000s is related to changes over that same period in the percent of workers changing jobs. In short, states that saw declines in mobility also saw declines in labor market dynamism. But increased geographic mobility is not something that can easily be created through policy. So what can policymakers do? George Borjas presents an indirect argument for what can be done in his 2001 paper “Does Immigration Grease the Wheels of the Labor Market?”. In this paper, the erstwhile immigration critic argues that immigration benefits society by increasing mobility and helping labor market opportunities equalize across regions.

Immigration and Entrepreneurship - One of the key economic arguments underpinning the immigration overhaul is that immigrants create jobs — not only because they spend money, but because they tend to be unusually entrepreneurial and innovative and so create job opportunities for the people around them. Think of Silicon Valley figures like Sergey Brin, Andrew Grove or Vinod Khosla — or the designer Liz Claiborne. The bill that passed the Senate last week, under Subtitle H, even included special provisions for what is being called a “start-up visa,” to be granted to people who start companies that meet certain venture capital, hiring and revenue requirements.  So is it true that immigrants are unusually entrepreneurial? The data available suggest that yes, immigrants are overrepresented among America’s business founders and innovators.

The dream of a post-racial America - David Brooks has a very interesting column about America's multiethnic future. This is a topic I've been thinking about for quite a while, especially after some Twitter conversations with some hard-core anti-immigrant nativists. Brooks' most important point is that America's increasing racial diversity is inevitable now: Up until now, America was primarily an outpost of European civilization. Between 1830 and 1880, 80 percent of the immigrants came from Northern and Western Europe. Over the following decades, the bulk came from Southern and Central Europe. In 1960, 75 percent of the foreign-born population came from Europe, with European ideas and European heritage. Soon, we will no longer be an outpost of Europe, but a nation of mutts, a nation with hundreds of fluid ethnicities from around the world, intermarrying and intermingling...  If enacted, the immigration reform bill would accelerate these trends...It would boost the rise of non-Europeans...In other words, immigration reform won’t transform America. It will just speed up the arrival of a New America that is already guaranteed...  On the whole, this future is exciting. The challenge will be to create a global civilization that is, at the same time, distinctly American. Immigration reform or not, the nation of mutts is coming.

Productivity & Effective Demand: An Intriguing and Disturbing Story . . .Edward Lambert at Effective Demand; Effective Demand = Effective Labor Income/(cu*(1-u)) points to the result of an economy left to maximize Profits at the expense of Labor. I have my own version or underlying causes of this issue and Edward gives the economic side of it.  I am going to show a graph of Productivity against Effective demand. It is an intriguing and a disturbing graph. Let me start by giving the equation for the productivity used in the graph.  Productivity = real compensation per hour: business sector/(labor share: business sector * 0.78) The data for this equation comes from this graph at FRED. The equation for effective demand is… Effective Demand = real GDP * (labor share: business sector * 0.78)/TFUR TFUR (total factor utilization rate) = capacity utilization * (1 – unemployment rate) Let me just show the graph and then start explaining . . .

Moochers, Grifters, and the Beveridge Curve - Paul Krugman - The overwhelming fact about the U.S. economy right now is that there aren’t enough jobs; the standard unemployment rate actually understates the problem, because it looks as if a fair number of workers have given up actively looking, and are therefore not counted as unemployed. Better to look at things like the employment-population ratio; I often prefer to look only at prime-age workers, as a way to deal with the demographic effects of an aging population. And what you see is this: Within this broader picture, however, there are some puzzles. An unusually high fraction of the unemployed have been unemployed for a long time; and there seems to have been an outward shift in the Beveridge curve, the historical relationship between vacancies and unemployment. What’s happening here? A number of people have attributed both the rise in long-term unemployment and the outward shift of the Beveridge curve to extended unemployment benefits, which make people less desperate to take a job, any job, when their benefits run out. Even if this were true, there is widespread misunderstanding of what it would mean. It would not, repeat not, mean that UI is causing higher unemployment. I tried to explain why in today’s column. The key point is that making the unemployed more desperate would do nothing to increase the number of available jobs. At most, it would precipitate a general fall in wages — and that would make our situation worse, not better, because it would increase the burden of household debt.

CEOs Recovering Well, Workers Not So Much - Escalating CEO compensation is a major contributor to income inequality. Along with financial sector pay, growing CEO compensation has helped more than double the income share of the top 1 percent over the past three decades. Moreover, the fact that CEO pay has risen so quickly since the end of the Great Recession is an indicator that the top 1 percent is doing far better than ordinary Americans in the recovery.One way to illustrate the increased divergence between CEO pay and an average worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio. Our new EPI paper, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, presents this analysis of CEO compensation based on our tabulations of Compustat’s ExecuComp data. The ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.  The CEO-to-worker compensation ratio in 2012 of 272.9 is far above the ratio in 1995 (122.6), 1989 (58.5), 1978 (29.0), and 1965 (20.1), as shown in the figure below. This illustrates that CEOs have fared far better than the average worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.

Big Lie: America Doesn't Have #1 Richest Middle-Class in the World... We're Ranked 27th!: America is the richest country on Earth. We have the most millionaires, the most billionaires and our wealthiest citizens have garnered more of the planet's riches than any other group in the world. We even have hedge fund managers who make in one hour as much as the average family makes in 21 years! This opulence is supposed to trickle down to the rest of us, improving the lives of everyday Americans. At least that's what free-market cheerleaders repeatedly promise us. Unfortunately, it's a lie, one of the biggest ever perpetrated on the American people. Our middle class is falling further and further behind in comparison to the rest of the world. We keep hearing that America is number one. Well, when it comes to middle-class wealth, we're number 27. The most telling comparative measurement is median wealth (per adult). It describes the amount of wealth accumulated by the person precisely in the middle of the wealth distribution -- fifty percent of the adult population has more wealth, while fifty percent has less. You can't get more middle than that.

Paid via Card, Workers Feel Sting of Fees - A growing number of American workers are confronting a frustrating predicament on payday: to get their wages, they must first pay a fee. For these largely hourly workers, paper paychecks and even direct deposit have been replaced by prepaid cards issued by their employers. Employees can use these cards, which work like debit cards, at an A.T.M. to withdraw their pay. But in the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards. These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account, according to interviews with consumer lawyers, employees, and state and federal regulators. Devonte Yates, 21, who earns $7.25 an hour working a drive-through station at a McDonald’s in Milwaukee, says he spends $40 to $50 a month on fees associated with his JPMorgan Chase payroll card. “It’s pretty bad,” he said. “There’s a fee for literally everything you do.”

Amazon warehouses: literally worse than coal mines - We’ve written often about the egregious labor abuses of Jeff “Say Uncle” Bezos and his tube sock shipping monopoly Amazon. I think we do a good job, generally, painting an accurate portrait of the crimes (in many cases literal crimes) of the counter-literary juggernaut. I also enjoy drawing a silly mustache or cartoonish horns on said portrait from time to time—our general tactic is to swing between inciting outrage and laughter. But lately Amazon has grown so cartoonishly villainous that it’s begun to steal the wind from both tacks. Case in point: Amazon has built a shipping warehouse in the former coal mining town of Rugeley in the English midlands. The Amazon shipping warehouse is literally the new coal mine in town. Well, the comparison is not exact. The work at Amazon is arguably harder, the pay is worse, the jobs are precarious, and the whole thing comes wrapped in a condescending veneer of self-fulfillment. John Brownlee writes on the Fast Company design blog about a beautiful photo essay by Ben Roberts covering the town and the warehouse, saying: The issue at Rugeley is not that workers are ungrateful for the jobs Amazon has given them, or even that they find these jobs unpleasant. Most of Rugeley’s workers come from mining families, a stock not exactly known for its weak-livered dandyism. It doesn’t matter that these jobs are hard. It’s that they have no future.

Which Households Have Incomes Below $30,000?- Looking at the demographics of households with less than $30,000 a year in income, it appears they are mostly headed by retired people. As Visualizing Economics notes, households with incomes below $30,000 are more likely to be located in rural and urban areas than the national average... and looking at the the poverty rate by county, very low income households (under $23,000 for a family of four) are concentrated in places like Mississippi, Texas, and South Dakota.

Jobless Benefits DO NOT Cause Unemployment -- The Wall Street Journal's headline asks, "Are Jobless Benefits Leading to Higher Unemployment?"  But in the very first paragraph in their story they answer their own question with A new paper from the Federal Reserve Bank of Boston suggests the answer is no -- or at least not much.   So then, why does the WSJ ask? Why not just use the headline of this post? The WSJ goes on to say that usually "more job openings means less unemployment, and vice versa. But recently, the relationship has changed: Unemployment is higher than it should be given the number of openings." But why should that be? The Bureau of Labor Statistics clearly states that there are only 3.8 million job openings for 11.8 million unemployed Americans. President Obama once called this "math". What's NOT to understand by the Wall Street Journal and all the "economists"? The U.S. doesn't have a labor shortage, it has a labor glut --- the labor market is over-saturated. But there are some people who think that, by adding a few thousand more work visas, this will help fill this job void --- like more automation and robotics would help --- like offshoring more jobs to Asia would help --- like putting a square peg in a round hole will help solve the job shortage.

Don't Blame Unemployment Insurance for Our Jobs Crisis - The Great Recession has not been a great vacation. Four years since the recovery officially began, many people are still unemployed not because they don't want to work, but because, with three job-seekers for every job opening, they can't find any work. And they are trying to find work. Indeed, a new paper by Rand Ghayad, a visiting scholar at the Boston Fed and a Ph.D. candidate at Northeastern University, shows that unemployment insurance hasn't otherwise made the unemployed less likely to take a job. If anything, it's made them more likely to keep looking.For a certain class of conservative economists, the unemployed must be funemployed. They just can't conceive of a world where supply can outpace demand; where excess demand for money and money-like assets can push the economy into a slump. (Paul Krugman's classic essay on the Capitol Hill babysitting co-op shows how it can). Their belief that supply creates its own demand is an age-old fallacy called Say's Law, which isn't a law, and hasn't been one for a long, long time. As Krugman points out, it was discredited enough back in the 1930s that it was thought something of a strawman when Keynes debunked it back then. But yesterday's caricature has become today's conviction. Casey Mulligan, for one, has never met a problem he doesn't think is a supply one. Back in December 2008, he argued unemployment was exploding, because people were choosing not to work so they could get mortgage modifications. By 2012, he decided food stamps were really to blame for joblessness. Needless to say, these arguments don't even pass the laugh test, let alone fit the data.

North Carolina axes benefits for long-term unemployed - Starting next week, North Carolina—which has the fifth highest jobless rate in the country—will become the only state in the union with no safety net for the long-term jobless. Thanks to reforms in the state’s unemployment insurance laws, North Carolina’s 71,000-plus long-term unemployed residents will lose access to the federally funded Emergency Unemployment Compensation (EUC) program. North Carolina is losing eligibility to the federal program because of a new law, signed by the governor in February of this year, which reduces the number of weeks that unemployed people are eligible for state-funded benefits and cuts the maximum weekly benefit amount by roughly one third, from $535 to $350. It is the latter provision that has cost North Carolina workers its eligibility: States looking to receive federal EUC money are forbidden from cutting weekly benefits. The federal government granted a special exemption from that rule to four other states last year, North Carolina’s request for a similar exemption was ignored. “I would call these cuts obscene,” said Michael Leachman, director of state fiscal research for the Center on Budget and Policy Priorities. As of Monday, July 1, North Carolina’s jobless will be able to collect state unemployment benefits for up to 19 weeks, but not the 26 weeks that is the national standard. And after that, they won’t have access to the federal funds available in every other state.

War On the Unemployed, by Paul Krugman - Is life too easy for the unemployed? You may not think so... But that, remarkably, is what many and perhaps most Republicans believe. And they’re acting on that belief: there’s a nationwide movement under way to punish the unemployed, based on the proposition that we can cure unemployment by making the jobless even more miserable. Consider, for example, the case of North Carolina. The state was hit hard by the Great Recession, and its unemployment rate, at 8.8 percent, is among the highest in the nation, higher than in long-suffering California or Michigan. As is the case everywhere, many of the jobless have been out of work for six months or more, thanks to a national environment in which there are three times as many people seeking work as there are job openings.  Nonetheless, the state’s government has just sharply cut aid to the unemployed. In fact, the Republicans controlling that government were so eager to cut off aid that they didn’t just reduce the duration of benefits; they also reduced the average weekly benefit, making the state ineligible for about $700 million in federal aid to the long-term unemployed.

Beyond Pity and Safety Nets - Paul Krugman is justifiably appalled at what he calls the “war on the unemployed”, the accelerating right-wing campaign to subdue, discipline and pauperize the jobless. Yet there is nothing new in this campaign. Economic conservatives and market fundamentalists have always tended to believe that the private enterprise system is both self-correcting and stringently just, and that unemployment results from a misguided combination of indulgent maternal do-gooding and inept government interference with the austere and efficient rectitude of market operations. The fundamentalists believe unemployment happens because artificial minimum wage laws prevent wages from falling as far as they need to fall to clear the labor market, and that unemployment insurance compounds the problem by seducing potential workers into an unsustainable, dead-end limbo on the dole when they should be swallowing their strong laissez faire medicines and the bitter wages that go with them. After all, if these dregs and flops were worth more handsome wages, then the Invisible Hand would have already dispensed those wages to them, right?

Redistribution and the Hollow Middle Class - Miles Kimball has made an interesting economic case for why there is much greater benefit of redistribution from the middle class to the poor than from the rich to the middle class. While this makes intuitive sense, I think it has important implications for how we view things such as universal benefits and indeed how we frame the discussion on redistribution. First, I would like to address the arguments that are usually made in favour of universal benefits. Earlier this year John Harris made an eloquent defence of the universal welfare state in The Guardian: “Once again, we have to wearily go back to first principles. As the child benefit fiasco proves, means-testing and selectivity cost huge amounts of money and governmental effort. In stigmatising help and demanding engagement with a labyrinthine machine, selective benefits often fail to reach the people they are meant for (which is why over 25% of kids entitled to free school meals don't get them, and the means-testing of winter fuel payment would be dangerous).

Unemployment Rate Still Above 10% in 27 US Metro Areas - Unemployment fell in May from a year earlier in two-thirds of the nation’s 372 metropolitan areas, but 27 still had jobless rates in excess of 10%, the Labor Department said Tuesday. Eleven of these areas were in California, the country’s most-populous state, which continues to grapple with fallout from the housing-market downturn. El Centro, Calif., had one of the nation’s highest unemployment rates, at 22.8%, surpassed by Yuma, Ariz., at 30.8%. At the other end of the spectrum, 37 areas had jobless rates of less than 5% in May. Bismarck, N.D., had a 2.4% unemployment rate, the nation’s lowest. The state is riding high on an oil-driven economic boom. Unemployment rates were lower in 253 areas from a year earlier, higher in 86 areas and unchanged in the other 33, the Labor Department said. The nation’s unemployment rate in May was 7.3%, not seasonally adjusted, down from 7.9% a year earlier. (The seasonally adjusted rate was 7.6%.)

The Benefits of the Safety Net, Part 2 - A few weeks ago I wrote about the role of the safety net to catch folks buffeted by market failure.  I argued that the evidence showed that programs like Unemployment Insurance and food stamps (now called SNAP) performed well in this regard, ramping up to meet the increased need induced by the great recession.That’s a short-term, “counter-cyclical” argument: when the economy goes down, we should unapologetically expect the safety net goes up (and vice-versa).  But new research from poverty scholars Hilary Hoynes and Diane Schanzenbach provides evidence of important impacts that go well beyond the business cycle: SNAP likely pays significant long-term health and economic dividends for children who have access to its benefits. While some policymakers suggest that we have failed to appreciate the long-run harm to beneficiaries and taxpayers from SNAP and other safety net programs, our research suggests that, if anything, the opposite may be true: we have failed to appreciate the long-run benefits to participants – particularly children – and to the taxpayer from SNAP and other safety net programs.

Paid Sick Leave Laws Generate Concern, but Not Much Pain - Six years later, Mr. Stone admits to having been a little alarmist about paid sick leave. “As a small restaurant business, it’s really hard to make money, and when they add another requirement, it makes you nervous,” Mr. Stone said in a recent interview. “But all and all, I actually think it’s a good thing.”  This spring, paid sick leave came up for vigorous debate in cities around the country. Portland, Ore., passed a law in March, and New York followed suit last week when the City Council overrode a veto by Mayor Michael R. Bloomberg. In Philadelphia, sick-leave legislation died after Mayor Michael Nutter vetoed it. In each case, the same concerns about the bill — that it is unnecessary and intrusive, and especially expensive and burdensome for small businesses — have surfaced.  Those arguments appeared to carry the day in the half-dozen states that have passed laws this year prohibiting cities and towns from enacting their own sick-leave laws. But in San Francisco, the District of Columbia and the state of Connecticut, places that have had such laws in force for more than a year (Seattle adopted one in September), it can be difficult to find small-business owners who say they have been hampered by the law’s obligations — though some object in principle.

ISM-New York: June Business Conditions Index Falls to 4-Year Low of 47.0: Business activity in the New York City area deteriorated sharply in June, according to data released Tuesday. The Institute for Supply Management-New York's Current Business Conditions index dropped to 47.0 last month from 54.4 in May. The June index is the lowest reading since May 2009, the ISM-NY said. An index reading below 50 indicates contracting activity. The subindexes covering current activity were mixed. The purchasing-volume index rebounded to 55.8 after it plunged to an eight-month low of 45.5 in May. The current revenues index held at a neutral 50.0. The employment index was little changed last month, at 50.8 versus 49.4 in May. The prices paid index fell to a one- year low of 50.0 from 54.5. When asked about business impediments, 42% cited no difficulties while 31% cited a shortage of working capital. Perhaps reflecting one of the rainiest Junes on record in the New York City area, a large 19% cited weather or natural disaster as an impediment. That's up from 6% in May and April. Looking ahead, "future optimism didn't flinch," the report said, "suggesting the drop in current conditions could be temporary."

Payroll Cards Are Under Scrutiny by New York’s Attorney General - New York’s top prosecutor is investigating some of the state’s largest employers over their use of A.T.M.-style cards to pay their hourly employees. The New York attorney general, Eric T. Schneiderman, has sent letters seeking information to about 20 employers, including McDonald’s, Walgreen and Wal-Mart, say people briefed on the matter. The inquiry by Mr. Schneiderman comes as a growing number of companies are abandoning paper paychecks and direct deposit to offer prepaid cards. But consumer lawyers, employees, and state and federal regulators have said that in the vast majority of cases, use of the cards can generate a range of fees — 50 cents for a balance inquiry and $2.25 for an out-of-network A.T.M. Those fees can quickly devour the pay of part-time and low-wage workers. And many employees say that they have no alternative. Even at companies where there is a choice, it is often elusive. Worried about imperiling their jobs, some employees say they are terrified of requesting another option, according to interviews with consumer advocates. Other employees say that they are automatically enrolled in the payroll-card programs and forced to navigate a bureaucratic maze if they want to opt out.

Jefferson County Files to End Bankruptcy, Adjust Debt - Jefferson County, Alabama, filed a plan to end the biggest U.S. municipal bankruptcy later this year by cutting $1.2 billion in principal payments to investors holding defaulted sewer-related debt. Less than $100 million of the county’s $4.2 billion in debt will be paid in full, marking the first time U.S. investors holding municipal debt have been forced as part of a bankruptcy case to take losses on the principal owed to them.  “The plan solves both of the problems that prompted the commission to file the largest Chapter 9 bankruptcy case,” Jefferson County Commissioner David Carrington said yesterday in an e-mailed statement. In addition to struggling with the sewer debt, the county has missed payments on general-obligation bonds backed by taxes. The plan is based on a settlement announced last month among JPMorgan Chase, seven hedge funds and a group of bond insurers, which together hold about $2.4 billion of the debt. The group will split about $1.84 billion, with JPMorgan taking the steepest cuts, collecting $375 million of the $1.22 billion it is owed, according to the plan filed yesterday in U.S. Bankruptcy Court in Birmingham, Alabama. None of the county’s more than $3 billion in sewer-related warrants will be fully repaid. That debt is tied to sewer fees that have not been high enough to cover the interest and principal payments.

Retirees’ Medical Bills Are Bringing Down Detroit - The emergency manager in charge of keeping Detroit afloat says the city’s $20 billion debt load can’t be reduced to manageable levels without “shared sacrifice” from all stakeholders, including retirees. Pension and retiree-health-care obligations make up the bulk of the city’s unsecured debt, and their costs are rising rapidly. The emergency manager, Kevyn Orr, is right that Detroit must reduce its retirement-related debt to secure its future, but he has to be more specific about his target. Cutting retiree health care -- also referred to as “other post-employment benefits,” or OPEBs -- should take priority over pensions. Detroit’s health-care benefits are generous even by the standard of its free-spending public-sector peers. On a per-household basis, the city owes more for retiree health care than any of the cities at the center of the 30 largest U.S. metropolitan areas except for Boston and New York. Retiree costs make up two-thirds of the city’s annual health-care bill, swamping those for current workers. Estimated at $5.7 billion in 2011, Detroit’s OPEBs are certain to grow when Orr’s office completes its revaluation of the costs. They already surpass most of Detroit’s other liabilities, including general-obligation debt ($1.1 billion) and pensions (recently revised higher to $3.5 billion).

What Happens in Detroit Won’t Stay in Detroit -- In Detroit, a reckoning is near. A recent report from the city’s emergency manager on its deteriorating finances reads like a municipal adaptation of the Book of Revelation.  The city’s population has dropped by about a quarter since 2000. Its rate of violent crime is five times the national average. Fires are rampant. Streetlights don’t work. The budget deficit is nearly $380 million, while long-term liabilities may total more than $17 billion. Detroit’s emergency manager, Kevyn Orr, has even considered selling the city’s art collection. Orr is now negotiating a reorganization plan with unions, creditors and bond insurers. If those talks fail, Detroit could become the largest city in U.S. history to file for Chapter 9 bankruptcy protection. The unions should strive to make a deal before that happens, even if it means forcing retirees to take substantial pension and benefit cuts. State taxpayers should recognize that it’s in their best interests to help those retirees out. And Orr must avoid unduly violating bondholders’ trust. The consequences of failure could reach well beyond Detroit.  Union leaders, understandably, don’t want to deny benefits to pensioners who loyally paid into their plans their whole careers. But if Detroit heads to bankruptcy court, Orr will be empowered to reject contracts, modify collective bargaining agreements and force cramdowns on parties that don’t consent to his proposed reorganization. That means pensioners could end up with significantly less than Orr is now offering them.

Thanks to the Drug War, the US incarcerates more of its own people than any country in the world - The chart above shows the breakdown of the current federal inmate population by type of offense, according to the most recent data from the Federal Bureau of Prisons. There are currently 90,043 Americans serving time in federal prisons for drug crimes, which is by far the No. 1 offense that results in a federal jail sentence (see chart). Drug offenders make up almost half (47.1%) of our federal inmate population of 218,171, and that helps explain why the US retains its status as the World’s No.1  Jailer with a prison population of 713 per 100,000 population, more than even any of the world’s most notorious and oppressive regimes like Myanmar (120 per 100,000 population), Cuba (510 per 100,000 population), and Iran (333 per 100,000).

How the 1% is privatizing (stealing) the $600bn public education budget - In our Deadlines post — “America faces more than a dozen deadlines, all caused by billionaires and wealth transfer“— we noted that public education was in a crisis of privatization from which it may never recover (some editing and added emphasis below): Number 15 on the list is “Destruction of public education.” Does that really have an end-point? If so, what does it look like? Extrapolate the charter-school / “for-profit school funded with public money” process — which is, again, both uni-directional and accelerating — to its end-point and you get a two-tiered school system with a sloppy middle. One tier is an aging, decrepit, under-funded, useless-for-education factory-school system for the middle and lower classes (most of the country). The other tier has bright shiny (private) charter schools for the billionaires and their millionaire administrators and friends. A good example of this bifurcation is the charter school that Chicago mayor Rahm Emanuel sends his children to, in which music and the arts are taught, which he supports at the same time he’s destroying public school funding for the poor and middle class of his own city.The rich and the rest; one system for the wealthy and another for the rest of us. The wealthy private-school owners receive funding from the government — via vouchers and other payments — and book for themselves the profits of the successful schools they create. Because of the prices charged for these schools, the vouchers that parents receive won’t be enough, so better incomes are needed to afford the better schools.

Number of the Week: “Non-Traditional” Students Are Majority on College Campuses - 29%:The share of college undergraduates who are traditional students.The word “college” tends to call to mind images of fresh-faced young students studying, living and, yes, partying on or near leafy suburban campuses. But that picture only describes a small fraction of the nation’s 18 million undergraduates—even though such students dominate the public debate over the value of a college education. First of all, more than 40% of all undergraduates in the 2011-2012 school year were enrolled in community colleges and other two-year institutions, according to Education Department data. Of the ones in four-year programs, more than one in five attend school part-time. That leaves a bit more than 8 million students who are enrolled full-time in four-year schools, or 45% of all undergraduates.That figure hasn’t changed much in recent years. But what has changed is where they’re going to school. In 2001, less than 4% of full-time, four-year students attended for-profit schools. A decade later, that figure was nearly 11%, and has almost certainly continued to rise. That leaves 7.3 million full-time students in four-year programs at public or nonprofit colleges.One final factor: age. More than two million of the remaining students were over age 21 in the fall of 2011, the traditional age of a first-semester senior. Nearly a million were at least 25, and nearly half a million were in their 30s or older.

44% of Young College Grads Are Underemployed (and That's Good News) - Yesterday, the Federal Reserve Bank of New York reported that a full 44 percent of recent college graduates were underemployed as of 2012, meaning that they were working in jobs that did not require their degrees.  Reports like the Fed's have helped fuel a good deal of post-recession soul searching about the value of a college degree, with lots of writers asking some version of the question former White House budget director Peter Orszag posed in a Bloomberg column this week: "Why are so many college graduates driving taxis?" Sub in bartender, barista, or whatever other low-paid service job you like, and you've captured the concern that's on a lot of people's minds.   Unfortunately, these conversations lack historical context. The lot of young college graduates has obviously deteriorated in the past few years. But it's less clear whether that's because the value proposition of college has fundamentally changed, or if it's because the economy got fed through a wood chipper during the recession and we still haven't picked up all the pieces.  The Fed report gives us a little insight on that front. First, as it shows in the graph below, the unemployment rate among recent college graduates tends to move more or less in step with unemployment among all working age adults. Their suffering is not particularly unique. They're having trouble finding work because everybody is.

Visualizing When Higher Education Doesn't Pay Back - College is usually a good investment, but that is not the case for every single school in America. As the following infographic shows, you may want to rethink your decision before handing over that big tution check.

Oregon legislature passes bill to give free tuition to in-state residents - This week the Oregon Senate passed a bill that would create a fund allowing it to bypass traditional student lenders by giving free tuition to students who then pay it back with a deduction from their paychecks after they graduate, according to the Associated Press. H.B. 3472, which has already passed Oregon’s House, creates a pilot program called “Pay It Forward, Pay It Back,” which would allow Oregon’s in-state residents to attend the state’s public colleges and universities without paying tuition or taking out loans in exchange for signing a “binding agreement” to pay 3 percent of their paychecks after graduation for a “specified number of years” — about 25. The bill also establishes seed money for the program, which could exceed $9 billion. The Wall Street Journal reported that the program was the brainchild of a Washington state-based think tank called the Economic Opportunity Institute (EOI), which purports to create ideas to help middle-class families. The group’s October 2012 paper proposing the program said that “Pay It Forward” had several benefits: First, it entirely removes up-front tuition barriers to attending college. Second, after the transition to Pay It Forward is complete, the system is not only entirely self-financing – it also supports successive net increases in college enrollment, making higher education both more affordable and accessible for succeeding generations of students. Third, by linking payments to students’ ability to pay, Pay It Forward allows graduates to chose work based on their interests and skills, rather than solely on financial conditions. And finally, students retain access to federal financial aid to cover their cost of living, books, etc.

Why are there not more science majors? -- There is a new paper (pdf) by Ralph Stinebrickner and Todd R. Stinebrickner on this topic, and here is their bottom line conclusion: We find that students enter school quite optimistic/interested about obtaining a science degree, but that relatively few students end up graduating with a science degree. The substantial overoptimism about completing a degree in science can be attributed largely to students beginning school with misperceptions about their ability to perform well academically in science.

College default rates higher than grad rates - More than 260 colleges and universities in 40 states, the District of Columbia and Puerto Rico have students who are more likely to default on their loans than full-time freshmen are to graduate, an analysis of federal data shows. Hundreds of thousands of students are enrolled at the 265 schools, nearly half of which are operated by for-profit colleges, a USA TODAY analysis shows. About one-third of the schools they attended were are public community colleges.  "These colleges should set off a red flag in the minds of prospective student borrowers — and their parents," says Andrew Gillen, research director for Education Sector, a non-profit, non-partisan think-tank on education policy that gathered the federal data. "Many students at these colleges will no doubt take out loans, graduate and get good jobs. But the high default rate

Student Loan Rates Double Without Congress’ Action - Interest rates on some new federally backed loans for college students are now double what they were last week. Subsidized Stafford loan interest rates went to 6.8 percent on Monday because Congress didn’t strike a deal to keep them low. That translates to an extra $2,600 per student in costs. It affects roughly a quarter of all federal borrowers. The effects aren’t immediate, though. That’s because most students sign their loan documents when they return to campus in the fall. Lawmakers say they can return the interest rates to 3.4 percent when they return after the July 4 holiday. The Republican-led House passed a bill before leaving town that linked student loan interest rates to the financial markets. The Democratic-led Senate, however, was unable to overcome a procedural hurdle.

Washington shrugs as student loan rates double —Borrowing costs for lower-income students shot up on Monday, jumping from 3.4% to 6.8% on subsidized Stafford loans from the federal government. For the average borrower, that means an additional $761 for every loan they take out through the program, according to Mark Kantrowitz, a financial aid expert and publisher of Edvisors Network.Neither party is thrilled about the outcome. But in contrast to last year’s student loan fight, when both presidential candidates took to the bully pulpit on the issue, there seems to be little sense of urgency coming from Congress or the White House, despite the absence of any clear resolution.Here’s why: First, the rate hikes only affect new loans that are taken out, not existing ones. Most students don’t start taking out loans until August or September for the coming school year, and only about 26% of all federal student loans are taken out through the subsidized Stafford program, which requires proof of financial need. What’s more, Congress could pass a retroactive fix to lower the rates for the loans that are taken out at the 6.8% rate, according to Senate Democratic aides. So while the optics of doubled rates aren’t great, Congress still has some time to come up with a solution before they actually hit students’ pocketbooks. And that took the political pressure off legislators who failed to come to a deal last week and simply packed their bags for the July 4 recess.

It’s Not Just the Interest Rate: How Congress Can Help Students - The Senate has officially left town for the upcoming holiday without passing a student loan fix, meaning that the interest rate on federal loans available to low-income students will double on Monday. Judging from the proposals being discussed, it looks like the best Congress can do is to retroactively extend current rates for a year, and take up the thornier question of a long-term fix when the Higher Education Act comes up for reauthorization in 2014. That’s an important issue, but student advocates point out that lowering interest rates are only a piece of the comprehensive reform needed to alleviate the debt burden crushing students and holding back the economy. “The interest rate issue has gotten so much attention it’s crowded out the debate about, first of all, how to help existing borrowers with their debt,”  “The debate really has gotten distorted.”   It’s not that the rate increase is not important—it’s just a small piece of the debate. “A rate increase will have a large impact on many borrowers, in how much they pay over the life of their loans,” said Loonin, an expert on the student loan industry. “But even for perspective borrowers there are a lot of other options to look at beyond the interest rates.”

Why Have Student Loans At All? Let’s Get the Burdens of Debt off College Students’ Backs — And Make Wall St. Pick Up the Tab -  Yves here. As much as I am a fan of having state supported higher education, the “making Wall Street pay for it” will backfire if not framed properly. The author, Les Leopold, advocates a transaction tax as the way to pay for increased support for schools.  The shortcoming here is that transaction taxes are NOT designed to be revenue-generators (although they do produce tax receipts). They are meant to reduce the activity that it taxed. And there is no question we need to shrink our bloated financial sector. Many economists, such as Simon Johnson in his 2009 article in the Atlantic, The Quiet Coup, pointed out how the banking sector had become disproportionately large relative to the size of the economy since the early 1980s. Brad DeLong describes how more and more economists are coming around to the point of view that a lot of financial sector is purely extractive:  So I’d suggest that the two agendas in Les Leopold’s piece be a little less tightly linked: we should institute transaction taxes to redirect capital away from speculation to productive activity. And we should also have more public support for higher education, since many students will simply forgo college if the price is becoming a debt slave. The system we have in place is bad for everyone involved except for the administrators at colleges and the people directly involved in the student debt business. Whatever revenues transaction taxes raise can help fund public education. But we should not look to them as a sole source

A good(ish) trend in US student lending -- Shahien Nasiripour and Ryan McCarthy both had great pieces recently about the latest trends in student lending and their potential wider implications for the economy. We also recommend this explainer from Dylan Matthews about the new jump in rates for certain kinds of student loans.Our own view has been that the ongoing growth of student lending is unlikely to represent a systemic financial risk, but it’s hard to imagine that it doesn’t have some damaging macroeconomic effects in the short- to medium-term.A much-cited New York Fed study shows that young people with high student loan debt are reluctant to borrow in housing and auto markets. And as Nasiripour explains, the obstacles to refinancing student loans have prevented the low interest rates of the past few years from directly helping this group of borrowers.See also this article by Mike Konczal, who rightly wonders how student loans affect the rate of household formation. (An expected recovery in formations after the dramatic post-crisis fall should continue to drive demand for both new single-family homes and rentals for the next few years.) But we recently came across a note from Capital Economics explaining that the annual growth rate of student lending has actually been in long-term, steady decline. And the sharp divergence with household debt in recent years, while disconcerting, has more to do with the big decline of other kinds of borrowing than any significant change in student loan borrowing.

Immigration and Social Security - The Social Security Administration says that the immigration bill passed by the Senate would help its coffers, adding $276 billion in revenue over the next 10 years while costing only $33 billion. But 10 years is a short time when you consider that a vast majority of the new and newly legalized immigrants would be paying into the system during that period and drawing out their Social Security benefits later. That is the problem with attempts to determine the effect of immigration on Social Security in the long haul — every study is going to have some sort of end point, after which people who have paid in are going to start drawing out.The Social Security Administration’s chief actuary, Stephen C. Goss, says he believes that even 75 years out, there will be a net gain from immigrants, as he wrote in May. That is because their withdrawals will be offset by their children’s contributions. Such estimates are based on a lot of assumptions, like how many children the newcomers are likely to have (higher birth rates among immigrants taper off with time), how many are low-skilled versus high-skilled (low-skilled workers tend to cost the system more, while high-skilled workers pay in more than they get out) and just how many new immigrants are admitted under the bill, all of which are open questions.  “It’s amazing that the actuaries have said it would be positive in the long run,” . “It’s a lot of moving parts.”

Time to ask some questions - As mentioned two days ago, GOP reps face a tough dilemma between serving their constituents and hating the Affordable Care Act like it shot their dog. At the same time the pary as a whole needs the ACA to fail in every possible way, a lot of single Reps will have a hard time with re-election if people see them playing political games with the health and livelihood of individual constituents. I can think of several terrible Republicans at the Senate level, Jesse Helms and Rick Santorum being two, who stayed afloat not in small part due to a reputation for great constituent service. There are three ways that a GOP Rep can go with this. Some of them will talk tough to the press but do their job like a grownup when real constituents call with real problems to address. Some other faction, most I would guess, will punt either by not answering or passing the caller off to HHS. Most of all we need to keep an eye out for the fabricators, liars and true believers whose staff genuinely believe the pap in the morning blast fax from Glenn Beck. October is still some time off, so let’s start with questions that everyone should know. Say that I have a pre-existing condition and cannot get an individual market plan for any price. Can I buy one in October? How would I do that? The correct answers are yes and it depends on the state; in most cases we do not know the full details yet. If you feel like testing their bad faith, tell them you heard there will be death panels. I will not offer a script because you should really use your own words for this. Staffers’ interest often ratchets way down when they start hearing the same wording twice. Try being polite but a little slow and ask for clarification when possible.

The regressive domestic complexity tax - Take medical bills. I have three kids, so there’s always a few appointments pending, but it’s absolutely amazing to me how often I’m getting charged for appointments unfairly. I recently got charged for a physical for my 10-year-old son, even though I know that physicals are free thanks to ObamaCare.  To I call up my insurance company and complain, spend 15 minutes on the phone waiting, then it turns out he isn’t allowed to have more than one physical in a 12-month period which is why it was charged to me. But wait, he had one last April and one this April, what gives? Turns out last April it was on the 14th and this April it was on the 8th. So less than one year. But surely, I object, you can’t ask for people to always be exactly 12 months apart or more! It turns out that, yes, they have a 30-day grace period for this exact reason, but for some reason it’s not automatic – it requires a person to call and complain to the insurance company to get their son’s physical covered. Do you see what I mean? This is not actually a coincidence – insurance companies make big money from having non-automatic grace periods, because many people don’t have the time, the patience, and the pushiness to make them do it right, and that’s free money for insurance companies.

Troubled Cities See Exchanges as Way to Unload Retirees -  Detroit is facing bankruptcy, and Chicago wants to cut retiree benefit costs. Both are turning to President Barack Obama’s health-care overhaul in what could become a road map for cash-strapped cities. The municipalities plan to end or limit health coverage for retirees under 65 who don’t yet qualify for Medicare, with the expectation they can get insurance in the exchanges opening Jan. 1 under President Barack Obama’s health-care law. With U.S. cities facing rising benefit costs and billions of dollars in unfunded liabilities, more municipalities will consider moving retirees off city rolls and into the exchanges, even if they continue to subsidize the coverage, said Neil Bomberg, a program director at the National League of Cities in Washington. “Cities and towns will be looking at ways to reduce those costs, and the exchanges may provide a very viable mechanism,” Bomberg said in an interview. Coverage for about 7 million people expected to enroll in health exchanges next year will cost U.S. taxpayers about $26 billion, the Congressional Budget Office says. That figure nearly doubles a year later, and exchange coverage is expected to total $1.1 trillion through 2023. A spokeswoman for the agency, Deborah Kilroe, said in an e-mail that it has no estimate of how many people in exchanges will be retirees.

Health Care Thoughts: Obamacare Meets Immigration Reform - With the passage of the Senate version of immigration reform we have some details to ponder. Illegals who become “provisional” for up to 13 years will not qualify for some Obamacare credits and subsidies. Workers who receive “unaffordable” insurance coverage from employers will be available for Obamacare subsidies, and the employer penalized up to $3,000. Provisional aliens would not be qualified for the subsidies, which could give provisionals up to a $3,000 cost advantage over U. S. workers. Whether this was intended or just thoughtless drafting remains to be seen. And of course, the Senate bill is just a starting point in a long hot political debate, so this may become nothing at all.

White House delays a key part of Obamacare - The White House on Tuesday delayed for one year a requirement under the Affordable Care Act that businesses provide health insurance to employees, a fresh setback for President Obama’s landmark health-care overhaul as it enters a critical phase. The provision, commonly known as the employer mandate, calls for businesses with 50 or more workers to provide affordable quality insurance to workers or pay a $2,000 fine per employee. Business groups had objected to the provision, which now will take effect in January 2015. The decision comes as Obama is working to secure his domestic legacy, urging Congress to pass an overhaul of immigration laws and using his executive powers to combat climate change. With the prospects for immigration reform uncertain in the House — and new environmental regulations still more than a year way — implementation of the 2010 health-care law has singular importance.  The White House portrayed the delay as a common-sense step that would reduce financial and regulatory burdens on small businesses. Republicans, who are planning to target “Obamacare” in the 2014 midterm campaigns, said the delay is an acknowledgment that the health-care overhaul is flawed.

White House Delays Key Element of Health Care Law : -- President Barack Obama's health care law, hailed as his most significant legislative achievement, seems to be losing much of its sweep. On Tuesday, the administration unexpectedly announced a one-year delay, until after the 2014 elections, in a central requirement of the law that medium and large companies provide coverage for their workers or face fines. Separately, opposition in the states from Republican governors and legislators has steadily undermined a Medicaid expansion that had been expected to provide coverage to some 15 million low-income people. Tuesday's move - which caught administration allies and adversaries by surprise - sacrificed timely implementation of Obama's signature legislation but might help Democrats politically by blunting an election-year line of attack Republicans were planning to use. The employer requirements are among the most complex parts of the health care law, designed to expand coverage for uninsured Americans.

Putting Off the Employer Mandate - The Obama administration announced Tuesday afternoon that it was going to delay an important part of the Affordable Care Act for one year.  The rule requiring employers with at least 50 full-time workers to provide them with coverage or pay a penalty (also known as the employer mandate) will now be enforced starting in 2015, not 2014 as originally planned. Here’s a very brief look at why, what, and what it means. A Treasury official published a blog post explaining that officials decided to give businesses more time to comply with the reporting requirements.  As The Times reported: “We have heard concerns about the complexity of the requirements and the need for more time to implement them effectively,” Mark J. Mazur wrote on the department’s Web site. “We recognize that the vast majority of businesses that will need to do this reporting already provide health insurance to their workers, and we want to make sure it is easy for others to do so.” Though the mandate will ultimately affect only a few employers, it is actually an important piece of the law’s architecture.  Without it, employers who currently provide coverage to their workers could drop the coverage and send their workers over to the state health care exchanges.  And since some of those employees would be eligible for subsidies to help defray the cost, the employer would be shifting what is now a private cost over to the government.

Will Delaying the Employer Mandate Deny Health Coverage to Workers? - The surprise announcement from the Obama administration that it will delay for one year penalizing employers that do not offer health coverage to their workers is the latest capitulation by the White House to big businesses that want to shirk their responsibility to help pay for health insurance. But the decision leaves huge unanswered questions about whether health coverage for uninsured workers will also be denied. Yesterday, the Treasury issued a notice delaying for one year, until 2015, the requirement that employers of more than 50 full-time employees (3 percent of all employers) report on whether they offer health coverage to their employees. The Affordable Care Act requires that these employers pay penalties when they they do not offer qualified coverage or when their workers access coverage through the new health care exchanges. The delay comes even though the Treasury has had more than three years to prepare to implement the law and an entire new industry has emerged advising employers on how to comply. The notice, full of sympathy for employers who have to comply with the reporting requirements, totally ignores the implications for employees. What will happen to workers for companies that do not offer health insurance or that offer coverage that does not meet the law’s minimum requirements? These are huge questions, and it is remarkable that the Obama administration would publish the Treasury Department notice without addressing them.

Obamacare’s employer mandate shouldn’t be delayed. It should be repealed. -Delaying Obamacare’s employer mandate is the right thing to do. Frankly, eliminating it — or at least utterly overhauling it — is probably the right thing to do. But the administration executing a regulatory end-run around Congress is not the right way to do it.

  • - By imposing a tax on employers for hiring people from low- and moderate-income families who would qualify for subsidies in the new health insurance exchanges, it would discourage firms from hiring such individuals and would favor the hiring — for the same jobs — of people who don’t qualify for subsidies (primarily people from families at higher income levels).
  • - It would provide an incentive for employers to convert full-time workers (i.e., workers employed at least 30 hours per week) to part-time workers.
  • - It would place significant new administrative burdens and costs on employers.
  • - By tying the penalties to how many full-time workers an employer has, and how many of them qualify for subsidies, the mandate gives employers a reason to have fewer full-time workers, and fewer low-income workers..

If You Haven’t Figured Out How to Make the Employer Mandate Work Yet, How Will Another Year Help? - The most concerning aspect about the Obama administration’s decision to delay the employer mandate is the justification for the delay. The Treasury Department is basically claiming that the reporting system they originally created to try to make the poorly designed mandate work is incredibly burdensome. From the Treasury:The Administration is announcing that it will provide an additional year before the ACA mandatory employer and insurer reporting requirements begin.  This is designed to meet two goals.  First, it will allow us to consider ways to simplify the new reporting requirements consistent with the law.  Second, it will provide time to adapt health coverage and reporting systems while employers are moving toward making health coverage affordable and accessible for their employees.  Within the next week, we will publish formal guidance describing this transition.  Just like the Administration’s effort to turn the initial 21-page application for health insurance into a three-page application, we are working hard to adapt and to be flexible about reporting requirements as we implement the law.This does beg the question: if you haven’t figured out how to make it work yet, how will another year will help? It is not like the implementation process was rushed. It was one of the longest ones for a piece of legislation ever. The administration had four years to work out the kinks but still haven’t.

ObamaCare Clusterfuck: How is another year going to fix the employer mandate? -- Jon Walker asks a good question: The Treasury Department is basically claiming that the reporting system they originally created to try to make the poorly designed mandate work is incredibly burdensome. This does beg the question: If you haven’t figured out how to make it work yet, how will another year will help? The employer mandate is necessary to make the system work as advertised. The administration should have been heavily focused on getting it ready. It should have been a top priority.  But maybe the employer mandate was a top priority, but as they say in the Navy: You can't buff a turd.* From where I sit, kicking the employer mandate can down the road looks like what happens when a project manager sees unacceptable risk and triages functionality; that is, they trade meeting some requirements for the ability to get something -- anything?** -- out the door. The Times concurs: The delay is viewed [by whom?] as an unspoken acknowledgment by federal officials of the size of the task ahead, according to policy experts and benefits consultants. By putting off the employer requirements, officials are in a position to concentrate on making sure the state exchanges work.

Health Law Delay Puts Exchanges in Spotlight - Employees who now have to wait another year to get health coverage through their employer will have little recourse but to buy their own insurance at the newly created state exchanges. The Obama administration’s decision, announced on Tuesday, to delay for a year a requirement that larger employers provide insurance or pay a penalty has made the operation of the state exchanges — where individuals can shop for insurance starting Oct. 1 — more critical to the success of the new health care law. The delay is viewed as an unspoken acknowledgment by federal officials of the size of the task ahead, according to policy experts and benefits consultants. By putting off the employer requirements, officials are in a position to concentrate on making sure the state exchanges work. “The real focus is now getting the individual exchanges and premium tax credits up and running,” said Timothy S. Jost, a law professor at Washington and Lee University who closely follows the new law, known as the Affordable Care Act. In addition to the creation of the exchanges, the law’s broad market reforms of the insurance industry and the expansion of Medicaid will continue, Mr. Jost said, adding, “I just don’t see this as a game changer.” Also still in effect is the requirement that people without insurance buy it by 2014 or face fines. Subsidies will be available for people who meet income requirements. 

‘I wish we had one more year:’ States are struggling to launch Obamacare on time: — Facing tight deadlines and daunting workloads, states across the country are scaling back ambitions for implementing the Affordable Care Act. At a monthly board meeting of Connecticut’s health insurance exchange, members of the standing-room-only crowd got a reminder that they, too, were behind schedule. The insurance marketplace they were working on nights and weekends won’t be completely ready on time. “It is highly complex, it’s unprecedented and it’s not going to be smooth,” .That’s why Connecticut — like other states across the country — has lowered the bar, doing what it can in the time it has left before the health-care law’s major programs are launched Oct. 1. Although the states are promising to provide new marketplaces for individuals to compare and buy health insurance plans, the Web portals will be a bare-bones version of what was initially envisioned. And then there are the federal setbacks. The Obama administration has put off significant aspects of the health-care overhaul as it races to finish provisions that will give Americans more insurance options and provide many with financial assistance to buy coverage. On Tuesday, the White House announced a decision to delay the “employer mandate,” a requirement that employers with 50 or more workers provide coverage. 

Confusing the Public on the Affordable Care Act - In my previous post I explained that general statements on the probable impact of the Affordable Care Act on the pocketbooks of Americans often do not make sense and can be quite misleading. My point can be illustrated with a recent news release from the Ohio Department of Insurance, “Health Insurance Costs to Increase Significantly Under Affordable Care Act.” The department states that it “released the information today to help health insurance consumers continue to prepare for the expected price increases.” It offers a one-sided perspective. In its announcement, the department reports: insurers expect the cost to cover health care expenses for consumers will significantly increase. .. the department estimates this increase is an average of 88 percent. … A total of 14 companies filed proposed rates for 214 different plans to the department. Projected costs from the companies for providing coverage for the required essential health benefits ranged from $282.51 to $577.40 for individual health insurance plans. Presumably these numbers refer to claims cost and not premiums. The release is silent on whether the reported average of $420 of this wide range of claims costs are those for a given benefit package or an average over quite different benefit packages. After all, how informative would it be to say that the average cost for a group of cars is $110,422, when that includes Chevrolets, Jeeps, BMWs and Ferraris?

The GOP's Endless War on Obamacare, and the White House Delay - Robert Reich - The official reason given by the Administration for delaying, by one year, the Affordable Care Act’s mandate that employers with more than 50 full-time workers provide insurance coverage or face fines, is that employers need more time to implement it. The unofficial reason has more to do with the Republicans’ incessant efforts to bulldoze the law. Soon after the GOP lost its fight against Obamacare in Congress, it began warring against the new legislation in the courts, rounding up and backstopping litigants all the way up to the Supreme Court. Meanwhile, House Republicans have refused to appropriate enough funds to implement the Act, and have held a continuing series of votes to repeal it. Republican-led states have also done what they can to undermine Obamacare, refusing to set up their own health exchanges, and turning down federal money to expand Medicaid. The GOP’s gleeful reaction to the announced delay confirms Republicans will make repeal a campaign issue in the 2014 midterm elections, which probably contributed to the White House decision to postpone the employer mandate until after the midterms. “The fact remains that Obamacare needs to be repealed,” said Senate Republican leader Mitch McConnell, on hearing news of the delay. Technically, postponement won’t affect other major provisions of the law — although it may be difficult to subsidize workers who don’t get employer-based insurance if employers don’t report on the coverage they provide. But it’s a bad omen. 

Hospitals Threaten Obamacare Savings by Exiting Program - Almost a third of 32 hospitals and health systems involved in an experiment aimed at changing the way medical providers are paid may exit the program, a potential threat to the Affordable Care Act’s ambitious cost-saving goals.  Medicare’s “Pioneer” program is designed to save money by more efficiently managing care for patients with chronic diseases, such as diabetes and dementia. The providers agreed to a three-year plan to forgo traditional fee-for-service payments, where hospitals charge for every procedure, and instead get a fixed monthly stipend for individual patients.  Begun in January 2012, Pioneer is one of several programs involving 252 providers created under the law to experiment with new payment models. Nine Pioneer members have told the U.S. they may exit, said Brian Cook, a Centers for Medicare and Medicaid Services spokesman. At least four may join other accountable-care programs that carry less financial risk, he said.  Depending on the number of patients involved, “it really shows a critical cost-containment approach in the Affordable Care Act is running into real problems,”

The PPACA Sky is Falling . . . The White House Administration has decided to give companies with >50 employees a one year extension in order to prepare and comply with the PPACA mandate. Given the amount of resistance the PPACA has received from the states in preparing for it and the House of Representatives, this delay should come as no surprise at all. While everyone has rushed into the fray claiming it is proof the PPACA is failing, the delay impacts a fraction of the employers with >50 employees. 94 – 96% of the ~200,000 employers who fall into this qualification already offer comprehensive healthcare insurance. The delay was to allow the 4 to 6% of the employers (8,000 to 12,000 employers) time to decide what they will offer Former Ezekiel Emanual had this to say as reported by Bloomberg Health-Law Employer Mandate Delayed by U.S. Until 2015: ‘I actually don’t think this is that big a deal,’ he said. ‘The provision only applies to employers who have 50 or more employees’, Emanuel said. He estimated that there are 200,000 total employers in the U.S. impacted and that “94 percent already offer health insurance” to employees. ‘We need to look for 2020 rather than moment to moment for changes in the system,’ Emanuel said.

Job Creation and the Affordable Care Act Have Little to Do with Each Other - I’m hearing a lot of talk these days about how the Affordable Care Act is going to hurt job growth.  Some of it is from news stories out today about the one-year delay in the employer mandate.  They reminded me of a debate a few weeks ago on CNBCs Squawk Box, where I was mixing it up with some usually level-headed pals (Zandi, Liesman) who I thought were giving far too much weight to ACA’s implementation as a factor weighing down job creation in the monthly employment reports.  Then today I read in a data note from evaluating monthly ADP jobs report that even though the ACA’s employer mandate was just delayed, the law is “…likely to still stifle hiring at firms with around 50 employees…” This essay (and sorry–it’s longer than usual) evaluates claims like these based on the expected interactions between the law and the job market and some evidence that I’ve pieced together from various sources that bears on the question of the ACAs impact on jobs.  While it’s true that there are incentives in the bill that could negatively impact job creation:

ObamaCare’s Relentless Creation of Second-Class Citizens (3) - As ObamaCare inches painfully closer to its October 1 launch date, we’re getting more and more detail on how the exchanges (or “marketplaces”) will actually work. By design, ObamaCare doesn’t treat health care as a right, and does not give all citizens equal access to health insurance, let alone to health care. By design, ObamaCare preserves private health insurance as a rental extraction mechanism, along with its complex and bug-prone system of eligibility determination by past (and projected) income, age, existing insurance coverage, jurisdiction, family structure, and market segment. I’ve heard it said in software engineering that complexity is the enemy of quality and, I would speculate, the same goes for social engineering too. In any system as baroque and Kafaesque as ObamaCare, some citizens will get lucky, and go to HappyVille; others, unlucky, will go to Pain City. The lucky are first-class citizens; and the unlucky, second class. In two earlier posts, I gave examples of the whimsical and arbitrary distinctions that ObamaCare makes between citizens who should be treated equally; in this post, I’d like to give two more. First, ObamaCare will use consumer reporting agency data to verify your identity during the eligibility determination process.* Reuters explains, today:  Is this person who she says she is? To check that, credit bureau Experian will check the answers against its voluminous external databases, which include information from utility companies and banks on people’s spending and other history, and generate questions. The customer will be asked which of several addresses he previously lived at, for example, whether his car has one of several proffered license plate numbers, and what color his old Volvo was.  And never mind that says this:You’ll provide some basic information to get started, like your name, address, and email address….

Digital Health Record Risks Emerge as Deaths Blamed on Systems - Electronic health records are supposed to improve medical care by providing physicians quick and easy access to a patient’s history, prescriptions, lab results and other vital data. While the new computerized systems have decreased some kinds of errors, such as those caused by doctors’ illegible prescriptions, the shift away from paper has also created new problems, with sometimes dire consequences. Dangerous doses of drugs have been given because of confusing drop-down menus; patients have undergone unnecessary surgeries because their electronic records displayed incorrect information; and computer-network delays in sending medical images have resulted in serious injury or death, according to a study published in 2011 based on reports submitted to the U.S. Food and Drug Administration. According to a study published in December by the Pennsylvania Patient Safety Authority, the number of reports about medical errors associated with electronic records is growing. Of 3,099 incidents reported over an eight-year period, 1,142 were filed in 2011, more than double the number in 2010. 

Most U.S. Health Spending Is Exploding — but Not for Mental Health -- As I wrote in a magazine column this week, mental illness costs the country a lot of money, primarily in indirect costs like lost worker productivity and increased use of the social safety net. That is one argument for why it might be cost-effective to increase national spending on the direct costs of treatment (like therapy, drugs, etc.). And there does seem to be some room for increasing spending on mental health care; so far, anyway, the United States has not had the same problem with out-of-control mental health treatment costs that has been seen with other kinds of medical spending. Mental health spending, both public and private, was about $150 billion in 2009, more than double its level in inflation-adjusted terms in 1986, according to a recent article in Health Affairs. But the overall economy also about doubled during that time. As a result, direct mental health spending has remained roughly 1 percent of the economy since 1986, while total health spending climbed from about 10 percent of gross domestic product in 1986 to nearly 17 percent in 2009.These numbers might seem particularly surprising given greater awareness of mental health care and higher take-up rates for it. Here is a chart, from the National Institute of Mental Health, showing the number of Americans who had any expenses associated with any of the five most costly medical conditions in 1996 versus 2006:

The 50 Fattest Nations - On the day after celebrating its independence and with likely half the nation suffering from over-consumption, we thought it appropriate to 'celebrate' another #winning rank by the US. At an average of 181.27lbs (gender-weighted!), Bloomberg finds that the US is the 'heaviest' nation on earth.

Brain sets prices with emotional value - Researchers at Duke University who study how the brain values things -- a field called neuroeconomics -- have found that your feelings about something and the value you put on it are calculated similarly in a specific area of the brain.  The region is small area right between the eyes at the front of the brain. It's called the ventromedial prefrontal cortex, or vmPFC for short. Scott Huettel, director of Duke's Center for Interdisciplinary Decision Science, said scientists studying emotion and neuroeconomics had independently singled out this area of the brain in their research but neither group recognized that the other's research was focused on it too. Now, after a series of experiments in which subjects were asked to modify how they felt about something either positively or negatively, the Duke group is arguing that emotional and economic calculations are more closely related than brain scientists had realized. The study appears July 3 in the Journal of Neuroscience.

The Middle East Plague Goes Global - When the Black Death exploded in Arabia in the 14th century, killing an estimated third of the population, it spread across the Islamic world via infected religious pilgrims. Today, the Middle East is threatened with a new plague, one eponymously if not ominously named the Middle East respiratory syndrome (MERS-CoV, or MERS for short). This novel coronavirus was discovered in Jordan in March 2012, and as of June 26, there have been 77 laboratory-confirmed infections, 62 of which have been in Saudi Arabia; 34 of these Saudi patients have died.  Although the numbers -- so far -- are small, the disease is raising anxiety throughout the region. But officials in Saudi Arabia are particularly concerned.  This fall, millions of devout Muslims will descend upon Mecca, Medina, and Saudi Arabia's holy sites in one of the largest annual migrations in human history. In 2012, approximately 6 million pilgrims came through Saudi Arabia to perform the rituals associated with umrah, and this number is predicted to rise in 2013. Umrah literally means "to visit a populated place," and it's the very proximity that has health officials so worried. In Mecca alone, millions of pilgrims will fulfill the religious obligation of circling the Kaaba. And having a large group of people together in a single, fairly confined space threatens to turn the holiest site in Islam into a massive petri dish.

Yes, Monsanto Actually DID Buy the BLACKWATER Mercenary Group! - A report by Jeremy Scahill in The Nation revealed that the largest mercenary army in the world, Blackwater (later called Xe Services and more recently “Academi“) clandestine intelligence services was sold to the multinational Monsanto. Blackwater was renamed in 2009 after becoming famous in the world with numerous reports of abuses in Iraq, including massacres of civilians. It remains the largest private contractor of the U.S. Department of State “security services,” that practices state terrorism by giving the government the opportunity to deny it. Many military and former CIA officers work for Blackwater or related companies created to divert attention from their bad reputation and make more profit selling their nefarious services-ranging from information and intelligence to infiltration, political lobbying and paramilitary training – for other governments, banks and multinational corporations.

Eroding soils darkening our future - Walter Lowdermilk, a senior official in the Soil Conservation Service of the U.S. Department of Agriculture, traveled abroad to look at lands that had been cultivated for thousands of years, seeking to learn how these older civilizations had coped with soil erosion. He describes a site in northern Syria, near Aleppo, where ancient buildings are still standing in stark isolated relief, but they are on bare rock.  Lowdermilk noted, “Here erosion had done its worst. If the soils had remained, even though the cities were destroyed and the populations dispersed, the area might be repeopled again and the cities rebuilt. But now that the soils are gone, all is gone.” The thin layer of topsoil that covers the earth’s land surface was formed over long stretches of geological time as new soil formation exceeded the natural rate of erosion. Sometime within the last century, soil erosion began to exceed new soil formation. Now, nearly a third of the world’s cropland is losing topsoil faster than new soil is forming, reducing the land’s inherent fertility. Soil that was formed on a geological time scale is being lost on a human time scale. Scarcely six inches thick, this thin film of soil is the foundation of civilization. Geomorphologist David Montgomery, in Dirt: The Erosion of Civilizations, describes soil as “the skin of the earth — the frontier between geology and biology.”

Allan Savory: “Agriculture is More Destructive than Coal Mining”  - Savory began his talk by explaining that he’s been addressing the subject of desertification for fifty years.  He rattled off soil erosion numbers. . . “our planet is losing 80-100 billion tons of soil per year,” calling that the most frightening statistic in the world.” He named some of the factors related to this soil loss, which included the burning of grasslands around the world, the loss of forests, the loss of biodiversity, and the silting of continental shelves. Then, he explained to us that because healthy soils are an important natural reservoir of water, today we have a big problem of decreased effectiveness of rainfall due to degraded and eroded soil. This is caused by agricultural practices, not by climate change. Because healthy soils and the microbes living in them sequester CO2, large soil losses have led to a reduced capacity to mitigate climate change. So, agriculture is more destructive than coal mining or anything else going on in the world today. [1]

All of New Mexico officially in a drought - The extreme drought keeps parching New Mexico and spreading. The entire state was in a drought last week, with 93.5 percent being in extreme or exceptional drought, according to the New Mexico Office of the State Engineer. That was an increase from the week of June 17 when 90.2 percent of the state was in extreme or exceptional drought, the OSI said. Forty-five percent of the state is experiencing an exceptional drought, the OSI said. A year ago, none of the state was in exceptional drought, and 25.2 percent was in extreme drought. The drought has brought an early end to the irrigation season in the middle Rio Grande valley. The Middle Rio Grande Conservancy District said that it will run out of stored water on July 1.

U.S. drought expands for 3rd straight week-US drought monitor - Drought conditions expanded in the contiguous United States over the past week given persistent heat and dryness in the southern Plains, while the eastern half of the country is out of drought amid steady rains, according to a weekly drought report. The U.S. Drought Monitor, issued by state and federal experts on Wednesday, said drought areas in the "moderate to exceptional" categories grew to 44.06 percent, from 43.84 a week ago. "This is the third straight week of the drought expanding," Matthew Rosencrans, with the U.S. Climate Prediction Center and author of the drought monitor, told Reuters. "The biggest expansion was in northeast Texas but the drought also expanded into southeast Texas and Oklahoma." The southern Plains, big wheat and cattle country, has struggled with drought for the past several years amid limited rains and intense heat. But overall conditions for the United States, the world's top food exporter, are much improved from the height of drought last autumn when two-thirds of the country was in drought, the worse since the 1930s. Of the big U.S. crop states, Nebraska - the fourth largest corn state and a leading producer of cattle, sorghum and wheat - is the driest with 88.41 percent in moderate to exceptional drought. That compares to 88.36 percent a week ago and 64.63 percent a year ago.

Experts See New Normal as a Hotter, Drier West Faces More Huge Fires - One of the deadliest wildfires in a generation vastly expanded Monday to cover more than 8,000 acres, sweeping up sharp slopes through dry scrub and gnarled piñon pines a day after fickle winds and flames killed 19 firefighters.Scientists said those blazes and 15 others that remained uncontained from New Mexico to California and Idaho were part of the new normal — an increasingly hot and dry West, resulting in more catastrophic fires. Since 1970, Arizona has warmed at a rate 0.72 degrees per decade, the fastest among the 50 states, based on an analysis of temperature data by Climate Central, an independent organization that researches and reports on climate. Even as the temperatures have leveled off in many places around the world in the past decade, the Southwest has continued to get hotter. “The decade of 2001 to 2010 in Arizona was the hottest in both spring and the summer,” said Gregg Garfin, a professor of climate, natural resources and policy at the University of Arizona and the executive editor of a study examining the impact of climate change on the Southwest. Warmer winters mean less snowfall. More of the winter precipitation falls as rain, which quickly flows away in streams instead of seeping deep underground. The soils then dry out earlier and more quickly in May and June. “It’s the most arid time of year,” Dr. Garfin said. “It’s windy as well.”

Collecting Rainwater Now Illegal in Many States as Big Government Claims Ownership Over Our Water | World Truth.TV: Many of the freedoms we enjoy here in the U.S. are quickly eroding as the nation transforms from the land of the free into the land of the enslaved, but what I'm about to share with you takes the assault on our freedoms to a whole new level. You may not be aware of this, but many Western states, including Utah, Washington and Colorado, have long outlawed individuals from collecting rainwater on their own properties because, according to officials, that rain belongs to someone else. As bizarre as it sounds, laws restricting property owners from "diverting" water that falls on their own homes and land have been on the books for quite some time in many Western states. Only recently, as droughts and renewed interest in water conservation methods have become more common, have individuals and business owners started butting heads with law enforcement over the practice of collecting rainwater for personal use.

Farmers Look to New Ways of Irrigating in a Drought - Mr. Grall’s cornfield is part of a closely watched demonstration project aimed at showing farmers how to use less irrigation water on their crops. It was put together by a groundwater authority in the Panhandle that strictly limits the amount of Ogallala water each farmer can pump. The project reflects the harsh reality that has taken hold across the drought-stricken state: farmers, who account for more than half of the water used in Texas, must learn to do more with less, just like cities and industrial plants. “The Ogallala is a mined aquifer,”. “That means we’re pumping out more than what is being recharged. And agriculture is a big water user. So we have a big responsibility to conserve.” The North Plains district began its demonstration project in 2010, at a cost of about $300,000 per year. Financing comes from the district as well as state and federal agencies. The idea was to have farmers grow corn, the most common crop in the district, with a little over half the water they would normally sprinkle on a field — while still remaining profitable.  The goal of the demonstration project is to use methods that can be applied immediately and are also cost-effective. One example: watering more efficiently using pivot sprinklers, rather than water-saving technologies like drip irrigation, which farmers say are too expensive.

Scientists Predicted A Decade Ago Arctic Ice Loss Would Worsen Western Droughts. Is That Happening Already? - Scientists predicted a decade ago that Arctic ice loss would bring on worse western droughts. Arctic ice loss has been much faster than the researchers — and indeed all climate modelers — expected (see “CryoSat-2 Confirms Sea Ice Volume Has Collapsed“). It just so happens that the western U.S. is in the grip of a brutal, record-breaking drought. Is this just an amazing coincidence — or were the scientists right and what would that mean for the future? I ask the authors. As the news release at the time explained, they “used powerful computers running a global climate model developed by the National Center for Atmospheric Research (NCAR) to simulate the effects of reduced Arctic sea ice.” And “their most striking finding was a significant reduction in rain and snowfall in the American West”:Where the sea ice is reduced, heat transfer from the ocean warms the atmosphere, resulting in a rising column of relatively warm air. The shift in storm tracks over North America was linked to the formation of these columns of warmer air over areas of reduced sea ice in the Greenland Sea and a few other locations, Sewall said.

Climate extremes are ‘unprecedented’ - The Earth experienced unprecedented recorded climate extremes during the decade 2001-2010, according to the World Meteorological Organisation. Its new report says more national temperature records were reported broken than in previous decades. There was an increase in deaths from heatwaves over that decade. This was particularly pronounced during the extreme summers in Europe in 2003 and in the Russian Federation during 2010. The WMO says smarter climate information will be needed as the climate continues to change. Its report, The Global Climate 2001-2010, A Decade of Climate Extremes, analysed global and regional trends, as well as extreme events such as Hurricane Katrina, floods in Pakistan and droughts in the Amazon, Australia and East Africa. The decade was the warmest for both hemispheres and for both land and ocean surface temperatures. The record warmth was accompanied by a rapid decline in Arctic sea ice, and accelerating loss of mass from the Greenland and Antarctic ice sheets and from glaciers. Global mean sea levels rose about 3mm per year - about double the observed 20th century trend of 1.6mm per year. Global sea level averaged over the decade was about 20cm higher than in 1880.  

2001-2010, A Decade of Climate Extremes - The world experienced unprecedented high-impact climate extremes during the 2001-2010 decade, which was the warmest since the start of modern measurements in 1850 and continued an extended period of pronounced global warming. More national temperature records were reported broken than in any previous decade, according to a new report by the World Meteorological Organization (WMO). The report, The Global Climate 2001-2010, A Decade of Climate Extremes, analysed global and regional temperatures and precipitation, as well as extreme events such as the heat waves in Europe and Russia, Hurricane Katrina in the United States of America, Tropical Cyclone Nargis in Myanmar, droughts in the Amazon Basin, Australia and East Africa and floods in Pakistan. The decade was the warmest for both hemispheres and for both land and ocean surface temperatures. The record warmth was accompanied by a rapid decline in Arctic sea ice, and accelerating loss of net mass from the Greenland and Antarctic ice sheets and from the world’s glaciers. As a result of this widespread melting and the thermal expansion of sea water, global mean sea levels rose about 3 millimetres (mm) per year, about double the observed 20th century trend of 1.6 mm per year. Global sea level averaged over the decade was about 20 cm higher than that of 1880, according to the report.

MAP: America's 21 Most Vulnerable Rivers - If  you're one of 142 million Americans heading to the outdoors this year, there's a good chance you'll run into one of at least 250,000 rivers in the country. Much of the nation's 3.5 million miles of rivers and streams provide drinking water, electric power, and critical habitat for fish and wildlife throughout. If you were to connect all the rivers in the United States into one long cord, it would wrap around the entire country 175 times. But as a recent assessment by the Environmental Protection Agency points out, we've done a pretty bad job of preserving the quality of these waters: In March, the EPA estimated that more than half of the nation's waterways are in "poor condition for aquatic life." Back in the 1960s, after recognizing the toll that decades of damming, developing, and diverting had taken on America's rivers, Congress passed the Wild and Scenic Rivers Act in 1968 to preserve rivers with "outstanding natural, cultural, and recreational values in a free-flowing condition." Unfortunately, only a sliver of US rivers—0.25 percent—have earned federal protection since the act passed. In the interactive map below, we highlight 21 rivers that, based on the conservation group American Rivers' reports in 2012 and 2013, are under the most duress (or soon will be) from extended droughts, flooding, agriculture, or severe pollution from nearby industrial activity. Find out which rivers are endangered by hovering over them (in orange). Jump down to the list below to read about what's threatening the rivers. For fun, we also mapped every river and stream recorded by the National Oceanic and Atmospheric Administration. It was too beautiful not to.

New Orleans’ Achilles Heel: a Storm Surge on the Mississippi River? - The Louisiana coastline has experienced 59 hurricane strikes since 1851 (including Isaac), but only one of these hurricanes brought a storm surge to New Orleans capable of overwhelming the 2013 levee system--if it behaves as designed. That storm was the deadliest hurricane in Louisiana history, the 1893 Chenier Caminanda hurricane, which hit the coast south of New Orleans as a Category 4 storm. Over 2,000 people died in the storm, mostly due to storm surge.But the New Orleans levee system has an Achilles' heel, one that makes it vulnerable to a mere Category 1 hurricane storm surge. That weakness is the levees that protect the city from the Mississippi River. Although these levees lie more than 100 miles upriver from the Gulf of Mexico, hurricane storm surges from five storms over the past 50 years--Betsy (1965), Katrina (2005), Georges (1998), Isaac (2012), and Gustav (2008)--have pushed storms surges of seven feet or higher upriver to New Orleans. These large surges can occur because strong sustained easterly winds push water into shallow Breton Sound, overtopping the river's east bank south of Pointe ?| la Hache, Louisiana. The surge then penetrates into the Mississippi River, and is confined by levees on the west bank. The main channel's width and depth allow the surge to propagate rapidly and efficiently upriver. Normally, these storm surges moving up the Mississippi River are not a concern for New Orleans, since hurricanes typically arrive in August, September, and October, when the river is at its lowest flow levels, more than 15' below the tops of the levees. But if any of these five hurricanes had occurred when the Mississippi River was in flood--when the river is just 3' below the tops of the levees in New Orleans--the storm surge coming up the river would have easily pushed water over the tops of the levees, filling the below-sea level bowl that much of the city lies in.

Why the City of Miami Is Doomed to Drown - When the water receded after Hurricane Milo of 2030, there was a foot of sand covering the famous bow-tie floor in the lobby of the Fontaine­bleau hotel in Miami Beach. A dead manatee floated in the pool where Elvis had once swum. Most of the damage occurred not from the hurricane's 175-mph winds, but from the 24-foot storm surge that overwhelmed the low-lying city. In South Beach, the old art-deco­ buildings were swept off their foundations. Mansions on Star Island were flooded up to their cut-glass doorknobs. A 17-mile stretch of Highway A1A that ran along the famous beaches up to Fort Lauderdale disappeared into the Atlantic. The storm knocked out the wastewater-treatment plant on Virginia Key, forcing the city to dump hundreds of millions of gallons of raw sewage into Biscayne Bay. Tampons and condoms littered the beaches, and the stench of human excrement stoked fears of cholera. More than 800 people died, many of them swept away by the surging waters that submerged much of Miami Beach and Fort Lauderdale; 13 people were killed in traffic accidents as they scrambled to escape the city after the news spread – falsely, it turned out – that one of the nuclear reactors at Turkey Point, an aging power plant 24 miles south of Miami, had been destroyed by the surge and sent a radioactive cloud over the city.

Officials in the Florida Keys stop debating sea level rise, start adjusting infrastructure - Hurricane storm surge can inundate the narrow, low-lying Florida Keys, but that is far from the only water worry for officials. A tidal gauge operating since before the Civil War has documented a sea level rise of 9 inches in the last century, and officials expect that to double over the next 50 years. So when building a new Stock Island fire station, county authorities went ahead added a foot and a half over federal flood planning directives that the ground floor be built up 9 feet. Seasonal tidal flooding that was once a rare inconvenience is now so predictable that some businesses at the end of Key West’s famed Duval Street stock sandbags just inside their front doors, ready anytime.While New York City’s mayor was announcing a dramatic multibillion-dollar plan for flood walls and levees to hold back rising water levels there, sea walls like those that encase the Netherlands wouldn’t help much in the Keys, as a lack of coastal barriers isn’t the island chain’s only problem. “Our base is old coral reef, so it’s full of holes,” says Alison Higgins, the sustainability coordinator for the city of Key West. “You’ve got both the erosion and the fact that (water) just comes up naturally through the holes.”

New Study: Tax Subsidies Do Little To Reduce Greenhouse Gas Emissions - The other day, President Obama proposed a modest and largely aspirational plan to respond to climate change. Unlike some of his past efforts, it did not include new proposals for highly targeted tax subsidies aimed at reducing the use of carbon-based fuels by encouraging “green” energy.The tax breaks were missing in large part because Obama wanted a plan that would not require congressional approval (which he will not get). But a new congressionally mandated study by the National Academy of Sciences concludes that extending the sort of energy-related tax preferences that are already scattered throughout the Revenue Code would do little or nothing to reduce greenhouse gasses.The report’s conclusion is damning: Although the Code included $48 billion in energy-sector tax preferences in 2010-2011, their effects were essentially nil. “The combined effect of energy-related subsidies for renewable sources and fossil fuels is very small, probably less than 1 percent of U.S. emissions, and could be either positive or negative.” That’s not to say the tax code could not be a useful tool for reducing greenhouse gasses. For example, a broad-based carbon tax (or its cousin, a cap-and-trade system) could be powerful way to reduce emissions.  But while that idea is dear to the hearts of economists, lawmakers are terrified to even talk about it.

Ethanol trade undermines U.S. biofuels policy: – U.S. policy to boost the use of fuel from renewable sources is generating additional greenhouse gas emissions due to rising trade in ethanol between the United States and Brazil, rather than lowering emissions as intended, research by Thomson Reuters Foundation shows. Washington created the Renewable Fuel Standard (RFS) in 2005, requiring 10 percent of every gallon of gasoline to be derived from biofuels. An update to the RFS, which took effect in July 2010, stipulates that a proportion of the mandate must be met by fuels with lower greenhouse gas emissions than corn ethanol, which is home-grown and plentiful. This policy change created an incentive for U.S. companies to import sugarcane ethanol from Brazil, a major producer, as it produces fewer emissions. At the same time, more corn ethanol made in the United States is now being exported to Brazil, as U.S. demand has dropped. As a result, since the start of 2011, the United States and Brazil have shipped over 1 billion gallons of ethanol back and forth – more than 500 million gallons each way. The emissions generated by the shipping have worsened the carbon footprint of both fuels. Thomson Reuters Foundation found that this overseas trade has produced more than 312,000 tonnes of carbon dioxide (CO2) since the start of 2011, based on an industry method used to calculate greenhouse gas emissions from shipping. This equals a ratio of one tonne of CO2 emitted for every 10 tonnes of ethanol transported between the two countries.

Obama Climate Plan Seen by Environmentalists Adding Jobs - President Barack Obama’s plan to use regulations to curb carbon-dioxide emissions from power plants could result in the U.S. economy adding jobs -- not losing them -- as well as lower electricity rates, according to an analysis released by an environmental group that favors the rules. The Natural Resources Defense Council, which proposed a plan in December to curb greenhouse gases from power plants, said today that its analysis showed that Obama can make good on his pledge last week to curtail the emissions blamed for global warming without harming the U.S. economy. “To avoid the worst impacts of climate change, we must act now, but we must do so in a way that creates and maintains quality jobs for American workers,” David Foster, executive director of the BlueGreen Alliance, a group of unions and environmental groups, said in a statement accompanying the report. Obama made curtailing carbon-dioxide emissions from power plants the centerpiece of a plan he unveiled June 25 to address global warming. That plan, according to Republican lawmakers and representatives of coal producers, could end up undercutting the American economy by curtailing the use of low-cost coal and increasing electricity rates.

The one thing you need to know about the president's plan to address climate change - The one thing you need to know about President Obama's plan to address climate change is that the most it will accomplish is slowing very slightly the pace at which the world is currently hurtling toward catastrophic climate change. Having said this, his plan is nonetheless a brave and even historic move in a country whose political campaigns and public discourse have been utterly poisoned by the science-free propaganda of the fossil fuel industry. I would be more enthusiastic about the president's baby steps if the devastating droughts and floods and swiftly melting ice in the polar regions and mountain glaciers weren't telling us that drastic action is necessary right now. Nature doesn't really care about the timetables of politicians or about what is politically feasible. Nature doesn't negotiate, and it doesn't compromise. The laws of physics and chemistry cannot be repealed or altered by the Obama administration, the United States Congress or any other body. And, these physical laws are deaf to complaints about the negative economic consequences of addressing climate change--consequences that will be far worse if we do nothing about climate change.

Economists Have A One-Page Solution To Climate Change - Climate change seems like this complicated problem with a million pieces. But Henry Jacoby, an economist at MIT's business school, says there's really just one thing you need to do to solve the problem: Tax carbon emissions. "If you let the economists write the legislation," Jacoby says, "it could be quite simple." He says he could fit the whole bill on one page. Basically, Jacoby would tax fossil fuels in proportion to the amount of carbon they release. That would make coal, oil and natural gas more expensive. That's it; that's the whole plan. Jacoby's colleague John Reilly told me the price of gasoline might rise by 25 cents a gallon in the first year. Over time, that would increase. By 2050, Reilly figures the carbon tax would add about $1 to the price of every gallon. Across the economy, prices of energy-intensive goods and services would rise. This would encourage people and businesses to be more efficient. This is why economists love a carbon tax: One change to the tax code and the entire economy shifts to reduce carbon emissions. No complicated regulations. No rules for what kind of gas mileage cars have to get or what specific fraction of electricity has to come from wind or solar or renewables. That's by and large the way we do it now. Reilly says the current web of rules is a more complicated and more expensive way of getting the same outcome as a carbon tax. The current system "pretty much is one of the worst ways we could do it," he says.

Climate change poses grave threat to security, says UK envoy   - Climate change poses as grave a threat to the UK's security and economic resilience as terrorism and cyber-attacks, according to a senior military commander who was appointed as William Hague's climate envoy this year. In his first interview since taking up the post, Rear Admiral Neil Morisetti said climate change was "one of the greatest risks we face in the 21st century", particularly because it presented a global threat. "By virtue of our interdependencies around the world, it will affect all of us," he said. He argued that climate change was a potent threat multiplier at choke points in the global trade network, such as the Straits of Hormuz, through which much of the world's traded oil and gas is shipped. Morisetti left a 37-year naval career to become the foreign secretary's special representative for climate change, and represents the growing influence of hard-headed military thinking in the global warming debate. The link between climate change and global security risks is on the agenda of the UK's presidency of the G8, including a meeting to be chaired by Morissetti in July that will include assessment of hotspots where climate stress is driving migration.

Humans – the real threat to life on Earth - Earth is home to millions of species. Just one dominates it. Us. Our cleverness, our inventiveness and our activities have modified almost every part of our planet. In fact, we are having a profound impact on it. Indeed, our cleverness, our inventiveness and our activities are now the drivers of every global problem we face. And every one of these problems is accelerating as we continue to grow towards a global population of 10 billion. In fact, I believe we can rightly call the situation we're in right now an emergency – an unprecedented planetary emergency. Our emissions of CO2 modify our atmosphere. Our increasing water use had started to modify our hydrosphere. Rising atmospheric and sea-surface temperature had started to modify the cryosphere, most notably in the unexpected shrinking of the Arctic and Greenland ice sheets. Our increasing use of land, for agriculture, cities, roads, mining – as well as all the pollution we were creating – had started to modify our biosphere. Or, to put it another way: we had started to change our climate.There are now more than 7 billion of us on Earth. As our numbers continue to grow, we continue to increase our need for far more water, far more food, far more land, far more transport and far more energy. As a result, we are accelerating the rate at which we're changing our climate. In fact, our activities are not only completely interconnected with but now also interact with, the complex system we live on: Earth. It is important to understand how all this is connected.

How to curb climate change? - Paying Canadians to keep their oil sands in the ground to curb climate change might not sound like an obvious vote winner to a cash-strapped European government. But it makes more economic sense than people realise, according to Bård Harstad, a Norwegian academic who has just won a prestigious environmental economics prize for a provocative paper suggesting just such a move. Mr Harstad, 40, has been awarded the Erik Kempe prize, worth SKr100,000, by the European Association of Environmental and Resource Economists for a study called “Buy Coal! A Case for Supply-Side Environmental Policy”. The FT article is here, and you may recall an earlier MR suggestion that sealing or blowing up especially dirty fuel sources, in a Hotelling intertemporal resource extraction model, is more likely to be effective than many kinds of tax.

A New Report Says Less Carbon Pollution And More Manufacturing Can Go Hand-In-Hand - If you listened just to GOP talking points, you’d think efforts to cut carbon emissions and efforts to revitalize the United States’ manufacturing sector are locked in perpetual, mutually exclusive combat. But a new report by the Center for American Progress suggests this antagonism is not inevitable — we can, in fact, combat global warming and boost manufacturing at the same time, providing jobs to working class Americans.  First off, the paper notes several hopeful signs: U.S. labor productivity is going up, rising wages in other countries such as China are making foreign labor more expensive and thus less attractive to firms, and trends in business and supply chains are beginning to favor manufacturing sites that are in close physical proximity to research and development sites — and the U.S. still has plenty of the latter. Manufacturing also has a high multiplier effect; an economic term meaning every dollar spent on manufacturing encourages $1.35 in activity elsewhere in the economy. Similarly, every job created in manufacturing indirectly helps to create anywhere from 5 to 10 other jobs depending on the sector. But CAP also notes that not all manufacturing is created equal.. The manufacturing that meshes well with the needs of the American economy, CAP concludes, is clean energy manufacturing that is innovative or has a strong U.S. market, or both. To that end the report proposes three main moves Congress should take to strike that balance:

Obama Announces $7 Billion Plan to Improve Africa’s Energy Access: During his three country tour of Senegal, South Africa, and Tanzania, US President Obama has unveiled the Power Africa initiative, in which he has pledged $7 billion of investment over the next five years to increase energy production and access to energy across the sub-Saharan region. The goal is to double access to electricity across six countries that Obama’s administration has selected for their promotion of good governance; Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. Africa as a continent and economic region is growing rapidly, and US companies see great potential. The US Trade Representative claims that in 2011 the continent imported $21 billion of merchandise from the US, up 23% on the year before; whilst exports to the US were up 14% to $74 billion, with most of the being oil. Obama understands that Africa has huge potential to grow, but lacks the financial backing. His new initiative will focus on supplying Africa with the means to support itself, rather than just handing over money to stem the problems for a short while.

Scientists Plan to Use Subterranean Volcanic Rock Formations for Energy Storage - Many hopes rely on renewable energy development. It is thought that renewable energy sources hold the key to saving the planet by reducing reliance on greenhouse gas producing fossil fuels, and that continued energy production in the future may only be possible from renewable sources, once reserves of oil and natural gas have been exhausted. One of the biggest problems holding back renewable energy is the fact that the sources of the energy, predominantly the wind and the sun, are not constant. The sun disappears at night, or on cloudy days, meaning that solar panels produce very little power, and the wind constantly shifts depending on the local pressure systems, preventing wind turbines from generating a steady output. The best way of overcoming this problem is by developing grid-scale energy storage systems, that can store excess energy produced during times of high output, and then released as and when needed during times of low output. Scientists at the Pacific Northwest National Laboratory, and the Bonneville Power Administration, have been studying the possibility of using porous, volcanic rocks as a natural, large-scale battery system. They believe that pressured air could be pumped into the underground rocks, and then stored for months, being released as and when needed to convert into electricity.

Oil trains and terminals could be coming to the Northwest - Pacific Northwesterners worried by three planned new coal export hubs along their shorelines have something new to fear. Oil refiner Tesoro and terminal operator Savage are trying to secure permits to build the region’s biggest crude oil shipping terminal at the Port of Vancouver, along the Washington state side of the Columbia River. KPLU reports that the proposed terminal would receive crude by rail from oil fields in North Dakota and transfer it onto oceangoing tankers for delivery to refineries along the West Coast. And that’s just one of many plans to boost shipments of oil through the region to coastal ports. Environmentalists are not pleased, fearing oil spills among other problems. From The ColumbianThe Port of Vancouver got an earful Thursday from backers and opponents of a proposed crude-oil transfer terminal who packed the Board of Commissioners’ hearing room to trumpet their arguments. Executives with Tesoro Corp. and Savage Companies, who want to build the terminal to handle as much as 380,000 barrels of oil per day, told commissioners the project capitalizes on rising U.S. oil production, boosts the local economy and will operate in ways that minimize harm to the environment. “A lot of family-wage jobs will be created,”

The Coming Arctic Boom -- The ice was never supposed to melt this quickly. Although climate scientists have known for some time that global warming was shrinking the percentage of the Arctic Ocean that was frozen over, few predicted so fast a thaw. In 2007, the Intergovernmental Panel on Climate Change estimated that Arctic summers would become ice free beginning in 2070. Yet more recent satellite observations have moved that date to somewhere around 2035, and even more sophisticated simulations in 2012 moved the date up to 2020. Sure enough, by the end of last summer, the portion of the Arctic Ocean covered by ice had been reduced to its smallest size since record keeping began in 1979, shrinking by 350,000 square miles (an area equal to the size of Venezuela) since the previous summer. All told, in just the past three decades, Arctic sea ice has lost half its area and three quarters of its volume.  No matter what one thinks should be done about global warming, the fact is, it’s happening. And it’s not all bad. In the Arctic, it is turning what has traditionally been an impassible body of water ringed by remote wilderness into something dramatically different: an emerging epicenter of industry and trade akin to the Mediterranean Sea. The region’s melting ice and thawing frontier are yielding access to troves of natural resources, including nearly a quarter of the world’s estimated undiscovered oil and gas and massive deposits of valuable minerals. Since summertime Arctic sea routes save thousands of miles during a journey between the Pacific Ocean and the Atlantic Ocean, the Arctic also stands to become a central passageway for global maritime transportation, just as it already is for aviation.

Don't Get Carried Away By The Shale Oil Boom - North American crude oil has been in the news on several fronts this week, including some rapid price moves and an unexpected intervention by President Obama. Despite the publication of a new report projecting a much more rapid rate of tight oil supply growth than is generally expected and the entire Buffet-Railroad-Traffic-Pipeline meme relying on increasingly exponential dreams of the Bakken et al. saving us from our excess-energy-consuming selves, Barclays questions just how realistic these forecasts are, noting "it is perhaps wise to exercise a degree of caution over longer-term shale oil forecasts... partly because of the steepness of decline rates for shale oil wells, a lot of the very big productivity gains have already been made, and finally, skepticism around some of the more ambitious projections of US shale output due to the existence of numerous logistical barriers."

Pennsylvania » FRACKING ROYALTIES - As was stated in REVOLT OF THE DRILL LEASERS, royalty checks are not all they were fracked up to be.  Responding to complaints of tiny royalty checks, enormous post production costs, and the inability of some leasers to install their cement ponds, the Pennsylvania Senate swiftly held a hearing. {...} Not only are the royalty checks tiny, in some instances leasers are being charged retroactively for post production costs which has resulted in receiving a BILL in the thousands of dollars instead of a check. Testifying at a Senate Environmental Resources and Energy committee hearing on June 27, 2013, Bradford County Commissioners Chairman Doug McLinko said, “Our constituents have shown us evidence of extraordinary post-production cost in Bradford County, with deductions of 40 and 50% all the way up to as much as 90%.”  “…we have seen checks come with zero payment.  We have seen retroactive charges being billed to land owners for tens of thousands of dollars where the property owners actually have a bill sent to them and they go without any royalty payments until it is paid in full.” Similar concerns were raised by the Pennsylvania Farm Bureau at the same hearing.

Cheaper Canadian Oil for Refiners in Midwest Not Reflected in Prices at the Pump - For nearly two years, refineries in the Midwest have been buying crude oil at steep discounts thanks to a glut of U.S. and Canadian oil. But drivers in the Midwest haven't seen a corresponding decrease in gasoline prices. In fact, they sometimes pay more at the pump than people in other parts of the country, even as windfall profits flow to BP, Koch Industries Inc. and other large Midwestern refiners. "It's good to be a refiner," said Tom Kloza, chief oil analyst at the Oil Price Information Service, a company that tracks energy markets. "For 20 years, the rule of thumb was that if you made $5 a barrel east of the Rockies, that was a good profit for a refinery. Recently, we saw a period in the Midwest where refiners were making $40, or $50, or even $60 a barrel on gasoline."

Canada Tries to Outmaneuver Pipeline Opponents - Canada's government last week proposed new fines and regulations for major crude oil pipelines in the country. Canada is among the world leaders in terms of oil production and needs safe and secure transit options to support its economy. At home, provincial and federal officials are debating prospects for a major pipeline project planned for the western coast. Across the border, the government of Prime Minister Stephen Harper says science is on its side in terms of the Keystone XL project. What happens with those pipeline projects may indicate whether the government moved ahead of the environmental issue effectively enough. Enbridge Energy shut down parts of a major pipeline system north of Calgary after about 750 barrels of oil sands spilled in a remote area near Fort McMurray. The company said it suspected flooding in the region may have dislodged the pipeline, leading to a releaseCanadian Natural Resources Minister Joe Oliver said from British Columbia that pipeline operators would have to keep nearly $1 billion on hand to respond to spills. Pipeline companies found to have violated environmental laws would have to fork over around $100,000 as part of a new enforcement regime. The provincial government in British Columbia is insisting on tighter pipeline rules as a condition of supporting the Northern Gateway pipeline, a 700-mile project designed to carry 525,000 barrels of oil per day to western Canadian ports.

Gaius Publius: A Primer – What’s in a “Tar Sands” Pipeline? - In the wake of renewed interest in the Keystone Pipeline project and the likelihood that Obama will eagerly approve it unless we stop him, there’s a lot of interest in what actually flows through those pipes.Van Jones has called it “planet-cooking goo.” I’ve called it “sludge.” But what is it really?To answer that question, we need to look at:

All of which produces a great bottom line. Click any of those links to jump to that section. The primary source, though not the only source, of this information is a great article and slideshow at the Scientific American website. Feel free to click and read as we walk through this material.“Tar sand” is sand with a mix of tar, clay and water stuck to the surface of its grains. Yes, literally tar (more on that below).To see tar sand in action, watch just a few seconds of this video, part of a piece made by Raul Grijalva and Adam Sarvana [corrected] to illustrate some of what’s wrong with Keystone and why it should be opposed. What Adam dumps into the water is clumped tar sand.

BP compensation fund for Gulf oil spill victims at risk of running out - BP could soon run out of cash in the compensation fund set up for victims of the Deepwater Horizon disaster, unless it is successful in a legal challenge that will be heard in court next week. The company has been fighting the compensation formula drawn up to pay businesses and individuals harmed by the 2010 spill, ahead of a court hearing in New Orleans on July 8. Court-appointed claims administrator Patrick Juneau has processed about a quarter of the 194,800 claims received, and made compensation offers worth about $3.86bn, almost half the $8.2bn that BP had expected for the total cost of the settlement with the plaintiffs' steering committee (PSC). BP has been paying compensation from a $20bn fund set up in 2010 and had already committed $18.3bn to pay claims by the end of March, leaving $1.7bn. At the current rate of spending the money could run out by September, according to a report in the Financial Times. The company is legally committed to paying compensation, even if its fund runs out. The oil firm gave up control over the compensation formula and framework for payments to claimants in a legal settlement. But it has since gone on to dispute – so far unsuccessfully – how that formula is being applied

Offshore Drilling Bills' Sponsors, Cosponsors Received Big Bucks From Oil Industry - Sponsors and cosponsors of two bills to expand offshore drilling taken up by the House this week received hundreds of thousands of dollars from the oil and gas industry in the last election cycle.  The first bill passed the House on Thursday by a vote of 256-171. The Outer Continental Shelf Transboundary Hyrdocarbon Agreements Authorizations Act would implement a February 2012 agreement between the U.S. and Mexico to expand drilling along the maritime boundary between the countries in the Gulf of Mexico. Many Democrats opposed the measure in part because it contains language that removes a requirement for companies to disclose payments they make to foreign governments. The oil and gas industry gave $41,500 to the bill's main sponsor,  Rep. Jeff Duncan (R-S.C.), for his 2012 campaign, making it his top industry donor, according to data.  Oil and gas was also the top industry donor to four of the 17 cosponsors of the bill: Reps.  Kevin Cramer (R-N.D.), Doc Hastings (R-Wash.), Doug Lamborn (R-Colo.), and Ted Poe (R-Texas), received a combined $442,000 in 2011-2012: almost $167,000 for Cramer, almost $135,000 for Hastings, more than $64,000 for Lamborn and nearly $76,000 for Poe.

U.S. Rig Count Rises to 1,757, Baker Hughes Says - Oil and gas rigs in the U.S. advanced by nine to 1,757, the first gain in three weeks, according to Baker Hughes Inc. Oil rigs increased by five to 1,395, the Houston-based field services company said on its website. Gas rigs were up two to 355, and miscellaneous rigs rose two to seven. The total count remained unchanged in the second quarter after five straight declines, potentially foreshadowing a rebound in activity and an increase in field-services demand as producers respond to this year’s rise in both oil and natural gas prices. June was the most active month for U.S. land drilling permits in more than a year, according to a Barclays research note. “With a frustratingly slow expansion of the land rig count to start the year, most investors demonstrated skepticism that demand prospects were improving for service providers throughout most U.S. basins,” James West, an analyst for the Barclays investment-banking unit in New York, said in the note yesterday. “Permitting activity, which typically leads drilling activity by several months, has been strong. We think gains in the rig count will accelerate.”

Energy updates: Crude oil production and petroleum exports are surging, net imports are decliing, and oil prices are stable =  According to data released today by the Energy Information Administration (EIA) through June, the US produced more crude during the first half of this year (an average of 7.166 million barrels per day) than in any year since 1992, more than 20 years ago (see chart). In just the last five years, domestic oil production has increased by more than 41%, from an average of about 5 million barrels per day in 2008 to more than 7 million barrels per day this year.Based on international trade data released today by the Bureau of Economic Analysis, the top two US export categories for the January to May period this year were: a) Petroleum products ($23.6 billion) and b) Fuel oil ($22.3 billion). For the same period in 2007, neither of those two petroleum-related items were even in the top 15 US export categories (semiconductors and civilian aircraft were the top two exports in 2007 through May). But that was before the US started employing advanced drilling techniques to tap into large oceans of shale oil, which is now being refined and exported at record levels.

The oil markets are in a flux … and it’s all because, the lady loves shale oil. Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored. The result: a major narrowing in the WTI-Brent spread.From JBC Energy on Tuesday: As the analysts note, the only thing the Brent market’s got going for it at this moment are delivery squeezes (our emphasis): The respective price movements pushed the Brent/WTI spread down to $5.01 per barrel at settlement, and was seen as low as $4.77 per barrel intraday, the narrowest since January 2011. WTI was boosted by BP’s start-up announcement of a new 250,000 b/d CDU at its Whiting refinery in Indiana. However, the current weakness in the Brent market could turn if the expected North Sea maintenance through September materialises to squeeze supply of the four grades which make up the marker, while continued arbitrage interest from South Korea may further tighten availability. If this happens, we could see the Brent/WTI spread widen again before long, although the scheduled completion of Transcanada’s 700,000 b/d Gulf Coast Pipeline project will narrow the spread again in Q4.

Oil: The Disappearing Brent / WTI Spread - The WSJ Real Time Economics has an article today on the declining spread between Brent crude oil and West Texas Intermediate (WTI). (note: this is something we discussed a few weeks ago): Number of the Week: U.S. Oil Boom Affecting Global Prices The U.S. pumped 6.5 million barrels a day of oil last year, according to the Energy Information Administration, the most since the mid-1990s, and production has continued to surge; April’s figure of 7.4 million barrels per day marked the best month in more than two decades...The industry wasn’t expecting the huge surge in production from North Dakota, so companies didn’t have the pipelines in place to handle all the new oil. So rather than flow into the global market, much of the oil stayed in the middle of the U.S. Now, however, the gap between WTI and Brent is starting to narrow, as a new report from the Energy Information Administration makes clear. The industry has expanded pipeline capacity and found other ways, such as rail cars, to get oil from the middle of the country to major demand centers on the coasts. Meanwhile, coastal refineries are shifting to use more domestic crudes, leading to lower demand for Brent. The result: The gap between the two prices has narrowed to under $10 per barrel. But, until the gap disappears completely, we still need to use Brent crude prices to forecast U.S. gasoline prices.Here is an update to the graph in the previous post that shows the divergence between Brent and Cushing starting in 2011. Recently the spread has been closing. At one point Brent was selling for about 25% more than WTI (even though they are comparable quality). Now the difference is under 7% (and less than $7 per barrel)

One reason for recent Brent-WTI spread narrowing originated outside the US - For the first time in some 2.5 years Brent-WTI spread (discussed here) has traded around $5/barrel. The two types of crude oil represent nearly the same product but have been trading at a wide spread due to difficulties of transporting sufficient amounts of North American crude from Cushing Oklahoma, where WTI is settled, to the Gulf of Mexico where it could be delivered to major US refineries or shipped elsewhere as a replacement for the more expensive Brent crude. These delivery challenges have been significantly reduced in the past couple of years. At the same time some technical issues in the North Sea have been resolved to stabilize Brent pricing. Bloomberg: - The drop in the gap between Brent, a gauge for more than half the world’s oil, and WTI shows how improved pipeline networks and the use of rail links have helped to unlock a glut at America’s oil-storage hub at Cushing, Oklahoma, in line with a prediction made by Goldman Sachs Group Inc. as long ago as February 2012. WTI rose 5.2 percent in the first half of this year. Brent dropped by 8.1 percent as North Sea supplies have stabilized following oilfield maintenance. “The spread is coming in on anticipation that we’re going to see pipelines get built and more rail capacity put in place,”. “There is now a likelihood that not only will U.S. imports drop further, but that the country will be exporting before long.”  But there is one question that still remains unanswered. A major portion of the spread compression to $5 has taken place just in the past few weeks. Something else happened in mid-June that started this steady decline. It was the Iranian elections. The outcome of this election greatly reduced the risk of a major conflict with Iran, thus lowering the "Iran premium" priced in Brent-WTI spread.

WTI and the taper effect - Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions.First of all, here’s what the compression looks like on a longer timeframe: It’s clear from the chart that the spread first began tightening in earnest in the fourth quarter of 2011. In fact, at the time, many market participants positioned themselves pretty heavily on the expectation that the spread would continue to tighten because the Seaway pipeline was set to be reversed. But the tightening turned back into unexpected widening, and before we knew it many funds and market participants found themselves nursing heavy losses related to the WTI-Brent spread. Everyone blamed Iran for the anomaly.

WTI Crude Climbs Above $100 on Egypt Unrest, U.S. Stockpiles - West Texas Intermediate crude rose above $100 a barrel for the first time since September as Egypt’s political showdown escalated, bolstering concern Middle East oil shipments may be disrupted, and a report showed U.S. stockpiles dropped the most this year. Futures advanced for a third day in New York after climbing to the highest settlement in 14 months yesterday as hundreds of thousands massed to demand the departure of Egypt’s President Mohamed Mursi. U.S. crude inventories declined by 9.4 million barrels last week, data from the American Petroleum Institute showed. A government report today is projected to show they will decrease by 2.25 million, according to a Bloomberg News survey. WTI for August delivery gained as much as $1.04 to $100.64 a barrel in electronic trading on the New York Mercantile Exchange and was at $100.60 at 9:52 a.m. Sydney time. The volume of all futures traded was 22 percent above the 100-day average. The contract increased $1.61, or 1.6 percent, to $99.60 yesterday, the highest settlement since May 2012. Prices rose as high as $100.42 on Sept. 14.

Egypt: Brotherhood defiant as deadline approaches - They have been jailed and tortured, hunted in the streets and blacklisted from public life. But a year after winning the presidency and reaching the pinnacle of their 80-year quest for power, Egypt’s Islamists are again facing a threat to their existence. President Mohamed Morsi was fighting back yesterday against what his supporters have dubbed a military coup against his democratically elected government.  In a defiant late-night speech, Mr Morsi made clear he would make no concessions to his opponents and said he was prepared to shed his blood to defend “legitimacy” in Egypt. He warned repeatedly that any moves against him could lead to bloodshed – an assertion that his opponents interpreted as a threat of civil war.

Morsi Defies Egypt Army’s Ultimatum to Bend to Protest  - President Mohamed Morsi rejected an ultimatum in an angry speech Tuesday night as Egypt edged closer to a return to military rule.  But before the president’s speech, Egypt’s generals took control of the state’s flagship newspaper, Al Ahram, and used it to describe on Wednesday’s front page their plans to enforce a military ultimatum issued a day earlier: remove Mr. Morsi from office if he failed to satisfy protesters’ demands.As both sides maneuvered, tensions rose on the streets of Cairo and other cities, where violence erupted between groups of protesters and Mr. Morsi’s defenders, primarily members of the Muslim Brotherhood. At least 11 people were killed — four shortly after Mr. Morsi’s speech — and dozens more were wounded as gunfire broke out in at least two neighborhoods of the capital. Angry Islamists gathered in the street with a sheet stained with the blood of one of their allies.

Crude Cracks $102 As Egyptian Army "Ready To Die" - WTI Crude futures just topped $102 per barrel (the highest price in 14 months) as Reuters reports 16 dead and Egypt's high command saying the army was ready to die to defend Egypt's people against terrorists and fools, in a response to Islamist President Mohamed Mursi. Their comment (via Facebook) read "We swear to God that we will sacrifice even our blood for Egypt and its people, to defend them against any terrorist, radical or fool," was issued 3 hours after Mursi's TV statement.

Oil nears $102 on report of Suez Canal disruptions - Oil futures topped $102 a barrel on Friday as concerns over the potential disruption of the Middle East oil trade intensified, setting prices up for their biggest weekly gain in over a year. Better-than-expected U.S. employment data for June also contributed to oil’s price gain, with the growth in new jobs helping to raise the prospects for energy demand. Crude for August delivery gained $1.18, or 1.2%, to $102.42 a barrel from Wednesday’s settlement on the New York Mercantile Exchange, which was closed Thursday for the Independence Day holiday. Tracking the most-active contracts, prices are poised for a weekly gain of 6.1%. That would be the biggest weekly gain since the week ended June 29, 2012, according to FactSet data. Also Friday, August futures for rival benchmark Brent rose $1.41, or 1.3%, to $106.95 a barrel on ICE Futures. For the week, prices were up almost 5%. It’s the “classic fear-premium trade due to concern that the Egypt protests could cause a domino effect and create supply disruptions in the Middle East,”

Egyptian President’s Ouster Likely Delays IMF Bailout Money For Now - The deposing of Egyptian President Mohammed Morsi by the military Wednesday likely freezes any chance for an International Monetary Fund bailout for the ailing economy until an internationally-recognized government is installed. In recent months, a handful of neighboring countries such as Qatar have been keeping Egypt’s economy afloat by loaning the country’s central bank cash. That has bought Morsi government time to delay implementing the politically-sensitive measures the IMF has sought as a precondition before it gives Cairo a $4.8 billion credit line. In particular, the IMF had said that Egypt must raise taxes and begin phasing out fuel subsidies. It’s not the only cash at stake. Other international donors have vowed another $9.7 billion for the country once the IMF program is in place. Roughly $1.55 billion in bilateral aid from Washington could also be held up: under U.S. law, the administration can’t loan money to countries where the military is involved in an unconstitutional change in government. The fund typically only engages with a government if there’s widespread recognition by the international community that a legitimate government has been installed. The IMF isn’t likely to negotiate with military authorities in Cairo without such international consensus given that the fund’s board represents the world’s powers, and it’s unclear how long that process could take. In the meanwhile, it’s also unclear whether the regional governments that had been injecting much-needed cash into Egypt’s reserves will continue to do so after Wednesday’s events. 

Europeans Oil Benchmarks Go From Trusted to Tainted - The European Union’s top energy official ignored a warning delivered in 2009 about potential manipulation of Platts oil benchmarks “because markets trusted” them. Andris Piebalgs, who was EU energy commissioner from 2004 to 2010, cited the confidence traders had in the pricing system when a lawmaker questioned the reliability of Platts’ prices more than three years ago. The warning went unheeded until May, when EU antitrust officials raided Platts, Royal Dutch Shell, BP and Statoil as part of an investigation into the possible rigging of benchmark energy assessments.The EU’s oil probe escalated global action beyond financial benchmarks such as Libor, the London interbank offered rate. Regulators warned of “huge” damage to consumers if manipulation is confirmed and drew comparisons with the bank-rate scandal, which has seen Royal Bank of Scotland Group Plc, UBS and Barclays fined about $2.5 billion. Platts publishes the Dated Brent benchmark that helps determine the price of more than half the world’s oil.

Heartburn in Washington: India Calls Iran “Critical” to their Energy Future - It is no secret that the South and East Asian economies have chafed under the multi-layered sanctions adopted by the United States, European Union and United Nations Security council against Iran for its civilian nuclear activities. Many in the West see Iran’s nuclear efforts as masking a covert weapons program, which Tehran has stoutly denied. For the moment India, Korea, Malaysia, South Africa, Sri Lanka, Turkey and Taiwan have dodged the penalties accruing from violating U.S. sanctions, as in June 2012, the Obama administration granted exemptions based on reductions of oil purchases from Iran of about 20 percent. One of the ‘waivered” countries, India, has stated that Iran is “critical” to India’s energy security, a development certain to cause major heartburn in Washington. Adding to the Obama administration’s concern is undoubtedly the fact that the observation was made not by a low-level functionary but rather, External Affairs Minister Salman Khurshid, who told reporters, “We are looking at re-energizing the national North-South Corridor to connect India with Central Asia and Russia through Iran, we are looking at trans-Afghan routes using Iranian port of Chahabar particularly to get access to Afghanistan, Uzbekistan and Tajikistan. We are looking at a rail link from Kazakhstan to Turkmenistan into Iran. Of course, it does make Iran very critical. On the other hand, it makes Afghanistan very critical. , “(When) Iran will be able to find a resolution with the European Union + 1 on the issue of nuclear energy so that Iran also becomes an important link between us and Central Asia. It will give us far greater access to Central Asia than we have now.”

Map Of Every Sovereign Wealth Fund In The World Reveals Trusts In Our Own Backyard We Didn’t Know Existed - Lots of countries have so much oil and gas wealth that they don't know to do with it.  Some U.S. states do too.  So they put it into a sovereign wealth fund — basically a giant, actively-managed investment portfolio.  Here's a map of every sovereign wealth fund in the world, via the Sovereign Wealth Fund Institute (red=oil and gas, blue=not, although we think there's some overlap).  Here is what stood out to us:

  • Most people know about Alaska's oil fund. But did you know Alabama, Louisiana, New Mexico, North Dakota, Texas and Wyoming also have SWFs? New Mexico's is valued at $16.3, larger than Chile's Social and Economic Stabilization fund. Most of these are from oil and gas royalties, although some, like New Mexico, have quirkier origins like a massive tobacco company settlement.
  • Norway's fund, worth $737 billion and the world's largest, is larger than every fund in Africa and Europe (including Russia's two funds worth $187 billion) combined.

ISM, Imports, Exports, and Global Trade: Some Observations: Global trade ex oil is now exhibiting recessionary conditions. YoY growth of US imports from China is contracting at the fastest rate since the 2008-2009 recession, which was the deepest contraction for growth of US imports from China in 23 years of trade data to that point. Moreover, China's import prices are now exhibiting a coincident recession-like decline in US imports from China as similarly occurred in 2008-2009, which in turn is indicative of recession-like conditions for US exports. Because of the nature of US-China trade, China's imports of US capital goods and materials tend to lead China's exports, i.e., primarily from US supranational firms' subsidiaries and contract producers' production in China for export to the US and elsewhere. With trade and capital flows effectively at parity between the three major trading blocs (thanks to cumulative $3-$4 trillion of US and Japanese foreign direct investment in China-Asia since the early 1990s), and global oil and cereals production per capita contracting since 2005-2008, it is quite likely that trade (primarily US-China flows) will no longer be a driver of global real GDP per capita hereafter. $100-$110 oil and falling net oil exports per capita worldwide will exacerbate the constraints on global real GDP per capita growth. The irony is that US firms' large scale of global foreign direct investment and resulting unprecedented fixed investment and credit bubbles in China has caused such rapid growth of demand for energy by China at peak global oil production that the resulting high cost of oil is precluding growth of real GDP per capita in the US, EU, Japan, and now Australia and Canada (65-70% of world GDP).

China Introduces Death Penalty for Serious Cases of Pollution - Pollution is killing the world; a strong statement, but true. Certain levels of pollution are considered acceptable by many, such as vehicle exhaust fumes, but large levels of pollution must be controlled. Unfortunately the general attitude towards pollution in many countries, especially the US, is pretty lax. People do go to jail for crimes against the environment, but it is very rare, with soft fines usually the main form of punishment. In Europe environmental regulations are far tougher, and jail terms and hefty fines are far more common.   Yet still pollution continues. Maybe in order to fully dissuade companies from causing excessive pollution more drastic measures must be taken. China has quite easily the worst pollution levels in the world. Levels of small particulate matter in the atmosphere of cities such as Beijing, Guangzhou, and others, is often recorded at seven times higher than the air quality standard set by the World Health Organisation (WHO). . A recent study by the Health Effects Institute reported that over a million people die prematurely every year in China due to air pollution. It offers some relief then that they seem to be taking environmental crimes very seriously, after Chinese authorities have just given courts the power to hand out death sentences when dealing with cases of serious pollution.  Obviously an extreme approach, but maybe it is the only way to actually deal with the problem.

Does China Have Enough Water to Burn Coal? -- By many measures, this northern Chinese city is an ideal candidate for being China's Wyoming. It has more brown coal reserves than any other Chinese region, and it is only 600 kilometers away from power-hungry Beijing. The sparsely populated landscape here provides enough space for new coal mines and downstream businesses. There's just one problem: The coal industry consumes huge amounts of water, while this land is one of China's driest. Informal ads offering well-drilling services hang everywhere outside of Xilinhot's coal fields, signaling how pressing the conflict is. China's demand for coal is creating a fierce competition for water. The nation has been scrambling for ways to ease the water scarcity, but proposed remedies raise more questions than answers. Currently, more than half of China's industrial water usage is in coal-related sectors, including mining, preparation, power generation, coke production and coal-to-chemical factories, according to China Water Risk, a nonprofit initiative based in Hong Kong. That means that the water demand of the Chinese coal industry surpasses that of all other industries combined.

Chinese Manufacturing Gauges Fall as Slowdown Persists - Bloomberg: Two gauges of China’s manufacturing fell in June, underscoring a sustained slowdown in the nation’s economy as policy makers seek to rein in financial speculation and real-estate prices. An official Purchasing Managers’ Index dropped to 50.1, the lowest level in four months, from 50.8, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing. A private PMI from HSBC Holdings Plc and Markit Economics was 48.2, the weakest since September. Readings above 50 signal expansion. Weaker gains in manufacturing and a cash squeeze in the banking system add to odds that Li Keqiang will become the first premier to miss an annual growth target since the Asian financial crisis in 1998. In the latest signal that policy makers will tolerate slower expansion, President Xi Jinping said local officials shouldn’t be judged solely on their record in boosting gross domestic product.

China Manufacturing Conditions Deteriorate, New Export Orders Fall at Fastest Rate Since March 2009 - In what should be no surprise to Mish readers, the HSBC China Manufacturing PMI™ shows Operating conditions deteriorate at quickest pace since last September, and new export orders plunge. Key points:
Output contracts for first time since last October
New export orders fall at the joint-fastest rate since March 2009
Job shedding intensified
After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 48.2 in June, down from 49.2 in May, signalling a modest deterioration of business conditions. Operating conditions have now worsened for two successive months.Chinese manufacturers signalled a first reduction of output for eight months in June. The rate of contraction was modest, and generally attributed to weaker client demand, as total new orders declined for the second month in a row. New business from abroad also fell in June, with the rate of contraction the fastest since last September, and the joint-sharpest in over four years. Anecdotal evidence suggested that reduced client demand, particularly from Europe and the US, led to fewer new export orders.

China factory-activity data weaken in June - For a second month running, two rival gauges of Chinese manufacturing differed over whether the sector was growing in June, though both reported worse results than in May. China’s official manufacturing gauge, released ahead of the Shanghai market open, showed growth in activity coming almost to a standstill in June. The government-sponsored version of the manufacturing Purchasing Managers’ Index fell to 50.1 from the previous month’s 50.8, matching the projection from a Dow Jones Newswires survey and beating a 50.0 estimate from Reuters. The result above 50 indicates an increase in factory activity, while one below 50 shows a contraction. However, a separately compiled China manufacturing PMI showed activity shrinking, with the headline results at 48.2, off slightly from a preliminary result of 48.3 and down from May’s final reading of 49.2. The results for this second PMI survey, conducted by HSBC and Markit, fell to the lowest level since September 2012. It was the second straight month the headline figure stayed under the key 50 level.

China PMI Drops To Lowest In 9 Months; Schrodinger's Economy Continues - Following South Korea's dip back into contractionary mode (PMI sub-50 for first time in six months - prompting JPY strength and NKY weakness, on implicit KRW weakness retaliation), it appears China's government-sanctioned PMI (printed at 50.1 relative to 50.8 prior and 50.1 expectations) is converging down to the nation's HSBC PMI (whose Flash print was 48.3 - final due at 2145ET). This is the equal lowest print in 9 months but provides just enough cover to the current administration to maintain its tight policy stance - even if it was the biggest MoM drop in 10 months. On a side-note, all PMI sub-indices also fell MoM. The market's response is modest AUD strength and Nikkei weakness which suggests investors were hoping for a little weaker data to push China a litte closer to folding on their bubble-popping position.

Numbers Go Missing From China Factory Report Without Explanation - An official report on China’s manufacturing in June omitted numbers for export orders, imports and inventories of finished goods, without any explanation for the gaps. Five of 12 sub-indexes usually released with the Purchasing Managers’ Index were absent from today’s releases from the National Bureau of Statistics and the China Federation of Logistics and Purchasing. The others were for backlogs of work and quantities of purchases. The statistics bureau didn’t immediately respond to e-mailed questions asking for comment. Analysts seeking a fuller picture of China’s economy could turn to an English-language version of the report released in Hong Kong by the Fung Business Intelligence Center, which included the missing numbers. Inflated trade figures this year highlighted flaws and omissions in data that investors rely on for assessing the strength of the world’s second-biggest economy. “We hope it’s just a hiccup, and we certainly want the data released to be consistent and comprehensive,” He said the sub-indexes of export orders, imports and stocks of finished goods are “important” in reading the Chinese economy.

China No Longer Making Up Numbers, Now Simply Deleting Them - For many years, the Chinese politburo had a simple solution to accusations that central planning doesn't work: just make up the economic numbers. However, a few months ago China found itself in hot water when it became impossible to pretend its manipulated numbers were even remotely credible, driven by a massive discrepancy between China exports to Hong Kong and HK imports from China. The immediate result by China, and the PBOC, as it attempted to regain some credibility was an drastic and epic move to force capital reallocation, in the process nearly wiping out its banking sector when interbank lending rates exploded to over 25%. For now, China appears to have regained some control even if the ensuing CNY1 trillion deleveraging that is imminent is sure to lead to unprecedented pain for the country that is more addicted to credit creation than any other. But in the meantime, China has once again fallen bank to doing what it does best: manipulating economic data, in this case the recently announced PMI. Only this time there is a twist: instead of goalseeking reported data to comply with some artificial reality that Beijing approves of, now China is simply flat out refusing to report numbers, period!

Loan Practices of China’s Banks Raising Concern - China’s regulators — and a fair number of economists, policy makers and investors — worry that legitimate banks are using lightly regulated wealth management products to repackage old loans and prop up risky companies and projects that might not otherwise be able to borrow money. Analysts warn that shadow banking is helping drive the rapid growth of credit in a weakening economy, which could lead to — in the worst situation — a series of bank failures. “This is the biggest uncertainty I’ve seen in my 18 years following the China market,” Dong Tao, an economist at Credit Suisse, said of shadow banking. “You don’t know how banks are deploying capital. And you don’t know the credit risks.” What banks are doing, analysts say, is pressing customers to shift money from the old, regulated part of their operations — savings deposits — into the new, less regulated part consisting of high-yielding wealth management products that can circumvent government interest rate controls and be used to finance high-interest loans to desperate customers. China’s leaders are so worried about credit risk that last month the country’s central bank tightened credit in the interbank market, where banks typically go to borrow money from other banks.

Inside China’s Bank-Rate Missteps —A rare peek into the actions of China’s leaders in a month when a Chinese cash crunch spooked global investors shows a leadership falling short in its struggle to redirect China’s economy and also faltering in its efforts to communicate its intentions to markets. The People’s Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth, according to an internal document reviewed by The Wall Street Journal. But by failing to make that clear—at a time when worries about slowing Chinese demand had already scared away some foreign capital, and as signals from the U.S. Federal Reserve also were redirecting global cash flows—the Chinese central bank inadvertently contributed to a surge in global market anxiety. After the chaos that ensued, including rumors that a major Chinese bank had defaulted on a payment, Chinese leaders are blaming market speculation and what the authorities view as overly aggressive media coverage for the problems. Some critics, however, say the fault lies partly with clumsy maneuvering by the central bank and the senior officials who oversee it, saying it exposed their inexperience in anticipating how markets—domestic and foreign—would interpret their actions. “The very best of policy intentions can create turmoil in markets if the central bank lacks transparency and clear communications,”

China Regulator Says Bank Reserves Enough to Weather Cash Crunch - China’s banking regulator, in his first public comments since the country’s worst cash crunch in at least a decade, said the operations of its lenders won’t be disrupted because they’ve built up sufficient cash reserves. Banks had about 1.5 trillion yuan ($244.4 billion) of cash reserves as of June 28 that could be used for payment and settlement needs, more than double what is usually required, Shang Fulin, chairman of the China Banking Regulatory Commission, said in a speech in Shanghai yesterday. “The tight liquidity condition on the interbank market has been easing in the last few days,” Shang said at the annual Lujiazui financial conference. “This type of situation won’t affect the banking sector’s smooth operations.”

China censors urge media to curb ‘cash crunch’ coverage - With a cash crunch roiling the Chinese economy, propaganda authorities have told local media to tone down their reporting to help stabilize financial markets. In a directive written last week and transmitted over the past few days to newspapers and television stations, local propaganda departments of the Communist party instructed reporters to stop “hyping the so-called cash crunch” and to spread the message that the country’s markets are well stocked with money. Chinese propaganda officials regularly send guidelines to the nation’s media about sensitive political subjects, telling them which words to avoid and how to frame their reporting. But it is rare for such instructions to be sent to financial media. Last week’s directive is an indication of the concerns in Beijing about the dislocation and growing panic in the country’s markets following the onset of the cash crunch. “First, we must avoid malicious hype. Media should report and explain that our markets are guaranteed to have sufficient liquidity, and that our monetary policy is steady, not tight,” the directive said, according to a text obtained by the FT.

Chinese credit: Look both ways - The Economist  - Most stories on China over the past few months have included some variation on the chart below, which appeared in a recent Free Exchange column ("Taking credit for nothing").  It shows the boom in Chinese credit, broadly and narrowly defined. A renewed surge in lending in the first ten days of June greatly alarmed China's central bank, according to a scoopy story in Tuesday's Wall Street Journal. Rattled, the central bank proceeded to rattle everyone else by letting the cost of interbank borrowing spike.But the chart opposite only tells half the story. The other half is shown in the chart below, published by Nomura in an impressive June 28th report called "Asia's rising risk premium". This chart, like the first, shows China's credit boom (including its shadow-banking boom), based on the deviation of credit (and property prices) from their trends. But on top of this depiction of the financial cycle it also shows a more traditional measure of the country's business cycle, based on the deviation of GDP growth from its trend. The two cycles, you will notice, are way out of tune with each other: credit is booming, but the economy is not.

China admits local govt debt levels unknown, could be higher than estimated (Reuters) - A senior Chinese official said on Friday that the government did not know precisely know how much debt local governments had built up and warned that it could be more than previous estimates. Estimates of local government debt range from Standard Chartered's 15 percent of the country's GDP at end-2012 to Credit Suisse's 36 percent. Fitch put the figure at 25 percent when it downgraded China's sovereign debt rating in April. Vice Finance Minister Zhu Guangyao said China had not released official figures since a 2010 auditing report that put local government debt at 10.7 trillion yuan.

Xi cuts CEO cloth for bruising battle - China's top government body, the Politburo of the Communist Party, late last month held an almost unprecedented three-day meeting at which Party General Secretary Xi Jinping did not attack a foreign enemy or internal dissidents, but rather the party members themselves. [1] Xi argued against the formalism prevailing in the party. He said that it wasn't enough for senior officials to "strictly abide by party discipline and act in strict accordance with policies and procedures," but that they should also "strictly manage their relatives and their staff and refrain from abuse of power". Xi underscored "The sole pursuit" of the party leaders should be "to seek benefits for the Chinese people as a whole", which is "the Party's cause and interests". As Russell Moses astutely noted on the June 22-25 meeting, "It's extremely rare for Politburo proceedings to be spoken of in such detail and openness. And it's unprecedented in modern times for the Party boss to start taking swings at his colleagues at the top by so directly reminding them of their responsibilities - a move that suggests he might be planning something even stronger soon."

Risks of a hard landing for China - The new Chinese leadership is trying to manage one of the most difficult of economic manoeuvres: slowing down a flying economy. Recently, difficulties have become more apparent, with the attempt of the authorities to bring “shadow banking” under control. Yet this is part of a bigger picture: the risk that a slowing economy might even crash. Indeed, the expressed desire of China’s new government to rely on market mechanisms raises the risks.  In a recent note, David Levy of the Jerome Levy Forecasting Center has asked the crucial question: what is China’s stall speed? The general view is that it is straightforward for China to move from 10 per cent to, say, 6 per cent growth over the coming decade. The implicit assumption is that “a rapidly expanding economy is like a speeding train; let up on the throttle and it slows down. It continues to roll along the track as before, just not as rapidly.” He argues, instead, that China is more like a jumbo jet: “In recent years, a couple of engines have not been working well, and the pilot is now loath to keep straining the remaining good engines. He is allowing the plane to slow down, but if it slows too much, it will fall below stall speed and drop out of the sky.”

China 'Officially' Moves From Made-Up Data To Hiding Data - When the official Chinese PMI printed a few days ago we noted the 'odd' fact that several of the key sub-indices were 'missing'. While most put this down to some 'hiccup' or aberration, we wondered at the time what this might mean in a nation that has seemingly gone out of its way to baffle with Schrodinger bullshit for much of the last few 'recovery' years in the face of collapsing electricity production, copper/cement/steel prices, fake trade invoices, and a shadow-banking system so re-hypothecated that even the PBOC has decided enough is enough. Well, as Bloomberg reports, it turns out it wasn't an aberration, but new policy from China's Federation of Logistics and Purchasing which has now officially suspended the release of industry-specific data from the monthly survey of manufacturers. As one analyst put it, "the random absence of official data is disorienting," which is likely exactly the plan.

Chinese Malls Waive Rents as Vacancies Loom - Chinese landlords are forgoing rent and paying to outfit stores for mass-market fashion brands including Zara and H&M, a bid to blunt the impact of a boom in shopping-mall construction that threatens to push up vacancies. Preferential leasing terms were reserved until recently for luxury brands such as Louis Vuitton and Gucci, which are coveted because they bring shoppers into malls. Now moderately priced labels are being enticed with offers as landlords work harder to fill shops, according to Cushman & Wakefield Inc. and RET Property Consultancy Ltd. Consumer demand is cooling as China’s economy slows and President Xi Jinping reins in lavish spending by officials. Landlords focused on lower-tier markets will be under more pressure as smaller cities add retail space at a faster rate than larger ones.

New threats to China's property bubble - In late 2011 many were expecting China's property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear (see discussion). But the correction turned out to be quite shallow and in spite of China's government's multiple attempts to arrest housing price appreciation (and partially succeeding - see post), house prices went on rising.With real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks ("encouraged" by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than "arms length" (see discussion). Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally. Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles.

China's Domestic Debt In The Spotlight; Nearly $2 Trillion And Counting - The domestic debt owed by China’s municipalities is closing in on $2 trillion, according to a recent government audit of 36 local governments. Last week, the National Audit Office (NAO) issued a new report that showed debt in the those 36 selected areas had grown 13% in the last three years. Moody's Moody's Investors Service estimates the direct and guaranteed debt of local governments nationwide was around 12.1 trillion yuan ($1.97 trillion) at the end of 2012, up from 10.7 trillion in 2010.Exact numbers are an unknown due to the special finance vehicles municipalities use to invest in pet-projects, from roads and bridges to residential complexes and shopping malls. Selected local governments in the NAO report comprise 15 provinces and the 15 provincial capital cities, as well as three municipalities and three districts. Other Chinese officials have even higher estimates, the China Daily reported on Sunday. Dong Dasheng, deputy minister of NAO, said the latest debt scale for governments at all levels was between 15 to 18 trillion yuan. Xiang Huaicheng, a former finance minister, said in April that China’s local governments might have already borrowed more than 20 trillion yuan. The number keeps getting higher rather than lower.

Xi Says GDP Not Officials’ Sole Focus in Signal on Growth -  China’s President Xi Jinping said officials shouldn’t be judged solely on their record in boosting gross domestic product, the latest signal that policy makers are prepared to tolerate slower economic expansion. The Communist Party should instead place more importance on achievements in improving people’s livelihood, social development and environmental quality when evaluating the performance of officials, the Xinhua News Agency reported yesterday, citing Xi at a meeting on personnel management on the eve of the 92nd anniversary of the party’s founding.Xi’s comments follow remarks he made last month that China won’t sacrifice the environment to ensure short-term growth, and take place as the world’s second-largest economy undergoes its worst cash crunch in at least a decade as the government seeks to wring speculative lending out of the banking system.

Likonomics: what’s not to like - JAPAN is still enjoying the effects of Abenomics, a campaign to reflate the economy named after Shinzo Abe, the prime minister. China, on the other hand, is now enduring the effects of something called "Likonomics". Likonomics stands for:

  • 1. No stimulus. Whereas Abenomics embraces both monetary and fiscal stimulus, Likonomics champions neither. In a bracing speech to officials on May 13th, Mr Li argued that China had little scope for stimulus or government-directed investment. In China, like the United States, stimulus is now a dirty word. But it fell into disrepute for opposite reasons. In America, stimulus failed to win favour because it was too small. In China the post-crisis stimulus was discredited because it was too big.
  • 2. Deleveraging. In China, credit, broadly defined, has been growing much faster than GDP. The stock of "total-social financing", an eclectic measure of loans, corporate bonds and a bit of equity financing, is now about 190% of GDP. Mr Li is committed to lowering this ratio, according to the Barclays economists, who cite last month's alarming cash crunch in the interbank market as evidence. 
  • 3. Structural reform. Mr Li talks a lot about the need for structural reform. "Reform is 'the biggest dividend' for China," he has said. At a May meeting of the State Council, China's cabinet, he outlined many worthwhile initiatives, from liberalising interest rates to raising utility prices. The hope is that he will flesh out these proposals at a big communist-party meeting in the autumn (the third plenum of the central committee of the Chinese Communist Party).

China's short-term rates stabilize but the yield curve remains inverted - The sharp jump in China's short-term rates has been nearly reversed. Repo rates are approaching their longer-term averages, with the PBoC coming to its senses and addressing the liquidity squeeze.However as the short-term rates came down, so have rates at longer maturities. The full interest rate swap curve has shifted lower but remains inverted (see post). The chart below compares today's curve with the one three weeks ago. The market continues to price in some further slowdown in China's economic growth.

Does China’s Central Bank Matter More than The Fed? - I suggested recently that a second, perhaps underappreciated factor in the bond market sell-off was a short-term liquidity squeeze in China – an effective policy tightening by China’s central bank, the People’s Bank of China. Concerns about a possible lending/credit bubble — particularly in the “shadow” banking system — in China are not new, and the Chinese government has been talking down credit growth . . . without the desired effect. So the PBoC jerked (hard) on the leash of the banking system (especially the shadow banking system). Overnight SHIBOR, (the Chinese equivalent of the Fed Funds rate), which had averaged around 3% over the past 18 months, peaked at 13.44% on June 20. That week, the People’s Bank of China told bank officials that they wouldn’t get any assistance in dealing with tightening liquidity conditions and they should scale back their leverage ratios to cope with the cash squeeze. (This tightening caused a global liquidity squeeze which coincided with the Fed’s new QE guidance, exacerbating the sell-off).

Renminbi overvalued by 30%; China macro risks rise - The suspicion is that China has allowed the currency to continue to rise to ward off higher inflation and prevent capital outflows amid fears over the longevity of the Fed’s quantitative easing policy.  Expectations of RMB appreciation draws capital into China but is a double-edged sword because flows tend to be of the hot money variety.  Worse, some exporters have been tempted to inflate sales, or invoice for non-existent orders, to exchange the dollar ‘proceeds’ for RMB, casting doubt on official trade data.  Even so, the central bank is likely to be acting as a drag on RMB’s appreciation by continuing to purchase dollars despite the central government’s efforts to cut the trade surplus as part of its policy to rebalance the economy in favour of domestic consumption.  A stronger RMB should slow export growth because it makes Chinese goods more expensive while at the same time boosting domestic demand through increasing the purchasing power of the currency.  The evidence that RMB is overvalued is the deflationary effect it is exerting – seen in exporters cutting prices to compete, causing a profits squeeze, which in turn impacts investment

Too much appreciation too soon for the renminbi? - Thanks to Monument Securities’ Marc Ostwald for directing our attention to an interesting report from MNI on Tuesday regarding changing attitudes to the renminbi: The PBOC made a “big mistake” in letting the yuan rise so quickly earlier this year because it has only swelled the level of foreign exchange onshore, creating potential problems when depreciation expectations rise and capital starts flowing out of the country, regulators contend. Even though central bank policies have come under fire from financial system regulators, it is unclear the extent to which any policy outcomes would be affected. The opposition to PBOC currency policy highlights internal concerns about potential outflows, and the degree to which the government’s exchange rate strategy may have inflamed this.“Yuan appreciation has been too fast…. Current appreciation may have reached its limits,” said a regulator in recent comments. “In future, depreciation expectations may create more negative issues than appreciation did though massive capital outflows still aren’t happening.” If this is true, it shows that a key concern in China is prospective capital outflows fuelled by a change in renminbi policy and its potential devaluation. This makes sense since a renminbi devaluation would not only destroy the Chinese bid abroad but scuttle hot foreign money that did manage to get exposure to the RMB — money which may indirectly be supporting the Chinese system in ways we don’t fully understand yet.As the story also notes (our emphasis): Market participants have suspected that the PBOC was moving against the grain in guiding the yuan higher ahead of further exchange rate reforms, such as another widening of the yuan’s trading band against the dollar.

China Declares War on French Wine - In retaliation for ridiculous EU tariffs on solar panels (sponsored mainly by France over the objections of Germany) China Declares War On Wine. Via Mish-modified Google translate from El Economista ... The Chinese government has decided to launch an investigation into the European wine sector with the later intention to apply a punitive tax if necessary, as China authorities accuse wine producers in the European Union (EU) of unfair trade tactics such as dumping and subsidies.The temporary imposition of a tariff on Chinese solar panels by the EU started a trade war whose greatest victim is wine.  "This is a thorough research on European wines for export, in all formats, is bottled in barrels or in bulk," say sources familiar with the process, which warned that the wineries are going to have to face a complicated process and urgent administrative that could derail Asian exports. And that is bad news for an industry whose sales in their home markets is already complicated by the financial crisis.Chinese authorities have given wine exporters 20 days to register as companies subject to investigation, and if they are not registered before July 21, China will automatically apply a punitive percentage.

China, Australia and a very hard landing - Kevin Rudd 2.0 has been quick to highlight the dangers posed by slowing Chinese growth since he was returned as Australia’s prime minister. For example: When I look at the challenges of rest of this year, and certainly for the upcoming three-year term, the huge outstanding economic challenge for us is the end of the China resources boom. This will have a dramatic effect on our terms of trade, a dramatic effect on living standards in the country, a dramatic effect also potentially on unemployment unless we have an effective counter-strategy. AndThere are a lot of bad things happening out there. The global economy is still experiencing the slowest of recoveries. The China resources boom is over… the time has come for us to adjust to the new challenges. New challenges in productivity. New challenges also in the diversification of our economy. New opportunities for what we do with processed foods and agriculture, in the services sector and also in manufacturing. But just how dangerous is a Chinese slowdown? Barclays economist Kieran Davies has some answers. But before turning to that here’s China’s relationship with Australia in pictures.

Don’t try this at home – central banker edition - Central bankers can do many things but they should never, ever attempt humour. To illustrate the point we present the price action in the Australian dollar on Wednesday. That’s a three year low of $0.9055 against the greenback and it followed a ‘gag’ from Glenn Stevens, governor of the Reserve Bank of Australia. From the Australian Financial Review:An off-the-cuff remark by Reserve Bank governor Glenn Stevens sent the dollar down on Wednesday after he “joked” a rate cut was seriously considered at Tuesday’s board meeting. Mr Stevens’s remark, which a spokesman confirmed was intended to be a joke, was at odds with the rest of his speech, which indicated the RBA was content to keep official interest rates on hold while the falling dollar spurs economic growth. Here, in full, is the ‘joke’.

Japan''s monetary base at record high -- Japan's monetary base jumped 36.0 percent in June from a year earlier to JPY 163.54 trillion (USD 1.6 trillion), marking an all-time high for the fourth straight month, the central bank said, Tuesday. The monetary base, which comprises money supplied to the markets by the Bank of Japan (BOJ), including cash in circulation and commercial banks' deposits held at the BOJ's current accounts, also grew for the 14th month in a row. An expansion in the monetary base has inflationary effect. The BOJ vowed in April to double the monetary base in two years, chiefly through the purchases of government bonds from financial institutions and money market operations, to overcome the country's deflation that has lasted for nearly 15 years. The central bank aims to increase the monetary base at an annual pace of about JPY 60-70 trillion

BOJ Beat: Five Takeaways From Tankan Survey - The Bank of Japan’s closely-watched tankan survey of corporate sentiment showed that the mood among businesses improved sharply in the three months to June after the central bank introduced an aggressive easing policy in April. Here are five initial takeaways from the poll.

  • The best reading in two years. The headline figure measuring sentiment among large manufacturers came to plus 4, up from minus 8 in the March survey. That’s the highest since plus 6 in the March 2011 poll, and the first positive reading following six straight quarters of minuses.
  • Stronger capex this fiscal year.. Big manufacturers and non-manufacturers revised higher their combined business investment plans for the current fiscal year started April to a 5.5% on-year rise from the 2.0% drop they had predicted in the March tankan.
  • First report card for Kuroda. BOJ Gov. Haruhiko Kuroda is likely to breathe a sigh of relief looking at the results of the survey, the first conducted after he led the central bank to introduce an easing policy on a “different dimension” in April, in a bid to beat deflation and generate 2% inflation in two years.
  • More good news for Abe. The tankan results are the latest in a series of indicators suggesting that Japan’s economy is continuing to pick up on recovering exports, despite the recent sharp pullback in Tokyo stock markets. That’s good news for Prime Minister Shinzo Abe, who is enjoying strong support of around 60% ahead of an upper house election on July 21.
  • No policy change seen. The BOJ’s policy board meets next week. The tankan results were in line with expectations–  As such, the BOJ is likely to stand pat on policy.

Abenomics Update: Domestic Japanese Car Sales Plunge 15.8% - While last night's Tankan manufacturing reports met lowered expectations, it seems the reality of the domestic Japanese economy remains as bleak as ever. As Nikkei reports, Japan's domestic sales of new cars, trucks, and buses declined 15.8% for a year earlier in June for the second consecutive month. Even if one argues that Abenomics goal is not just boosting the domestic economy, total Japanese car sales were down almost 11% YoY as Honda saw its sales drop a stunning 40.7%. The latest figures continue this year's downward trend and while some blame the particularly sharp drop on fewer selling days in June, the auto dealer's association also said reflects the "ongoing severe" situation in the domestic market.

Japan: Conflicted Policy - The government of Japan under Shinzo Abe is following policies that are self-contradicting.  The recent headlines have focused on monetary expansion with that will put the U.S. to shame for sheer size of the effort.  Less attention has been given to the seemingly draconian tax increases on consumption.  Taxes will increase by 60% in April 2014 and a total of 100% from current levels by October 2015.  While pouring money into the financial system with one hand Abe will be draining it from consumers with the other. Follow up: Japan introduced a consumption tax (CT), the equivalent of the European Value Added Tax (VAT), in 1989.  Initially the tax was  3%.  In 1998 the tax was increased by 67% to 5% where it remains currently.  The two tax dates coincide with the start of serious economic disruption in Japan:  (1) 1989 was the peak of the Japanese expansionary bubble and (2) 1998 was the start of Japan's most serious post-peak recession until The Great Recession of 2007-2009.The CT changes may not have "caused" the two contractions, but it would be hard to argue that they did not exacerbate them.

TPP: Obama's Free (but not Fair) Secret Trade Agreement - This week several groups announced a campaign to stop the Trans-Pacific Partnership (TPP). People have had enough experience with treaties like NAFTA to know that it is bad for the economy, bad for workers and bad for the environment. And the Trans-Pacific Partnership trade agreement is NAFTA on steroids. The only groups that benefit from these trade agreements are big transnational corporations who offshore jobs to get cheaper labor, lower taxes and less regulations. Just recently Senator Elizabeth Warren has announced she will oppose President Obama’s nominee for the new U.S. Trade Representative, Michael Froman, in part due to his stance on the Trans-Pacific Partnership (TPP). Anti-globalization advocates accuse the TPP of going far beyond the realm of tariff reduction and trade promotion, granting unprecedented power to corporations and infringing upon consumer, labor, and environmental interests. One widely republished article says, "This isn’t just a bad trade agreement, it’s a wish list of the 1% -- a worldwide corporate power grab of enormous proportions. Of the 26 chapters under negotiation, only a few have to do directly with trade. The other chapters enshrine new rights and privileges for major corporations, while weakening the power of nation states to oppose them." This outrageous trade agreement has been negotiated in secret for four years. It was put together mostly by a few hundred corporate advisers and lobbyists who participated in the backroom closed-door deals, and dictated to the US government just exactly what they expected from the treaty --- even if it means relinquishing control of American sovereignty and trade policies to globalists (and possibly communists).

India has to repay $172 billion debt by March 2014 - The U.S. Federal Reserve’s hint that it could roll back its cumulative easy money policy seems to have suddenly increased India’s vulnerability to slowing capital flows in the near future. In this context, India’s short-term debt maturing within a year would seem to be a matter of concern against the current backdrop of the declining rupee and the U.S. Fed’s possible change of stance on easy liquidity in future. Short-term debt maturing within a year is considered by experts as a real index of a country’s vulnerability on the debt-servicing front. It is the sum of actual short-term debt with one-year maturity and longer-term debt maturing within the same year. India’s short-term debt maturing within a year stood at $172 billion end-March 2013. This means the country will have to pay back $172 billion by March 31, 2014. The corresponding figure in March 2008 — before the global financial meltdown that year — was just $54.7 billion. India has accumulated a huge short-term debt with residual maturity of one year after 2008. The figure has gone up over three times largely because this period also coincided with the unprecedented widening of the current account deficit from roughly 2.5 percent in 2008-09 to nearly 5 per cent in 2012-13. Much of this expanded CAD has been funded by debt flows. This may turn into a vicious cycle. More pertinently, short-term debt maturing within a year is now nearly 60 per cent of India’s total foreign exchange reserves. In March 2008, it was only 17 per cent of total forex reserves. This shows the actual increase in the country’s repayment vulnerability since 2008.

Brazilian central bank lowers economic growth projection - The Brazilian central bank’s projection for Brazil’s economic growth this year has fallen for the seventh consecutive time, this time from 2.46 percent to 2.40 percent, as well as falling from 3.1 percent to 3.0 percent for 2014, the bank said in its weekly analysis. The central bank also forecasts that public sector debt as a percentage of Gross Domestic Product (GDP) will remain at 35 percent both this year and in 2014, and that the trade surplus will fall from uS$6.5 billion to US$6 billion this year and from US$8 billion to US$7.35 billion in 2014. The current account deficit will rise from US$73.76 billion to US$74.5 billion this year and from US$79 billion to US$79.75 billion in 2014. When the current account posts a deficit this means the country is being funded by external savings.

Brazil’s Central Bank Seen Likely to Raise Key Interest Rate Next Week - Brazil’s central bank is seen as likely to raise its key interest rate again next week because inflation remains stubbornly higher than the government-set ceiling. A survey of 12 economists and analysts showed that all are expecting a half-point rise in the Selic rate next week. At the end of May, the central bank’s monetary-policy committee voted unanimously to raise the Selic rate a half point to 8.0%. The next rate decision will take place on Wednesday. “The annual inflation rate ended June above the government’s tolerance band, even with monthly inflation weighing in below expectations,” said Juan Jensen, an economist and partner at São Paulo consulting group Tendências. “That will force the central bank to raise its Selic base rate again next week.” Brazil’s 12-month inflation rate ended June at 6.7%, above the ceiling of the government-set inflation range for 2013 of 2.5% to 6.5%. Monthly inflation eased a bit in June to 0.26% from 0.37% in May. The latest concern is the depreciation of the Brazilian real versus the U.S. dollar. The real was trading at about BRL2.26 against the dollar on Friday, representing an 11% depreciation since the beginning of the year. The stronger dollar makes everything from imported wheat and fuel to computer components more expensive for Brazilians.

Puerto Rico awaits budget to solve economic crisis - Puerto Rico legislators on Friday rushed to try to approve a budget amid debate on how best to revive the U.S. territory's economy, which the New York Federal Reserve president warns has not yet bottomed out. The proposed $9.8 billion operating budget proposes a flurry of new taxes while seeking to boost the island's education system and rescue a crumbling public pension system. The local House of Representatives recently approved the budget, but is meeting again to evaluate several amendments that the Senate sought to add. "We are facing a gradual fiscal deterioration that is affecting the capacity to generate needed revenue," reads a measure that legislators are reviewing. "The magnitude of the reality we're facing cannot be avoided." Puerto Rico is struggling to emerge from a seven-year recession while trying to reduce a $1.2 billion deficit and $69 billion in public debt. The island of 3.7 million people also has a nearly 14 percent unemployment rate, higher than any U.S. state.

Obama to Africa: you need to do more - President Barack Obama challenged Africa Sunday -- especially its young -- to build on the remarkable progress the continent has made by promoting democratic and honest government and a thriving middle class. “There is an energy here that can’t be denied,” he said. “Africa rising.” Obama acknowledged the immense changes that have transformed sub-Saharan African in recent years, speaking on the same campus where Robert F. Kennedy in 1966 delivered his Day of Affirmation speech about the spread of civil rights, and just hours after Obama took his family to see the prison that held Nelson Mandela in the days of apartheid. But he cautioned that, despite freer societies and growing economies, much needs to be done to eradicate poverty, shed corruption and eliminate conflict. “We know this progress…rests on a fragile foundation,” he said. “Across Africa, the same institutions that should be the backbone of democracy can all too often be infected with the rot of corruption.” He pledged the United States would do its part, not by offering a handout, but by partnering with African governments and private companies to lure businesses to the continent. That would come in the form of a new $7 billion program to double access to electricity and continuing efforts to produce new food technologies and reduce illnesses including AIDS and HIV.

Global Bonds Dive for Second Month as Stocks Lose $2.7 Trillion - Global bonds plunged for a second straight month in June, stocks tumbled and the dollar began to rebound as the Federal Reserve set a timetable for ending the stimulus that drove equities to record highs and debt yields to record lows. Emerging markets suffered as China created a cash squeeze and protests turned violent from Turkey to Brazil. The $41 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market index lost an average 1.4 percent in June. The MSCI All-Country World index of equities declined 3.1 percent as emerging markets erased 6.8 percent of their value. The Standard & Poor’s 500 fell for the first time in eight months. The U.S. Dollar Index ended 0.3 percent lower after falling as much as 3.5 percent. U.S. central bankers could start reducing their $85 billion of monthly bond buying as soon as this year, Fed Chairman Ben S. Bernanke said June 19, prompting investors to recalibrate their outlook for economic growth. Stimulus efforts around the world have supported markets following the worst financial crisis since the Great Depression.

Unprecedented Globalization - Paul Krugman - A couple of weeks ago I posted a chart showing the long-term trend of world trade in manufactures relative to world production. The paper I took the chart from, however, only went up to 2000. And I decided to update it for the next edition of Krugman Obstfeld Melitz. And it’s pretty striking:You see the interwar trade decline; the growth in world trade after World War II didn’t return to 1913 levels of globalization until around 1970. But since then, trade has grown incredibly. Interestingly, the big tariff cuts in GATT rounds had already happened; what we’re looking at here is trade liberalization in developing countries plus containerization, and the emergence of massive vertical specialization (iWhatevers being made in many stages in different countries). No special moral here — and no, it doesn’t actually make the world flat, because services account for most value added and are still mainly not tradable. But it’s quite a picture.

Five Years Of Global PMI Data In One Heatmap - Confused by the numerous regional monthly flash and final PMI (manufacturing) data points? Having trouble visualizing the recovery, or as the case may be, the lack thereof (there was a manufacturing pickup in 2010 - it's long gone)? Then this 5 year global PMI heatmap is for you.

Europe Says Trade Talks With US To Start Monday Despite Concerns Over Spy Claims -The European Union will launch broad trade talks with the U.S. in Washington next week despite French and German concerns about reports of U.S. spying. France and Germany had demanded that Washington respond to news reports that the National Security Agency spied on European institutions, the latest diplomatic blow-up from revelations by fugitive NSA leaker Edward Snowden. French President François Hollande on Monday said, “we cannot have any negotiations or deals” until France and the EU get guarantees that the U.S. is not spying on its European allies. German officials said the trade talks could proceed but “only on the basis of trust.” On Tuesday, the Brussels-based European Commission, the EU’s executive arm and lead trade negotiator, said the formal trade talks would start the week of July 8 as planned. “Whilst the beginning of EU-U.S. trade negotiation should not be affected, the EU side will make it clear that for such a comprehensive and ambitious negotiation to succeed, there needs to be confidence, transparency and clarity among the negotiation partners,” said a spokeswoman for the commission.

Buy America laws raise hurdles in European talks - General government procurement accounts for more than 10 per cent of economic output in the US, according to the OECD, the Paris based group of countries that tries to promote growth. So a proliferation of Buy America bills – similar to the one supported by Mr Young, which requires Maryland to choose domestically produced products over foreign ones where possible – are barriers that European officials would like to see removed in trade talks, due to begin next month. “What we are trying to establish in these negotiations is free trade – we’re not going to be able to do that everywhere but that is the general objective – and that means not discriminating between European goods or services and their American counterparts,” says an EU official in Washington. “This is an issue for us because in Europe we have used procurement as an instrument to open up trade between member states, and in doing that we haven’t discriminated against foreigners.” According to the National Foreign Trade Council (NFTC), a US business lobby that tracks state-level Buy America legislation, there has been a fourfold increase in such measures this year, from five bills introduced in 2012 to more than 20 in 2013. New Buy America measures were passed in Ohio last year.  The flurry of Buy America bills presents a dilemma for the Obama administration in the trade talks. On one hand, US trade negotiations could use them to seek a carve-out for US procurement in retaliation for exemptions sought by the EU, such as France’s demand to protect its film industry. On the other hand, it could put the US on the defensive, making it harder for Washington to argue for more liberalisation in Europe, not just on procurement but other areas such as data privacy and agriculture.

EU Demands Explanations for US Spying, Threatens Data Pacts and Trade Deal - Yves Smith - The lead story at the Financial Times tonight is about how the European Union is threatening to suspend two data sharing agreements with the US. The pink paper also adds that this row has the potential to undermine the EU-US trade negotiations which are set to start next week (we speculated a few days ago that this might come to pass). On our side of the pond, so far only the Wall Street Journal has weighted in, with a cheery headline U.S.-EU Trade Talks on Track Despite Spy Fears which is narrowly accurate since the trade negotiations have not been rescheduled but seems to understate the degree of unhappiness and ire.  The interesting question is how and why has this row escalated now? Mind you, the Eurocrats do have a lot to be angry about. Remember, the US was caught spying on EU officials. Der Speigel released information from Edward Snowden that charged that the NSA had bugged the European Union’s offices in Washington and the UN and hacked into their computers (which enabled them to monitor meetings) and targeted other missions. If you remember, this story broke shortly before a G8 meeting in Dublin. Obama got the cold shoulder. The European officials appear to have cornered the Americans. This AFP story ran June 14, while the summit was underway: As I am reading between the lines of the two FT stories tonight, US agrees to talks with EU on surveillance, and Brussels threatens to suspend data sharing with US in spying row, the Administration may be even more on the back foot that it appears.

Prosecutions of offshore banks may help turn tide against secrecy - It sounds like the stuff of a Hollywood movie, but it’s just one of many eye-popping tales buried in thousands of pages of court documents reviewed by McClatchy and used in the prosecution of Wegelin & Co., Switzerland’s oldest bank, whose origins date to 1741. Wegelin officials pleaded guilty in January to helping Americans shelter taxable income in Switzerland, and sentencing was March 4. It marked a major victory for Preet Bharara, the U.S. attorney for the Southern District of New York. Wegelin was ordered to pay about $58 million on top of $16.3 million in forfeitures already obtained by U.S. authorities. From clandestine meetings to phony foundations described in federal indictments, the secret world of offshore banking and the lengths to which Americans have gone to avoid taxes point to the complexities Congress will confront as it embarks on comprehensive tax restructuring. Fully 45 percent of Americans who’ve taken advantage of the IRS’s tax amnesty program held accounts in Switzerland. The issue of offshore bank accounts has trailed politicians in recent years. A $3 million declared Swiss account and a number of holdings in the Cayman Islands dogged the campaign of GOP presidential nominee Mitt Romney last year.

Private Banks Leave Switzerland as End of Secrecy Hurts - For European lenders with private-banking aspirations, a presence in Switzerland used to be a must. Now, with bank secrecy eroding and rising compliance costs chipping away at profits, more are saying adieu. The number of foreign-owned Swiss banks fell to 129 by the end of May from 145 at the start of 2012, according to data from the Association of Foreign Banks in Switzerland. Assets under management slid by a quarter to 870.7 billion Swiss francs ($921 billion) in the five years through 2012 as clients withdrew money or paid taxes on undeclared accounts, the data show.A crackdown on bank secrecy and increased regulatory scrutiny may unlock a wave of mergers and acquisitions in the next 12 to 18 months, according to bankers, consultants and analysts interviewed by Bloomberg News. While Switzerland remains the biggest center for global offshore wealth with $2.2 trillion, or about 26 percent of the market, according to Boston Consulting Group, departures may further chip away at the Alpine republic’s status.

EU Accuses 13 Banks of Hampering CDS Competition - Thirteen of the world’s biggest investment banks were accused by the European Union of colluding to curb competition in the $10 trillion credit derivatives industry. The EU sent a complaint, or statement of objections, to 13 banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association over allegations they sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009,” the European Commission said.The probe is one of several by the Brussels-based commission into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates. Joaquin Almunia, the EU antitrust chief, said he’s seeking to settle the probes into Libor and Euribor with some of the same banks in the CDS case by the end of the year. The EU in April 2011 opened a probe into whether banks colluded by giving market information to Markit, a data provider majority-owned by Wall Street’s largest banks. Earlier this year, the EU extended its investigation to include ISDA, having found indications that it “may have been involved in a coordinated effort of investment banks to delay or prevent exchanges” from entering the credit swaps business.

EU Antitrust Authorities Sue 13 MegaBanks Over Credit Default Swaps Collusion to Stymie Exchanges - Yves Smith - Ooh, here we thought bank reform was dead, and an unexpected front opens up.  Gary Gensler of the CFTC has been fighting to implement Dodd Frank rules on derivatives, and not only is Obama pushing him out on an accelerated schedule, but European regulators are throwing hissy fits via Jack Lew over Gensler’s continuing insistence on enforcing regulations they haven’t managed to stymie intransigence.  Just as not every regulator in the US has given up on doing his job, so too seems to be the case overseas. Recall that the Treasury and the FSA in the UK pushed hard for a Glass-Steagall type split between retail banking and other operations. Concerted opposition by Treasury resulted in that being watered down to mere ring-fencing. And now, in an amusing coincidence of timing, while one cohort of European regulators is trying (with not much success) to get Gensler leashed and collared, another has launched a major attack on a big derivatives profits engine, credit default swaps. From the Financial Times: Investment banks’ 20-year grip over credit insurance markets has come under regulatory assault as Brussels served charges against 13 banks for allegedly conspiring to block exchanges from challenging their business model. The formal European Commission charge-sheet, running to almost 400 pages, alleges collusion to ensure the insurance-like contracts remained an “over-the-counter” (OTC) product – preserving the banks’ lucrative role as middlemen. Brussels alleges that the harm from blocking exchanges, such as Deutsche Börse and CME Group of the US, went beyond trapping investors in the relatively more costly OTC market.

Joblessness Edges Higher To Hit a Euro Zone Record - Unemployment in the euro zone continued its steady rise in May ... The jobless rate in the 17 countries that belong to the euro zone was 12.1 percent in May, adjusting for seasonal effects, according to a report from Eurostat, the European Union statistics agency. That figure compared with 12 percent in April, which was revised down from 12.2 percent reported earlier. Based on the revised figures, May unemployment was at a record high.  Eurostat estimated that 19.2 million people in the euro area were jobless in May, an increase of 67,000 from April. For all 27 countries in the European Union, the unemployment rate was unchanged at 10.9 percent. The European bloc expanded to 28 countries on Monday when Croatia officially joined. Joblessness in the euro zone has been rising almost without interruption since early 2008, when the financial crisis began, declining only briefly at the beginning of 2011. And analysts see little prospect for a sustained decline anytime soon.  While economists expect the euro zone economy to stabilize in the course of this year, growth will most likely remain too slow to generate large numbers of jobs.

Euro-zone unemployment hits record high - Unemployment in the euro zone hit a record high in May, as the region continued to grapple with recession. The percentage of those out of work in the euro zone was 12.1% in the month, up from 12% in April and a marked drop from the 11.3% recorded in May last year, according to EuroStat, which released the figures on Monday. The highest rates in the 17-country euro-zone were in Spain and Greece, with jobless rates of 26.9% and 26.8% respectively. Across the wider 27-member EU, unemployment was stable compared with April, at 10.9%, but down from 10.4% a year ago. Joblessness increased in 17 of the EU states and fell in 10, according to EuroStat. People less than 25 years old bore the brunt, as youth unemployment hit 23% in the EU and 23.8% in the euro zone in May, with Greece top at 59.2%

Euro-Zone May Jobless Rate Revised Up to 12.2% from 12.1% - The European Union's official statistics agency said Tuesday the rate of unemployment across the 17 countries that share the euro was 12.2% in May, not the 12.1% given in a release Monday. In a statement, Eurostat said the error in its calculations was due to "an error in the loading of French data" that led to the unemployment rate for France being underestimated by half a percentage point, and the unemployment rate for the euro zone as a whole by a tenth of a percentage point. The 12.2% rate of unemployment is the highest since records began in 1995.

Nigel Farage Blasts European Parliament for Hopeless Positions on Youth Job Programs and Global Warming Programs - The always entertaining Nigel Farage says there is a "Gathering Electoral Storm" in his blast of European Parliament for Hopeless Positions on Youth Job Programs and Global Warming Programs.Link if video does not play: Nigel Farage: There is a Gathering Electoral Storm... Once again, Farage hits the nail squarely on the head.

Is Europe Recovering? Manufacturing and PMI Data out for Europe overnight and, much like the flash data, the news is getting better but with some serious caveats.

• Final Eurozone Manufacturing PMI at 16-month high of 48.8 in June (flash: 48.7)
• PMIs rise in all nations except Germany
• Price pressures ease further as input costs and output charges decline in June

The Eurozone manufacturing sector moved a step closer to stabilisation at the end of the second quarter, with rates of contraction in output and new orders continuing to ease. The seasonally adjusted Markit Manufacturing EuroZone PMI rose to a 16-month high of 48.8 in June, up from 48.3 in May , and slightly higher than the flash estimate of 48.7. Over the second quarter as a whole, the average reading for the headline PMI (47.9) was the highest since Q1 2012. The PMI has nonetheless remained below the neutral 50.0 mark since August 2011. Among the nations covered by the survey, only the German PMI failed to rise in June. Ireland saw a marginal improvement in manufacturing business conditions and Spain experienced a stabilisation, while rates of contraction eased in France, Italy, the Netherlands, Austria and Greece.

Italy's Manufacturing PMI Rises To 23-Month High: An indicator of Italian manufacturing sector performance rose to its highest level in almost two years in June, a survey by Markit Economics showed Monday, suggesting that the rate of contraction in activity has eased notably amid slower decline in new orders. The seasonally adjusted Markit/ADACI purchasing managers' index rose to a 23-month high of 49.1 in June from 47.3 in May. Readings below 50, however, suggests contraction of the sector. Production expanded for the first time since September 2011. New orders continued to fall, but the rate of decline was the weakest in the current 25-month bout declines. This improvement was driven by higher new export orders, which have now increased for six successive months. The latest gain in new export orders was the sharpest since April 2011. Employment at Italian factories continued to decrease for a twenty third consecutive month in June, but the pace of decline eased to the slowest since March 2012.

French manufacturing shrinks at slowest rate in 16 months: PMI - Economic Times: French manufacturing activity shrank at the slowest rate in 16 months in May, a poll showed on Monday, in the latest sign that the long-suffering sector may be regaining traction. Data compiler Markit's final purchasing managers index ( PMI) for manufacturing rose to a 48.4 from 46.4 in May, up slightly from a preliminary reading of 48.3.The improvement brought the index to its highest level since February 2012 and took it closer to the 50 line dividing contractions in activity from expansions. "A slower fall in new orders was a key contributor, with domestic demand showing signs of steadying, off-setting a sharper drop in export sales," The flow of new orders was its best since February 2012, with some panelists reporting a boost from low client stock levels and new product launches despite a subdued market. With the outlook beginning to improve, the pace of job shedding at companies was the slowest in 15 months, which may help keep spiralling unemployment in check in the coming months.

France and the Eurozone recovery - The biggest threat to near-term recovery in the Eurozone is not the periphery. It's France - which represents over a fifth of the area's GDP.  CNBC:  - The figures showed the euro zone's second-largest economy, hit by lagging trade competitiveness and a caught in a shallow recession, will not be able to count on its traditional driver - consumer spending - to rebound. The sickly growth will leave France's 2013 public deficit near 4 percent of economic output, overshooting an already revised target of 3.7 percent and further away from an EU goal of 3 percent, the state auditor said in a report on Thursday, French consumer confidence is now worse than the lows of the Great Recession. In contrast, German consumer sentiment (as measured by GfK) jumped to a 5.5-year high in June. Even Italy is showing improved consumer mood, which is now at a 15-month high. Assuming the banking system deleveraging slows (and many expect that it will), stabilization of economic conditions in France could set the stage for recovery in the Eurozone as a whole.

"Risk On" Sentiment Returns In Aftermath Of Stronger European Manufacturing Data - Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.

Chart for the day: Growing on Imports - Rebecca Wilder - Or should I say barely contracting on imports. In the traditional sense, growth in imports does not make a whole lot of sense. Normal economies import and export things, such that statistical agencies subtract the dollar amount of things that are made in other economies but consumed domestically (imports) out of their tally of spending on goods and services (GDP) in order to avoid double counting items. So if I spend $20 on candy at store in some resort town – $9 on taffy made in Monterey, California and $11 on chocolate made in Belgium – the government only counts the $9 candy made in Monterey as part of US GDP. If imports is the sole positive growth contribution for GDP, that’s tantamount to production falling on goods and services but we don’t want to double-count the drop in spending of imported goods when calculating GDP, so it’s added back. that’s what’s happening in the euro area. Fixed investment spending has dropped four consecutive quarters. Consumption grew in Q1 2013 but contributed just 0.04% to total growth following 5 consecutive quarters of contraction . Exports tumbled for two consecutive quarters, serving to drag growth -0.41% and -0.36%, respectively in Q4 2012 and Q1 2013. Over the last two quarters, imports has been the only consecutive positive contributor to GDP growth. Some heavy damage has been done in Europe by the austerity drive. Just thought you might want to see this.

Follow up to yesterday’s post: Euro area consumption and Investment in Q2 2013 - Rebecca Wilder - Yesterday I illustrated the unsustainable accounting growth engine of imports occurring in the euro area (EA). Today I’ll present more of a forward looking analysis on private domestic demand within the euro area: consumption and investment. If current levels of real retail sales hold at the euro area level, then the contributions to growth in Q2 2013 will likely be ever so slightly healthier amid a pickup in private consumption. Consumption Yesterday we received the May 2013 data on euro area real retail sales, of which the quarterly growth pattern (after revisions, which is very important because this index is heavily revised) has a 70% correlation with euro area real private consumption. A simple bivariate regression predicts that real consumption will grow 0.3% in the second quarter of 2013, holding all else equal and provided the level of real retail sales does not change in June. This would be a material increase from its meager 0.04% contribution to real GDP growth in Q1. The other part of private domestic demand is gross fixed capital formation (GFCF, or investment less inventory build). There is no real monthly indicator that I know of to forecast quarterly GCFC growth, so I look at the industrial confidence index released by the DG ECFIN (which aggregates various local statistical agency surveys). Euro area industrial confidence has a 70% correlation with GFCF growth, where a simple bivariate regression predicts that GFCF will contract at an 0.8% pace in Q2 2013. This is less than half the rate of contraction seen in Q1 2013.

Germans Let Cars Age as Consumers Halt Buying in Crisis - Cars on German roads are older than they’ve ever been as consumers balk at replacing aging models with new ones amid Europe’s sovereign-debt crisis. Registrations of new models in the country slumped 4.7 percent in June, the fifth decline this year, leading to an 8.1 percent drop for the first half of 2013 to 1.5 million vehicles, according to data released today from Germany’s motor vehicle office, KBA. The lack of buying meant cars are 8.7 years old on average, a new high and a full year older than the pre-crisis level in 2007, the VDA, Germany’s auto-industry association, said today. “Germany naturally can’t decouple itself from the crisis-laden environment” in Europe, VDA President Matthias Wissmann said at a press conference in Berlin. “There’s evidently insecurity because of the ongoing euro crisis.” The VDA stuck to its forecast for full-year sales of 2.9 million to 3 million vehicles in Germany and said demand would hover at about 3 million autos in the coming years in Europe’s biggest car market. Still, declines in the second half will gradually decrease and a recovery in the region will come eventually, the auto lobby said.

Health minister says hospitals may be closed in order to reduce costs - Health Minister Adonis Georgiadis visited Geniko Kratiko Hospital in central Athens on Sunday night, a few hours after saying that he would be prepared to shut down hospitals in order to reduce healthcare spending. Georgiadis used Twitter to thank the hospital staff after his visit, saying that they were “fighting hard.” In a newspaper interview on Sunday, Georgiadis said that he would oversee stringent checks on spending at hospitals and would replace top executives over the next couple of weeks. “If I have to close hospitals, I will do so,” said Georgiadis.

Stakes raised as Greece, lenders resume talks on bailout loan (Reuters) - Greece and its international lenders resume talks on Monday to unlock 8.1 billion euros ($10.5 billion) of rescue loans after a two-week break during which the government almost collapsed over redundancies at state broadcaster ERT. Prime Minister Antonis Samaras has said he expects the talks to conclude successfully, despite setbacks to the country's privatization program and delays in public sector reforms. To pressure Athens to deliver on reforms, the trio of lenders might refuse to pay the full sum in one go and break it up into three monthly payments instead, Greek media reported. "The biggest issue in the negotiations will be the delays in public sector reforms," a senior finance ministry official told Reuters. Athens missed a June deadline to place 12,500 state workers into a "mobility scheme", under which they are transferred or dismissed within a year. The country is battling through its sixth year of recession, and the latest installment is one of the last big cash injections it stands to get before the 240-billion-euro bailout expires at the end of 2014.

Exclusive: Greece has three days to deliver or face consequences - EU officials -  Greece has three days to reassure Europe and the IMF that it can deliver on conditions attached to its bailout in order to receive its next tranche of aid, four euro zone officials said on Tuesday. The lenders are unhappy with progress Greece has made towards reforming its public sector, a senior euro zone official involved in the negotiations said, while another said they might suspend an inspection visit they resumed on Monday. Athens, which has about 2.2 billion euros of bonds to redeem in August, needs the talks to conclude successfully. If they fail, the International Monetary Fund might have to withdraw from the 240 billion euro ($313 billion) bailout to avoid violating its own rules, which require a borrower to be financed a year ahead. That would heighten the risk that concerted efforts by policymakers over the past nine months to keep a lid on the euro zone crisis could unravel, at a time when tensions are rising in other troubled debtor countries. Athens is scrambling to bridge differences with troika inspectors and wrap up the review by the end of this week, a Greek coalition official who took part in the talks told Reuters on Tuesday.

Troika gives Greece a 3-day ultimatum on bailout - Greece has three days to satisfy lenders it can fulfill the promises it made under its bailout deal, or risk more conditions on the next 8.1 billion-euro ($10.59 billion) installment of rescue loans, Reuters reported Tuesday. The warning comes after the Greek government resumed negotiations on Monday with the "Troika" of lenders -- the International Monetary Fund, the European Union and the European Central Bank -- about unlocking the next injection of cash. Greece, which has seen six years of recession, has missed deadlines for public-sector reforms. The government will have to make a convincing case in a presentation to lenders on Friday, or risk having the €8.1 billion in aid delivered in three monthly payments, rather than a lump sum.

Credit Contraction Exceeds 6% in Spain, Highest Ever in Crisis - According to prime minister Mariano Rajoy, Spain has been on the verge of recovery for two years. Rajoy has also promised to bring Spain's budget deficit to 3% of GDP for two straight years. And EU has extended the timeline for Spain to hit that goal from 2012 to 2013 to 2014 to 2015 and now to 2016.  Last year Spain's budget deficit was 7.1% and the unemployment rate is nearly 27% with a youth unemployment rate over 56%.   Today we can add another piece to Spain's misery index. Via Google Translate, please consider Credit Contraction Exceeds 6% for First TimeDespite the efforts, or the good wishes of the Government, the day of the reopening of the credit tap still seems distant. According to the Bank of Spain, loans to the private sector residents, families and businesses have registered a fall of 6.1% in the month of May, the highest percentage in the entire crisis. The evolution of the total loan portfolio shows that quarter to quarter, month to month, continues to reduce credit volume in rapid stepsSpain Lending Stats

  • February Down 5.5%
  • March Down 5.7%
  • April Down 5.8%
  • May Down 6.1%

Portuguese turmoil - Here’s Portugal’s 10 year benchmark punching through 8 per cent to start your morning. We’d note it was sitting at 6.4 per cent on the 1st of this month… To lose one cabinet minister is bad luck, to lose two in two days… means… time for another eurozone peripheral crisis? The resignation of Portugal’s foreign minister Paulo Portas yesterday has everyone worried, because of his role as leader of the CDS-PP, the junior partner in the governing coalition. If CDS-PP withdrew their support, the government would be left with 108 seats in a 230-seat parliament and uncertain prospects for scraping together a majority. And all this less than two weeks before a troika delegation is due to start their next review of the economy as the lenders consider whether Portugal will get an easing of terms on its 2011 €78bn bailout, and receive the next €2bn instalment.

Ruling Coalition Splinters on Austerity Fatigue - Portuguese borrowing costs topped 8 percent for the first time this year after two ministers quit, signaling the government will struggle to implement further budget cuts as its bailout program enters its final 12 months. Social Security Minister Pedro Mota Soares and Agriculture Minister Assuncao Cristas will hand in their resignations to Coelho today, broadcaster TVI reported on its website last night, without saying how it obtained the information. Both ministers are from Portas’s CDS party.  The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn’t yet requested another change of timetables and targets. On March 15, the government announced less ambitious targets for narrowing the budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. It targets a deficit of 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. Portugal forecasts debt will peak at 123.7 percent of GDP in 2014. Gaspar’s resignation shows the risk of reforms faltering, Organization for Economic Cooperation and Development Chief Economist Pier Carlo Padoan said yesterday at the Lisbon Council in Brussels. “Fatigue may suddenly erupt and the temptation to go backward may be very, very strong,” he said.

The Portuguese crisis is a big deal -- Over the past two years, Portugal has been the poster child for the IMF-EU as to how a country should undertake difficult budget austerity and economic reform. For until very recently, it displayed a high degree of political consensus on the need for major budget austerity in that country. It was hoped that Portugal’s perseverance with budget austerity and economic reform would allow that country to graduate from the IMF-EU bailout program and to fully access international capital markets in 2014. The breaking apart of the Portuguese coalition government that is presently underway over the very issue of austerity underlines how the political consensus for austerity has broken down. It also raises the prospect of a significant deepening in Portugal’s already very deep economic recession since it is bound to usher in a prolonged period of domestic political uncertainty and of market volatility. And it almost certainly puts paid to any notion of Portugal being able to access the international capital markets on a sustained basis anytime soon. The political crisis in Portugal has significance beyond its borders since it comes at a time of worsening economic and political fundamentals in the rest of the European periphery. The Greek government appears to be teetering, the Irish economy has moved decisively back into recession, Italy’s politics has become increasingly dysfunctional, and the Cypriot economy is literally collapsing. Against this background, the difficulty of sticking to austerity by Portugal, Europe’s model pupil, is bound to cause markets to refocus attention on the rest of the European periphery. This could very well make for a hot summer in the markets.

Analysis - Portugal, Greece risk reawakening euro zone beast (Reuters) - A teetering Portuguese government has underlined the threat that the euro zone debt crisis, in hibernation for almost a year, may be about to reawaken. From Greece to Cyprus, Slovenia to Spain and Italy, and now most pressingly Portugal, where the finance and foreign ministers resigned in the space of two days, a host of problems is stirring after 10 months of relative calm imposed by the European Central Bank. Portuguese Prime Minister Pedro Passos Coelho told the nation in an address late on Tuesday that he did not accept the foreign minister's resignation and would try to go on governing. If his government does end up collapsing, as is now more likely, it will raise immediate questions about Lisbon's ability to meet the terms of the 78-billion-euro bailout it agreed with the EU and International Monetary Fund in 2011. Portugal had been held up as an example of a bailout country doing all the right things to get its economy back in shape. That reputation is now harder to sustain and even before this latest crisis, the International Monetary Fund reported last month that Lisbon's debt position was "very fragile". Coming soon after the near-collapse of the Greek government, which has been given until Monday to show it can meet the demands of its own EU-IMF bailout, the euro zone may be on the brink of falling back into full-on crisis.

Moody's downgrades Spanish bank debt - Moody's has downgraded three nationalised Spanish banking groups, sending their debt deeper into junk bond territory on fears that private investors may get burned in case of trouble. Moody's Investors Service axed its ratings of Bankia, Catalunya Banc and NovaCaixaGalicia, citing their 'very weak' asset quality, poor profits and the major challenges they face in lowering debt, closing branches and cutting staff numbers. The New York-based assessor of credit said in a statement late Tuesday that it had taken account of the large degree of support to the banks from the Spanish government. But Moody's said it believed the government would find itself 'increasingly constrained' if it tried to offer further support to Spanish banks. The agency said this raised the risk of 'burden sharing' -- meaning private investors could have to accept losses.

Spain puts property on block in bid to replenish its coffers - The Spanish government has approved a plan to sell a quarter of its state-owned properties in an attempt to raise hundreds of millions and boost the government's empty coffers. Some 15,000 properties, from office buildings to agricultural land, will be put up for sale over the next seven years. The measure is the latest in a series of moves to bring Spain's budget deficit to within the EU target of 3 per cent by 2016 from 7.1 per cent of GDP last year. Spain's government has introduced a number of unpopular austerity measures as the nation struggles with its sixth quarter of negative growth and an unemployment rate of nearly 27 per cent.

Beware, the Borderless Tax Man Cometh - It’s no secret that the Spanish government is desperate for money these days. Like a junkie experiencing the early spasms of withdrawal, Rajoy’s administration has been frantically surveying its surroundings for anything of value to steal or pawn. Last year it reneged on pretty much all its election pledges by unleashing the most severe austerity regime in the country’s democratic history, with 27 billion euros of cuts and a 7% rise in utility prices. Taxes were hiked across the board and, as in Greece, privatised hospitals and other public services were hastily fast-tracked into the pockets of multinational corporations. But all to no avail. Despite its austerity drive, the government failed dismally in its attempts to meet the Troika’s 5.3 percent budget target for 2012, and by May this year had already given up on meeting the 2013 target. With time fast running out and the Troika’s goons breathing heavily down its neck, the government began frantically searching for new, more imaginative ways of raising funds. And in January, 2013, it seemed that it had found the perfect answer – namely, to target the funds of expatriate residents and nationals living overseas. The government stealthily announced a new law that obligated any resident in Spain with more than 50,000 euros worth of savings, assets or real estate overseas to declare all of it – and with pin-point accuracy.

Eurozone faces ‘lost decade’ - The eurozone faces a Japanese style "lost decade" unless action is taken to address the deep-seated problems of its banks, ratesetter Benoît Coeuré has warned. Troubled bank balance sheets had the potential to “choke the engine of recovery” in the 17-nation bloc, and “exert a more persistent drag on economic growth,” said Mr Coeuré, who sits on the executive board of the European Central Bank (ECB). Mr Coeuré said ailing banks had to be repaired or shut down. Failure to do so could result in a decade of stagnant growth in the eurozone, similar to Japan in the 1990s. He said the eurozone crisis risked creating a Japanese-style wave of “zombie banks” in which lenders, fearful of falling foul of capital rules, chose to “evergreen” - or roll over - bad loans instead of recognising losses on their books. This had led to the “perverse” practice of banks extending credit to insolvent borrowers, rather than lend to creditworthy firms, said Mr Coeuré. Banks then “gambl[ed] on the hope that [firms] would recover or that the government would bail them out”.

Draghi Says ECB Rate to Stay Low for ‘Extended Period’ - President Mario Draghi said the European Central Bank expects to keep interest rates low for an “extended period” as he tries to restrain market borrowing costs, in a new departure for an institution averse to setting policy in advance.“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi said at a press conference in Frankfurt. “What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future. Our exit is very distant.”   The ECB chose words over deeds after an “extensive discussion” about cutting interest rates, and the support for the new language was unanimous, according to Draghi. He said the bank kept an open mind on whether to cut the deposit rate below zero. Historically, Draghi and predecessor Jean-Claude Trichet have said that the ECB “never precommits” to any future monetary policy. Draghi said the reason for taking what he called an “unprecedented” step was the ECB’s expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the 17-nation euro-area economy.

ECB's Draghi: "ECB interest rates to remain at present or lower levels for an extended period of time" - From David Keohane at FT Alphaville: Forward guidance is contagious and the ECB has caught it  From a very dovish Mario Draghi’s press conference following the European Central Bank’s decision to keep its key rates on hold ... Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates ... to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.This feels really rather significant. And from the WSJ: ECB Chief Gives Rate Forecast It is a radical departure from the policy the ECB has followed ever since it started operations in 1999, under which it never pre-committed to any level of rates in advance....Earlier in the day, the Bank of England had also broken with its usual practice, issuing a forward-looking statement that, likewise, appeared aimed at damping expectations of future interest rate increases. Mr. Draghi said it was a "coincidence" that the two things had happened on the same day. Mr. Draghi drew attention to the fact that the council had been unanimous on giving its new guidance, implying that even hawkish members such as Germany's Jens Weidmann had consented to what was a powerfully dovish signal.

Draghi-Carney Seek Independence Day Break From Bernanke Exit - European central bankers broke new ground to protect their economies from a U.S.-led surge in bond yields, indicating they will keep benchmark interest rates low for longer than investors bet. With rising market borrowing costs posing fresh threats to weak expansions, Bank of England Governor Mark Carney and European Central Bank President Mario Draghi gave greater clarity over their monetary policy thinking yesterday in the hope financial markets will correct.The pound and euro slid against the dollar, while bonds and stocks rose as both officials used rhetoric to distance themselves from Federal Reserve Chairman Ben S. Bernanke’s signal that the U.S. is preparing to start unwinding its $85-billion a month bond-buying program later this year. That had sparked a global selloff in bonds, forcing up yields in economies less able than the U.S. to cope with tighter credit. “The ECB and BOE are declaring their monetary independence from the rising U.S. rate trend,” “It’s the right thing to do, because European economies need low rates.”

Forward guidance crosses the Atlantic - A NEW era was ushered in today in European central banking. But it did not involve changes in interest rates or in asset-purchase schemes. Rather it was the adoption of a new communication strategy.  The communication now in vogue is “forward guidance” and has already been adopted by America’s Federal Reserve. Now it is crossing the Atlantic. In an irony, Mario Draghi, head of the European Central Bank (ECB), which has historically ruled out pre-commitment, got there before Mark Carney, the new governor of the Bank of England (BOE), has had a chance to introduce a policy he pioneered in Canada. But it is coming soon to Britain, too. Forward guidance arms central banks with fresh ammunition even when they have lowered short-term interest rates close to zero. It allows them to influence not just current rates but those stretching into the future through pledges to keep them low. The forward guidance can be for a period of time or it can be linked to specific indicators, such as an unemployment-rate threshold (which is not, however, a trigger) in the case of the Fed.

Pound Slumps Most Since 2011 as BOE Signals Rates to Stay Low - The pound plunged the most in almost two years against the dollar after the Bank of England signaled it will keep interest rates at a record low for longer than investors had expected.  Led by new Governor Mark Carney, the central bank kept its bond-buying target at 375 billion pounds ($565 billion) and issued a statement afterwards, signaling a move toward the foward-guidance tool he favors. Today’s decision was the first by the central bank since Carney became governor on July 1. The nine-member Monetary Policy Committee also left the U.K.’s main interest rate at a record-low 0.5 percent. Former Bank of Canada Governor Carney is the first foreigner to run the 319-year-old U.K. central bank. The Bank of England typically doesn’t release statements after leaving policy unchanged. The decision to do so today reflects comments Carney made earlier this year to use communication, including forward guidance, as one of his policy tools.

Bank of England Comments Send the Pound Lower -— Barely four days in the job, Mark J. Carney, the new Bank of England governor, is already having an impact on markets here. The pound dropped about 1.3 percent against the dollar and also fell against other major currencies on Thursday after the central bank said that any expectations that interest rates would rise soon from their current record-low level were misguided. The statement, issued along with the bank’s monthly interest rate announcement, was itself a departure from previous practice and showed that Mr. Carney, who became governor on Monday, is already making his mark on procedures. “The drop in the pound is byproduct of the comments, and the market reaction indicates just how eager it is for comments from the new regime,” Peter Dixon, an economist at Commerzbank, said. The central bank decided to leave its main rate at 0.5 percent and also held its program of economic stimulus at £375 billion, or $570 billion. Recent data from the services and manufacturing industries had surprised some economists by showing faster rates of growth.

Mark Carney's biggest challenge -- NO CHANGE in Threadneedle Street today as the Bank of England held its main rate at 0.5% and the scale of quantitative easing fixed at £375 billion. Nobody expected anything else, despite the arrival of the new boss, Mark Carney, on Monday. The bank's statement was more dovish than usual though, with the MPC saying that “the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy” - it reads like a step towards Fed-style forward guidance. Gilt yields have fallen in past half an hour.  Things might change for real next month. Mr Carney is due to present his views on whether the BoE should issue explicit forward guidance: essentially promising to keep rates low until some economic threshold (NGDP, say) has been met. It is a policy idea that divides people. We set out why we like the idea in a leader back in March. Others are more sceptical: Chris Giles is worth a read in today’s FT, as is a brand new blog by Tony Yates, an economist who knows all there is to know about how the bank works. Its and interesting debate, but forward guidance is the second most important thing Mr Carney needs to do. So I hope it doesn’t distract the bank, and bank watchers, from the bigger problem, British firms’ ongoing credit crunch. It has been going on for far too long, and it is getting worse. Check out the grim chart below.

What derailed the UK recovery? - Here's a horrible chart:  It comes from ONS's Economic Review for July 2013. There are a couple of key things that this shows. The first is systematic underestimation of the damage to the UK's economy. The 2008/9 recession was deeper than previously estimated and output remains lower. But the second is to my mind more interesting. The 2008/9 recession was originally thought to be similar to the 1979 recession. We now know it was quite a bit deeper and lasted longer. But the shape of the curve was actually more like the 1990 recession, which unlike the 1979 recession involved a property market crash. Indeed the two lines parallel each other nicely - even with the revision - until the 10th quarter after the crisis. Then it all went wrong: even though the second dip shown on the original line has now turned into simply a flattening of the curve, the economy stopped recovering then and there has been little growth since. It is all too easy to blame this on the Coalition government that took office in May 2010 with a deficit-cutting agenda. But at the time, the economy was growing and the big issues were government finances and inflation. No-one thought that GDP was at risk: the trajectory was for a recovery similar to that in the 1990 recession, and there was no particular reason to think that it would fail. The abrupt change of growth trajectory suggests that a pretty major exogenous shock hit the economy towards the end of 2010. But finding out what that shock was, and why it derailed the recovery so comprehensively, requires some detective work.

Mysteries of the middle class - Chrystia Freeland - If you are worried about the Western middle class – and we all should be – you may have started to have some doubts about the virtues of flexible labor markets. In theory, flexible labor markets should make our economies more productive, and all of us richer, by making it easier for people to do the work the economy needs and to stop doing the work it doesn’t. In practice, though, some economists who once championed flexible labor markets without reservation, like Daron Acemoglu of the Massachusetts Institute of Technology, have begun to have second thoughts. Acemoglu doesn’t doubt the positive economic effects of flexible labor markets, but he has begun to be concerned about their political and distributional consequences. They might help the economy grow overall, but they may also be contributing to the hollowing out of the middle class by weakening its political bargaining power. That’s why a recent paper makes such fascinating reading. Van Reenen and Pessoa set out to unravel the two big mysteries about Britain’s economic performance over the past five years. The backdrop to both is the devastation that Britain, with its oversize banking sector, suffered in the wake of the 2008 financial crisis. “The big story in the UK is that the economy has shrunk by 2.5 percent since the pre-crisis period,” Van Reenen told me. “That’s the longest depressed economy in this country for more than a hundred years.”

Mortgages are dangerous beasts - Barclays is complaining. The Prudential Regulation Authority (PRA) is proposing to test the bank's ability to comply with a proposed new regulatory target - the leverage ratio.In corporate finance, the leverage ratio is the ratio of equity to total debt. But in the banking world, the leverage ratio is the ratio of equity to total assets. It is in theory a simple measure, although different accounting standards do make a difference to its calculation - for example, US GAAP and IFRS netting rules for derivative exposures are different, which leads Simon Johnson to make the mistake of claiming that Deutsche Bank's leverage ratio is too low relative to US banks, when actually under US GAAP it is rather good....However, I digress. The capital ratio, by contrast, is the ratio of equity to risk weighted assets. Risk weighting reduces the value of a particular asset or asset class in the capital ratio denominator: unsecured risky loans are weighted at 100% (i.e. the denominator includes the full value of the loan), but other loans are weighted at various percentages depending on the creditworthiness of the borrower, the value of any collateral and various other risk measures. Obviously, the lower the risk weighting, the lower the amount of capital needed to meet the capital ratio target set by regulators.

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