U.S. Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week on increased holdings of Treasuries, Fed data released on Thursday showed. The Fed's balance sheet liabilities stood at $3.611 trillion on Sept. 4, from $3.602 trillion on Aug. 28. The Fed's holdings of Treasuries rose to $2.033 trillion as of Wednesday, from $2.024 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) stayed just about flat at $1.291 trillion from a week ago.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $65.713 billion, which was unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $17 million a day during the week, compared with $21 million a day the previous week.
FRB: H.4.1 Release--Factors Affecting Reserve Balances--September 5, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks
Fed’s Williams: Still on Track to Taper Bond Buys This Year - The Federal Reserve remains on track to slow its bond-buying stimulus program later this year and end it in 2014, a U.S. central bank official said Wednesday. “The time is approaching when our economy will have enough momentum on its own without the need for additional monetary stimulus,” Federal Reserve Bank of San Francisco President John Williams said in a speech here. In making his case for a slowdown and an eventual end to the Fed’s $85 billion program of Treasury and mortgage bond purchases, Mr. Williams didn’t offer a specific timetable for action. Many in financial markets expect the Fed will most likely begin to trim its bond purchases when it meets on Sept. 17 and 18, in what is predicted to be a small cut. That said, there’s considerable uncertainty around the issue, and some suspect that the Fed could delay the cutback until later in the year as officials take stock of how potential U.S. military action in Syria and new wrangling over the U.S. borrowing limit affect the economy. In his speech, Mr. Williams relied heavily on the timing laid out by Fed Chairman Ben Bernanke earlier this year, which didn’t offer a date for action, only a general guideline based on the expected path of the economy. “I haven’t significantly changed my forecast since then, and I view Chairman Bernanke’s timetable to still be the best course forward,” Mr. Williams said in the text of his speech that was prepared for delivery before a local audience of business people. He added, “any adjustments to our purchases are likely to be part of a multistep gradual process, reflecting the pace of improvement in the economy.”
Fed stimulus not enough: Kocherlakota - The Federal Reserve isn't providing sufficient stimulus to the economy, said Minneapolis Fed President Narayana Kocherlakota on Wednesday. In prepared opening remarks to a town hall meeting in La Crosse, Wisc., Kocherlakota said the Fed's own forecasts of inflation below 2% over the medium term and a gradual decline in joblessness "suggest that it should be providing more stimulus to the economy, not less." Kocherlakota, not currently a member of the Fed's policymaking committee, said the central bank plans to buy more securities over the remainder of 2013 and didn't hint about when purchases would be tapered. Kocherlakota will be a voting member next year. The town hall meeting is being web cast here.
Fed Watch: Williams On Board With Tapering, Kocherlakota Not So Much -- This morning I had the opportunity to hear San Francisco Federal Reserve President John WIlliams present his outlook for the US economy and the implications for monetary policy in Portland. I had anticipated that Williams would be supportive of tapering in the near future, and I was not disappointed. Williams first catalogues the improvements in the private sector of the economy and, importantly, downplays the recent rise in interest rates:Recently, longer-term rates have risen as investors prepare for the eventual normalization of monetary policy. But they are still quite low by historical standards.Obviously, he doesn't think investors have overreacted to the tapering talk; instead, they have reacted appropriately to the likely path of policy. In other words, Williams is not inclined to delayed tapering due to the market reaction. That said, better times lay ahead:Where will we go from here? GDP adjusted for inflation grew at a modest rate just above 1½ percent over the past year. However, I expect growth to pick up in the second half of 2013 as the drag from the federal budget wanes and momentum in the private sector continues to gather steam. For this year as a whole, I see inflation-adjusted GDP growing about 2 percent, and then rising to about 3 percent in 2014. In strong contrast lies Minneapolis Federal Reserve President Narayana Kocherlakota. In a opening remarks tonight, Kocherlakota bluntly says:But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the futureevolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy. Doesn't really take any special knowledge of the Federal Reserve to read the message in that statement. Don't taper; increase asset purchases. Alas, I do not think the policy winds are blowing in Kocherlakota's direction. The momentum is with the tapering crowd.
Fed’s Evans: Bond Buys Can Be Trimmed This Year - One of the Federal Reserve‘s strongest supporters of aggressive stimulus action said Friday the day is nearing when the central bank can slow the pace of its bond buying program. But the official, Federal Reserve Bank of Chicago President Charles Evans, declined to say when the central bank might make the first move to pare what is now an $85 billion-per-month program of buying Treasury and mortgage bonds. There’s widespread expectation in financial markets that the Fed’s upcoming meeting, to be held on Sept. 17 and 18, will see the first reduction, but there remains a lot of uncertainty surrounding that view. Mr. Evans’ views appeared to suggest he may be reluctant to change gears so soon. For Mr. Evans, a voting member of the monetary policy setting Federal Open Market Committee, the outlook for Fed bond buying closely matches a path laid out by Chairman Ben Bernanke several months ago. The policymaker told an audience in Greenville, S.C., that he expects the economy to perform in such a way that the Fed will likely shrink the pace of bond buying “starting later this year,” with the purchases being wound down “over a couple of stages.” But anything the Fed does is not pre-ordained. “Adjustments to asset purchases and changes in the federal funds rate will depend on the data,” the official said. The official suggested that he will not have enough information on hand by the September Fed meeting to support a change in bond buying. To slow the rate of buying, “it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,”
Fed Officials Face Cliffhanger September Meeting After Mixed Jobs Report - Fed officials want to start scaling back their $85 billion-per-month bond-buying program this year and could take a small step in that direction at their policy meeting Sept. 17-18. But the economic data in recent months have been ambiguous and new threats to the economy and markets loom, which could prompt officials to wait longer before acting. Many officials have been on the fence in recent weeks, wanting to see incoming economic data before deciding what to do at their next meeting, according to their public comments and interviews. The usual round of behind-the-scenes, pre-meeting discussions will kick off during the next few days. Their options have narrowed but no decision set. The dilemma was reinforced by the August employment report released Friday. The unemployment rate fell to 7.3% last month from 8.1% when Fed officials launched the program. But job growth has been anemic in recent months, below the 200,000-per-month some of them want to see. Many Fed officials want to start reducing their bond purchases to acknowledge the decline in unemployment, but they are also cautious because other labor market measures show persistent weakness — such as the falling share of Americans holding or seeking jobs. Another reason for caution is that the economy isn’t clearly on the stronger growth path they have been projecting for months.
Fed’s George: Appropriate to Trim Bond Buying -- A Federal Reserve official on Friday called for the central bank to agree to start unwinding its bond-buying program at its coming meeting, reducing monthly purchases to an initial $70 billion. Federal Reserve Bank of Kansas City President Esther George called for a “gradual” unwinding of the stimulus program, and repeated her belief that it should end sometime during the first half of next year. The Fed at its June meeting laid out a plan to slow bond purchases later in the year and stop them in 2014 if the economy improves as expected. “For example, an appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion a month, then have purchases going forward split evenly between Treasury and agency-MBS securities,” said Ms. George in her prepared remarks Friday. Ms. George has consistently called for an end to the bond-buying program, citing an improving economy, though her remarks before a group of business leaders came as expectations tempered for an early shift in the bond-buying program after the closely watched August employment report came in short of expectations.
Update: Charts to Track Timing for QE3 Tapering - We can update three of the four charts that I'm using to track when the Fed will start tapering the QE3 purchases. The September FOMC meeting is on the 17th and 18th. The only data relevant for these charts that will be released between now and the September FOMC meeting is the August unemployment rate that will be released this coming Friday. The first graph is for GDP. The current forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013. Combined the first and second quarter were below the FOMC projections. GDP would have to increase at a 2.8% annual rate in the 2nd half to reach the FOMC lower projection, and at a 3.3% rate to reach the higher projection. The second graph is for the unemployment rate. The current forecast is for the unemployment rate to decline to 7.2% to 7.3% in Q4 2013. We only have data through July, and so far the unemployment rate is tracking in the middle of the forecast.This graph is for PCE prices. The current forecast is for prices to increase 0.8% to 1.2% from Q4 2012 to Q4 2013. So far PCE prices are close to this projection - however this projection is significantly below the FOMC target of 2%. Clearly the FOMC expects inflation to pickup, and a key is if the recent decline in inflation is "transitory". PCE prices wouldn't have to increase much over the next five months to reach the upper FOMC projection. This graph is for core PCE prices. The current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013.
Fed Watch: The Countdown to September 18 - As summer draws to an end, the final countdown to the September 17-18 FOMC meeting begins. Odds still favor that the Fed begins tapering asset purchases at the conclusion of that meeting. But make no mistake, whether the Fed begins the tapering process this meeting or next is essentially irrelevant at this point. What is relevant is that the conversation fundamentally changed with Federal Reserve Chairman Ben Bernanke's post-FOMC press conference back in June. Expanding accommodation is no longer really on the table; now the story is about how and when accommodation with be reduced.Bill McBride at Calculated Risk surveys the latest data in light of the Fed's forecast and concludes: With the upward revision to Q2 GDP, and the low expectations for inflation (significantly below target), it now looks the year-end data might be "broadly consistent" with the June FOMC projections. I think that is correct; the Fed could easily read the data as if it was "broadly consistent" with the June projections, and thus conclude that they can begin tapering. In addition, arguably the cost is low given that market participants already expect a reduction in the scale of asset purchases. There shouldn't be anyone surprised if the Fed cuts asset purchases this month.
Chart: QE3 is ineffective in growing credit in the US - Based on the data from the Federal Reserve Bank of St. Louis here is a single chart that shows credit growth in the US is continuing to decline while the Fed's balance sheet is expanding.
Quantitative and Credit Easing vs. Forward Guidance - There seems to be a tendency in recent studies to place ascribe greater impact to forward guidance than to quantitative measures, such as purchases of Treasurys and MBSs -- at least insofar as domestic interest rates are concerned.   But it’s interesting just because asset purchases don’t necessarily affect interest rates, it doesn’t follow that exchange rates and other cross-border asset prices, would be similarly unaffected by quantitative/credit easing measures.Consider this statement from Steven Englander of Citi (8/30, not online): Investors globally are taking the prospect of Fed tapering and the end of QE as a signal that global liquidity is being withdrawn. If the Fed is correct that policy is not being tightened, the reaction in G10 and EM FX high beta currencies is not justified. We think investors are correct in being skeptical that forward guidance represents a concrete policy commitment upon which they should act. I’d add the following point, drawn from a portfolio balance framework. If short and long term Treasury bonds were perfect substitutes, then credit easing would have no impact, as many asserted (of course, this must mean that agents are risk neutral, or close to it ...) I’m willing to stipulate perfect or near perfect substitutability is plausible. However, it seems less clear to me that domestic and foreign assets are perfect or near perfect substitutes. The less substitutable, the bigger the impact, ceteris paribus.
The Fed driving too fast down an unknown road - Is the current aggressive monetary policy effective? Do the risks outweigh the benefits? Mark Thoma wrote on August 31st…“It’s just that some members of the Fed do not believe the Fed has much influence over the economy beyond stabilizing the financial system. Once that is done, the Fed’s powers are very limited (when at the zero bound) and — in the eyes of some members of the Fed — the risks of further aggressive action, e.g. QE, outweigh the potential benefits. So I think both camps (banking and macroeconomic) have the same goal, stabilizing the macroeconomy, the difference is in the view of how much the Fed can do without risking bubbles, inflation, etc.” I think the same way and many others do too. Aggressive and loose monetary policy definitely helps the economy bounce back from a recession, but the economy still must function within its own constraints. Monetary policy can try to push the economy beyond a natural GDP level, but the result would most likely be inflation or bubbles as noted in Mark Thoma’s quote.
QE’s Fanboys and Fearmongers Fan Economic Perversity - The government released a disappointing August jobs report today. And unfortunately, the hype and misinformation surrounding the Fed’s quantitative easing program has created a perverse situation in the capital markets which may contribute to sustaining that job market stagnation for some time. For several months now, we have seen the establishment of an entrenched pattern in which investors routinely respond to a bad jobs reports with bullish behavior and respond to a good jobs reports with bearish behavior. Bad jobs news is treated as good news for investors; good jobs news is treated as bad news for investors. Why in the world would they respond in this way? Because in a classic case of the madness of crowds driven by misinformation and disinformation, the markets have convinced themselves that the fate of the world now depends on whether or not the Fed will choose either to continue or “taper” its quantitative easing program in the near term. The negative economic consequences of such an entrenched pattern should be obvious: We now have a clumsy capital market that is systemically programmed to step on its own feet. If investors are buying, that should stimulate investment and hiring. The result will be an uptick in the employment picture presented in the succeeding jobs report. And that uptick will then be treated as bad news, and a reason to pull back on the buying! So good jobs news is treated by the markets as a reason to counteract its own earlier bullishness and worsen the prospects for the jobless. Clearly this isn’t the way we want our economy to work. Good news about jobs should be treated as … good news! … which will help drive a virtuous cycle and a self-sustaining recovery
FOMC members fret over deflation risks - Some FOMC members continue to focus on the historically low inflation levels in the US (see post). They are worried about repeating the Japan experience of being stuck in a deflationary regime for years. They want to see some inflation return before changing policy. Chicago Fed President Charles Evans: - "For me, to start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory." But it's not just the current level of inflation that the Fed is monitoring. As important (if not more) for policy decisions are inflation expectations - the markets' consensus of future inflation. The Cleveland Fed has developed a methodology to track expectations of future inflation (described here). It's basically the breakeven (market implied) inflation minus what they refer to as "risk premium" - a historical volatility based measure ("GARCH processes" for those who are interested). And the last time this number was published, inflation expectations picked up - which must have made some of the FOMC members quite happy. The US is not becoming another Japan ...
DeLong’s False Dichotomy - Brad DeLong proposes that there are, broadly speaking, two camps among economists with respect to what a central bank is and the purposes it should serve: the Banking Camp and the Macroeconomic Camp: One camp, call it the Banking Camp, regards a central bank as a bank for bankers. Its clients are the banks; it is a place where banks can go to borrow money when they really need to; and its functions are to support the banking sector so that banks can make their proper profits as they go about their proper business. Above all, the central bank must ensure that the money supply is large enough that mere illiquidity, rather than insolvency, does not force banks into bankruptcy and liquidation. The other camp, call it the Macroeconomic Camp, views central banks as stewards of the economy as a whole. A central bank’s job is to uphold in practice Say’s Law – the principle that output is balanced by demand, with neither too little demand to purchase what is produced (which would cause unemployment) nor too much (which would cause inflation) Paul Krugman agrees with DeLong, and puts himself in the Macroeconomic Camp. he also complains that the President is in the wrong camp.I believe this is a false dichotomy. The central bank has a macroeconomic role, but that role is constrained by its institutional powers and responsibilities. And failure to appreciate those constraints has led a number of economists to chase monetary policy wild gooses over the past four years, when they should have been helping the American people bring heavy political pressure to bear on the Congress and the President, who have behaved both incompetently and corruptly.
Turnover at Federal Reserve adds uncertainty to interest rate and QE3 promises - The Federal Reserve is facing significant turnover among top officials at a time when it is trying to craft a long-term strategy for winding down its support for the nation’s economy. The looming departure of Fed Chairman Ben S. Bernanke when his term ends in January has garnered the most attention on Wall Street and in Washington. But as much as half of the central bank’s powerful policy-setting committee could also leave next year — making it the biggest transition at the Fed since before the recession. The policy committee steers the nation’s economy by setting interest rates that determine what businesses and consumers pay for loans. The personnel changes have heightened the uncertainty surrounding the Fed’s next moves. That’s because one of the main ways the central bank has tried to bolster the economy now is by promising to act in the future. Fed officials say they won’t stop buying long-term bonds intended to bolster the recovery until the unemployment rate hits 7 percent. They also vowed to keep short-term interest rates low, at least until the jobless rate hits 6.5 percent or inflation rises above 2.5 percent. But by the time those criteria are met, a new cast of characters could be calling the shots at the central bank.
The New York Times is Wowed that Obama’s Six Rubinites Support Larry Summers -- William K. Black The Obama administration, for reasons that pass all understanding, has been running a campaign of leaks disparaging one of Obama’s few senior female appointees, Janet Yellen. Rubin wants the job of Fed Chair to go to his top protégée, Larry Summers. Yellen, as Vice Chair of the Fed stands in the way of Rubin’s ambitions. (Rubin is too toxic to take the Chair directly.) The administration has been leaking primarily to the New York Times’ Binyamin Applebaum. His latest article contains this remarkable statement, without analysis. “[T]he president’s top economic advisers uniformly support the selection of Mr. Summers. They regard him as a creative thinker and an experienced crisis manager, qualities they value in particular because they expect the Fed may confront difficult choices as it begins to retreat from its six-year-old stimulus campaign.” The obvious question, except to the NYT, is who the “president’s top economic advisers” are who “uniformly support the selection of Mr. Summers”? There are six such advisers:
- Gene Sperling (Director, National Economic Counsel)
- Jason Furman (Chairman, CEA)
- James Stock (Member, CEA)
- Jacob Lew (Treasury)
- Penny Pritzker (Commerce)
- Sylvia Mathews Burwell (OMB)
Each of Obama’s top economic advisers is a Rubinite. Sperling is one of Rubin and Summers’ closest allies. Furman’s prior job was running the Hamilton Project – created by Rubin to propagate his ideas. Stock is a Rubinite, a colleague of Summers, and the co-author of the article that infamously coined the term “The Great Moderation” Jacob Lew and Furman share the characteristic of being Rubinites and leading architects and proponents of the “Grand Betrayal” (the effort to inflict austerity and cuts in the safety net). Pritzker is a national disgrace. Her appointment prompted extremely pointed criticisms.
The Case against Summers: Much More Obvious than Critics Are Making It - Various types of backlash appear to be growing against Lawrence Summers in the political fight over who should be the next chair of the Federal Reserve Board of Governors. Josh Barro reports on a research note from BNP Paribas saying that “if President Obama picks Larry Summers as the next Federal Reserve Chairman, he will do serious harm to the U.S. economy.” Binyamin Applebaum develops similar themes in the New York Times. And Paul Krugman worries that a Summers appointment won’t produce enough media shock and awe to signal a “regime shift” and awaken the confidence fairies from their slumbers. Unfortunately, many of these critics are overly concerned with short-term impacts related to market confidence, market neuroses and monetary policy fads, and are missing the point entirely. There is one surpassingly excellent reason for opposing the Summers appointment: Lawrence Summers is one of the primary architects of the disastrous laissez faire policy revolution of the late 20th century that is responsible for bringing us the financial collapse of 2007 and 2008, and the Great Recession that followed that collapse. He is for that reason utterly disqualified for leadership of the nation’s central bank.
The Federal Reserve Nomination - NY Times Editorial Board - Mr. Obama is expected to announce his nominee soon, and, by all accounts, Mr. Summers is still a contender. It is time for senators of both parties who appreciate the importance of this nomination to tell the president that Mr. Summers would be the wrong choice. Mr. Summers’s reputation is replete with evidence of a temperament unsuited to lead the Fed. He is known for cooperation when he works with those he perceives as having more power than he does, and for dismissiveness toward those he perceives as less powerful. Those traits would be especially destructive at the Fed, where board members and regional bank presidents all bring their own considerable political power and intellectual heft to the Fed’s decision-making on monetary policy and financial regulation. Putting Mr. Summers in charge would risk institutional discord or worse, dysfunction. His record on financial regulation is abysmal, and he has not acknowledged the errors. In the late 1990s, Mr. Summers was instrumental in deregulating derivatives and in repealing the Glass-Steagall banking law. He has said that the resulting financial crisis was unforeseeable, which is wrong. He waged public battles against regulators who correctly argued for regulating derivatives and disparaged the comments of a prominent economist who early on identified risks in the too-big-to-fail banking system. This is precisely the wrong background for the next Fed leader, who will take charge in the middle of the delayed rule-making for the Dodd-Frank financial reform law.
Sumner: Has CPI Been Wildly Overstating Inflation? - Scott Sumner makes a very good point (though my interest here is somewhat peripheral to the main thrust of his post): Government price indices don’t measure the prices that are of macroeconomic interest. For instance in the 6 years after the housing bubble peaked the US, BLS data shows housing prices rising by about 10%, while Case-Shiller showed a 35% decline. Housing is 39% of the core CPI. That’s a big deal. Here’s what that looks like: Yow. (The important CPI sub-components of housing, i.e. owner equivalent rent, look similar.) Contra the sky-is-falling inflationistas at ShadowStats, this suggests that CPI has greatly overstated inflation since the (Shiller) housing peak in April 2006. Just for illumination, here’s a rough-and-ready shot at replacing the 40% of housing movement in the CPI with the movement we see in Case-Shiller: If this has any merit, we’re looking back at three to six years of deflation. It also suggest that inflation has been shooting up in the last year or so. Do with that what you will. Paul Krugman often defends CPI against ShadowStats-style attacks by pointing to the Billion Price Index, which tracks closely with CPI over time. But the BPI is an index of retail prices. It doesn’t include housing, health care, education, and many other components that make up more than 50% of the Consumer Price Index. (Which makes you wonder why CPI and BPI track so closely…)
Fear The Inflation - The labor department correctly judges that prices paid for shelter should be a significant proportion of the core CPI calculation (about a 40 percent weighting). According to the Labor Department, prices for shelter increased only 2.3 percent from July of last year. When the government uses such an incorrect assessment of home price appreciation it is then able to report only a slight increase in core inflation. However, according to the National Association of Realtors, existing home prices surged 13.7 percent YOY. And new home prices jumped 8.5 percent YOY, according to the Commerce Department. If you include the increase in the other items in core CPI ex-housing (up 1.2 percent YOY) a more accurate measurement of core CPI can be achieved. Consumer prices would be up 5.1 percent from the year ago period -- assuming you simply average the cost of purchasing a new with that of an existing home. In reality, existing home purchases exceed the number of new home sales and would therefore increase the core rate reading. Of course, the difference between the government's data and what is collected from private sources is that the Bureau of Labor Statistics measures the imputed rental value of homes, instead of actual increases in what consumers have to pay for real estate.
Fed's Beige Book: Economic activity increased "at a modest to moderate pace" - Fed's Beige Book "Prepared at the Federal Reserve Bank of San Francisco and based on information collected on or before August 26, 2013." Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of early July through late August. Eight Districts characterized growth as moderate; of the remaining four, Boston, Atlanta, and San Francisco reported modest growth, and Chicago indicated activity had improved. Consumer spending rose in most Districts, reflecting, in part, strong demand for automobiles and housing-related goods. Activity in the travel and tourism sector expanded in most areas. Demand for nonfinancial services, including professional and transportation services, increased slightly on net. Manufacturing activity expanded modestly. Residential real estate activity increased moderately in most Districts, and demand for nonresidential real estate gained overall. Lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Activity in residential real estate markets increased moderately. The pace of sales of existing single-family homes continued to increase moderately in most Districts. ... Reports from several Districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many "fence sitters" were prompted to commit to purchases. Many Districts reported that limited inventories of desirable properties contributed to upward price pressures. Office vacancy rates and other indicators in markets for office space improved modestly in the major metropolitan markets in the New York, Richmond, and St. Louis and Districts.
Beige Book: District-by-District Summaries - The Federal Reserve‘s latest “beige book” report Wednesday said overall economic activity continued to expand at a “modest to moderate pace” throughout the nation. The following are highlights from a district-by-district summary of economic conditions for early July through late August.
GDP drag from State and Local Governments - One of the reasons I expect GDP to pick up over the next few years is that state and local government spending will probably stop being a drag on GDP, and might even add a little to GDP going forward. However the 2nd estimate of GDP showed state and local government spending was still a drag on GDP in Q2 (the advance estimate indicated a small positive contribution). This graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 11 quarters (through Q2 2013). However state and local government spending has made a negative contribution for 13 of the last 14 quarters. The drag has diminished but is still ongoing. Based on recent news reports, I expect state and local governments to make small positive contributions to GDP going forward. Note: Currently state and local government as a percent of GDP is back to 1970 levels!
Balance Sheet Recession About Over - Because of the weak nature of this recovery, there is ample statistical ammunition for both the bullish and bearish economists to make their case. The bears can point to overall consistently weak GDP growth, still high unemployment and weak wage growth. In contrast, the bulls can point to strong auto purchases, rising home sales, an accommodating Fed and strong stock market. Neither side has sufficient data on their side to rhetorically put the other side away, as it were.Last week, I made the argument that we may be closer to a recession than previously thought. I noted that industrial production and capacity utilization have stalled over the last nine months, along with recent weak readings from durable goods and new home sales. At the same time, a bullish argument can still be made, as highlighted be several recent well-written articles that also appeared last week. Bill McBride over at Calculated Risk made the following points: It still appears economic growth will pickup over the next few years. With a combination of growth in the key housing sector, a significant amount of household deleveraging behind us, the end of the drag from state and local government layoffs (four years of austerity mostly over), some loosening of household credit, and the Fed staying accommodative (even if the Fed starts to taper, the Fed will remain accommodative).
Stephanie Kelton Interviews Warren Mosler - Stephanie Kelton has inaugurated a new series of New Economic Perspectives podcasts with a fantastic interview of Warren Mosler. The discussion covers current forecasts by Goldman Sachs and others on the state of the US economy; the Fed’s quantitative easing program and market jitters about tapering; the impact of Japan’s “Abenomics”; the political inertia behind the European community’s intractable political commitment to austerity; the investment foibles of the goldbugs; and more. For all of those people who wonder why MMTers are so skeptical about QE, this is the podcast for them. Mosler’s explanation is as clear as a bell. The podcast can be downloaded via iTunes by searching for “Stephanie Kelton” or “stephaniekelton’s podcast”. But is also available here via the web. Highly recommended!
Scary Thought on Labor Day Weekend: Obama's Economic Team Think They Are Doing a Good Job - Dean Baker - Ezra Klein gives us some terrifying news in a Bloomberg column today. President Obama's economic team think they are doing a great job, hence the desire to bring back former teammate Larry Summers as Fed chair. This is terrifying because the economy this Labor Day is described by a set of statistics that can only be described as horrible.We are almost 9 million jobs below the trend level of employment. The number of people involuntarily working part-time is still up by almost 4 million from its pre-recession level. Wages have been stagnant for a decade and show no signs of increasing any time soon. And, according to the Congressional Budget Office, the economy is still operating more than $1 trillion (6 percent) below its potential. Oh, and by the way, the financial sector is more concentrated than ever, with top honchos drawing the same sort of paychecks they did before the crisis.I could go on but what's the point? This is an economy that under other circumstances we would all say is awful.
4 economic indicators signal that US growth is off to a weak start for the quarter - Those hoping for the US economy to accelerate in the second half - and many economists made that call early in the year - will be disappointed. While employment metrics seem to show steady improvements, putting the Fed on the "taper path", the economy is facing some increasing headwinds. Here are four indicators signaling a tough road ahead.
1. The rate of improvement in the housing sector is slowing. Weak new home sales number was the first indication that not all is well with US housing (discussed here), but now home price increases (HPI) have leveled off. This trend may actually take MBS off the table for the Fed's taper, leaving the central bank to focus on cutting back only the treasury purchases.
2. Personal income growth remains weak.NY Times: - After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.
3. Growth in consumer spending (which represents over 70% of the GDP) has slowed as well.
4. As discussed earlier (see post), consumer confidence has peaked in the second quarter and has been declining steadily since. What's particularly troubling is that according to Gallup polling right before this weekend, economic confidence index suddenly dove to the lowest level since the sequester went into effect in March. The uncertainty related to the Syrian crisis and potential US military involvement is one potential explanation.
The Arithmetic of Fantasy Fiscal Policy - Paul Krugman - Sometimes — usually, though not always, in a belligerent tone — people ask me, well, how big do you think the stimulus should have been? How much debt should we have run up? Regardless of the tone, that is actually a question worth answering. With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential.Start with the CBO estimates of potential GDP, which can be subtracted from actual GDP to estimate the output gap. Start the clock at the beginning of 2009, and the output gap — measured quarterly, but at an annual rate — looks like this: If you add it up, the cumulative output gap since start-2009 comes to $2.29 trillion — that is, $2.29 trillion worth of goods and services we could and should have produced, but didn’t. How much government spending would have been required to close that gap? The evidence is now overwhelming that when you’re at the zero lower bound the multiplier is greater than one; see,e.g., Blanchard and Leigh. Suppose we take a multiplier of 1.3, which is fairly conservative. Then it would have taken $1.76 trillion in spending over the past 4 1/2 years to close the output gap. Yes, I know, it would have been politically impossible — but we’re just doing the economics here. So is that an extra $1.76 trillion in debt? No — the economy would have been stronger, leading both to higher revenue and to lower spending on means-tested programs. A fairly conservative estimate is that each dollar of extra GDP would have saved 1/3 of a dollar in the form of higher revenue and lower spending, which means 2.29/3 = $0.76 trillion.
Years of Tragic Waste, by Paul Krugman - In a few days, we’ll reach the fifth anniversary of the fall of Lehman Brothers — the moment when a recession, which was bad enough, turned into something much scarier. Suddenly, we were looking at the real possibility of economic catastrophe. And the catastrophe came. Set aside the politics for a moment, and ask what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done... I’ve done a back-of-the-envelope calculation ... It would have been about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.Would such a policy have worked? All the evidence of the past five years says yes. ... Government spending on job creation would, indeed, have created jobs. But wouldn’t the kind of spending program I’m suggesting have meant more debt? Yes... But ... the ratio of debt to G.D.P. ... would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?And, on the other side of the ledger, we would be a richer nation, with a brighter future.
Fed’s Fisher Slams Congress Over Fiscal Policy -- Federal Reserve Bank of Dallas President Richard Fisher again sharply criticized Congress for its handling of fiscal policy, and indicated that the central bank hadn’t yet finalized “tapering” plans even as it prepares to “dial back” on bond purchases. “We’ve begun to socialize the idea that there is no ‘QE’ infinity–this doesn’t go on forever,” Mr. Fisher said, referring to the Fed’s $85 billion in monthly bond purchases also known as quantitative easing, or QE. Asked when the gradual exit from quantitative easing would begin, Mr. Fisher replied “it’s up to the group when we will start dialing back.” Speaking at a luncheon hosted by financial-industry trade group the Dallas Estate Planning Council at the Dallas Country Club, Mr. Fisher said the central bank has done all it can to stimulate the U.S. economy. He said members of Congress–both Republicans and Democrats–have failed to do their part. Elected officials have “sold our children–and our grandchildren–down the river,” Mr. Fisher said. “We haven’t had a budget for five years; no one knows what their taxes are going to be; no one knows what spending is going to be.” The Dallas Fed president has long maintained that the missing ingredient in the economic recovery is a sound fiscal policy. He argues that deadlock in Washington over a budget plan has created a “fog” of uncertainty. Poor visibility makes it difficult for business owners to plan expansion and hiring, Mr. Fisher noted. Responding to a question from the audience, Mr. Fisher said “Obamacare” health-care reform is currently a “weight” on the outlook for corporate growth. “In our surveys of businesses…no one can figure out what it’s going to cost them,” Mr. Fisher said.
Fiscal Collisions Ahead - Even as serious decisions loom regarding Syria, Congress and President Obama still must deal with two related fiscal policy issues: raising the debt ceiling before the government’s borrowing authority runs out around mid-October, and funding government operations beyond the end of the fiscal year on Sept. 30. Democrats and Republicans are on collision courses on both matters. Republicans (the pragmatic ones, at least) seek further spending cuts to address the still-wide fiscal deficit, while the president is focused instead on reversing the cuts set to take hold through the sequester mechanism he signed into law as part of the Budget Control Act of 2011. The focus on Syria means that fiscal decisions could be put off for a short period. Even that, however, would require compromise that might prove challenging, such as agreement by the president to accept the continued sequester and by Republicans to raise the debt ceiling without accompanying spending cuts. A failure to act would harm the economy. Not lifting the debt ceiling in particular would be expected to have catastrophic economic effects. Interest rates could skyrocket if investors question the full faith and credit of the United States government, leading to a credit crunch that pummels business and consumer spending. The calamity might be avoided if the Treasury Department makes payments to bondholders to avoid a default, but even with this contingency plan (which the Treasury shows no sign of putting into place), the spectacle of a government that cannot finance its routine operations would doubtless translate into a severe negative impact on private confidence and spending.
Syria Is A Get-Out-Of-Jail-Free Card For #cliffgate -- It wasn't too long yesterday after House Speaker John Boehner (R-OH) announced his support for the president's position on Syria that the blogosphere erupted with speculation that the White House had cut a deal. Boehner, it was said, had quickly signed on to U.S. military action against Syria in exchange for the White House moving closer to the GOP position on the upcoming battles on the continuing resolution, the debt ceiling and sequestration, that is, on #cliffgate. That's nonsense.The two issues are so separate, the White House and congressional Republicans are so far apart on everything having to do with the budget, Boehner's and Obama's ability to deliver their respective party's votes on spending and revenues so doubtful and Boehner's and the president's history of negotiating so poor that it's virtually impossible to imagine how the administration and the speaker could possibly have come to any agreement on Syria and #cliffgate so quickly. Think of this as a federal budget debate get-out-of-jail-free card. There are only nine legislative days from when Congress returns to Washington next week and the start of fiscal 2014 on October 1 and that wasn't going to be enough to begin let alone conclude any kind of budget deal even before another issue claimed time on the calendar. Given the political sensitivity of the Syria debate, the GOP leadership now has an easy-to-explain excuse to use with its caucus to delay debating the budget over the next few weeks without having to deal with defunding Obamacare or spending cuts.Syria makes a short-term CR and debt ceiling increase far more likely. I'm guessing that the extension will be until the middle of November.
Syria, Egypt Crises Could Thaw US ‘Grand Bargain’ Talks — As the Obama administration reaches across the aisle to deal with instability in Syria and Egypt, some say working together on missile strikes and hardware shipments could help produce a sequester-addressing fiscal deal.White House officials and Republican lawmakers suddenly are aligned on lobbing cruise missiles into Syria and maintaining military aid to Egypt. Working together on those issues, former officials and defense insiders say, could help both sides to find common ground later on a bill that lessens or voids the remaining nine years of sequestration.For instance, several months ago, Sen. John McCain, R-Ariz., was one of President Barack Obama’s chief critics — on domestic and foreign policy issues. Half a year later, McCain has worked with Obama on immigration reform, fiscal matters and met privately with the president about national security issues. Obama even sent McCain to Egypt. And prominent conservative columnist Norman Ornstein has predicted if Obama can get McCain to sign off on a sequester-addressing “grand bargain,” the bill could get up to 70 votes in the Senate. Other analysts say that could be enough to force House Speaker John Boehner, R-Ohio, into a political corner with one exit: To allow the grand bargain to pass the House with mostly Democratic support.
Wall Street Sees Debt-Limit Talks Past Mid-October Target - The U.S. Congress may have scope to extend debt-limit negotiations for weeks past the mid-October date when Treasury Secretary Jacob J. Lew has said the nation will exhaust its borrowing authority, according to analysts at Credit Suisse Group AG and Jefferies LLC. Lew urged lawmakers last week to raise the $16.7 trillion ceiling by the middle of next month, and said if they don’t the Treasury would be forced to use about $50 billion in cash to fund the government. Wall Street firms are trying to pinpoint when the Treasury’s money runs out: Jefferies predicts sufficient funds through the end of October, while Credit Suisse sees enough cash until as late as mid-November. A delay past Lew’s timetable threatens to disrupt the world’s deepest debt market by postponing or reducing Treasury auctions, according to Goldman Sachs Group Inc. Lew’s estimate reflects his concern that lawmakers will repeat delays two years ago that led to the first downgrade of the U.S.’s credit rating, analysts said. “It’s important for Treasury to have some kind of a deadline because Congress tends to work better when they come up against a deadline,”
Declaring the Grand Bargain Dead Is Premature - Stories in The Washington Post and the New York Times have some in the blogosphere proclaiming that it’s time to celebrate the death of the Grand Bargain, and others at least raising a question about its death. I’ll go on record as saying that celebrating its death is definitely premature. It is so because we’ve yet to go through the budget or continuing resolution-passing activities coming up in September, and also have yet to go through the debt ceiling conflict to come in October. Mainstream Washington commentators believe John Boehner is determined to avoid a government shutdown crisis of the budget/CR conflict and that one or the other will be passed before October 1. Assuming they’re right, that still leaves the matter of the debt ceiling “crisis,” which the same commentators are saying will happen because Boehner has to promise his tea party caucus a chance to coerce the Administration, if he’s going to get their acquiescence on the budget/government shutdown matter.So, they think, we are looking at a debt ceiling crisis around October 15, when Jack Lew says the Government will run out of borrowing authority, and he will be reduced to juggling $50 Billion in available cash to both repay debt and pay for the other obligations of Government legislated by Congress. The position on the debt ceiling being taken by the Administration now is that it will not negotiate over it, and that it’s demanding a clean bill raising the debt limit to pay for spending Congress has already approved.
Who Cares About the National Debt? - This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.) In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO). So what’s the problem? According to Mankiw: “The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine.”Republicans like to say that they are opposed to deficits and that debt is evil. (Debt ceiling, anyone?) But when confronted with a proposal that makes perfect economic sense and reduces deficits, they reject it—on the grounds that it would “finance larger government.” Instead, they insist on offsetting the tax increase—which, remember, is economically efficient standing on its own.
Taxing Homeowners as if They Were Landlords - Continuing my series on tax expenditures, I want to discuss an obscure one: the imputed rent that homeowners get from living in their own homes. At first glance, the idea that this constitutes any form of income probably strikes most people as bizarre. But a little thought shows that there are many forms of income that don’t take the form of monetary payments. I discussed one previously, the exclusion for employer-provided health insurance. Clearly, it is a form of income that workers value but do not pay taxes on because a specific exception has been made in the tax law. The exclusion for imputed rent is of a different nature. It is untaxed simply because of long practice, not because Congress or the Internal Revenue Service ever said so.To see why imputed rent is a real form of income, consider two homeowners living in identical houses. Suppose they trade houses, each living in the other’s. They now pay rent to each other because the other is now the other’s landlord. If they pay identical rent, it would appear that it all cancels out, except that each now has rental income to report on her taxes.In principle, that rental income is there even when one lives in one’s own home. Homeowners simply pay it to themselves though in this case, it does not give rise to taxable income. In effect, homeowners wear two hats – consumers and investors. As consumers, they pay rent just as those who live in rental apartments do. As investors, they are landlords who receive that rent from themselves.
Are Some Americans Paying Federal Income Tax They Don’t Owe? - According to one estimate, in 2003 more than 8 million people had almost $16 billion in taxes withheld but did not file 1040s. Not only did many pay tax they didn’t owe but some likely missed out on refundable credits that could have improved their well-being. To some degree, this is the flip side of another set of numbers that get far more attention—those American who pay no federal income tax. The other day, the Tax Policy Center estimated that about 43 percent of Americans will be off the federal income tax rolls in 2013, down from 47 percent in 2009. Nearly three in four non-payers file 1040s. Nearly all pay some tax—sales taxes, payroll taxes, excise taxes and the like. And most have income taxes withheld from their paychecks but get these payments returned from the government in the form of refunds or credits. There are also people who make money, have no tax withheld, and owe no tax. Think low-income retirees who are living on Social Security or younger adults who work but make very little. But a surprisingly large number of people do work, do have taxes withheld, but never file 1040s. Because we don’t know much about them, TPC treats them as non-payers of income tax even though some do pay through withholding. As a result, our estimate that 43 percent of Americans don’t pay federal income tax is probably high.
Time to get God out of taxes - Chris Bergin over at Tax Analysts has a good point about the exclusion from income for the rental value of the minister’s residence–it makes no sense and has no place in the tax code. See Bergin, What we need is a Godless tax code, Tax Analysts, His riff is based on recent stories in the Washington Post (here, and here) that the head of the Freedom from Religion Foundation has been given a housing allowance and is litigating over the fact that she cannot exclude the rental value like a “minister of the gospel” may do under section 107 of the Internal Revenue Code. As Bergin notes, this isn’t really the kind of suit that the government likes to get involved in–it’s a lose-lose situation for the government.
- If the government argues to uphold the special exclusion available only to religious ministers, it seems to be arguing against a core principle of the Constitution–the idea that freedom of religion in the First Amendment ensures the separation of church and state and permits every American to choose to be free to be religious or free “from” religion: religion will not be imposed on us nor its support demanded of us.
- if the government argues to reject the special exclusion available only to religious ministers, which acts as a tax subsidy to religious institutions and individuals, the Christian right will ponce on this as further evidence of what it sees as a “war on Christianity” (sometimes cast as a war on religion itself). Anytime that a privileged group that has received a privilege over a long period of time faces the possibility that it will lose that privilege as society recognizes the basic unfairness of it, the privileged group will tend to claim that it is society which is attacking them, rather than that they have been ‘attacking’ society for decades due to the preference that they claimed that others were not entitled to.
Another Bogus Argument for a Repatriation Tax Holiday - Forgive me but I just had to endure some nonsense from the tax community – this time being a fluff piece from Bloomberg BNA: Thomas J. Brennan, a law professor at Northwestern University, found that during the last repatriation tax holiday, in 2005, companies spent most of the repatriated money on cash acquisitions and debt reduction, with lesser amounts on research and development, share repurchases and dividends. That finding contrasts with an earlier study embraced by some lawmakers that estimated as much as 60 cents to 92 cents on each repatriated dollar went to shareholder payouts that were not permissible under the federal tax holiday. The earlier study's conclusion, Brennan wrote, was “completely incorrect.” … How many things did things did Bloomberg BNA miss here? First of all – it would have been nice had the fluff piece that identified the study that Brennan suggested was incorrect and why it might have been supposedly incorrect. I suspect it was this NBER publication: Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed.
Jack Lew Shows His True Colors By Forcing Deregulation of Derivatives on the CFTC - David Dayen - I don’t know of any clear-eyed analyst who held out much hope that the handover of the Treasury Department from Tim Geithner to Jack Lew would herald a new era of stringent financial regulatory reform. Lew, outside of a stint at Citi, didn’t have much expertise with the matter; he’s more of a budget wonk. And when, at his confirmation hearing, he pronounced that Dodd-Frank solved the Too Big to Fail problem, he told you exactly who would have his ear at Treasury. This was further confirmed when Mary Miller, the undersecretary for domestic finance, denied the existence of TBTF in a speech to the Minsky conference in April. But the most obvious reminder of the Geithner-Lew continuity was the recent upending of what would have been Gary Gensler’s final and most triumphant act at the Commodity Futures Trading Commission. Gensler was trying to finish off the cross-border derivatives rule from Dodd-Frank, which would have given CFTC oversight of any affiliates which execute more than $8 billion in trades, no matter where the location of the entity. This would have arrested a race to the bottom, where the mega-banks that control 95% of all trades fan out overseas to park their trading desks away from CFTC oversight.
How the Bank Lobby Loosened U.S. Reins on Derivatives - One by one, Gary Gensler’s supporters deserted him. Now the chief U.S. regulator of derivatives was being summoned by Treasury Secretary Jacob J. Lew to explain why he refused to compromise. Banks and lawmakers, as well as financial regulators from around the world, had besieged Lew with complaints about Gensler’s campaign to impose U.S. rules overseas. The July 3 meeting in Lew’s conference room with a view of the White House grew tense, according to three people briefed on it. Gensler argued his plan was vital if the U.S. hoped to seize meaningful authority over financial instruments that helped push the global economy to the brink in 2008, taking down American International Group Inc. (AIG) and Lehman Brothers Holdings Inc. and igniting the worst recession since the 1930s. Lew insisted that Gensler coordinate better with the Securities and Exchange Commission, whose new chairman, Mary Jo White, was also present. Gensler, who was deep into negotiations with his European counterparts, was surprised by Lew’s demand. He’d been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room, the people said.
U.S. Probes Whether J.P. Morgan Employees Misled Regulators - The Justice Department's probe into J.P. Morgan Chase's alleged manipulation of U.S. energy markets is focusing in part on whether bank employees misled regulators during a previous investigation, said people close to the case. The Justice Department in recent months opened the criminal investigation on the heels of a $410 million civil settlement reached in July between J.P. Morgan and the Federal Energy Regulatory Commission, according to people close to the case. The settlement was over allegations the bank engaged in "manipulative bidding strategies" while competing for electricity contracts. The investigation is looking into whether employees misled regulators. The Federal Bureau of Investigation also is involved in the criminal investigation, which is being handled by U.S. Attorney Preet Bharara for the Southern District of New York, according to the people familiar with the matter. J.P. Morgan didn't admit to wrongdoing as part of the FERC settlement. FERC enforcement staff in March sent the New York bank a notice alleging that J.P. Morgan Chase commodities chief Blythe Masters and three other employees made false representations under oath about various energy trading schemes and the strategies behind the schemes, according to a person familiar with the notice. FERC decided not to pursue individual sanctions against Ms. Masters and the three other J.P. Morgan employees, but the Justice Department is examining whether employees obstructed FERC's investigation, said a person close to the case. It isn't known which employees are under scrutiny, but one person close to the probe said investigators will examine testimony of all relevant employees who participated in the FERC conversations.
Assad Reveals He’s a Bank CEO: Obama Ends Threats, Bails Out Syria & Grants Immunity By William K. Black - I do not think the twin epidemics of mortgage loan origination fraud (appraisal and “liar’s” loans) and the various epidemics of post-origination fraud by financial institutions are comparable crimes to the use of chemical weapons. The President’s job, however, is to deter a wide range of criminal conduct. The elite fraud epidemics cost over $11 trillion in losses to households alone and 10 million American jobs. The cost of these fraud epidemics is so vast that deterring future epidemics should be a high priority of every administration. The refusal of the Obama and Bush administrations to prosecute any elite banker whose actions contributed to the crisis has done the opposite of deterring future fraud epidemics – it has encouraged them. The Obama administration has refused to prosecute elite bank fraudsters even when their crimes threaten our national security. The administration announced the infamous “too big to prosecute” doctrine in refusing to indict HSBC, its officers, or even its former officers for massive felonies that continued for over a decade. If one believes the administration’s findings, HSBC posed a far graver threat to U.S. national security than did the claimed chemical weapon attack in Syria. HSBC helped terrorists evade U.S. financial sanctions, helped Iran evade financial sanctions, and aided one of the most violent drug gangs in the world. The drug gang has killed more people than the presumed chemical attack in Syria.
Forget Al Capone — Today’s Racketeers are on Wall Street - What crimes did Al Capone, the notorious 1920s crime boss, have his henchmen commit? Did Capone’s thugs go around robbing convenience stores? Did they burglarize homes? Or lurk in the shadows and mug innocent passersby? None of the above. Capone and his fellow kingpins of “organized crime” left high-risk, low-return illegality to the lowlife. Kingpins like Capone ran rackets instead. They sold “protection.” They loan-sharked.Racketeering, of course, is still going strong. But the getup of our contemporary racketeers has changed somewhat. Our most highly compensated racketeers today don’t wear fedoras. They fill power suits. Our top racketeers these days don’t run from the law. They run Wall Street. Most of us imbibed our first inkling of this Wall Street racketeering after the economy melted down in 2008. We soon learned that America’s biggest banks had been nurturing systematic fraud for years, bankrolling mortgage operations that thrived on phony appraisals and “liar’s loans,” then slicing and dicing the resulting junk mortgages into exotic securities they marketed, for exorbitant fees, to unwary investors.
Bonds Bleed: Largest Bubble In History Unwinds, But The “Great Rotation” Into Stocks Is Deceptive Wall Street Hype - Wolf Richter – The bond-fund massacre has been spectacular. Prime example: antsy investors yanked $7.7 billion in August out of the largest bond fund in the world, Pimco’s Total Return Fund. In July, they’d yanked out $7.5 billion, in June a record $14.5 billion. From May 1 through August 31, the fund’s assets shriveled 14%, from $292 billion to $251 billion; $26 billion from outflows and $15 billion from the shrinking value of the bonds. The fund lost 5.5% during that period. September is shaping up to be even worse. Bonds are cratering and yields are spiking worldwide. In the US, the 10-year Treasury yield kissed the magic 3.0% late Thursday, at least briefly, for the first time since July 2011, up from a low of 2.75% at the beginning of the month. It will drag other bond yields, mortgage rates, and other consumer and corporate rates behind it.Pimco’s fund wasn’t alone: in total, $39.5 billion were yanked out of bond mutual funds in August, $21.1 billion in July, and a record of $69.1 billion in June. Emerging market funds, international bond funds… they’ve all gotten hit. The Great Rotation out of bonds into stocks? Alas, that concept is vacillating between pipedream and deceptive hype, proffered by Wall Street for its own benefit. In reality, it doesn’t exist. As bond-fund investors are pulling up their stakes, the hapless funds have to sell bonds, but for each bond they sell, there has to be a buyer, and for each dollar a fund receives for its bonds, there has to be a buyer willing to surrender it. It’s a zero-sum game. Um, plus the fees – because someone always makes money on Wall Street.
Banks face new set of capital rules - FT.com: Banks face being hit with a new set of international capital rules aimed at forcing bondholders rather than taxpayers to bail out failing institutions. Global regulators are seeking support from world leaders to draw up proposals to Mark Carney, the Bank of England governor who is heading global efforts to prevent a repeat of the 2008 financial crisis, said the move was a necessary component in the “ambitious” desire of the Group of 20 nations to stop the most important banks from being “too big to fail”. As chairman of the Financial Stability Board, Mr Carney was seeking to win political backing for regulators to draw up more concrete plans at this week’s G20 summit in Russia. But even with agreement, he said that the process of protecting countries from “too big to fail” banks would still take a long time and could not be completed until 2015 at the earliest. “We now have to move from powers to practical . . . We have made a promising start but we have to translate it into actual resolution plans [for individual global banks]”, he said. To ensure failed banks did not need to be bailed out by taxpayers, those which are deemed to be globally important banks are likely to be asked to ensure their capital structures offer taxpayers sufficient protection with high levels of potential loss absorption. force banks to hold a minimum amount of debt that can be “bailed in” if a bank collapses.
Bank Leverage Is the Defining Debate of Our Time -- Simon Johnson -- There are plenty of other important debates taking place around the world, but these questions are largely settled, and many of the issues are more rhetorical than real. Convergence in economic models is the order of the day. Except when it comes to the question of how much bank leverage is too much. On this issue, there are two equally determined -- and irreconcilable -- camps. The stakes are high; excessive leverage could bring down the world economy again. And the next financial collapse could be even worse than what we experienced in the fall of 2008 and the prolonged recession that followed. What separates the two sides is a well-defined bone of contention: the extent to which banking regulators should rely on a simple leverage ratio -- that is, the size of banking assets relative to loss-absorbing equity capital, with due (or perhaps any) consideration of so-called risk-weighted assets. In one corner, we have the world’s banking elite, whose latest champion is Peter Sands, the chief executive officer of Standard Chartered Plc. “I guarantee that a regulatory framework that uses the leverage ratio as a primary measure will make banks and the banking system more prone to crisis,” he wrote recently in the Financial Times. Arrayed against the world’s big banks are some of the sharpest financial intellects, including Tom Hoenig, vice chairman of the Federal Deposit Insurance Corp. and author of “Basel III Capital: A Well-Intended Illusion,” which explains why the risk weights preferred by Sands are a dangerous fantasy.
Making ‘Too Big To Fail’ Banks Help Poor Borrowers - Predatory lenders are folding fast in New York State, thanks to a savvy banking regulator who takes his duty to protect the public as seriously as his duties to the financial industry — and knows how to use the law to get quick action. Nine of 35 predatory lenders closed their operations in the Empire State after banks cut them off from using the automated bank money transfer system to collect debts from borrowers’ bank accounts, the trade paper American Banker reported on Thursday. It seems likely that more predatory outfits will fold their operations in the days ahead, not just in New York, but around the country, because the handful of “Too Big to Fail” banks operate in every state and so threatening them in New York effectively is a nationwide law enforcement strategy. Amazingly, all it took was a single letter, showing that regulation and enforcement need not be costly to taxpayers.
Smaller Banks’ Loans Growing Faster Than Larger Rivals - Bank customers like Mr. Buoncore are contributing to a sharp surge in loan growth at little banks. The move has opened up a wide gap in loan growth between smaller banks and large ones. Small banks saw annualized loan growth of more than 6% in the second quarter, compared with less than 2% at the 25 largest banks, according to research by Keefe, Bruyette & Woods Inc. As long as regulatory uncertainty remains, big banks will continue to be at a disadvantage, according to bank analysts and executives. "This could have a significant impact on lending from big banks in the year and years ahead," said Scott Anderson, chief economist at San Francisco-based Bank of the West. Bank of the West, which operates about 600 branches in 19 Western and Midwestern states, in May announced it was hiring 50 new commercial-lending bankers to meet rising demand from middle-market companies. The bank saw its total loans grow 3% to $46 billion in the second quarter of 2013 from the year-earlier period.
Unofficial Problem Bank list declines to 707 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for August 30, 2013. Changes and comments from surferdude808: This week, the FDIC finally released industry results for the second quarter and its enforcement actions through July. For the week, there were 11 removals and four additions. The changes leave the Unofficial Problem Bank List holding 707 institutions with assets of $250.6 billion. A year ago, the list held 891 institutions with assets of $331.5 billion. For the month, the list declined by a net 22 institutions and dropped $102 billion of assets. Monthly activity included six additions, one unassisted merger, four failures, and 23 action terminations, which was the most action terminations in a month since 25 cures in April 2012. With second quarter industry results, the FDIC said there are 559 institutions with assets of $192 billion on the Official Problem Bank List. The difference between the two lists dropped by one institution to 148. We had anticipated for the difference to narrow to about 135. CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 707.
LPS: Mortgage Delinquencies Decline in June, Distressed Sales down Sharply - LPS released their Mortgage Monitor report for�July today. According to LPS, 6.41% of mortgages were delinquent in July,�down from 6.68% in June. LPS reports that 2.82% of mortgages were in the foreclosure process, down from 4.08% in July 2012. This gives a total of 9.23% delinquent or in foreclosure. It breaks down as:
• 1,846,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,347,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,406,000 loans in foreclosure process.
For a total of 4,599,000 loans delinquent or in foreclosure in July. This is down from 5,562,000 in July 2012. This graph from LPS shows percent of loans delinquent and in the foreclosure process over time. From LPS: The strong downward trend in delinquencies and foreclosures continues ... Foreclosure starts year to date were the lowest since 2007; almost 50% are repeats ... Delinquency and foreclosure improvement extends across virtually all products Delinquencies and foreclosures are still high, but moving down - and might be back to normal levels in a couple of years.
LPS: Downward Trend in Delinquencies and Foreclosures Continues: The July Mortgage Monitor report released by Lender Processing Services (NYSE: LPS) found that while loan origination volume had slowed slightly from May to June, overall activity remained relatively strong. July’s monthly prepayment rates are still about where they were this time last year, when rates were at historic lows. In fact, they are roughly at the same levels as the heights of the ‘mini refinance booms’ in 2010 -- when interest rates were comparable to where they are today -- and in 2009, when rates were even higher. Of course, as interest rates continue to climb, we can expect that both prepayments and associated originations will decline. It’s notable however, that we saw an increase in prepayment activity in July among higher loan-to-value (LTV) mortgages -- those with LTVs of 100 percent or more -- indicating continued HARP refinance activity.“With that in mind, we also looked at the delinquency rate for what are likely to be HARP loans 12 months after origination,” Blecher continued. “We found that while delinquencies were higher than “traditional” (sub-80 percent LTV) GSE loans -- at approximately 1.2 percent -- this group is performing better than both pre-crisis GSE loans and post-crisis FHA loans (which both averaged 4 percent delinquency rates at 12 months of age). Overall, the data shows that the strong downward trend in delinquencies and foreclosures continues nationwide, with a decrease in foreclosure starts contributing to this improvement. For the year to date, 2013 has produced the lowest level of foreclosure starts since 2007. Given that nearly 50 percent of these are repeat foreclosures means that the picture is even more positive than a surface reading of the numbers might suggest.” This month’s Mortgage Monitor also leveraged residential real estate transaction data from the LPS Home Price Index to examine trends associated with distressed sales and found that these too were on the decline. For the 12-month period ending in June 2013, distressed sales overall (including both REO and short sales) were down nearly 30 percent from the same period ending in June 2012 -- from 650,000 to 463,000. Of these, short sales had declined significantly -- by nearly 60 percent -- accounting for just over 46,000 sales during that timeframe as compared to 104,000 in 2012.
LPS' July Mortgage Monitor: Despite Interest Rate Hikes, Origination Volume Remains Stable; YTD Foreclosure Starts Lowest Since 2007, Nearly Half Are Repeats - WSJ.com: -- The July Mortgage Monitor report released by Lender Processing Services (NYSE: LPS) found that while loan origination volume had slowed slightly from May to June, overall activity remained relatively strong. According to LPS Data & Analytics Senior Vice President Herb Blecher, prepayment activity (historically a good indicator of mortgage refinances) is still largely driving origination volume, as has been the case for some time now. "Prepayment speeds have been impacted by the sharp increase in mortgage interest rates we've seen over the last couple months," Blecher said. "However, even with that increasing interest rate pressure, July's monthly prepayment rates are still about where they were this time last year, when rates were at historic lows. In fact, they are roughly at the same levels as the heights of the 'mini refinance booms' in 2010 -- when interest rates were comparable to where they are today -- and in 2009, when rates were even higher. Of course, as interest rates continue to climb, we can expect that both prepayments and associated originations will decline. It's notable however, that we saw an increase in prepayment activity in July among higher loan-to-value (LTV) mortgages -- those with LTVs of 100 percent or more -- indicating continued HARP refinance activity
Injunction Preventing Hundreds of Rhode Island Foreclosures Is Lifted - A Rhode Island federal judge lifted a blanket injunction, which initially blocked foreclosures in 825 different cases. But the First Circuit said the judge lacked the authority to do so, making it necessary for him to retreat from his earlier decision. Law360 explains:“The court takes this action reluctantly because it continues to believe that, consistent with the law and proper procedure, it is in all parties' and the court's best interest to have the parties talk to each other in a meaningful way … without the threat and/or negative consequences of having plaintiffs' homes taken away from them due to foreclosure or eviction,” the order said.
States Divert Foreclosure Prevention Money to Demolition -- The Treasury Department has changed the rules on the Hardest Hit Fund, a program meant to help people hit by the housing crisis stay in their homes, allowing states to use some money from the $7.6 billion foreclosure prevention program to demolish homes instead. Michigan and Ohio have changed their contracts with the Treasury Department so they can use foreclosure prevention funds for home demolition. Michigan has diverted a $100 million into demolition. That’s a fifth of its money from the Hardest Hit program, part of the Troubled Asset Relief Program, or TARP. The money will be used to tear down 7,000 vacant homes. Michigan officials say blight leads to abandonment. It invites crime and drives down property values in neighborhoods where the 13,000 homeowners they’ve already helped are trying to hold on. They say demolishing derelict homes is foreclosure prevention.But demolition wasn’t the intent of the Hardest Hit program, says housing activist Bruce Marks of the Neighborhood Assistance Corporation of America. “It is a matter of priorities,” he says. “And the first priority is to save the many tens of thousands, hundreds of thousands of homeowners who want to keep their homes, who want to stay in their homes, who do not want to be foreclosed on and to be forced out.”
Editorial Board: A Dodd-Frank capitulation on mortgage down payments - Washington Post - ENACTED THREE years ago, the Dodd-Frank financial reform law remains a work in progress, as federal bank regulators attempt to convert its broad mandates into operational rules. Alas, special-interest groups are busily bending the rule-making process to their advantage. Case in point: the recent announcement of a proposed regulation that would weaken Dodd-Frank’s main mechanism for avoiding another meltdown in the mortgage-backed-security market. To the bill’s authors, a key cause of the financial crisis was that Wall Street packaged and sold securities backed by subprime, “no-doc” and other questionable mortgages. Not having to retain any of the default risk themselves, the banks fobbed off the bonds onto investors and went off in search of more loans, any loans, to package and sell. Dodd-Frank tried to discourage this business model by requiring future mortgage securitizers to put their own capital at risk — except when they package lower-risk “qualified” loans. The legislation’s co-author, former Rep. Barney Frank (D-Mass.), said this was his bill’s “most important” provision.To the regulators’ credit, they are still holding out the possibility of reinstating a down-payment requirement in the final rule, due by 2014. We hope they’ll persist. No doubt there is a trade-off between credit risk-reduction and credit availability, as the housing lobby argues — indeed, as it always argues. Yet recent history would seem to suggest erring on the side of safety. If the U.S. housing market suffered from anything before the crisis, it was excessive liquidity, and Dodd-Frank was supposed to remedy that.
BofA/Merrill Lynch Analyst Says QE and Housing Policy Boosting Inequality - David Dayen - Anyone surprised by the housing recovery is simply blind to the context that the Federal Reserve has administered a bazooka full of aid and comfort over the past few years. They bought up enough mortgage bonds to force interest rates to near-record lows, boosting the fortunes of asset holders. And in so doing they made housing an attractive investment product, bringing lots of Wall Street cash into the REO-to-rental play, at least for a short while. That predictably increased demand and put housing prices on their current trajectory. The promising winds could shift come autumn, however. Too much dumb money entered the investor purchase market, and the Fed is likely to decide to Septaper in a couple weeks. This has already impacted credit markets; 10-year Treasuries hit 3% briefly yesterday, and the 5% mortgage is likely not too far behind. Oddly enough, jumbo loans are actually now cheaper than conforming loans for the first time in anyone’s memory, partially because of banks wanting to hook rich homebuyers and partially because of the forced suicide of the GSEs. Who has benefited and who has suffered from the policy decisions in housing and monetary policy over the past few years? According to a remarkable little report from mortgage-backed securities analysts at Bank of America Merrill Lynch, “the cost burdens are disproportionately impacting low-income groups and renters.” BofA/Merrill cites a Harvard State of the Nation Housing report : The report starts with comments on the benefits associated with housing’s revival, such as home equity accumulation, but it quickly turns to a starker reality, which is that “the number of households with severe housing cost burdens has set a new record.” This language would be more consistent with the view of housing expressed in gold terms – housing is not a good news story. Moreover, the report shows that the hardest hit in the population are renters and those at the low end of the income distribution. As Exhibit 4 highlights, the share of renters in the population, now at 35%, has been rising in recent years, as the homeownership rate has steadily declined from the bubble peak in 2004. So not only are renters disproportionately sharing in increased housing costs, the percent of households in this category is increasing in the wake of the financial crisis.
WSJ: "FHA Cuts Waiting Period to 1 Year for Buyers Who Earlier Faced Foreclosure" -From Nick Timiraos at the WSJ: New Lifeline for Home Buyers A recent rule change lets certain borrowers who have gone through a foreclosure, bankruptcy or other adverse event—but who have repaired their credit—become eligible to receive a new mortgage backed by the Federal Housing Administration after waiting as little as one year. Previously, they had to wait at least three years before they could qualify for a new government-backed loan. To be eligible for the new FHA loans, borrowers must show that their foreclosure or bankruptcy was caused by a job loss or reduction in income that was beyond their control. Borrowers also must prove their incomes have had a "full recovery" and complete housing counseling before getting a new mortgage. We started seeing "bounce back" buyers in 2011 (see: After Foreclosure: The Bounce Back Buyers). As Timiraos noted, the standard FHA waiting period is 3 years. The waiting period is 7 years for a conventional loan following a foreclosure (4 years for a conventional loan following a short sale).
The Fed, FHA, FHFA, and “Guv’ment” Policies on Mortgage Rates: Out of Whack or Just Plain “Wack?” - Lawler - In a controversial paper presented at Jackson Hole, authors argued that Fed “large scale asset purchases” (LSAP) of agency MBS are “more economically beneficial” than Fed LSAP of Treasury securities. Here is an excerpt from their “conclusion” section.“We have presented theory and evidence that LSAPs work through narrow channels in which asset purchases affect the prices of the assets that are purchased. The primary channels for the operation of LSAPs in the US, and likely around the world, are the capital constraints and scarcity channels. We find that MBS LSAPs are more economically beneficial than Treasury LSAPs. There is little evidence for the operation of a broad channel through which LSAPs lower the yield on all long-term bonds.” While I won’t go into the details of the paper, essentially the authors argue that (1) Fed purchases of a particular type of security lower that security’s yield relative to other yields; (2) purchases of agency MBS, by lowering MBS yields relative to other yields, encourages/allows mortgage lenders to originate agency-eligible mortgages to home buyers and home owners at lower interest rates; (3) lower rates on agency-eligible mortgages benefit the housing market; and (4) benefiting the housing market relative to other markets is a “good thing.” While the authors don’t explicitly state their “findings” this way, that effectively is what their “findings” imply. There are, however, several things missing from the paper. First, of course, is the issue of whether monetary policy should be conducted in a fashion that alters the allocation of credit to one sector of the economy relative to other sectors of the economy. Another shocking thing missing from the paper is that actions by other government entities and Congress have worked in the opposite direction of the Fed’s LSAP of agency MBS. FHA, for example, has raised its mortgage insurance premiums a boatload since 2010, both the bolster its depleted reserves and to encourage “private capital” to return to the mortgage market. Both Fannie Mae and Freddie Mac, to a large extent at the direction of its regulator (FHFA), have increased significantly the guarantee fees they charge on new SF mortgage acquisitions, both to bolster their finances and to encourage private capital to return to the mortgage market. And finally, Congress passed (and the President signed) the Temporary Payroll Tax Continuation Act of 2011, which required both Fannie Mae and Freddie Mac to increase their guarantee fees on all SF residential mortgages delivered to them on or after April 1, 2012 by 10 basis points.
It's Perfectly Fine For The Fed To Stimulate Housing In The Wake of A Housing Crisis - I’m a big fan of Tom Lawler, but I think his rant – posted earlier today by Bill McBride – is misguided. Lawler’s essential complaint is that the Fed is stepping outside of its mission by buying up Mortgage Backed Securities. According to a recent analysis by two of the Fed’s own economists, the Fed’s policy of purchasing billions in Mortgage Backed Securities lowers interest rate on mortgages, but does little to bring down interest rates paid by other borrowers. This result isn’t immediately obvious – and indeed is somewhat controversial – because economists often assume that financial markets are tightly linked. When the interest rate on Mortgage Backed Securities declines, investors will shift their money towards other types of lending (credit cards, ex) driving down rates in that market. Not so say the Fed economists. Their analysis suggests that the links are not as tight as previously thought. Investors who normally buy-up mortgages are reluctant to switch to a different type of asset. Hence, the Fed’s purchases of MBS give a lot of benefit to mortgage borrowers, but not many other folks. What really upsets Lawler, however, is that the Fed economists think this is a good thing. Its perfectly fine for the Fed to direct credit towards one sector of the economy – in this case housing – when that sector experienced a credit meltdown that paralyzed the rest of the economy. Now perhaps Lawler feels – as a great many people do – that housing hasn’t experienced a credit meltdown, so much as a correction from a fundamentally unsustainable bubble. Under this view, all the Fed is doing now is inflating the same bubble that caused so much damage last time.Even if you don’t buy my story, however, there is the a much more fundamental reason to be skeptical about this view of the world. The US has a radically unsustainable shortage of home building. Things have improved recently, but housing starts well below what’s needed to keep up with population growth.
MBA: Mortgage Applications Increase in Latest MBA Weekly Survey - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey: Mortgage applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 30, 2013. ... The Refinance Index increased 2 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier. ... The refinance share of mortgage activity increased to 61 percent of total applications from 60 percent the previous week. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.73 percent from 4.80 percent, with points decreasing to 0.33 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. . The first graph shows the refinance index. The refinance index is down 63.4% over the last 17 weeks. The last time the index declined this far was in late 2010 and early 2011 when mortgage increased sharply with the Ten Year Treasury rising from 2.5% to 3.5%. We've seen a similar increase over the last few months with the Ten Year Treasury yield up from 1.6% to over 2.85% today. The second graph shows the MBA mortgage purchase index.
‘Jumbo’ Mortgage Rates Fall Below Traditional Ones - Interest rates on mortgages for pricey homes have dropped below those on smaller mortgages, an event that lending executives say has never happened before. Borrowing rates for so-called jumbo mortgages, which are too big for government backing, historically have been set higher than rates on what are known as conforming loans, which are backed by Fannie Mae, Freddie Mac or government agencies. But in the past two weeks, the relationship has flipped, a combination of interest-rate volatility, government policy and banks flush with cash that are enjoying lower funding costs, making jumbo mortgages an attractive investment for them. The average 30-year fixed-rate conforming mortgage was at 4.73% last week, according the Mortgage Bankers Association, compared with 4.71% for the average jumbo 30-year fixed-rate mortgage. Executives say the inversion in the so-called spread, or difference, between jumbo and conforming loans is unprecedented. "In my 30-year career, I've never seen nonconforming loans priced below conforming loans," said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage, the nation's largest mortgage company.
As mortgage rates spike, a market distortion appears - Mortgage rates hit another high today, touching levels not seen since early 2011. We have now experienced an almost 150bp spike (over 40% relative increase) from the lows in a matter of a few months.Something highly unusual is happening in the mortgage market however. Recently jumbo (see definition) mortgage rates have been lower than conforming rates. This is one of those market dislocations that most would have never thought possible. Yet here we are. Jumbo mortgages have generally been considered riskier by banks simply because they typically can not offload them to Fannie and Freddie as they can and do with conforming mortgages. Therefore banks would charge a premium for having to tie up balance sheet. What's driving this distortion? As the Fed prepares to reduce its purchases (which include MBS), agency MBS bonds are selling off. The latest price decline in fact has been quite sharp.Conforming mortgages are priced based on a spread to these bonds, and therefore very much tied to the MBS market fluctuations. As the MBS market sold of, conventional mortgage rates spiked. Jumbo loans on the other hand are not financed with MBS. Flush with deposits, banks have access to extraordinarily cheap capital and are seeking to earn more interest income. Seeing stability in high-end property values in certain areas, they are more willing to take additional risk these days. With willingness to deploy some balance sheet and competition for wealthier clients, banks are charging less for these loans. Qualified applicants who are now on the borderline between a conventional and a jumbo mortgage will be incentivized to buy a larger property in order to get a lower rate. High-end properties will therefore benefit from this effect at the expense of lower-priced homes. This is yet another market distortion created through government-based housing finance, with securities in this market dominated by the Fed.
Weekly Update: Existing Home Inventory is up 19.5% year-to-date on Sept 2nd - Here is another weekly update on housing inventory: 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 July). 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.
CoreLogic: House Prices up 12.4% Year-over-year in July - Notes: The recent Case-Shiller index release was for June. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic Reports July Home Prices Rise by 12.4 Percent Year Over Year: Home prices nationwide, including distressed sales, increased 12.4 percent on a year-over-year basis in July 2013 compared to July 2012. This change represents the 17th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.8 percent in July 2013 compared to June 2013. Excluding distressed sales, home prices increased on a year-over-year basis by 11.4 percent in July 2013 compared to July 2012. On a month-over-month basis, excluding distressed sales, home prices increased 1.7 percent in July 2013 compared to June 2013. Distressed sales include short sales and real estate owned (REO) transactions. The CoreLogic Pending HPI indicates that August 2013 home prices, including distressed sales, are expected to rise by 12.3 percent on a year-over-year basis from August 2012 and rise by 0.4 percent on a month-over-month basis from July 2013. Excluding distressed sales, August 2013 home prices are poised to rise 12.2 percent year over year from August 2012 and by 1.2 percent month over month from July 2013. . This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 1.8% in July, and is up 12.4% 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 17.6% from the peak - and is up 22.8% from the post-bubble low set in February 2012.
Trulia: "Asking home prices rose 11.0 percent year-over-year (Y-o-Y) and 1.2 percent month-over-month (M-o-M) in August" - This was released earlier today: Asking home prices rose 11.0 percent year-over-year (Y-o-Y) and 1.2 percent month-over-month (M-o-M) in August Asking home prices rose 11.0 percent year-over-year (Y-o-Y) and 1.2 percent month-over-month (M-o-M) in August. However, a closer look at the quarterly changes in asking home prices reveals a downward trend that’s much less volatile than the monthly changes suggest. Quarter-over-quarter (Q-o-Q), asking home prices rose 3.1 percent in August, down from 3.2 percent in July and 4.0 percent in April. And this downward slope will likely continue as mortgage rates rise, inventory expands, and investor interest declines. ...Rents rose 3.5 percent Y-o-Y nationally, jumping 3.9 percent on apartment units and only 1.6 percent on single-family homes. Among the 25 largest U.S. rental markets, rents increased the most in Seattle, Portland, and Miami, while declining slightly in Philadelphia, Washington, and Sacramento. Looking at single-family homes only, rents fell Y-o-Y in 6 of the 25 largest rental markets, including investor favorites such as Las Vegas, Phoenix, and Atlanta. ... Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases over the next few months on a seasonally adjusted basis (but the year-over-year increases will probably slow).
Wall Street’s Rental Bet Brings Quandary Housing Poor - LaTanya Moore-Newsome, a real estate agent with Century 21 in Atlanta, has been calling Wall Street-backed landlords for months on behalf of her low-income clients with government housing vouchers. She said some of the area’s biggest homebuyers in the past two years, including Blackstone Group, American Homes 4 Rent and Silver Bay Realty Trust repeatedly told her they had nothing available for tenants who use subsidies under the federal Section 8 assistance plan. Private-equity firms, hedge funds and real estate investment trusts have bought more than 100,000 U.S. homes, becoming dominant single-family landlords in markets hardest-hit by the housing crash such as Atlanta. As the companies seek thousands of tenants to fill newly renovated properties, their decision whether to lease to low-income Americans with Section 8 vouchers stands to affect both their profitability and poor residents who have been longtime renters. Blackstone -- the largest company in the fledgling industry after spending more than $5 billion to buy 32,000 U.S. homes -- inherited at least 200 Section 8 tenants when it bought a portfolio of Atlanta-area houses in April for about $100 million. That brought the amount of homes occupied by voucher holders to less than 1 percent of its portfolio, the company said at the time.
Black Homeownership Collapses As "Livable, Affordable Housing" Slips Out Of Reach -- President Obama's speech last during the 50th anniversary of MLK may seem sadly ironic now. As he noted, "Dr. King explained that the goals of African-Americans were identical to working people of all races: decent wages, fair working conditions, livable housing..." but the facts are that, as Bloomberg reports, while, for most Americans, the real estate crash is finally behind them and personal wealth is back where it was in the boom; For blacks in the U.S., 18 years of economic progress has vanished, with a rebound in housing slipping further out of reach and the unemployment rate almost twice that of whites. The homeownership rate for blacks fell from 50% during the housing bubble to 43% in the second quarter, the lowest since 1995. The rate for whites stopped falling two years ago, settling at about 73%, only 3 percentage points below the 2004 peak. As Rev. Alvin Love, who knew Obama in the 80s notes, "it's going to take a generation to get back to the point where homeownership can build wealth in this community."
Construction Spending in July: Private Spending increased, Public Spending Declined -- The Census Bureau reported that overall construction spending increased in July: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2013 was estimated at a seasonally adjusted annual rate of $900.8 billion, 0.6 percent above the revised June estimate of $895.7 billion. The July figure is 5.2 percent above the July 2012 estimate of $856.3 billion.... Spending on private construction was at a seasonally adjusted annual rate of $631.4 billion, 0.9 percent above the revised June estimate of $625.6 billion. ... In July, the estimated seasonally adjusted annual rate of public construction spending was $269.4 billion, 0.3 percent below the revised June estimate of $270.1 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 51% below the peak in early 2006, and up 46% from the post-bubble low. Non-residential spending is 28% below the peak in January 2008, and up about 32% from the recent low. Public construction spending is now 17% below the peak in March 2009. The second graph shows the year-over-year change in construction spending.
Survey: "Shortage of Lots Slows Housing Recovery" - I talked with several builders at the end of last year, and in early January I reported: "I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline)."Here are the results of a NAHB survey released today: Shortage of Lots Slows Housing Recovery A shortage of buildable lots, especially in the most desirable locations, has emerged as one of the key factors holding back a more robust housing recovery, according to the latest survey on the topic conducted by the National Association of Home Builders (NAHB).“In our August 2013 survey, 59 percent of builders reported that the supply of lots in their markets was low or very low—up from 43 percent September of last year, and the largest low supply percentage we’ve seen since we began conducting these surveys in 1997,” said NAHB Chief Economist David Crowe. “One reason is that many residential developers left the industry, abandoned certain markets or simply stopped buying land and developing lots during the downturn.”The survey found that lot shortages tended to be especially acute in the most desirable, or “A,” locations. Thirty-four percent of builders said that the supply of A lots was very low, compared to 18 percent for lots in B and 12 percent for lots in C locations. The shortages have also translated into higher prices for builders who are able to obtain developed lots to build on. ...Land developers are working to meet the demand from home builders, but it takes time to obtain all the entitlements - so this could still be an issue in 2014.
About That "Construction Worker Shortage" - Now that the house "recovery" myth is blowing up before everyone's eyes, the confidence spin crew, headed by the Fed itself, is stuggling to come up with any shred of evidence that despite everything seen so far, despite spiking mortgage rates, despite the scramble to cash out of all "homes for rent" ventures, despite the rush to cash out of major rental, and housing, investments by the smartest money of all, there is still room for hope. Today's hook came courtesy of the Beige Book, which otherwise was lethargically boring (same old "modest to moderate growth"), was promptly used to serve as an theme of "construction worker shortages" across areas of the country, and thus to indicate that there is simply too much demand, and not enough supply, resulting in not enough transactions. Some of the quotes "justifying this argument were the following:
- In some areas, demand for new homes substantially exceeded the supply, and shortages of construction workers held back the pace of new home construction activity.
- Several Districts noted constraints on the construction of single-family homes. San Francisco pointed to shortages of construction workers.
- Construction-related contacts noted some labor shortages, although there were no reports of wage pressures
Well, if that is true, that means that the level of construction workers already employed should be near or approaching previous capacity levels, right? Let's take a look shall we: Uhm. Oops.
Real Median Household Incomes: Another Monthly Decline - The Sentier Research monthly median household income data series is now available for July. Nominal median household incomes were up $15 month-over-month and $1,286 year-over-year. However, adjusted for inflation, real incomes were down $68 MoM and up only $291 YoY (-0.1% and 0.6%, respectively). And these numbers do not factor in the expiration of the 2% FICA tax cut. The median real household income is down 7.3% since the beginning of the century. The first chart below is an overlay of the nominal values and real monthly values chained in July 2013 dollars. The red line illustrates the history of nominal median household, and the blue line shows the real (inflation-adjusted value). I've added callouts to show specific nominal and real monthly values for January 2000 start date and the peak and post-peak troughs. The blue line in the chart above paints the grim "real" picture. Since we've chained in July 2013 dollars and the overall timeframe has been inflationary, the earlier monthly values are adjusted upward accordingly. In addition to the obvious difference in earlier real values, we can also see that real incomes peaked before the nominal (January of 2008, one month after the recession began, versus July 2008). Also the real post-recession decline bottomed later than the nominal (August 2011 versus September 2010).
Flat Line Real Consumer Spending and Income for July 2013 - The July personal income and outlays report shows no change in real consumer spending, which is really bad news for GDP. Not adjusted for inflation consumer spending rose a scant 0.1%. Real personal income isn't any better with no change for the month. Personal income not adjusted for inflation rose 0.1%. Once again we see America tapped out, not increasing their spending which fuels America's economic growth. Consumer spending is another term for personal consumption expenditures or PCE. Real personal consumption expenditures were $10,709.6 billion for July. Real GDP was $15,681.0 billion so we can see consumer spending is about 68% of GDP. Real means adjusted for inflation and is called in chained 2009 dollars. Disposable income is what is left over after taxes and increased 0.1% when adjusted for prices. Graphed below are the monthly percentage changes for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue). Below are the real dollar amounts for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue) for the last year. Consumer spending encompasses things like housing, health care, food and gas in addition to cars and smartphones. In other words, most of PCE is most about paying for basic living necessities. Graphed below is the overall real PCE monthly percentage change so one can see, a zero monthly percentage change isn't that unusual although overall economic growth as been anemic.
Consumers Upbeat on Better Labor Market View - An improving view of U.S. labor markets helped to push up consumer economic confidence at the start of this month, according to data released Thursday. The Royal Bank of Canada said its U.S. consumer outlook index increased to 51.1 in September from 49.4 in August. The index is at its highest since June. The RBC current conditions index edged up to 41.0 from 40.9. The expectations index increased to 59.3 from 57.3. “This month in particular shows increasing optimism which appears to be rooted in the security of perceived economic stability,” the report said. U.S. consumers hold a much better view of labor markets. The September employment index jumped to 60.1 from 56.0. This month’s reading is the highest since October 2007. “Nearly one half (48%) of consumers believe it unlikely that they or someone they know will suffer job loss in the next six months,” up from 43% in August, the report said. Prices, however, remain a concern. The inflation-expectation index rose to 80.8 from 79.0. In a series of special questions, RBC asked about the ease or difficulty in finding a job compared to a year ago as well as back-to-school shopping. The survey found 18% of consumers think jobs are easier to find, up from 14% saying that in April 2011, when the question was last asked. A larger 40% think it is harder, but that’s down from 49% saying that in 2011. On the matter of school purchases, 20% of parents say they are spending more this year, while 33% say they are buying less.
Consumer Confidence: A Useful Indicator of . . . the Labor Market? - Consumer confidence is closely monitored by policymakers and commentators because of the presumed insight it can offer into the outlook for consumer spending and thus the economy in general. Yet there’s another useful dimension to consumer confidence that’s often overlooked: its ability to signal incipient developments in the job market. In this post, we look at trends in a particular measure of consumer confidence—the Present Situation Index component of the Conference Board’s Consumer Confidence Index—over the past thirty-five years and show that they’re closely associated with movements in the unemployment rate and in payroll employment. Consumer confidence is a widely followed economic indicator, largely based on the idea that the consumer’s mood—driven by what Keynes referred to as “animal spirits”—can independently affect the degree to which he or she is prone to spend. Less well known is the linkage between consumer confidence and labor market conditions. This is an important distinction, because most formal analyses evaluating consumer confidence as an economic indicator examine its predictive content for consumer spending—after controlling for measured changes in the labor market—rather than study its comovement with employment measures.
Households Gained $1,200 Thanks to Surging U.S. Oil Production - About $1,200 a year. That’s what the average American household gained in disposable income in 2012 as a result of surging U.S. oil and natural gas production in unconventional energy plays, according to research firm IHS. IHS reaches its conclusion by calculating lower bills for natural gas and electricity — thanks to swelling supplies of natural gas—as well as cheaper prices for a number of goods and services. The firm also factors in higher wages and jobs generated by the oil and gas industry. All in all, it finds that the “unconventional revolution” contributed $163 billion to U.S. households last year. And its estimates only increase over time. By 2020, IHS believes unconventional energy production will contribute just over $2,700 to the average household. By 2025, it reaches $3,500 a year. These numbers, part of a new report released Wednesday, personalize the U.S. energy boom in a unique way. Piles of research try to calculate the energy industry’s impact on gross domestic product, trade imbalances and tax revenues. Just last week, for example, the White House economic advisors said an upward revision of second-quarter GDP was due in large part to lower petroleum imports. But economists rarely attempt to quantify the benefit to average Americans. “We wanted to make this real to all Americans,” said John Larson, IHS vice president and chief author of the report. The Energy Information Administration expects U.S. crude oil production to increase more than 25% between 2012 and 2014—from 6.5 million barrels a day to 8.2 million. It expects marketed natural gas production to stay relatively flat in that time.
Will Big Data Bring More Price Discrimination? - There’s a lot of value in price discrimination for overcoming fixed costs. The textbook example of this is a rural doctors office that can only operate profitably if they can price discriminate and charge some customers more than others. As a result you generally see economists more in favor of price discrimination than non-economists, who regard it as unfair. Depending on how the different pricing is structured, this can be either first, second, or third degree price discrimination. First degree price discrimination involves charging every individual customer a price based on their individual willingness to pay. Second degree price discrimination does not charge based on customer characteristics, but based on the amount of the good purchased, e.g. quantity discounts. Third degree price discrimination relies on putting customers into groups and charging different rates based on willingness to pay within those groups, e.g. senior discounts at the movies. This of course brings us to Google Glass. If knowing where people go on the web can increase profits by over 1% compared to simple demographics based price discrimination, then how much will it help to know where people go in the real world? How about who they encounter and speak with? What products they look at and how much time they spend looking at them? Is this kind of world sort of creepy and unfair? I think this is somewhat true and my guess is most people think this is very true. But consider the benefits.
Will Big Data Create A Personalized Pricing Nirvana for Retailers? - In a fascinating blog post, Adam Ozimek makes the case that we will see much more individualized pricing (which economists call "first degree price discrimination") as more data mining becomes available. For instance, in a new working paper, Ben Shiller is able to use big data to massively improve his ability to predict demand for Netflix subscriptions by any given individual: Adding the full set of variables ... including web-browsing histories and variables derived from them, substantially improves prediction – predicted probabilities range from close to zero to 91%….I find that web browsing behavior substantially raises the amount by which person-specific pricing raises variable profits. As more and more data become available, it's easy to imagine retailers using these data to offer personalized prices for each consumer, especially for information goods where margins are large and pricing flexibility is greatest. "You want to watch Elysium tonight? Special price just for you!" This can substantially increase profits, and it is also likely to make products and services available at lower prices to some people who couldn't previously afford them, increasingly overall economic efficiency. At the same time, total consumers' surplus is often falls when differential pricing is introduced, as consumers with high valuations make larger payments to sellers for goods and services they would have purchased anyway.
Short Your Kids, Go Long Your Neighbor: Betting on People Is Coming Soon - mathbabe - Yet another aspect of Gary Shteyngart’s dystopian fiction novel Super Sad True Love Story is coming true for reals this week. Besides anticipating Occupy Wall Street, as well as Bloomberg’s sweep of Zuccotti Park (although getting it wrong on how utterly successful such sweeping would be), Shteyngart proposed the idea of instant, real-time and broadcast credit ratings. Anyone walking around the streets of New York, as they’d pass a certain type of telephone pole – the kind that identifies you via your cell phone and communicates with data warehousing services and databases – would have their credit rating flashed onto a screen. If you went to a party, depending on how you impressed the other party go-ers, your score could plummet or rise in real time, and everyone would be able to keep track and treat you accordingly.I mean, there were other things about the novel too, but as a data person these details certainly stuck with me since they are both extremely gross and utterly plausible. And why do I say they are coming true now? I base my claim on two news stories I’ve been sent by my various blog readers recently.
Weekly Gasoline Update: Up a Nickel or So - 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 rose a nickel and Premium six cents. Regular and Premium are 18 cents and 16 cents, respectively, off their interim highs in late February. According to GasBuddy.com, Hawaii is the only state averaging above $4.00 per gallon, down from two last week. Two states are reporting average prices in the 3.90-4.00 range (Alaska, which was over $4 last week, and Connecticut); that’s up from no states last week.
U.S. Light Vehicle Sales increase to 16.0 million annual rate in August - Based on an estimate from WardsAuto, light vehicle sales were at a 16.02 million SAAR in August. That is up 11% from August 2012, and up 2.6% from the sales rate last month. This was above the consensus forecast of 15.8 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for August (red, light vehicle sales of 16.02 million SAAR from WardsAuto).This was the first time the sales rate has been over 16 million since November 2007. The growth rate will probably slow in 2013 - compared to the previous three years - 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. Unlike residential investment, auto sales bounced back fairly quickly following the recession and are still a key driver of the recovery. Looking forward, growth will slow for auto sales. If sales average the recent pace for the entire year, total sales will be up about 9% from 2012, not quite double digit but still strong
US Auto Sales Race to Strongest Month Since October 2007: Even as dealers sold out of some of the hottest models, U.S. auto sales raced past expectations in August, rising at their fastest pace in nearly six years, while demand showed no signs of cooling as consumers grew more confident in the economy. Vehicle sales increased 17 percent in August, and the annual sales rate in the month finished at 16.1 million vehicles. That sales pace topped analysts' expectations of 15.8 million and marked the strongest month since October 2007, before the start of the 2008-2009 recession. Sales easily surpassed expectations as consumers, after years of putting off purchases of new cars, took advantage of still-low interest rates and snapped up a wide range of vehicles from pickup trucks to luxury sedans. Overall retail sales for August, due to be reported in the middle of the month, are currently forecast to have risen 0.3 percent from July, but the robust auto sales could indicate the current estimates are too conservative.
Across U.S., bridges crumble as repair funds fall short - America's roads and bridges have been eroding for decades, but the deeper they fall into disrepair, the less money there is to fix them. First, the recession crippled local budgets, cutting the money available for transportation projects. As states began to recover, the federal government adopted its own mandatory budget cuts via sequestration. Then last month, the federal legislation that annually funds transportation projects across the country hit a roadblock of Republican opposition that throttled multibillion-dollar transportation bills in the House and Senate. The new political deadlock in Washington, D.C., comes as the Federal Highway Administration estimates that bridge and road repair needs have escalated to $20.5 billion a year. Every day, U.S. commuters are taking more than 200 million trips across deficient bridges, according to a variety of analyses, and at least 8,000 bridges across the country are both "structurally deficient" and "fracture critical" — engineering terms for bridges that could fail if even a single component breaks. "These bridges will all eventually fall down,"
U.S. factory orders post sharpest decline in four months (Reuters) - New orders for U.S. factory goods dropped in July by the most in four months, a worrisome sign for economic growth in the third quarter. The Commerce Department on Thursday said new orders for manufactured goods dropped 2.4 percent. Analysts polled by Reuters had expected an even sharper decline. The decline was spread broadly across the nation's factories, from those producing computers and machinery to cars and electrical equipment. Manufacturing slowed in the spring, hobbled by tight fiscal policy and weak global demand. While a survey in August of purchasing managers by the Institute of Supply Management pointed to improving confidence in the sector, the picture in July still looked dour. New orders for capital goods other than military items and aircraft, which is seen as a gauge of business spending plans, dropped 4 percent in July, its steepest decline since February. Shipments of this category, which directly feed into the Commerce Department's calculations of economic growth, also slipped.
US factory orders drop 2.4 percent in July - Orders to U.S. factories fell in July by the sharpest amount in four months, held back by weaker demand for commercial aircraft and heavy machinery. A key category that reflects business investment plans also fell. Factory orders dropped 2.4 percent in July compared with June, when orders rose 1.6 percent, the Commerce Department reported Thursday. Orders for core capital goods, a category viewed as a proxy for business investment spending, fell 4 percent in July. Core capital goods are considered a good measure of businesses' confidence in the economy. They include items that point to expansion — such as machinery, computers and heavy trucks — while excluding volatile orders for aircraft and defense. The July setback was expected to be temporary. Orders for durable goods, items expected to last at least three years, declined 7.4 percent, a slightly bigger drop than the 7.3 percent fall estimated in a preliminary report last week. It was the biggest decline since a 12.9 percent fall in August 2012. Orders for nondurable goods, items such as chemicals, food and paper, rose 2.4 percent in July after a 0.5 percent decline in June. Excluding the volatile transportation category, factory goods orders were up 1.2 percent. The big drop in core capital goods orders suggests the third quarter is off to a weaker start than some had hoped. While economists cautioned that it's just one month of data, a few lowered their growth estimates for the July-September quarter after seeing the durable goods report. Some believe that growth may only come in around 1.9 percent for the current quarter, a drop from previous estimates of 2.5 percent growth.
Pace of U.S. Manufacturing Hit 2-year Peak in Aug. - U.S. factories expanded last month at the fastest pace since June 2011 on a jump in orders. The report signals that manufacturing output could strengthen in coming months. The Institute for Supply Management, a trade group of purchasing managers, said Tuesday that its manufacturing index rose to 55.7 in August from 55.4 in July. That topped the index’s 12-month average of 52. A reading above 50 indicates growth. A gauge of new orders rose nearly five points to 63.2, the highest level in more than two years. At the same time, production increased more slowly than in July, and factories added jobs at a weaker rate. Despite the drop, production reached its highest level in 2½ years. The overall improvement contrasts with other recent reports that had pointed to a slowdown in manufacturing. The ISM’s survey found broad-based growth, with 15 out of 18 industries reporting expansion and only one reporting contraction. That suggests that factory production could accelerate this year.
ISM Manufacturing Index Rose 0.3% in August - Today the Institute for Supply Management published its August Manufacturing Report. The latest headline PMI at 55.7 percent is an increase from 55.4 percent last month and is the best reading since June 2011, twenty-six months ago. Today's number beat the Investing.com forecast of 54.0 percent and Briefing.com's call for 54.5 percent. Here is the key analysis from the report: Manufacturing expanded in August as the PMI™ registered 55.7 percent, an increase of 0.3 percentage point when compared to July's reading of 55.4 percent. August's reading reflects the highest overall PMI™ reading in 2013. 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 August PMI™ indicates growth for the 51st consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the third consecutive month. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through August (52.5 percent) corresponds to a 3.2 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for August (55.7 percent) is annualized, it corresponds to a 4.2 percent increase in real GDP annually." Here is the table of PMI components. I've highlighted a key point in advance of Friday's employment report. Manufacturing employment continued to grow in August but at a slower pace than in July.
ISM Manufacturing 55.7% PMI Shows Growth Held for August 2013 - The manufacturing survey responders comments were not as positive. Slow down was the phrase in many sectors with some noting a decrease in government spending is still hurting. The comment which stood out was from miscellaneous manufacturing, not sure why is something nobody likes to hear. Business is slowing down, not sure why — but we may end up below last year's sales levels, whereas we had forecast 6.5 percent growth. Back to the index, new orders increased 4.9 percentage points to 63.2%. This is the highest the new orders index has been since April 2011 and in the 60's for new orders should imply some solid growth. Below is 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. The Census reported July durable goods new orders declined by -7.3%, where factory orders, or all of manufacturing data, will be out later this month, but note the one month lag from the ISM survey. The ISM claims the Census and their survey are consistent with each other. Below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics. Here we do see a consistent pattern between the two.
ISM Manufacturing index increases in August to 55.7 - The ISM manufacturing index indicated faster expansion in August. The PMI was at 55.7% in August, up from 55.4% in July. The employment index was at 53.3%, down from 54.4%, and the new orders index was at 63.2%, up from 58.3% in July. From the Institute for Supply Management: August 2013 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in August for the third consecutive month, and the overall economy grew for the 51st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. "The PMI™ registered 55.7 percent, an increase of 0.3 percentage point from July's reading of 55.4 percent. August's PMI™ reading, the highest of the year, indicates expansion in the manufacturing sector for the third consecutive month. The New Orders Index increased in August by 4.9 percentage points to 63.2 percent, and the Production Index decreased by 2.6 percentage points to 62.4 percent. The Employment Index registered 53.3 percent, a decrease of 1.1 percentage points compared to July's reading of 54.4 percent. The Prices Index registered 54 percent, increasing 5 percentage points from July, indicating that overall raw materials prices increased when compared to last month. Comments from the panel range from slow to improving business conditions depending upon the industry." Here is a long term graph of the ISM manufacturing index.
August ISM Index: Mfg. Expands At Fastest Pace In 2 Years -- The US economic profile for August is still largely a mystery, but today’s update on the ISM Manufacturing Index offers an early clue for thinking that last month will remain firmly in the growth camp. The composite value for this widely followed benchmark inched higher last month to 55.7, the highest in more than two years. Although the gain surprised many analysts, my econometric modeling left room for thinking that we could see another decent report, as last week’s ISM preview noted. Surprising or not, today’s ISM news implies that the upbeat macro trend in July will roll on in August once all the numbers are published.While the composite ISM manufacturing index increased to a two-year high last month, the new orders slice of the data surged even more. That’s a sign for expecting that relatively robust manufacturing activity will persist in the months ahead. But as the chart above also shows, the employment sub-index slipped a bit. Although the employment reading is still well above the neutral 50 mark, today’s ISM report reminds that the outlook is still muted for expecting anything more than a moderate gain in the rate of increase for US payrolls. Then again, if the surge in the new orders sub-index is a guide, perhaps we’ll see positive surprises in jobs creation down the road.
Vital Signs: Demand for Factory Goods Soars - Manufacturers wrote up more orders in August, supporting the idea that the factory sector is back in expansion mode this quarter. The Institute for Supply Management’s survey of manufacturers showed its new orders index increased to 63.2 in August from 58.3 in July. It was the third consecutive monthly gain in demand and the highest reading since April 2011. The August overall purchasing managers’ index unexpected rose to 55.7 last month from 55.4 in July. (A reading over 50 indicates expanding activity.) According to the ISM, only one industry, miscellaneous manufacturing, reported a drop in August order and demand from foreign customers expanded last month. Expanding order books explains why production is increasing. The ISM production index slipped a bit from its 9-year high of 65.0 in July but remained at a strong 62.4 in August.
ISM Non-Manufacturing Index at 58.6 indicates faster expansion in August - The August ISM Non-manufacturing index was at 58.6%, up from 56.0% in July. The employment index increased in August to 57.0%, up from 53.2% in July. Note: Above 50 indicates expansion, below 50 contraction. From the Institute for Supply Management:�August 2013 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in August for the 44th consecutive month, "The NMI™ registered 58.6 percent in August, 2.6 percentage points higher than the 56 percent registered in July. This indicates continued growth at a faster rate in the non-manufacturing sector. This month's NMI™ is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.2 percent, which is 1.8 percentage points higher than the 60.4 percent reported in July, reflecting growth for the 49th consecutive month. The New Orders Index increased by 2.8 percentage points to 60.5 percent, and the Employment Index increased 3.8 percentage points to 57 percent, indicating growth in employment for the 13th consecutive month. The Prices Index decreased 6.7 percentage points to 53.4 percent, indicating prices increased at a significantly slower rate in August when compared to July. According to the NMI™, 16 non-manufacturing industries reported growth in August. The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy." emphasis added This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.
ISM Non-Manufacturing Index: Faster Growth Than Forecast - Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 58.6 percent, signaling faster growth than last month's 56.0 percent. The August is the highest reading since the January 2008 inception of the composite. Today's number beat the Investing.com forecast of 55.0 percent and Briefing.com's 54.5 percent consensus.Here is the report summary: The NMI™ registered 58.6 percent in August, 2.6 percentage points higher than the 56 percent registered in July. This indicates continued growth at a faster rate in the non-manufacturing sector. This month's NMI™ is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.2 percent, which is 1.8 percentage points higher than the 60.4 percent reported in July, reflecting growth for the 49th consecutive month. The New Orders Index increased by 2.8 percentage points to 60.5 percent, and the Employment Index increased 3.8 percentage points to 57 percent, indicating growth in employment for the 13th consecutive month. The Prices Index decreased 6.7 percentage points to 53.4 percent, indicating prices increased at a significantly slower rate in August when compared to July. According to the NMI™, 16 non-manufacturing industries reported growth in August. The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy. chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.
August Service ISM Soars To 58.6, Highest Since 2005, Second Biggest Two Month Surge In History - The data is getting painfully laughable: on one hand Gallup says unemployment is soaring to two year highs, on the other, the ISM non-manufacturing report just printed at 58.6: for those keeping track, and who enjoy laying along, this was the highest since December 2005, and the 2nd largest two month increase in the index on record. Of course, this means unless NFP tomorro comes at -1,000,000, the Taper is a done deal as the 10 year, which just printed 2.969% and surging, indicate. Stocks continue to do their own thing, blissfully ignorant of the debalce that will take place once the 3.00% yield stops are hit. The good news for bond bulls: this index can only go down from these ridiculous levels.
Service Sector Index Hits Highest Level Since It Was Created in 2008 - The U.S. nonmanufacturing sector expanded at a solid pace in August, according to data released Thursday by the Institute for Supply Management. The reading on employment also strengthened last month. The ISM’s nonmanufacturing purchasing managers’ index rose to 58.6 in August from 56.0 in July. The August reading “is the highest reading for the index since its inception in January 2008,” the report said. Forecasters surveyed by Dow Jones Newswires had expected last month’s PMI to slow to 55.0. Readings above 50 indicate activity is expanding. “The majority of respondents’ comments continue to be mostly positive about business conditions and the direction of the overall economy,” the report said. The majority of nonmanufacturing subindexes picked up steam. The new orders index rose to 60.5 from 57.7 in July. The business activity/production index increased further to 62.2, after it jumped to 60.4 in July. Both new orders and production are at their highest since February 2011. The ISM inventory index rose to 56.0 from 53.5. The employment index jumped to 57.0 in August from 53.2 in July. The service sector has been the main driver of job growth in this recovery. The ISM reading suggests Friday’s employment report should contain another solid gain in August service-sector payrolls. Earlier Thursday, payroll processor Automatic Data Processing estimated private service providers added 165,000 jobs last month.
Services Revenue Report: Funeral Homes Fading as Hospitals Show Signs of Life - Funeral-home revenue continued a slow downward march in the second quarter while hospitals’ financial intake perked up, a Commerce Department report on the nation’s service industries showed Wednesday. Overall, several major service industries posted stronger gains in the second quarter of 2013 after a sluggish start to the year. About seven out of every 10 U.S. workers are employed in service industries, making the sector’s growth critical to the economy as a whole. From April through June nearly all industries tracked on a quarterly basis posted revenue gains, reversing declines or tepid increases during the first three months of the year. Aided by strong growth in the legal field, revenue for the professional, scientific and technical services category advanced 2.3% during the quarter, on a seasonally adjusted basis, compared with a 1% decrease the prior quarter. The administrative and waste-management field grew 2.5% following a decline to start the year.The information sector grew 0.6% in the second quarter, a stronger gain than the 0.1% growth in the first. Improved growth for the information field bodes well for the broader economy as gains in the category — including telecommunications, data processing and software development — often boosts productivity in other industries. Of 11 broad categories tracked by the government, the strongest year-over-year gain came in education services, up 13%. The field includes trade schools and tutoring services, but excludes colleges and grade schools.
Small Businesses Not Adding Workers Like They Used to -- It’s well known that job growth has been lacking in this recovery. One reason for the disappointment is that small businesses aren’t adding workers like they used to. Economists at Goldman Sachs explored the shift in hiring by business size using the Labor Department‘s Business Employment Dynamics survey. Although the BED data lag, the Goldman economists found small firms (defined as businesses employing less than 1-49 workers) have indeed underperformed medium and large companies whether underperform is defined as “a slower rate of job growth during the recovery relative to other firm size classes or a failure to regain the absolute magnitude of job losses incurred during the recession.” These trends contrast with the last business cycle of the early 2000s. Small firms barely lost any jobs in the 2001 recession and then outpaced medium and large firms in the expansion. Of course, job growth overall has been hampered by weak demand, credit constraints and global woes. Goldman identified some reasons unique to small-company hiring. First, small firms account for a disproportionately large share of construction jobs and those payrolls collapsed during the Great Recession. Second, labor markets have seen a structural shift toward large company jobs. For instance, Goldman notes large companies’ share of retail employment has jumped 16 percentage points from the early 1990s to 64% today. Many mom-and-pop stores can’t compete against big box retailers. Lastly, large-business employment has tended to be more sensitive to the business cycle. When the U.S. recovery strengthens, big firms benefit a bit more.
US Trade Deficit Widens More Than Expected : The U.S. trade deficit widened 13.3% to $39.1 billion in July. Economists expected it to have expanded to $38.6 billion. The trade gap with China widened to a record $30.1 billion from $26.6 billion. The $13.9 billion deficit with the European Union was also the highest ever. "The global economy showed signs of recovery in July, with business confidence and activity data surprising on the upside in both the euro area and in China," wrote the economists at Bank of America Merrill Lynch before the report.
Trade Deficit increased in July to $39.1 Billion - The Department of Commerce reported this morning: [T]otal July exports of $189.4 billion and imports of $228.6 billion resulted in a goods and services deficit of $39.1 billion, up from $34.5 billion in June, revised. July exports were $1.1 billion less than June exports of $190.5 billion. July imports were $3.5 billion more than June imports of $225.1 billion. The trade deficit was close to the consensus forecast of $39.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through July 2013. Imports increased in July, and exports decreased. Exports are 14% above the pre-recession peak and up 3% compared to July 2012; imports are 1% below the pre-recession peak, and up 1% compared to July 2012 (mostly moving sideways). The second graph shows the U.S. trade deficit, with and without petroleum, through July. 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. Oil averaged $97.07 in July, up slightly from $96.93 in June, and up from $93.71 in July 2012. The trade deficit with the euro area was $11.0 billion in July, up slightly from $10.8 billion in July 2012. The trade deficit with China increased to $30.1 billion in July, up from $29.4 billion in July 2012. Most of the trade deficit is related to China and oil. And most of the recent improvement in the trade deficit is related to a decline in the volume of imported petroleum.
US Trade Deficit Widens to $39.1 Billion in July - The U.S. trade deficit widened in July from a four-year low in June. American consumers bought more foreign cars and other imported goods, while U.S. companies exported fewer long-lasting manufactured goods. The Commerce Department said Wednesday that the trade gap rose 13 percent to $39.1 billion. That’s up from June’s deficit of $34.5 billion, which was the smallest since late 2009. Imports increased 1.6 percent to $228.6 billion, lifted by more shipments of oil, autos and consumer goods. Exports slipped 0.6 percent to $189.4 billion. Companies shipped fewer capital goods, such as civilian aircraft and industrial engines. A wider trade gap can slow economic growth because it means that U.S. consumers and businesses are spending more on foreign goods than U.S. companies are earning from overseas sales. Still, the decline follows a steep drop in June. And economists noted that trade is running at roughly the same pace as the previous quarter. Many were also encouraged by the increase in imports of consumer products. That follows a weak government report last week on consumer spending in July.
The U.S. Trade Deficit Returns in July 2013 -- The U.S. July 2013 monthly trade deficit increased 13.3% to $39.147 billion and as expected. Overall exports decreased -0.6% while imports increased by 1.6%. The real news is the monthly China trade deficit just hit a new all time high of $30.1 billion. The monthly not seasonally adjusted trade deficit with China was $30.083 billion. The China trade deficit alone was 42.7% of the not seasonally total goods deficit, on a Census accounting basis. The U.S. jhit a new record annual 2012 $315 billion trade deficit. The 2013 the trade deficit with China to date is $177.789 billion with five more months to go. The below graph shows how highly cyclical the monthly trade deficit with China is. Country trade statistics are not seasonally adjusted, yet this time last year the 2012 cumulative China trade deficit was $174.409 billion. In other words it is looking like America will see yet another record trade deficit with China for 2013. Graphed below are imports and exports graphed and by volume and beyond recessions, nothing seems to make a dent in the growing trade deficit. Imports are in maroon and exports are shown in blue, both scaled to the left. We can also see what bad trade treaties has wrought by the below graph. Below are the goods import monthly changes, seasonally adjusted. On a Census basis, overall imports increased by $3.619 billion to $189.222 billion as crude oil imports came roaring back by $1.357 billion. Fuel oil imports also increased by $883 million and bad news for U.S. workers, auto parts imports really jumped up.
- Industrial supplies and materials: +$1.987 billion
- Capital goods: -$0.276 billion
- Foods, feeds, and beverages: +$0.125 billion
- Automotive vehicles, parts, and engines: +$0.807 billion
- Consumer goods: +$0.710 billion
- Other goods: +$0.266 billion
Below is the list of good export monthly changes, seasonally adjusted, by end use and on a Census accounting basis, declined by -$1,4 billion to $131.762 billion. The U.S. seems to be exporting petroleum products routinely these days and this month gave an additional $695 million worth. Nonmonetary gold exports increased by $412 million. What crashed and burned for July were aircraft engines, industrial engines and machines. Gems and Jewelry exports declined, together -$944 million in a month, a lot less blink for July.
- Automotive vehicles, parts, and engines: -$0.179 billion
- Industrial supplies and materials: +$1.689 billion
- Foods, feeds, and beverages: +$0.343 billion
- Capital goods: -$1.606 billion
- Consumer goods: -$1.363 billion
- Other goods: -$0.343 billion
Worse Than Expected US Trade Deficit Spikes In July, Trade Gaps With China, EU Rise To Record - When last week the revised Q2 GDP print was announced, which beat expectations solidly driven entirely by a surge in net exports, we said that "with China on the rocks and tightening, the Emerging Markets in free fall, and Europe still a net exporter (so not benefiting the US), anyone hoping this trade led-recovery will be sustainable, will be disappointed." Sure enough, the first trade data update for the third quarter as of July, confirmed just this, as the trade deficit widenedfrom a revised $34.5 billion deficit, to a substantially larger monthly deficit, amounting to $39.1 billion. This was $500MM more than consensus expected, or $38.6 billion, and it means that as we predicted, the downward revisions to Q3 tracking estimates are about to start rolling in, trimming ~0.1%-0.2% from US GDP for this current quarter. Specifically, imports for the month rose from $225.1 billion to $228.6 billion while exports fell from $190.5 billion to $189.5 billion. But perhaps most notable is that in July, the US trade deficit with China and the EU rose to a record of $30.1 billion (from $26.6bn last month) and $13.9 billion (from $7.1bn) respectively.
Highlights from the July Trade Report: Record Auto Imports and Oil Exports - Highlights from the Commerce Department‘s report on trade in July showed an improving domestic economy, supporting stronger imports, while overall exports slipped after a strong showing in June.
- AUTOS. Booming car sales aren’t just good for domestic manufacturers. July imports of autos, engines and parts hit a record $26.49 billion, up a little more than 3% from the prior month. So far this year, vehicle imports are up $3.05 billion, or a little more than 1%, from the same stretch in 2012. (The trade figures are not adjusted for inflation.)
- OIL. July exports of petroleum products hit a new record, one result of a resurgent domestic energy industry and rising prices amid escalating tensions in Egypt and Syria. The $12.53 billion in overseas sales was up more than 8% from June. Of course, the American appetite for oil also pulled in more imports, widening the trade deficit for petroleum products.
- WIDER GAPS WITH EUROPE and CHINA. Trade deficits with the European Union and China were the highest on record in July. Economists have been watching both markets closely to see if Europe’s struggles, China’s slowdown and a stronger dollar will squeeze American exporters. The U.S. trade deficit with the EU nearly doubled in July as exports slipped and imports surged. Overall, U.S. exports to the bloc are down 4.4% so far this year. In trade with China, U.S. exports fell and imports rose for the month, but through the course of the year exports are growing faster than imports.
U.S. Importing Much Less Oil, but Still Spending a Lot on It -- The U.S. is importing a lot less foreign oil. But it isn’t spending much less on it. The surge in domestic oil production — combined with a slow but steady decline in consumption — has taken a big bite out of U.S. oil imports in recent years. The U.S. imported just under 10 million barrels a day of crude oil and related products in June, according to Energy Information Administration data, down from more than 12 million barrels per day in 2010. Exports, meanwhile, are up more than 50% over the past three years. Put the two together and we’re importing less oil on a net basis than at any point since the early 1990s. But the oil boom’s impact has been much more muted in terms of the trade deficit, as economist James Hamilton recently noted. That’s because we measure the trade deficit in dollars — and the price of oil remains high. Oil prices have shot up in recent weeks, partly in response to the threat of worsening conflict in the Middle East. But even before the latest rise, prices had been hovering around $100 per barrel. Set aside 2008’s short-lived spike above $140 per barrel, and prices have been trending upward for more than a decade. Rising prices mean the U.S. is spending more for the oil it imports, even as it imports less of it. The U.S. bought $31.3 billion on oil in July and sold $12.5 billion worth, for a deficit of $18.7 billion, the Commerce Department said Wednesday. That’s down 13% from a year ago, a significant decline, but far smaller than the 24% decline in net imports by volume. In terms of barrels, U.S. is now importing about the same amount of oil as it was 20 years ago — net imports are actually down 7% since the start of 1993. But in dollar terms, the petroleum trade deficit has more than tripled over the same period, even after adjusting for inflation.
The limit of labor’s consumption rate - How much of their income do labor and capital use for consumption of finished goods and services? Now, if labor and capital do not spend their money on consumption, they either save it or pay taxes. In the case of labor, whose rate of consumption is very high, they have less and less income available for saving and taxes as the years go by.On this labor day, we can see the divide between labor and capital. Currently capital income’s consumption rate (blue line) looks to be heading back up to the previous high of 27% seen back in 1965. After 1965, capital income’s consumption rate declined to 0% by 1980. During that time, labor increased its use of income for consumption from 65% to 75%. We might assume that consumption moved from capital income to labor income.We now see that capital is once again using income for consumption. Eventually, capital will reverse this trend and lower its consumption rate. Will labor income compensate? Will consumption be able to move from capital to labor income?
Labor Market Trends As Of Labor Day - Private payrolls continue to grow at 2.0% a year. Not great, but not awful. The fact that the economy has been consistently minting new jobs on a net basis is encouraging for thinking that the expansion will roll on. Meantime, the index of weekly hours worked for production/nonsupervisory employees continues to grow on a year-over-year basis, although this indicator slipped a bit in the July update with a 1.7% rise vs. a year ago, or down from a 2.0% gain in June. Not a good sign... if the deceleration continues. On a brighter note, new jobless claims continue to slide. Based on monthly data, the average for the August figures published so far are lower by nearly 11% vs. a year ago (these changes are inverted on the chart below for easier comparison with payrolls and the index of hours worked). As a leading indicator, the ongoing decline in new filings for unemployment benefits offers the strongest case for optimism in the realm of the broad labor trend. Overall, it’s fair to say that the labor market continues to heal, albeit moderately. Can we expect more of the same in this Friday’s August update on payrolls from the government? Yes, according to the consensus forecast. Private payrolls are expected to deliver a slightly better round of growth, adding a net 180,000 for August, according to Briefing.com. That's a touch better than the 161,000 gain in July. Not great, but not awful.
Investors Are Doing Better Than Workers - By some measures, the U.S. economy has done a decent job of enduring the tax increases and spending cuts imposed earlier this year. We now know, for example, that gross domestic product has been expanding at about the same rate in the first half of this year as it has since mid-2010. This supports the argument that the Federal Reserve’s stimulus actions have managed to offset the impact of fiscal tightening. This doesn’t mean that all is well. For one thing, growth is still too anemic to return the U.S. economy to anything resembling full employment for several more years, even under the most optimistic assumptions. At the same time, new evidence from the U.S. Bureau of Economic Analysis, which released its monthly personal income and spending report today, indicates that most of the modest growth has gone to the small share of the population that owns the vast majority of the country’s assets. Since the beginning of 2013, total personal income has increased by about $323.3 billion, while total employee compensation has increased by just $112.5 billion. People who get their income from renting out real estate, from dividends on stocks and from interest payments on bonds got an additional $186.7 billion. (The rest of the growth came from Social Security, Medicare, Medicaid, and veterans’ benefits.) Put another way, workers only got about a third of the economic growth generated so far this year. That’s significantly less than their average share of income growth since the beginning of 2010, which was closer to about half.
Not Really Labor’s Day - The annual holiday supposedly celebrating labor has long lacked much celebratory feel. Over the last 30 years, employment has become more precarious and real wages for most workers have stagnated. Since 2008, in particular, the corrosive impact of persistent unemployment and declining wages on American workers has been felt at holiday picnics and parades. The seasonally adjusted July unemployment rate of 7.4 percent showed a slight decline from last year’s 8.2 percent, but the gains came largely as a result of declining labor force participation rather than job creation. The larger measure of underemployment (known as U-6) that includes people working part time because they cannot find full-time work, and those who want a job and have looked for one in the last 12 months but have given up currently looking, was a seasonally adjusted 14 percent in July, compared with 14.9 percent a year earlier. Public policies could help. As Jared Bernstein explained in an earlier Economix post, the federal government could become an employer of last resort. A new report from the Urban Institute outlines several specific strategies to lower long-term unemployment in particular. Why is there so little political will to put such policies in place?
Thursday: ADP Employment, Unemployment Claims - Small business employment gains have been weak for the last few years, and it appears small business employment was slightly negative in August ... but the outlook is improving.From NFIB: Summer Winds Down; Job Growth Does Not Wind UpOverall, owners reported a decline in employment averaging 0.3 workers per firm. ... Rosier skies appear ahead, it seems, as plan for future job creation rose a very large 7 points, netting sixteen percent of owners with plans to increase total employment. This is the best report since January 2007 and historically a very strong reading. ... If we assume this increase is not a fluke, it signals a substantial resumption of hiring in the coming months. From Intuit: Small Business Employment Remained Flat in August“The slight drop of one-hundredth of 1 percent in August employment equates to about 1,300 jobs lost, which means employment was essentially flat for the month. This is the second month that small business recovery has been flat or falling,” said Susan Woodward, the economist who worked with Intuit to create the indexes.Thursday:
• 8:15 AM ET, the ADP Employment Report for August. This report is for private payrolls only (no government). The consensus is for 177,000 payroll jobs added in August, down from 200,000 in July.
• At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 330 thousand from 331 thousand last week.
Weekly Jobless Claims Beat Forecast; 4-Week Average Lowest Since October 2007 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 323,000 new claims number was a 9,000 decrease from the previous week's 332,000 (an upward revision from 331,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the trend, fell by 3000 to 328,500, the lowest level since October 2007.Here is the opening of the official statement from the Department of Labor:In the week ending August 31, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 9,000 from the previous week's revised figure of 332,000. The 4-week moving average was 328,500, a decrease of 3,000 from the previous week's revised average of 331,500. The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending August 24, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 24 was 2,951,000, a decrease of 43,000 from the preceding week's revised level of 2,994,000. The 4-week moving average was 2,979,500, a decrease of 18,000 from the preceding week's revised average of 2,997,500. Today's seasonally adjusted number came in well below the Investing.com forecast of 330K.Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.
Biggest 2-Week Drop In Initial Claims In 3 Months But Unit Labor Costs Stagnate - The last 2 weeks have seen the biggest drop in initial jobless claims in 3 months as today's print is within a smidge of six year lows. Continuing claims also fell close to 5.5 year lows. All good healthy "Taper-On" news ahead of the all-important NFP. However, the only fly in the ointment as far as celebrating this 'renaissance' remains productivity gains and the ongoing slump in unit labor costs (which missed expectations of an easy-money earnings-growth generated +0.8% gain and came in at a dismal 0.0%). Simply put, all the hope of wage inflation providing the self-sustaining glue to hold this 'thing' together post-Fed-Taper is fading fast as the liquidity pipeline remains unerringly clogged.
Applications for U.S. Jobless Aid Near a 5-Year Low - — The number of Americans seeking unemployment benefits dropped 9,000 last week to a seasonally adjusted 323,000, near the lowest level since June 2008. The figure shows that employers are laying off fewer and fewer workers. The Labor Department says weekly applications are just 1,000 above a five-year low reached last month. The four week average, a less volatile measure, declined 3,000 to 328,500. That’s the lowest point since October 2007. The data come a day before the department will release the August jobs report. Economists expect it to show employers added 177,000 jobs, up from 162,000 in July. The unemployment rate is expected to remain 7.4 percent. Applications are a proxy for layoffs. They have fallen 5 percent in the past two months, raising hopes that hiring could pick up.
Unemployment At One Year High, Gallup Finds - Since lately it seems that the BLS' sole mandate is to smooth and otherwise seasonally adjust noisy, incomplete employment data, even as the one part of employment that should not be rising - part-time jobs - continues to creep ever higher both seasonally adjusted and otherwise, it has become virtually impossible to get an accurate, unadjusted perspective of how the US labor force is truly doing. And with this Friday's non-farm payroll report "the most important ever", as every other month of course, this time because it will seal the fate of the taper (or won't) depending if the data is bad enough, everyone is eager to get a sense of what is going on behind the scenes and how to position for Friday. Unfortunately this Wednesday's ADP private payrolls report will be quite inconclusive as well: not only has it become a laughable predictor of the immediately following NFP data, it does not even disclose what the unadjusted data actually is. Which leaves us with a third, and final, approach to analyze jobless trends in the US: Gallup, which every week polls thousands of adults to get an unadjusted, snapshot picture of who has a job, who has a part-time job and who has no job. The latest weekly results are good and bad. Good for those who fear that the NFP print on Friday will be so bad Bernanke will have no choice to delay (or reduce) the taper; bad for the economy. Because at 8.5%, unemployment for the week ended September 1 is now near the highest levels it has been in one year, following a spike in mid-August that sent it all the way to 8.8%.
Unemployment Rate Surges To Highest Since 2011 - Gallup Polling - With ADP out of the way, and providing no guidance to an extreme NFP print one way or another, we once again turn to Gallup. As a reminder, a few days ago we showed that things are bad and getting worse for America's job prospects following direct polling land as relates to unemployment on a seasonally unadjusted basis. Today, the polling group has released its seasonally adjusted unemployment number and how it compares to the BLS' own estimation of the labor market. In a word: it is not pretty (which, again, is good for those who are hoping and praying St. Ben will keep the monetary Kool Aid running for a little bit longer): at 8.6% it is over 1% higher than the BLS' reported print, and is the highest since the end of 2011.
Gallup can not predict payrolls, but points to labor market stability = Unlike Gallup's economic sentiment index, which has been leading other confidence indicators, the firm's job creation index seems to be less helpful in estimating actual job growth. While the jobs index has been rising steadily over the past 4 years, payrolls increases have stalled at under 190K new jobs per month on average. The Gallup's job index strength does tell us however that the employment situation in the US remains stable. The breakdown of the index indicates that layoffs have not been increasing while the percentage of employers hiring is at least stable if not rising. Moreover, the labor market weakness remains with the federal government, whereas private sector jobs seem quite stable. This is important because the Fed has been quite focused on private payrolls growth (among other indicatorsThe Gallup jobs index tells us that this Friday's payrolls report is unlikely to be shockingly bad and could even surprise to the upside. And we all know what that means for the Fed.
Gallup Says Seasonally-Adjusted Unemployment Climbs to 8.6%; Who to Believe (Gallup or the BLS)? The payroll report tomorrow is going to be interesting. The discrepancy between what Gallup reports and the BLS reports is widening. Last month, the BLS reported the seasonally-adjusted unemployment rate at 7.4%. oday Gallup reported Unadjusted unemployment climbs to 8.7% (The seasonally adjusted rate is 8.6%). ven if there is a huge jump of half a percentage point in unemployment, there will still be a major difference of opinion as to what the rate is. Here are some charts and discussion from the Gallup report. The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, dropped to 43.7% in August, from 44.6% in July, and is down from 45.3% in August 2012. Gallup's P2P metric estimates the percentage of the U.S. adult population aged 18 and older who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted. August marks the seventh month this year that the P2P rate failed to improve over the same month in 2012. In fact, so far this year, P2P has declined an average of 0.3 percentage points in terms of monthly year-over-year changes. That is a reversal from last year, when 11 out of 12 months showed year-over-year increases in P2P and there was an average 0.8-point increase for the year.
ADP: Private Employment increased 176,000 in August - From ADP: Private sector employment increased by 176,000 jobs from July to August, according to the August ADP National Employment Report®. ... July’s job gain was revised down slightly from 200,000 to 198,000. ... Mark Zandi, chief economist of Moody’s Analytics, said, "It is steady as she goes in the job market. Job gains in August were consistent with increases experienced over the past two-plus years." This was at the consensus forecast for 177,000 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 August, on a seasonally adjusted (SA) basis.
ADP Payrolls 176K, Small Miss, Pace Of Increase Broken For First Time Since April - While the ADP private payrolls report is nothing but pompous noise, which despite allegedly relying on actual empirical payrolls data has greater revisions than even the BLS's largely made up number, what it reported today would certainly have implications on expectations for tomorrow' NFP report. Which is why on the surface while the just reported miss to expectations of 176K (Exp. 184K) was not too bad, it was quite bad to those hoping the Friday NFP print would be atrocious and force the Fed to delay tapering. Based on today's data point at least, the Taper is set to proceed in just under two weeks. This was the first miss in three months, and also follows a small revision to the July number from 200K to 198K. Finally, this was the first sequential break in the monthly rate of increase since April.
ADP Employment Report Shows 176,000 Jobs for August 2013 - ADP's proprietary private payrolls jobs report shows a gain of 176,000 private sector jobs for August 2013. ADP revised July's job figures down by 2,000 to 198 thousand jobs. Overall, August shows same ole, same ole in the ADP job figures. This report does not include government, or public jobs. Jobs gains were in the service sector were 165,000 private sector jobs, again large gains. The goods sector gained 11,000 jobs. Professional/business services jobs grew by 50,000. Trade/transportation/utilities showed strong growth again with 40,000 jobs. Financial activities payrolls increased by 1,000, the lowest increase since June 2012. Construction work tapered off in the goods sector job growth with 4,000 jobs added. Manufacturing gained 5,000 jobs 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 stable hiring and this as average job growth of the last year. Steady as she goes was quoted by Moody's. One odious comment claimed manufacturing recovered, uh, no they have not, they reserved their ADP jobs losses from last month. If one tallies up the ADP jobs by sector reported, financial, construction, manufacturing, professional/business and trade/transportation/utilities, they had up to 100,000 jobs for this month. It appears that ADP does not report on the biggest jobs growth, food and restaurant workers. These are jobs within the service sector and are most often the lowest paying and also part time. Below is a graph of those jobs left over from the ADP employment figures after subtracting off these five sectors: financial, construction, manufacturing, professional/business and trade/transportation/utilities. ADP reports 7.075 million private sector jobs have been added since January 2010. There has been a 2.942 million job gain in those sectors not broken down by ADP. That's 41.6% of the jobs ADP reports as gained where we have no clue on what types or sector gains they are in. For a reference the BLS gives a 7.31 million private sector job gain of the same period.
U.S. Employers Add 169,000 Jobs, Rate Falls to 7.3% - U.S. employers added 169,000 jobs in August and much fewer in July than previously thought. Hiring has slowed from the start of the year and could complicate the Federal Reserve’s decision later this month on whether to reduce its bond purchases.The Labor Department said Friday that the unemployment rate dropped to 7.3 percent, the lowest in nearly five years. But it fell because more Americans stopped looking for work and were no longer counted as unemployed. The proportion of Americans working or looking for work fell to its lowest level in 35 years. July’s job gains were just 104,000, the fewest in more than a year and down from the previous estimate of 162,000. June’s figure was revised to 172,000, from 188,000. The revisions lowered total hiring over those two months by 74,000. Employers have added an average of just 148,000 jobs in the past three months, well below the 12-month average of 184,000. The weaker jobs picture could make the Fed hesitate to scale back its bond buying. The Fed’s $85 billion a month in Treasury and mortgage bond purchases have helped keep home-loan and other borrowing rates ultra-low to try to encourage consumers and businesses to borrow and spend more.
Jobs Report: First Impressions–Data Should Point Fed Away from Sept Taper - Payrolls were up 169,000 last month and the unemployment rate ticked down to 7.3%, according to this morning’s report from the BLS. However, as has sometimes been the case in recent months, the decline in unemployment rate was not to more people getting more jobs. It was due to a decline in the share of the population in the labor force, which ticked down two-tenths of a percent, to 63.2%, its lowest level since the summer of 1978, according to MarketWatch.com.Another weak sign in the report were the downward revisions to prior months’ payroll gains. Instead of the already sub-par 162,000 payroll jobs we thought we added in July, the revised number was only 104,000. Together, revisions to June and July subtracted 74,000 from the job counts. Over the past three months, the average monthly payroll gain was 148,000–that would just be enough to hold the jobless rate steady at its current elevated rate, if folks weren’t dropping out of the labor force. In other words, while far from a disaster, this is a considerably weaker report than expected (although—pat, pat on own back—I predicted 170,000 jobs, so I’m not surprised by that). Considering the not-great jobs number, the downward revisions, and the continued slide in the participation rate, the labor market remains, to re-use an analogy I used last month, stuck in second gear. And let’s be clear about this next point: when you’re puttering along in second gear, you don’t want to be driving up hills. Which brings us to the Federal Reserve. As I see it, they need to worry more right now about rising interest rates—longer-term rates are already up a point over the last month, though they’ll probably come down today—than overly aggressive monetary stimulus. In other words, they need to rethink the September taper.
August Employment Report: 169,000 Jobs, 7.3% Unemployment Rate (graphs) -From the BLS: Total nonfarm payroll employment increased by 169,000 in August, and the unemployment rate was little changed at 7.3 percent, the U.S. Bureau of Labor Statistics reported today. ... ...The change in total nonfarm payroll employment for June was revised from +188,000 to +172,000, and the change for July was revised from +162,000 to +104,000. With these revisions, employment gains in June and July combined were 74,000 less than previously reported. The headline number was slightly below expectations of 175,000 payroll jobs added. However employment for June and July were also revised lower. This graph is ex-Census meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes. The second graph shows the unemployment rate. The unemployment rate declined in August to 7.3% from 7.4% in July. This is the lowest level for the unemployment rate since November 2008. The unemployment rate is from the household report and the sharp decline in the participation rate helped lower the unemployment rate. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate decreased to 63.2% in August (blue line) from 63.4% in July. This is the percentage of the working age population in the labor force. The Employment-Population ratio declined in August at 58.6% from 58.7% in July (black line).
Only 169K New Jobs, But Unemployment Rate Drops to 7.3% - 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 169,000 in August, and the unemployment rate was little changed at 7.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in retail trade and health care but declined in information. Today's nonfarm number was weaker than the Investing.com forecast, which was for 180K new nonfarm jobs, but the unemployment rate dropped to 7.3 from 7.4%. Investing.com was expecting no change at 7.4%. The nonfarm jobs number for July was revised downward from 188K to 172K and the June number was revised downward from 162K to 104K for a combined decline of 74K from last month's report.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. Unemployment is usually a lagging indicator that moves inversely with equity prices (top chart). 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 2.7% -- down from the 2.8% reading of 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%.
August payrolls: +169,000, and unemployment rate 7.3 per cent - There was nothing to cheer in Friday’s US employment situation report for August, including the decline in the unemployment rate. Payrolls in the prior two months were revised downward a combined 74,000. The fall in the unemployment rate was down to yet another decline in the labour force participation rate. Payrolls growth has averaged just 148,000 for the past three months, a notable decline from the pace earlier this year and well below the 184,000 average of the past twelve months. In the household survey, the total number of people employed declined by 115,000, but the size of the labour force fell by a much higher 312,000, accounting for the decline in the unemployment rate. Most of the reaction will focus on how this will affect the upcoming decision by the Fed of whether or not to introduce tapering. That’s understandable, though do spare a thought for the year’s flagrant bungling by fiscal policymakers as well. Ever since Bernanke’s clumsy attempt earlier this year to telegraph the eventual tapering, FOMC members have tried to stress that any decision would be contingent on the economy’s performing in line with their expectations. The unemployment rate has declined faster than they expected, if anything — but as a number of commentators have pointed out, the labour force participation rate is now at its lowest point since 1978. Going by the employment situation report alone, at least, it would seem impossible to argue that the labour market outlook has continued on its way towards “substantial” improvement in recent months without also arguing that structural unemployment is higher than the Fed assumed. Maybe that’s an argument we’ll hear soon, but we haven’t heard it yet. The research on this point — specifically on the structural vs cyclical elements of labour force participation — remains mixed.
Establishment Survey: +169K Jobs, June and July Revised Lower; Household Survey: Employment -115,000, Not in Labor Force +516,000; BLS in Wonderland - The establishment survey showed a gain of 169,000 jobs.For the second consecutive month, the previous two months were revised lower. The employment change for July was revised down by 58,000 (from +162,000 to +104,000). Last month the BLS revised June employment down by 7,000 (from +195,000 to +188,000).This month, the BLS said June was still not correct and revised June lower by another 16,000 to +172,000.See the change in pattern here? Earlier in the year, revisions were to the plus side. In spite of the above, the unemployment rate dropped 0.1 to 7.3%. After all, it's the household survey that determines the unemployment rate, not the establishment survey baseline jobs number. Employment fell by 115,000 but the labor force fell more (in spite of a population rise of 203,000). That's why the unemployment rate dropped.August BLS Jobs Statistics at a Glance
- Payrolls +169,000 - Establishment Survey
- US Employment -115,000 - Household Survey
- US Unemployment -198,000 - Household Survey
- Involuntary Part-Time Work -334,000 - Household Survey
- Voluntary Part-Time Work +211,000 - Household Survey
- Baseline Unemployment Rate -0.1 - Household Survey
- U-6 unemployment -0.3 to 13.7% - Household Survey
- Civilian Labor Force -312,000 - Household Survey
- Not in Labor Force +516,000 - Household Survey
- Participation Rate -0.2 at 63.2 - Household Survey
Unemployment Rate Drops for Wrong Reasons - The U.S. unemployment rate dropped 0.1 percentage point to 7.3% in August and a broader measure of unemployment fell to 13.7% from 14%, but the declines came from the wrong reasons. The drop in the main unemployment rate was driven almost totally by negative factors. The number of people employed fell by about 115,000. The only reason the rate declined is that the overall labor force dropped by a larger 312,000, a possible sign of discouraged long-term jobless dropping out. The labor force participation rate, which is the percent of the population either working or looking to work, took a tumble to 63.2% — its lowest level since 1978. The drop in the number of people employed may come as a shock, considering that the number of jobs in the economy rose last month. That’s because the number of jobs added to the economy and the unemployment rate come from separate reports. The number of jobs added comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month. The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force. A positive sign was a big drop — 198,000 — in the number of people who say they’re unemployed, but with the decline in the labor force many of those people may have just given up looking for work.
Unemployment Rate Drops On Over Half a Million More Not In Labor Force - The BLS employment report shows the official unemployment rate declined a percentage point to 7.3% as over half a million people dropped out of the labor force. The labor participation rate just hit a low not seen since August 1978. Less people were employed as well. People dropping out of the labor force is no way to lower an unemployment rate, yet this is what is going on, five years eight months after the start of the Great Recession. This article overviews and graphs the statistics from the Current Population Survey of the employment report. The labor participation rate is now 63.2%, 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 staying out of the labor force The -0.3 percentage points represents about 740 thousand people. For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age. he number of employed people now numbers 144,170,000, a -115,000 monthly decline. 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 two million from a year ago. The noninstitutional population has also increased by 2.393 million during the same time period, so this is actually a good sign that people employed did really increase over the past year. The statistics from the CPS do generally vary widely from month to month, yet two million more employed per annum is still not enough to correct the jobs crisis in America. Below is a graph of the Current Population Survey employed. Those unemployed stands at 11,316,000, a -198 thousand decrease from last month. From a year ago those officially unemployed has declined by 1,167,000. This isn't a great showing, especially considering the low labor participation rate and also implies about a million of those getting the jobs might be new entrants into the labor force, such as foreign workers The United States counts foreign guest workers in their employment statistics. This also means many people simply fell off of the BLS radar screen for being counted at all and are considered instead not in the labor force. Below is the change in unemployed and as we can see, this number also swings wildly on a month to month basis.
August Jobs Rise 169K, Less Than Expected, Unemployment Rate 7.3%, Huge Downward Revision To July Print - A messy report out of the gate with the number of jobs added in August at 169K, or as predicted by ADP, worse than the 180K expected, however this was offset by the Unemployment Rate dropping from 7.4% to 7.3%, on expectations of an unchanged print. However what has shocked the market is the revision to the July jobs number from 162K to only 104K, resulting in a net drop of 74K jobs, and breaking the average 2013 jobs gain of 200K which previously was said by the Fed to be the key threshold level for tapering. The question now is: is this print bad enough to delay the taper? From the report:Total nonfarm payroll employment increased by 169,000 in August, about in line with the average monthly gain of 184,000 over the prior 12 months. In August, job growth occurred in retail trade and health care, while employment in information declined. Employment continued to trend up in food services and drinking places, professional and business services, and wholesale trade. (See table B-1.)Retail trade added 44,000 jobs in August and has added 393,000 jobs over the past 12 months. In August, job growth occurred in clothing stores (+14,000), food and beverage stores (+12,000), general merchandise stores (+9,000), and electronics and appliance stores (+4,000).Employment in health care increased by 33,000 in August. Within the industry, most of the job growth occurred in ambulatory care services (+27,000).
Record 90.5 Million Out Of Labor Force As Half A Million Drop Out In One Month; Labor Force Participation Rate Plunges To 1978 Levels - While the Establishment survey data was ugly due to both the miss and the prior downward revisions in the NFP print, the real action was in the Household survey, where we find that the number of people not in the labor force rose by a whopping 516,000 in one month, which in turn increased the total number of people outside the labor force to a record 90.5 million Americans.And what is even worse, the Labor Force Participation Rate declined from 63.4% to 63.2%: the is the lowest print since August 1978!
Real Unemployment Rate Rises To 11.4%, Difference Between Reported And Real Data Rises To Record -As frequent readers know, for the past three years we have compiled data looking at the US unemployment rate assuming a realistic labor force participation rate, which is the trendline average of the past three decades, or in the mid-65% area. Using such an approach allows us to estimate what the true unemployment (U3, not U6 underemployment) rate is. We can report that as a result of the latest monthly collapse in the labor force whose only purpose was to lower the unemployment rate from 7.4% to 7.3%, the actual implied unemployment rate just rose from 11.2% to 11.4%. This can be seen on the chart below. Also can be seen that the spread between the reported manipulated unemployment rate and the real rate accounting for a realistic labor force participation, just hit a record high 4.1%. In other words, unemployment data manipulation by the BLS was never been greater in the history of the US than in the past month.
Highlights from the August Jobs Report -- A downward revision of June and July payroll figures combined with August gains that fell short of forecasts painted a lackluster picture of the jobs recovery over the summer. Meanwhile, the August unemployment rate, measured by a separate survey, fell to 7.3%, a five-year low. Here are highlights from the Labor Department’s report.
- Fed watch: The 6-month trend shows job creation averaging 160,330 per month since March. That may concern Federal Reserve policy makers ahead this month’s meeting. Some Fed officials have said they want to see steady job creation of close to 200,000 jobs a month before paring back their bond purchases.
- Revisions: July’s payroll gain was revised down by 58,000 to 104,000. The June number was also recast lower by 16,000. In total, the economy added 74,000 fewer jobs those months than previously estimated. (August’s figure and the downward revisions put the average monthly payroll gain this year at 180,250, a pace that is now slightly slower than the 2012 average.)
- Sectors: Retail trade gained 44,000 jobs; education and health services added 43,000 positions; and manufacturing rose 14,000. Service-producing jobs continued to make up the bulk of the job gains, adding 151,000 positions in the month.
- Sequester watch: Federal government employment held flat in August. An increase at local schools helped push up total public sector employment.
- Discouraged workers: There were 866,000 discouraged workers in August, nearly unchanged from a year earlier. Discouraged workers are people not currently looking for work because they believe no jobs are available for them.
- Broader Measure: The unemployment rate that includes discouraged workers and part-time workers seeking full-time employment fell slightly to 13.7% in August from 14.0% the prior month.
The BLS Jobs Report Covering August 2013: School, Crappy Jobs, and Earnings Gains All at the Top End - August is the month where large numbers of students return to school. The BLS defines the unemployed as those actively seeking work. Since many students are not actively seeking work at this time, the size of the labor force and both the number of employed and unemployed decrease in seasonal terms in August. Consequently, unadjusted, the labor force declined by 1.225 million. The number of employed dropped by 604,000, and the number of unemployed declined by 621,000. (The sum of these two equals the drop in the labor force.) As a reflection of this, the number of part time workers for economic reasons decreased 634,000. As expected, these declines are moderated in the seasonally adjusted data, with the labor force decreasing by 312,000, and employment dropping by 115,000 and the unemployed by 198,000.The jobs or business data are, in part, at odds with the people data. While the labor force declined in August, the jobs data show the number of jobs increasing by 169,000 seasonally adjusted and 378,000 seasonally unadjusted. We may look on the seasonally adjusted number as suspect since the July number of 162,000 was revised downward 58,000 to 104,000 (which is below the level needed to keep up with population growth). In any case, the crapification of American jobs continues. Seasonally adjusted, retail trade added 44,000, healthcare 33,000, professional and business services 23,000, and food and drinking places 21,000. If your great ambition in life is flip burgers or work at Walmart, America remains the land of golden opportunity. Hours increased slightly in August, and weekly pay reflected this, but both these improvements could be due in part to the stripping out of lower paying involuntary part time positions we saw in the household or people data. As usual, most of these gains were concentrated at the top end. Real trend unemployment is now 5.2% above the “official” rate of 7.3%.
Persistent Scars of Long-Term Joblessness - Hugely elevated levels of long-term unemployment remain one of the worst and most persistent scars from the Great Recession, as underscored yet again in the mediocre August jobs report. All in all, about 4.3 million Americans have been out of work for six months or more. For those workers, the chance of getting a job gets slimmer and slimmer as time goes on, skills degrade and employers’ biases harden. Even if those workers do become re-employed, it is often for lower wages or worse work. Granted, the number of Americans that count themselves among the long-term jobless has declined sharply over the last three years, dropping by about 2.4 million from a peak of 6.7 million in 2010. But the number remains significantly elevated, and hundreds of thousands out of work for long spells have simply given up and dropped out of the labor force. The slowly improving economy is not really improving for the long-term unemployed: Short-term joblessness has actually declined a smidge since 2007. Long-term joblessness is up 244 percent. This report says that we’re barely creating enough jobs to keep the unemployment rate falling from its current high levels,” said Justin Wolfers of the Brookings Institution. “Policy makers have been looking for a signal that the recovery has become self-sustaining. This report doesn’t provide it.” But the further you dig into the numbers, the worse they look. “The jobs count may be up, but for recent college graduates and middle-aged adults seeking positions the situation is grim,” said Peter Morici of the University of Maryland. “Adding in part-timers who want full-time employment and discouraged adults who have abandoned searching for jobs, the unemployment rate becomes 13.7 percent. This figure has fallen because more adults appear reconciled to permanent part-time status.”
Chart Of The Day: August Job Additions, Or Rather Losses, By Age Group -- Frequent readers are well aware that in addition to having broken the story about America's conversion to a part-time worker nation nearly three years ago, another topic we have been closely tracking over the past year, and well ahead of the mainstream, has been its conversion to a gerontocratic worker society (from October 2012: "55 And Under? No Job For You"), which has shown that contrary to yet another urban legend that old workers are retiring in droves, it is the old workers who are getting the bulk of the jobs, at the expense of everyone else (those 55 and younger). In fact, America's oldest working age group "bucket" is hitting record employment levels month after month. Which brings us to today's chart of the day which shows the August job additions broken down by age group, and as tracked monthly by the household survey. The additions, or rather job losses, need no additional commentary aside from what we have provided so far.
Weak participation rate haunts US labor markets - Weakening labor force participation remains the key problem for US labor markets. Using a fixed age group of 25-54 in order to account for the aging population shows a substantial and a nearly linear decline since the start of the Great Recession. We haven't seen participation rates this low in almost 30 years. A material portion of the decline in the headline unemployment rate can be traced to lower participation. For example, according to the ISI Group, if we brought the total labor force participation to where it was at the end of 2011 (64% vs. 63.2%), the unemployment rate would be 8.4% rather than the latest 7.3%.The Fed is keenly aware of the situation, but there is no real evidence that any of the three rounds of quantitative easing have slowed the decline in labor participation. And there is an expression for doing more of the same thing while expecting different results ...
Why Is U.S. Work Force Shrinking? - The labor force participation rate in the U.S. fell in August to the lowest level since 1978, a development that may reflect the lack of higher-paying jobs in the economy. Participation in the workforce has trended down steadily since early 2008, near the start of the recession, and fell last month to 63.2%. A number of factors are driving the trend, including an aging population, women no longer entering the labor force at increasing rates and a growing fraction of those with college educations not working. People in all those groups may not be able to find jobs that pay enough to entice them to work rather than pursue other options, be it early retirement, raising children or returning to school. “At the margin, people are saying the reward is not worth the effort, and focusing on other things,” said John Silvia, chief economist at Wells Fargo.
Porn Industry Blamed For "Temporary" Softness In Jobs Data - After months of rock-hard gains in stocks, and an extended period of firming in the headline jobs data, some are noting that today's limpness in the jobs data is temporary, driven by an unexpected choke down of staffing in the porn industry. As Bloomberg reports, a big surprise in today's report was a 6% decline in the number of people working in the "motion picture and sound recording industries," which can be attributed to a shutdown in the porn-film industry that doesn’t reflect the underlying health of the economy. It turns out that, as WaPo notes, the U.S. porn industry stopped working for a week after an actress tested positive for HIV. Once it became clear that no one else had the disease, work resumed. The one-week shutdown would affect the jobs numbers for the month of August but tells us nothing about the broader state of the U.S. economy. Had those 22,000 people been working, employment growth in August would have modestly beaten expectations. Fed officials are probably blowing off this month’s weakness for that very reason. It seems we should all be pulling for a revival of the porn industry to raise the economy from its slumber.
Looking for Furloughs in the Jobs Data - The number of workers on federal government payrolls has fallen only 55,000 since January, which might lead you to conclude that the sequester has not had much impact on federal employment. But the number of federal employees who report working part time because they cannot get full-time hours — a sign they might be on furlough — remains high.The number of these “involuntary part-timers” was 144,000 in August. That is more than twice the number of involuntary part-timers in the federal government in 2012 and in 2011. (The numbers are not seasonally adjusted, so it’s best to use year-over-year comparisons rather than the change from one month to the next.) How furloughs are executed varies by government agency and department; in some cases workers must take one unpaid leave day each week, and in others they might be able to take their furlough days consecutively (in which case affected workers would report they didn’t work at all, not that they worked short hours). As a result, the numbers above might understate how many federal workers were furloughed in August. For comparison, the number of involuntary part-time workers was actually down year-over-year in the private sector, as Jason Furman, the chairman of the Council of Economic Advisers, noted in a blog post:
Quality Of August Jobs Added: Absolutely Abysmal -- While we already have the quantiative components of today's jobs number (horrendous), here is the qualitative breakdown. For the time constrained readers we will jump to the conclusion: absolutely abysmal, to a degree perhaps not seen in years. Of the 169K jobs added, the vast majority, some 144K or 85% of the entire August gain, consisted of the lowest paying jobs possible:
- +44K jobs added in Retail Trade
- +43K added in Education and Health
- +27K added in Leisure and Hospitality
- +17K added in Government (looks like sequester effect has finally "tapered")
- +13K added in Temp Help services
But at least they are full-time "lowest paying jobs" possible. If there was one silver lining in today's jobs report it is that Full Time jobs added finally surpassed the Part-Time jobs, which actually declined. Elsewhere, for those still confused by the Beige Book's idiotic proclamation that there are construction worker shortages, don't tell the BLS: the number of jobs added in the Construction secotr: 0. Narrowing it down to just construction jobs of residential buildings, the number was down 3.9K. So much for that lie. As for the two highest paying job categories: Financial Services and Information? -5,000 and -18,000 respectively.
Vital Signs: New Jobs Carrying Smaller Paychecks - The U.S. economy created 152,000 private-sector in August, but not all jobs are created equal. Using Labor Department data, economists at the Royal Bank of Canada have tracked the weekly pay earned at new private jobs versus pay for all private positions. To calculate average new-job pay, they looked at which industries added jobs over the past 3 months and the average pay offered in those industries. While new jobs were outpaying existing jobs earlier in the 2013, the trend has shifted this summer, says RBC’s chief economist Tom Porcelli, confirming that the “preponderance of new jobs are of the low-paying variety.” He says one positive in the August jobs report was the rise in total weekly pay, and that’s important because income growth is the main driver of consumer spending in this recovery (mainly because credit use and tapping into home equity are nonstarters for most households). RBC expects real consumer spending will grow about 2% in the second half, roughly equal to the moderate pace of the first half. “If you want to see an acceleration in spending, you need to see an acceleration in wage growth,”
Number of the Week: Lackluster Pay Growth - 2.2%: The year-to-year increase in average hourly wages. On the surface, the August job numbers look solid: a 169,000 gain in jobs, close to expectations, and a drop in the unemployment rate to 7.3%. But the details paint a darker picture that should raise concerns about the consumer outlook in the second half. The July jobs increase was revised much lower: 104,000 vs 162,000. And the unemployment rate fell mainly because about 300,000 adults dropped out of the labor force. The August report changes the view of the U.S. labor markets. Businesses are still reluctant to hire new workers at a pace that would support faster consumer spending. And without stronger consumer spending, it is unlikely gross domestic product growth will rev up in the second half. Indeed, another disappointing trend in the employment numbers was lackluster pay growth. The average hourly wage rose a nickel in August but stands only 2.2% above its year-ago level. Household budgets barely are keeping pace with inflation. Paychecks so far in the third quarter are running slightly above their second-quarter average. The outlook for consumer spending will follow the trend in incomes. But the latest jobs report suggests businesses are holding the line on both hiring and pay raises.
The Old Are Working, but Not the Young -- During the summer months this year, an average of 35.9 percent of men ages 65 to 69 had jobs. Similarly, 25.6 percent of women in the same age group were working. Both figures were records for any summer since such numbers became available in 1981. The rate of employment for women 70 to 74 is also higher than in any previous summer. All other age groups over 60 came close to setting records. The share of men 60 to 64 with jobs was 57.2 percent, and the share of women in the same age group was 47.1 percent. Both were less than a half a percentage point short of the previous summer high. On the other end of the scale, the proportion of people under 30 with jobs, while up from the recession lows, remains far below what it was before the Great Recession. The charts below are based on the Bureau of Labor Statistics’ survey of households. Because the bureau does not make seasonal adjustments based on age, the charts compare the three-month averages of this summer to previous summers: the summer of 2007, the last one before the recession began; and the summer of 2011, when the job recovery was still young and weak. They show the ratio of employment to population for each age group of men and women, regardless of whether those without jobs were seeking employment.
Mediocre Jobs Report Adds to Fed Speculation - The nation’s employers added 169,000 jobs in August, slightly below what economists were expecting. The unemployment rate ticked down to 7.3 percent from 7.4 percent, but it fell largely because people dropped out of the labor force and so were no longer counted as unemployed. In fact, the share of working-age Americans who were either working or looking for work was at its lowest level since 1978, a time when women were less likely to be participating in the labor force. The report also contained large downward revisions to job growth in July and June. August’s growth was about in line with the average hiring rate so far this year, which has been steady but mediocre. If the economy were to fill the jobs gap left by the recession within the next four years, around 300,000 jobs a month would need to be created, according to the Hamilton Project at the Brookings Institution. The latest numbers leave in question whether the Federal Reserve will start scaling back its stimulus measures after it meets Sept. 17-18, as Wall Street seems to expect. The Fed has been buying long-term Treasury bonds and mortgage-backed securities in order to keep long-term interest rates low, and the Fed chairman, Ben S. Bernanke, has said that the central bank will reduce the rate of those purchases “later this year.” Friday’s somewhat disappointing jobs report, released by the Labor Department, came on the heels of some positive economic reports that had helped reinforce Wall Street expectations that “tapering” would come in September. Health care, retail and food services were among the industries that added jobs, while payrolls fell in the information industry. Government employers, which have generally been shrinking in the last few years, added workers in August. Employment gains in the recovery have been disproportionately in lower-wage sectors like food service and retail, causing concern about not only the quantity of the new jobs but also their quality. The industries are more likely to hire part-time workers and operate on just-in-time schedules, making it difficult for employees to predict how many hours they will have from week to week
An Unexpectedly Weak Jobs Report For August, But Moderate Growth Trend Still Prevails - Private payrolls increased in August by 152,000 vs. the previous month, a gain that was unexpectedly low. Once again the latest macro data point dispensed a surprise, which is typical. This time it disappointed the crowd, and by more than a trivial degree. Some analysts will jump on the news as a dark sign. It may prove to be… in time. But the fact remains that private payrolls continued to rise by 2%-plus on a year-over-year-basis through last month. That’s in line with the annual pace we’ve seen in recent months. In fact, each of the last three monthly updates for private payrolls show annual growth rates of 2% or better—the best consecutive trio of annual changes since last year’s fourth quarter. In other words, nothing much has changed. The private sector is still creating jobs on a net basis and at the rate that’s prevailed for much of this year. If anything, the rate has improved a touch. This news will probably be lost in the rush to focus on the latest number and how it compares with the previous month. That’s certainly a more dramatic comparison—it always is. Indeed, as the chart below reminds, the monthly changes bounce around a lot, which is rich material if you're looking for economic drama. But the monthly numbers have a long history of misleading us. Revisions and other short-term distortions are no help if you’re looking for comparatively reliable signals about the big picture.
Five Takeaways From August Jobs Report - The U.S. economy added 169,000 jobs in August, the Labor Department said Friday, and the unemployment rate fell to 7.3%. Economists are still digesting today’s report, but here are five initial takeaways.
- Bad news all around. There’s no way to sugarcoat it: This was a lousy jobs report. Taken on its own, 169,000 jobs isn’t terrible—ever-so-slightly worse than expectations, and a bit slower than the average pace over the past year. But don’t let the headline fool you. The government also revised down its estimated job growth for June and July by a combined 74,000 jobs, meaning the net gain from today’s report is under 100,000 jobs.
- Stagnant trend. The month-to-month jobs figures can be volatile, and are subject to big margins of error. But in this case, looking at the longer-run trend doesn’t make the picture look much rosier. The economy has added 2.2 million jobs over the past year, pretty much the same full-year pace as in July, but only because July’s figures were revised downward.
- Bad news for job seekers. More than four years after the recession ended, finding a job remains extraordinarily difficult. The share of job-seekers finding work fell slightly in August, to 19.5%, while the number of long-term unemployed rose by 44,000. The average unemployed worker has been out of work for more than eight and a half months—a figure that rose for the second month in a row.
- Job quality remains a concern. Even those lucky enough to find jobs aren’t necessarily finding good ones. More than a third of all job creation came in the generally low-paying restaurant and retail sectors, while construction payrolls were flat and a 19,000-job gain in manufacturing was partly a quirk of the Labor Department’s formula for seasonal adjustment.
- Hints of hope for the future. The August report was weak, but the fall could be better. The average workweek increased slightly in August, and hourly wages rose by five cents an hour, both possible signs that employers were willing to spend more on labor to boost production.
Growth in low paying jobs and wage deflation for low-income groups - a painful trend - A few weeks back the WSJ published a chart showing that growth in US payrolls has been dominated by low wage jobs (see chart). It's worth exploring the topic some more. Though not precise, one way to confirm this trend is to look at the "indexes of aggregate weekly hours and private payrolls by industry sector" from the U.S. Bureau of Labor Statistics (here). Over the past 5 years the indexes show non-supervisory hotel jobs for example outpacing the overall private payrolls growth. The higher paying construction and factory jobs on the other hand lag the overall index.
Numbers continue to be Stunning. 96 percent of net jobs added this year have been part-time jobs - Updating the job numbers with the new numbers that are out today continues to show that virtually all the jobs created this year have been part time jobs. So far this year there have been 848,000 new jobs. Of those, 813,000 are part time jobs (for both economic reasons and noneconomic reasons). To put it differently, an incredible 96% of the jobs added this year were part-time jobs. These numbers make it pretty obvious why Obama wanted to put off the employer mandate that has already been forcing some companies to move to part-time workers so as to avoid government imposed penalties. Data from the BLS.gov.
Employment Report Comments (more graphs) - Overall this was a weak employment report. Although the headline number of 169,000 jobs added was just a little below the consensus forecast, the downward revisions to the June and July estimates were significant (74,000 fewer jobs than previously reported). Disappointing. The decline in the unemployment rate to 7.3% in August, from 7.4% in July, was due to a decline in the participation rate (not good news). If the participation rate had held steady, the unemployment rate would have increased to 7.5% instead of declining to 7.3%. However if we look at the year-over-year change in employment - to minimize the monthly volatility - total nonfarm employment is up 2.206 million from August 2012, and private employment is up 2.300 million. That is essentially the same year-over-year gain as in July (2.202 million total, 2.279 million private year-over-year in July). So the story mostly remains the same: slow and steady job growth. 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. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle. The ratio was unchanged at 75.9% in August. This ratio should probably move close to 80% as the economy recovers, but that also requires an increase in the 25 to 54 participation rate. 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 part time workers declined in August to 7.911 million. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 13.7% in August from 14.0% in July. This is the lowest level for U-6 since December 2008. This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.290 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 4.246 million in July. This is generally trending down, but is still very high. This graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years. (Note: Scale doesn't start at zero to better show the change.) In August 2013, state and local governments added 17,000 jobs, and state and local employment is up 17 thousand so far in 2013 (basically flat).
Restaurant Work in the States and the Loss of Middle Class Jobs - Dean Baker - As many people have noted, a disproportionate share of the jobs being created in this upturn are in low-paying sectors like restaurants and retail trade. This means that even the people who are able to find work in the current labor market conditions are unlikely to get a job that will provide enough income to support a family. This is clearly bad news for large segments of the workforce. The question is why are we seeing so many bad jobs? On the one hand we have the technology story which tells us the economy has changed. The jobs that used to provide a decent standard of living for the middle class are disappearing. In our brave new world of robots and computers the economy creates some number of very good jobs for the people with the right skills and it creates bad jobs for everyone else. The other line of reasoning is that it is not technology that has changed, rather it is people's desperation that is forcing them to take bad jobs that they would not have considered otherwise. In this view the bad jobs were always there, but most people had better alternatives so they didn't take them. What's changed from the period when we didn't see so many bad jobs is that we have a much weaker labor market. The weakness of the labor market is the key factor in this story. Note that these two stories have very different policy implications. In the first story, we want to train more of the losers to get the skills they need to become winners. For the ones who are too old or just can't hack computer technology, well maybe we can dig up some spare change to keep them fed and housed, but you know, life is tough. In the weak labor market story the key is to boost demand. This can be done through government spending, reducing the trade deficit, or by redistributing work through work sharing. If the labor market tightens then people will be able to get better jobs. In fact, if the labor market tightens enough even the bad jobs will become better jobs. In a tight labor market employers will pay people much more to work in fast food restaurants or as retail clerks.
What’s the Difference Between Jobless and Unemployed? - Time is running out for the long-term jobless, the Wall Street Journal reported this morning. Note the term “jobless” rather than “unemployed”: It’s an important distinction, with major implications for both short-term economic policy and the U.S.’s long-term growth prospects. Anyone watching the economy over the past few years has heard that the government only considers people “unemployed” if they’re actively looking for work. That makes sense, at least in normal times: People can be without jobs for lots of reasons — retirement, school, childcare, a prolonged illness — that have little to do with the state of the economy. Economists mostly care about the people who would be working if they could — in other words, people who are looking for jobs.But these aren’t normal times. The recession wiped out 8 million jobs; four years into the supposed recovery, only 6 million of them have been regained. Accounting for population growth, it would take more than seven years at the recent pace of hiring to get back to prerecession levels of employment. And as today’s story made clear, the long-term jobless face barriers that go beyond the weak job market: Many employers won’t even consider applicants who have been out of work for an extended period. It’s no surprise, then, that many Americans have given up looking for work. Officially, there are about a million “discouraged” workers, people who have stopped looking for a job because they don’t believe they can find one. But the Labor Department uses a fairly narrow definition of “discouraged” — workers have to be available to work right now, and they have to have searched in the past year. A full accounting of the discouraged would need to include those who have retired involuntarily, taken refuge in school, filed for disability or otherwise hidden from the brutal job market.
Labor Day Has Nothing to Celebrate - Unions have been under attack for over 30 years and corporations are more powerful than ever. CEOs get obscene amounts of money while workers are squeezed. Union membership is at an all time low and wages by any measure are flat. Union busting and declaring bankruptcy to get out of worker pension obligations is now common and doesn't seem to generate a ripple of public outcry. Part-time hours and bad jobs are at record highs, never mind the dismal employment statistics of the last five years. The Economic Policy Institute created a pay recalculator where one can see what worker compensation really should be today if wages kept up with productivity. What we have today are simply more economic metrics painting more detail in the American labor depressing picture. While Wall Street awaits employment statistics, their concern isn't about employing America, works and people. Wall Street's only concern is about making money off of quantitative easing. Short story long, American labor has lost their power and multinational corporations rule the roost. That is the state of American labor today.
Paid Vacation’s Decline - Americans working in the private sector are less likely to have paid vacation days than was the case 20 years ago, according to a recent report from the Bureau of Labor Statistics. In 1992-93, 82 percent of American workers reported receiving paid vacation days. Today the share is down to 77 percent. The biggest declines occurred for people working part time and for people working at establishments with fewer than 100 employees. For most other kinds of paid leave, though, employees’ access has increased. For example, while the United States still remains one of just a handful of countries worldwide that don’t require paid maternity leave, the share of American private sector workers who do have access to paid family leave has risen. It is still very rarely offered, though. As of 2012, 11 percent of private sector workers said they had paid family leave (which includes leave to care for family members). In 1992-93, when the survey question was worded more narrowly, 2 percent of workers said they received paid maternity benefits and 1 percent paid paternity benefits. Sick leave has also become more common, although it is also still not universal. As of last year, 61 percent of private sector employees had access to paid sick leave, compared with 50 percent two decades ago.
The Case of the (Still) Missing Jobs - As Walmart goes, so goes the nation. With 1.3 million workers, the retail giant is the country’s largest private employer, so its hiring patterns tell us something about the health of the larger U.S. jobs market. And recent signs have not been encouraging. A June 13 Reuters survey of 52 Walmart stores (out of about 4,600) in all 50 states found that more than half were hiring only temporary workers, a practice Walmart has never adopted on so large a scale outside the busy holiday shopping season. Walmart spokesman David Tovar confirmed to Reuters that “flexible associates” had come to comprise nearly 10 percent of Walmart’s U.S. workers—compared to only one or two percent before 2013. A large chunk of the nation’s biggest private workforce, in other words, is just barely employed. If we were in the midst of a normal economic recovery, Walmart wouldn’t be acting this way. The “great American jobs machine,” which once boosted employment during recoveries as quickly as it shed them during recessions, has rusted up. If the machine were operating properly, Walmart would be hiring permanent employees to meet rising consumer demand and stay competitive in a tightening labor market. For that to happen, though, the labor market would have to be tightening a whole lot more than it is. Why is it so stubbornly slack?
America’s Jobless Generation - The need for gainful work is desperately important now, with overall unemployment, even after recent improvements, still stubbornly high, and blacks, as has long been the case, around twice as likely to be unemployed as whites. Obama got it wrong. “The twin forces of technology and global competition,” he said, “have subtracted those jobs that once provided a foothold into the middle class, reduced the bargaining power of American workers.” This is the centrist economist in Obama talking, who buys into current economic orthodoxy: technological advances in many industries, so the explanation goes, have in many cases replaced a human labor force with an automated one; and thanks to global markets, what human labor is needed is moving to countries where wages are low. What about government policy? Many aspects of our current employment crisis have less to do with technology or globalization than with the administration’s failure to adopt policies to strengthen the labor force, and more precisely, those parts of the labor force that are most crucial to the nation’s long-term social and economic health.Consider the bleak prospects of young people entering the workforce today: the portion of people aged twenty to twenty-four who have jobs has fallen from 72.2 percent in 2000 to just 61.5 percent. Meanwhile, if we adjust for inflation, the median earnings of men between the ages of sixteen and twenty-four working full-time has fallen by nearly 30 percent since 1973. For women, the median has fallen by 17 percent. As Andy Sum, an economist at Northeastern University who has studied youth unemployment for many years, has shown, if you are out of work or underemployed during those initial years of adulthood, chances are far higher you will be unemployed, poor, or dependent on welfare later on.
Freedom From Jobs - Notwithstanding this culture of work’s ideological claims to the contrary, however, jobs are less preconditions for freedom than impediments to freedom’s concrete realization. Beyond consuming most of workers’ waking hours (consuming that which constitutes the precondition for freedom – time), jobs also wreck people’s health, vitiating freedom in the sense of bodily movement as well. Moreover, that people are compelled to work a job – in spite of the job’s actual function – demonstrates the consanguinity of jobs and dependency, rather than in-dependency. Some may counter at this point that needing a job is just a natural, unavoidable fact – that people must work to live. But the inordinately excessive amount of time that people devote to work in the US is less a natural fact than a cultural one. Additionally, we shouldn’t neglect to consider the fact that when people talk about “good jobs” they are not necessarily discussing the correction of some pressing problem, or providing some truly desired service, or satisfying some actual need. When people discuss “good jobs” they are primarily discussing ways to make money. If one can turn a solid profit selling known carcinogens, such employment will count as a “good job” in spite of the fact that an enterprise like that wreaks more objective harm than good. Contrary to popular opinion, then, people don’t actually need jobs; we work jobs in order to acquire money. And money’s another thing we don’t in truth need – we need those things that this socioeconomic system only provides in exchange for money: food, housing, clothing, etc. Jobs are but a middleman – a means to acquire resources, not an end.
For workers and the economy, autumn could be scary - The U.S. economy looks headed for a rough autumn, with slowdown threats looming from the housing market, the Middle East and Washington. Oil and gasoline prices are rising and could shoot up further if Western countries launch military strikes on Syria, pinching U.S. consumers who do not have much disposable income to spare. The housing recovery, which has been the economy’s hottest spot for the past year, is showing signs of cooling as mortgage rates rise. In Washington, the Federal Reserve could be poised to start winding down its latest round of monetary stimulus as soon as this month. Congress and President Obama appear set for another series of down-to-the-last-second fights over funding the government and raising the nation’s debt limit to ensure the United States does not default on any interest payments. It also looks increasingly likely that Democrats and Republicans will allow the federal budget cuts known as sequestration to persist for another year, even as the economy is showing more strain from the sequester this year. “Unfortunately, we seem to be entering another of those periods of elevated risk,” economists at Bank of America Merrill Lynch wrote last week. Researchers at RBC Capital Markets sounded even more bleak. “Just when you thought the U.S. economy was ready to break out of its lackluster 2 percent growth pace that has dominated the recovery,” they wrote, “reality hits.”
Calls to raise minimum wage return with Labor Day-- A recurring call to raise the minimum wage has returned in the run-up to Labor Day in the form of national rallies and a new report that finds Michigan ranks second-to-worst among states for wage growth during the past 30 years. Fast-food workers in Detroit, Flint, Lansing and elsewhere in the state and country protested on Thursday with demands for higher wages, which followed similar demonstrations by unions and community groups during the past several months. They seek $15 an hour — more than double the federal minimum wage of $7.25. The nonprofit advocacy group Michigan League for Public Policy released a study a day later that also calls for raising the minimum wage. The report includes analysis of U.S. Census data that finds Michigan's median wage fell by 7 percent between 1982 and 2012 after adjusting for inflation — the biggest wage drop of all 50 states and the District of Columbia after Alaska. The report, which incorporates recent U.S. Census data analyzed by the labor-oriented Economic Policy Institute, also finds a 24 percent decline in the median wage for African-Americans during the same period. The gap became the widest last year, when the white median wage was $4.20 per hour higher than the black median wage.
WSJ Misreports Demographics Of Min Wage Workers - A recent article from the Wall Street Journal had this to say about the age of minimum wage workers: We remember when fast-food jobs were for teenagers. Those days are gone. A recent analysis by the Economic Policy Institute shows more than 88% of workers making minimum wage are older than 20 years of age. However, the EPI report refers to the 88% of workers who they estimate would be impacted by a higher minimum wage, which includes workers who make more than the minimum wage. The correct number they want is from the BLS, which shows that there are 3.55 million workers who earn the minimum wage or less, and 854,000 of them are ages 16-19, leaving 2.7 million who are 20 or older. This comes out to 76% of minimum wage workers who are 20 or older, which is both lower than 88% and is going to be higher than the exact number they quoted which is for those who are older than 20 years of age, not 20 years and older.
How America's Minimum Wage Really Stacks Up Globally - By the standards of other rich nations, the U.S. minimum wage, at $7.25 an hour, can look pretty measly. Australia's minimum for full-time adult employees works out to almost $15, these days. France's is around $12. For almost a year now, American fast food workers have been going on strike to demand that kind of pay. But in some senses, those high wages abroad aren't quite as high as they sound. The reason: cost of living. Melbourne, where about a fifth of all Australians live, is the fourth most expensive city in the world according to The Economist's Intelligence Unit—about 36 percent pricier than New York. Making rent and putting food on the table in Paris, meanwhile, is about 28 percent costlier than in NYC. When it comes to everyday living in these countries, money doesn't stretch as far as in the states. Thankfully for us, economists have come up with a concept that lets us adjust exchange rates to account for the differences local prices. It's called "purchasing power parity," or PPP. When applied to minimum wages around the world, it tends to even out the differences, a bit. As shown in the chart below, based on 2012 data from the Organization for Economic Cooperation and Development, Australia's minimum wage is actually closer to $10 once purchasing power is taken into account. France's also drops to around $10. Both are still higher than America's, but not quite as eye-popping.
On wage-led growth - What's the relationship between capitalists' spending and the profit share? This sounds like an abstruse question, but it is key to the question of whether predistribution and wage-led growth are feasible. I say this for a simple reason. Measures to raise wages, such as a living wage or stronger collective bargaining would tend to depress the profit share. There are two possible responses to this: - If workers have a higher propensity to spend than capitalists, aggregate demand would tend to rise. This in turn could encourage capitalists to invest, in anticipation of that demand. If this happens, we'll get wage-led growth. - If workers save their higher incomes their demand won't rise much. And capitalists might cut their spending in anticipation of this. This might be exacerbated if they regard better conditions for workers as a threat to the business environment. Theory, then, is ambiguous, as it always is. My chart provides some evidence. It shows the coefficient on a simple regression of three-year real GDP growth on the profit share lagged three years, for rolling five year periods. A negative coefficient indicates periods of wage-led growth - a below-average profit share leads to above-average GDP growth. You can see that, for most of the last 50 years we have indeed had wage-led growth; the coefficient has been negative. In most five-year periods, lower profit shares did lead to better growth and higher profit shares to lower ones.
'No one should have to work for free': Is this the end of the unpaid internship? - Franklin is one of a growing number of disgruntled workers who have begun to challenge the fairness — and legality — of the unpaid internship, a fact of life for young Americans hoping to pad their resumes and gain experience. In June, a Federal District Court judge in Manhattan ruled that Fox Searchlight Pictures violated federal and New York minimum wage laws by failing to pay two interns working on the film “Black Swan.” When the suit was filed two years ago, it was the first of its kind. Now interns have waged more than 20 lawsuits against companies such as the Hearst Corporation, Conde Nast, Atlantic Records, and Gawker Media. [Former interns filed suit in July against NBCUniversal, earlier this year; the company began paying interns.] These lawsuits cite the Fair Labor Standards Act, which requires that an employer using unpaid interns provide training and gain “no immediate advantage” from the trainee. This criteria would appear to make most internships illegal; interns often perform menial, not meaningful, tasks. (Perhaps employers realize this when they look at resumes for employee hires; unpaid interns experienced no advantage in the job market, and no higher starting salary, compared to students who had not completed internships, according to a survey of 20,000 students conducted by the National Association of Colleges and Employers.)
Income Gap Grows Wider (and Faster) - INCOME inequality in the United States has been growing for decades, but the trend appears to have accelerated during the Obama administration. One measure of this is the relationship between median and average wages.
- 1.7%: Increase in median annual wage
- 3.9%: Increase in average annual wage
2009 through 2011The median wage is straightforward: it’s the midpoint of everyone’s wages. Interpreting the average, though, can be tricky. If the income of a handful of people soars while everyone else’s remains the same, the entire group’s average may still rise substantially. So when average wages grow faster than the median, as happened from 2009 through 2011, it means that lower earners are falling further behind those at the top. One way to see the acceleration in inequality is to look at the ratio of average to median annual wages. From 2001 through 2008, during the George W. Bush administration, that ratio grew at 0.28 percentage point per year. From 2009 through 2011, the latest year for which the data is available, the ratio increased 1.14 percentage points annually, or roughly four times faster. The reasons for the widening income gap aren’t entirely clear. Yes, the nation has had a big recession, but recessions typically tend to lessen inequality rather than increase it. “We’re seeing the continued effects of the weak labor market and the long-term trends involving technology and globalization,” “Our self-inflicted wounds from austerity are also exacerbating things.”
One In Seven Families Face Food Insecurity - Almost 18 million families in the United States couldn’t get sufficient food to live healthily in 2012 according to the Department of Agriculture’s (USDA) annual report on food insecurity. The report, released Wednesday, shows that the pattern of elevated food insecurity since the financial crisis still continues. It found that 14.5 percent of U.S. families experienced food insecurity, which is defined as lacking “consistent, dependable access to enough food for active, healthy living.” An average of 11 percent of families were food insecure from 1998 to 2007, but in 2008 the rate spiked above 14 percent. While critics of food aid point to the doubling of enrollment in SNAP (formerly known as food stamps) as evidence that government safety net spending on food is too generous, the USDA statistics show that those programs could not absorb the full economic force of the Great Recession. Just 59 percent of food-insecure families from the USDA survey reported participating in either SNAP or the other two largest food aid programs.
How the Other 47 Percent Lives - Paul Krugman - I couldn’t make space for it in today’s column, but any affluent reader who wants a sense of what America is like for many hard-working people should read about the website McDonald’s has established to help its workers manage their family budget. The sample monthly budget they offer includes $900 from a second job; monthly rent of just $600 (which is very low even for a single-bedroom apartment in inexpensive cities, and of course ludicrous in metro New York), and zero heating expenses.This disparity between the way many of our fellow citizens live and the lives of the 1 percent ought to inspire a lot of empathy — and to be fair, in many cases it does. On average, however, widening inequality seems to be reducing, not increasing, empathy, as the life experiences of the affluent diverge from those of ordinary workers, to such an extent that the upper class no longer sees members of the working class as people like themselves. Of course, Rick Santorum says that this is all “Marxism talk” — even the term “middle class” — because there are no classes in America.
Why Incomes Could Fall For the Next 30 Years - Economists Richard Burkhauser of Cornell University and Jeff Larrimore, a staffer on the Congressional Joint Committee on Taxation, warn that demographic factors -- which have largely aided the U.S. economy in the past -- could end up pushing incomes down for the next 30 years or more. If other factors don’t force incomes up, we may be at the beginning of the longest period of economic decline in American history. It’s well understood that incomes went up in the 1980s and 1990s but stagnated from 2000 to 2007. The median income fell sharply during the 2007-2009 recession and has yet to recover. The new study, which will be published as part of a Russell Sage Foundation book later this year, breaks down income trends since 1979 into various causal factors, then projects how demographic changes will affect median income through 2050. The biggest factor helping to boost incomes between 1979 and 2000 was the growing percentage of women in the workforce, along with rising earnings for those women. Starting around 2000, however, the contribution of female workers to income growth plateaued. Around the same time, male earnings began to fall, detracting from income growth. Two other trends will exert powerful influence on incomes in the future: the aging workforce and the growth of minorities—especially Hispanics —as a percentage of the overall population. As the baby boomers retire, the U.S. population will become top-heavy with a larger portion of lower-earning seniors. And since average earnings for blacks and Hispanics are lower than the national earnings average, the median income will fall as lower earners become a greater percentage of the workforce.
The Economy: From Dollar Stores to Bombs - Dawn Hughey had worked at a Dollar General store for just four months when she was named "manager" of a store in the Detroit suburbs in 2009. But like other managers in America's booming dollar store industry, Hughey quickly came to realize she was a manager in name only. The major dollar store chains --- Dollar General, Dollar Tree and Family Dollar --- have thrived by offering customers rock-bottom prices that rival Walmart's, a business model that requires shaving costs wherever possible. For a manager like Hughey, that meant working far beyond a 40-hour work week. But in interviews and court documents, former and current store managers claim major dollar store companies classify them as managers merely to evade overtime obligations --- and to pay them less money. Those manager/employees, in turn, have accused the companies of illegally shorting them on pay and forcing them to work off the clock due to payroll constraints. Several workers at these dollar stores told the Huffington Post that they lost their jobs or their hours once they got hurt or encountered health problems, leading to bitter feelings and long legal battles. Employers have literally been waging a war on workers for decades, and just like Warren Buffett had said, "We're winning." Dawn Hughey at the Dollar General store had said, "We're disposable."
Vital Signs: Northeast Lags in Job Demand - Looking for work? Avoid the Northeast. Jobseekers have a better chance of landing employment in areas with a greater demand for labor. Bright.com, an aggregator of job postings and resumes, calculated which cities had the most job openings per population in August. The website found the highest ratios were in the Midwest and South, with a smattering of better job markets in the West (including the No. 1 Seattle-Tacoma-Bellevue, Washington, area which had 168.44 job openings posted per 10,000 residents).In Bright.com’s tally, no city in the Northeast cracked the Top Ten. In fact, the first Northeast area is Albany-Schenectady, New York, at No. 29. The recovery in housing is good news for job-seekers. Rising home values and a greater number of buyers should make it easier for unemployed homeowners to sell their homes and move to find work. Greater mobility, in turn, should lift job growth.
“Labor Day Report: Michigan’s Paycheck Blues” - Each year the Michigan League for Public Policy issues a Labor Day report on the status of Labor with in the state. This year the outcome for Michigan Labor is no better than in previous years. 90% of Michigan Labor finds themselves making less and a further deterioration in earning power. The upper 10% of Labor has been able to maintain its earning power while the majority of Labor today makes less than what it did 30 years ago when adjusting for inflation. Median Wage workers making $15.89/hour in 2012 can purchase 7% less than Median Wage workers in 1982 while those workers in the 90th percentile has seen its purchasing power increase by 22% over the same period. Having the 4th highest Median Wage in 1982, Michigan saw its Median Wage deteriorate to 24th after losing much of its manufacturing base through globalization and the skewing of productivity gains to Capital. In comparison to other states and six of eight Midwest states, Michigan saw a decrease of 7% in Median Wage while the other states (Wisconsin decreased 2%) increased Median Wage. In determining the significance of the drop from from 1982 to 2012, Michigan ranked 50th amongst the states and District of Columbia with Alaska at 51st (larger drop). 90% of Michigan Labor’s earning power has been hit hard since 1982. Looking at the racial makeup of Michigan Labor and breaking it down by race, there is a great and growing disparity in earning power for African American when compared to Caucasian Labor. The gap in earning power between the two groups is at its widest in 34 years of tracking Labor wages.
Promises, Promises … Detroit, Pensions, Bondholders And Super-Priority Derivatives - Ilargi - On July 18th, the city of Detroit filed for Chapter 9 municipal bankruptcy, the largest such filing in US history. After kicking the can down the road, with increasing desperation, for many years, then end of the line has been reached. The city is finally admitting that far too many financial promises have been made, and that the majority of these simply cannot be kept. It does not matter whether the promise-holders have a good case for receiving services or needing payments, or whether those promises are legally protected. Promises that cannot be kept will not be kept. It is as simple as that. To complicate matters, however, the architecture of the financial system prioritizes promises, in a perhaps counter-intuitive, and certainly self-serving, manner. This will make the task of allocating extremely scarce resources to stakeholders lower down the financial food chain very much more difficult. It is time for a good look at the range of promises made, the competing needs of the recipients, the leverage enjoyed by powerful players in shoring up their own position, and the real world implications for municipalities far beyond Detroit. Outside of Detroit, for the time being, one would hardly think the United States was standing on the edge of a major financial precipice. Optimism is riding high in America at the moment. Markets have been booming until recently, and consumer sentiment is at its highest level in a long time. People have been spending freely and having no trouble justifying it to themselves. Are you feeling OK about things? If so, you’re in sync with the typical American consumer.
Big Dreams, but Little Consensus, for a New Detroit — There are 78,000 abandoned buildings in this city standing in various levels of decay. Services have fallen into dysfunction, and debts are piling ever higher. Yet for all the misery, Detroit’s bankruptcy gives an American city a rare chance to reshape itself from top to bottom. But reinventing a city so devastated is hardly a sure thing, and the questions about how to proceed loom as large as the answers: Should its areas of nearly vacant blocks be transformed into urban farms, parks and even ponds made from storm water? Could its old automobile manufacturing economy be shifted into one centering on technology, bioscience and international trade? Should Detroit, which lost a million residents over the last 60 years, pin its sharpest hopes on luring more young people here, playing on an influx of artists and entrepreneurs? Should the city take down its enormous ruins, like Michigan Central Station, that have devolved into bleak tourist attractions or restore some of these buildings and market them, perhaps as museums or tributes to a proud industrial past?
Detroit Billionaires Get Arena Help as Bankrupt City Suffers - At the 1997 groundbreaking for a 40,000-seat ballpark for Major League Baseball’s Detroit Tigers, Michigan Governor John Engler said the stadium would symbolize the city’s renewal. Ford Chairman William Clay Ford Jr., whose family owns the National Football League’s Lions, said in 1999 that his new 65,000-seat dome would “showcase the city’s turnaround.” Now that Detroit has become the biggest U.S. municipality to declare bankruptcy, it’s Republican Governor Rick Snyder’s turn to tout a comeback spurred by a stadium for a suburban fan base financed with help from city taxpayers. Snyder approved a plan to put public money toward a $450 million downtown arena on behalf of the the National Hockey League’s Red Wings and their billionaire owners. The 18,000-seat complex and a planned $200 million private development nearby would transform a blighted area into one with apartments, offices, restaurants and shops, says Snyder, who controls the city through an appointed manager. Critics call the plan a giveaway to Mike Ilitch, owner of the Red Wings, the Tigers and the Little Caesar’s pizza chain. “It’s going to be very tough, in my opinion, to make the case that the city of Detroit should go into bankruptcy so they can simply go in and just raid pensions or give money to the Red Wings,”
Austerity Is for the Little People: Syria Edition … Schools, libraries, post offices and other public services are closing across the country in the wake of budget cuts, and Congress may have just voted to cut $1.5 trillion from programs like Head Start over the next decade, but many officials still feel confident the US is positioned to fund yet another expensive military operation in Syria. Obviously, current and former officials aren’t debating the moral implications of killing human beings in order to “save” other human beings as part of a murky plan that essentially boils down to underwear gnome logic (cruise mussels + something = Assad is gone and democracy!), but these same officials brazenly claim that the cost of a military operation in Syria will be “relatively easily absorbed.” This rhetoric is familiar. A report from the Special Inspector General for Iraq Reconstruction called the Iraq reconstruction effort back in 2008 “a $100 billion failure,” and alleged that the Pentagon “simply put out inflated measures of progress to cover up” failures. The report details how Jay Garner, then-head of the Office of Reconstruction and Humanitarian Assistance, warned then–Defense Secretary Donald Rumsfeld that the military operation in Iraq would be costly. According to a recent study, the Iraq was cost more than $2 trillion, and with benefits owed to war veterans added in, could ultimately cost more than $6 trillion over the next four decades
The Changing Role of Disabled Children Benefits - SF Fed - The federal Supplemental Security Income (SSI) program for disabled children provides cash benefits to low-income families with a disabled child. When the program began in 1974, about 71,000 disabled children received benefits, and program expenditures totaled around $40 million. As Figure 1 shows, the program is orders of magnitude larger today. In 2011, about 1.3 million disabled children received benefits at a cost of $9.3 billion. Program growth increased most rapidly immediately following the 1990 Supreme Court decision in Sullivan v. Zebley, which greatly expanded disability eligibility criteria for children. Welfare reform in 1996 tightened eligibility standards and slightly reduced the rolls for one year. However, since that time, recipients and expenditures have steadily increased. In this Economic Letter, we summarize the factors behind this growth (for a detailed discussion, see Burkhauser and Daly 2011). Neither decreases in child health nor increases in the number of income-eligible families, are responsible. Instead, an easing of eligibility standards and the interpretation of these standards by Social Security evaluators are the probable drivers of the rise in the number of SSI disabled children beneficiaries.
In budget cuts, low-income students suffer more than wealthy ones — For America’s 98,800 public schools, it’s been a tale of two sequesters. In Virginia’s Loudoun County—the wealthiest county in the U.S.—the automatic budget cuts have “meant hardly anything” as its public schools barely receive any federal support, explains school district spokesman Wayde Byard. Less than two hours south in Virginia’s Shenandoah Valley, it’s a different story. When Harrisonburg students went back to school in August, there were fewer teachers and staff to greet them: The district lost an English proficiency teacher, a school social worker, a Head Start teacher, and a teacher’s aide when sequestration cut $400,000 from the school budget, The cuts come to a district where 70% of students qualify for a free school lunch, and more than 40% speak English as a second language. While both school districts have to absorb the same 5% cut to federal education funding, that doesn’t mean they feel the reductions equally. Title I funding, the largest federal education program, is doled out according to the proportion of low-income students in any given district. Schools in those areas also tend to rely far more heavily on federal aid because they receive less revenue from local property taxes.As a result, sequestration has tended to hit schools with low-income students harder than those with wealthy students, disproportionately affecting schools in highly urban or rural areas that have higher poverty rates. While school districts receive 10.5% of their funding from federal sources on average, there’s tremendous variation between states and within them: Federal aid makes up less than 1% of Alexandria, Virginia’s $800 million district budget, but it’s nearly 60% of the funding for Window Rock, Ariz., an impoverished Native American reservation.
Some school districts quit healthier lunch program- “After just one year, some schools around the country are dropping out of the healthier new federal lunch program, complaining that so many students turned up their noses at meals packed with whole grains, fruits and vegetables that the cafeterias were losing money. Federal officials say they don't have exact numbers but have seen isolated reports of schools cutting ties with the $11 billion National School Lunch Program, which reimburses schools for meals served and gives them access to lower-priced food.Districts that rejected the program say the reimbursement was not enough to offset losses from students who began avoiding the lunch line and bringing food from home or, in some cases, going hungry. "Some of the stuff we had to offer, they wouldn't eat," "So you sit there and watch the kids, and you know they're hungry at the end of the day, and that led to some behavior and some lack of attentiveness."
Philly teachers turn to crowd funding for supplies - - Some schoolteachers in Philadelphia are looking to the Internet to raise funds for basic school supplies amid ongoing budget shortfalls. Philadelphia is one of the nation's largest school districts, serving more than 190,000 traditional and charter school students, and it's been working for several months to close a budget deficit of nearly $304 million. Until the district recently received $50 million in emergency aid, officials feared they wouldn't be able to open in time for fall classes. Allison Wudarski, a kindergarten teacher at the Julia deBurgos School in the Kensington section of the city, said her budget for school supplies each year is around $100 - and she doesn't expect that to increase any time soon. Necessary supplies, she said, often come out of her own pocket. To offset some of those costs, Wudarski has been raising money for supplies online and has gotten funding from people she doesn't even know. Websites like DonorsChoose.org and Indiegogo allow teachers to crowd fund everything from scissors to musical instruments.
The STEM Crisis Is a Myth - You must have seen the warning a thousand times: Too few young people study scientific or technical subjects, businesses can’t find enough workers in those fields, and the country’s competitive edge is threatened. It pretty much doesn’t matter what country you’re talking about—the United States is facing this crisis, as is Japan, the United Kingdom, Australia, China, Brazil, South Africa, Singapore, India…the list goes on. In many of these countries, the predicted shortfall of STEM (short for science, technology, engineering, and mathematics) workers is supposed to number in the hundreds of thousands or even the millions. A 2012 report by President Obama’s Council of Advisors on Science and Technology, for instance, stated that over the next decade, 1 million additional STEM graduates will be needed. In the U.K., the Royal Academy of Engineering reported last year that the nation will have to graduate 100 000 STEM majors every year until 2020 just to stay even with demand. Germany, meanwhile, is said to have a shortage of about 210 000 workers in what’s known there as the MINT disciplines—mathematics, computer science, natural sciences, and technology. To parse the simultaneous claims of both a shortage and a surplus of STEM workers, we’ll need to delve into the data behind the debate, how it got going more than a half century ago, and the societal, economic, and nationalistic biases that have perpetuated it. And what that dissection reveals is that there is indeed a STEM crisis—just not the one everyone’s been talking about. The real STEM crisis is one of literacy: the fact that today’s students are not receiving a solid grounding in science, math, and engineering.
Why We Still Have College Administrations That Are Soft on Rape - In this story about USC’s mislabeling sexual assault to keep their campus rape numbers low, this part floored me: Reed said she was told by Raquel Torres-Retana, student judicial affairs and community standards director, that the university had difficulty taking Reed’s side because “we know that all the students at this university are good students. They’re good people. That’s why they’re here.” When your good students rape people, they might not be “good people” any more. Because rape isn’t like stumbling and spilling your coffee–it is an active act of sexual predation. Predators aren’t good people. Amazingly, I heard this kind of crap twenty-five years ago. Guess what? Not all of your students are good people. Some of them are flat-out shitheads. Who do you think has been responsible for running this country into the ground over the last few decades? The high-school dropouts?
Students Screwed Again by Congress ? ? ? - As you know, the Senate reached a bi-partisan agreement in the smoked filled backrooms to which the House agreed to in a follow-up vote. You would think there had never been any partisanship amongst either party from reading some of the remarks made by the Senate-buds. Anytime Cantor, Boehner, and Ryan get excited about a Senate decision, you know something is coming down the hill which is not going to be good for us. If you have bothered to read some of the media comments and blog articles (more on these later), allegedly there really is not much difference in what results from minimal interest rates changes. There is some truth to this when looking at monthly payments as the difference is usually small. I always like to look at the amortization table and total cost of the loan to make a decision. Eventually though, a dollar here and a dollar there and pretty soon you are talking about $thousands which does make a difference for students and parents. Undergraduate loan are now capped at 8.25% and Parent Plus Loans are capped at 10.5%. The agreement reached managed to save students some money in the beginning before it reverts to true rates agreed upon. The loans will be tied to a 10-year Treasury Bill rate with a 2.05% premium added to it. When they agreed to the new policy, the TB rate was 1.9%. I looked today to see it had gone to 2.4%, which means the next set of borrowers (if this stays there) will pay more than this year’s borrowers will for new and consecutive year loans.
Textbook Case of Inflation Hammering Students: Chart of the Day - Bloomberg: The cost of college textbooks has more than doubled since the end of 2001 even as prices for other books retreated, illustrating soaring tuition isn’t the only thing to blame for rising higher education bills as the school year begins. The CHART OF THE DAY shows university textbook prices surged 102 percent through July from December 2001 while the costs for recreational books declined 1.5 percent. Over the same period, the consumer price index measuring the cost of all goods and services rose 32 percent.“We’re on an untenable trajectory -- we keep on stretching the proverbial rubber band, and at some point it’s going to come back and hit us in the face and it’s going to hurt,”
Number of Students Enrolled in College Drops -- The number of students pursuing higher-education degrees fell last year for the first time since 2006, though the number of Hispanic college students rose to an all-time high in line with an increase in the nation’s Hispanic population. Overall undergraduate and graduate school enrollment dropped by about half a million to 19.9 million in 2012, reversing a six-year pattern of solid growth, according to the Census Bureau’s annual school enrollment report released Tuesday. The report looks at the characteristics of students at all levels of education from nursery to graduate school and tallies the population by age, sex, race, Hispanic origin, and whether the students were born in the U.S. or abroad. The overall decline in college enrollment was driven by students age 25 and older. That group fell by 419,000 students from 2011, while enrollment of younger students dropped by 48,000. The number of Hispanic students enrolled in college last year rose to 3.4 million, up 447,000 between 2011 and 2012. Hispanics accounted for nearly 22% of students from preschool to adult education in 2012, up from 15.6% a decade earlier. “This increase in the number of Hispanics enrolled in college can be attributed to the combination of an increase in the adult Hispanic population and their climbing likelihood of being enrolled,”
College leaves grads in debt, brewing coffee: Is college worth it? More and more recent graduates – and their parents – are asking that question as they send out resumes, wait tables, and live at home – all while paying off hefty student loans. It’s long been believed that a college degree is a ticket to secure, financially rewarding employment. Back in 1974, Jacob Mincer’s Schooling, Experience and Earnings came up with what is called “the rate of return to education,” estimated by researchers at 6-10 percent. Every year of additional education is said to pad annual salary by 6 to 10 percent. Try telling that to the bartenders across America with high-priced bachelor’s degrees. “There are 80,000 bartenders in the United States with bachelor’s degrees,” says Richard Vedder, author of “Going Broke by Degree: Why College Costs Too Much.” He told consumer columnist John Stossel that 17 percent of baggage porters and bellhops, and 15 percent of tax and limo drivers have bachelor’s degrees.
JPMorgan to stop making student loans (Reuters) - JPMorgan Chase has decided to get out of the student loan business, after the biggest U.S. bank concluded that competition from federal government programs and increased scrutiny from regulators had limited its ability to expand the business. JPMorgan, which already restricted student loans to existing Chase bank customers, will stop accepting applications for private student loans on October 12, at the end of the peak borrowing season for this school year, according to a memo from the company to colleges that was reviewed by Reuters on Thursday. Not making more loans "puts us in a position to redeploy those resources, as well as focus on our No. 1 priority, which is getting the regulatory control environment strengthened," Duckett said. JPMorgan's decision comes after Congress acted in mid-2010 to bypass the banks and have the government lend directly to students. The federal government now issues 93 percent of student loans. Banks and other private lenders have also come under pressure from regulators and politicians to offer more flexible repayment terms on student loans. JPMorgan's portfolio has been shrinking by roughly $1 billion to $2 billion a year since then, and is a small fraction of its assets. The company's student loan portfolio at the end of June held $11 billion - less than 0.5 percent - of its $2.44 trillion of assets. Last year, Chase made education loans to 12,500 people for a total of about $200 million.
Student Loan Servicers, Like Mortgage Servicers, Failing to Inform Borrowers of Cheaper Payment Modifications - David Dayen - The idea for a ratings system tied to federal funding and eligibility for student aid has been shredded both here and elsewhere, but another part of the plan was to bulk up the Income-Based Repayment (IBR) system. Under IBR, loan recipients have their monthly payment capped at between 10-15% (depending on the IBR program) of annual “discretionary” income, defined as above 150% of the poverty line for a fixed period and at the end of that period, any outstanding principal balance is forgiven. There’s bipartisan legislation that would expand IBR mostly along the Administration’s lines. This is a least-worst option as far as I’m concerned – using available tax benefits and other resources already employed to “make college affordable” and simply making college free would be at the top of the list – but it’s an improvement over a student loan system that currently works more like an indenture. Perhaps because it’s a better deal for debtors, particularly struggling ones, it’s not being used very much. According to CFPB, only around 30% of those eligible for IBR are signing up. In many cases, the debtor doesn’t even know about the option; a National Consumer Law Center survey in May found that 65% of borrowers “do not recall receiving any contact prior to default.” Despite the fact that the government directly lends out about 85% of all student loans, they don’t directly service them. They hire for-profit companies to handle day-to-day operations, and they’re paid a sliver of the loan proceeds. (Does this sound familiar?) And though the government has laid out a payment option that would be more affordable for debtors in trouble, the servicers, who wouldn’t see the same profits under such programs, have not extended that information to their customers. (No, really, does this sound familiar?) Shahien Nasiripour and Joy Resmovits have the story:Sallie Mae, the nation’s largest servicer of federal student loans, is failing to enroll many of its distressed borrowers into one of the Obama administration’s main initiatives for alleviating high student debt.Documents obtained by The Huffington Post and estimates provided by the White House separately suggest that Sallie Mae, or SLM Corp., has enrolled relatively few borrowers into the Income-Based Repayment program. Sallie Mae dominates the now-discontinued Federal Family Education Loan Program, owning between 37 and 40 percent of the outstanding FFELP debt held by the private sector. But its share of FFELP borrowers who are enrolled in IBR is about half that, or 15 to 18 percent [...]
The student loan bubble is starting to burst -- The largest bank in the United States will stop making student loans in a few weeks. JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October, according to Reuters. The official reason is quite bland. "We just don't see this as a market that we can significantly grow," Thasunda Duckett tells Reuters. Duckett is the chief executive for auto and student loans at Chase, which means she's basically delivering the news that a large part of her business is getting closed down. The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending."Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space," the press release issued in August 2007 said.
Parents face the student loan double whammy - Together, Rose and her children owe as much as $136,000 in student loans. "I didn't think I would have this much debt," Rose said. But she thinks it's important for her children to get college degrees, even though her student loan debt could affect her ability to retire. "I think that I'll still be able to pay it off. That's my goal. I just can't see not paying the debt," Rose said. It is ironic since Rose, who lives outside Orlando, Fla., is director of housing for Consumer Debt Counselors, counseling people about their mortgage debt. Rose is just one of a new group of Americans—parents struggling to pay off student loans even as their children take on new debts to pay for their own schooling. Student loans were once thought of as temporary. But for some Americans, they're becoming a lifetime—or even a multigenerational—burden, as parents become unable to help their children pay for tuition, forcing the children to take on even more debt themselves.
Kansas pension system’s funding gap jumps to $10.2 billion -- The Kansas public pension system says it had robust investment gains last year but still saw its long-term funding gap grow to $10.2 billion. The Topeka Capital-Journal reports the gap widened because the Kansas Public Employees Retirement System was still booking deferred losses from the 2008 collapse of financial markets. A Kansas House committee reviewed the figures Wednesday. The gap represents the difference between anticipated revenues and promised benefits through 2033. The figure for the end of 2011 was about $9.2 billion. KPERS reported earning 14.5 percent on its investments last year. Also, legislators enacted laws in 2011 and 2012 to overhaul the pension system to boost its long-term financial health. But the system’s assets would cover only 56 percent of its long-term commitments.
Public Employee Pensions Underfunded by $4.1 Trillion -- State Budget Solutions, a national nonprofit dedicated to fiscal responsibility, released a report that finds state public employee pension plans are underfunded by a breathtaking $4.1 trillion.The report, Promises Made, Promises Broken—The Betrayal of Pensioners and Taxpayers, also identifies states where taxpayers and public employee pensioners are most threatened from unfunded pension promises including: Illinois, Ohio, New Jersey, Oregon, Connecticut, Nevada, New Mexico, Hawaii and Alaska. These states face a particularly large unfunded liability at a per capita level and as a percentage of their annual gross state product. "This tragically amounts to $4.1 trillion in broken promises. Promises to taxpayers that public officials were managing funds appropriately and to pensioners who, quite frankly, did nothing wrong," "Too many Americans worked their entire lives to now learn their states and local governments cannot provide what they promised. By not reining in this underfunded pension crisis sooner, elected officials betrayed the trust of citizens by putting politics before public employees, pensioners and taxpayers.". The worst offenders are the driving force behind state plans that combined to be just 39 percent funded.
401(k)s are replacing pensions. That’s making inequality worse. -- The once-dominant defined benefit pension plan–which pays out a fixed amount after an employee retires–is on its way to becoming an historical artifact. More and more employers are offering 401(k) plans instead, which require employees to pay into their own accounts, sometimes with and sometimes without a matching contribution. And according to a new analysis from the labor-oriented Economic Policy Institute, the effect has been a stratification of retirement savings by education, income, and race–which could deepen inequality among the elderly as the population ages. It’s actually possible to tell a positive story here, in which the average size of retirement accounts has grown overall in recent decades, and aggregate saving and household net worth as a percentage of income have started to bounce back since the recession first hit in 2008: That’s because the top-earning people are choosing to put a lot more money away, while those who earn less can’t afford to. Retirement savings by the top fifth of income earners have risen markedly, while they’ve declined or risen only slightly for most everyone else:
Retirement Inequality Chartbook: How the 401(k) revolution created a few big winners and many losers - Retirement insecurity has worsened for most Americans as retirement wealth has become more unequal. For many groups, the typical household has no savings in retirement accounts and balances are low even when focusing only on households with savings. Retirement savings are characterized by large differences between mean and median values because mean savings are skewed by large balances at the top.401(k)s are an accident of history. In 1980, a benefit consultant working on revamping a bank’s cash bonus plan had the idea of adding an employer matching contribution and taking advantage of an obscure provision in the tax code passed two years earlier clarifying the tax treatment of deferred compensation. Though 401(k)s took off in the early 1980s, Congress did not intend for them to replace traditional pensions as a primary retirement vehicle, and 401(k)s are poorly designed for this role.In theory, the shift from traditional defined-benefit pensions to 401(k)-style defined-contribution plans could have broadened access to retirement benefits by making it easier and cheaper for employers to offer benefits. However, participation in any employer-based retirement plan declined over the past decade even as defined- contribution plans became prevalent in the private sector. And as pension coverage declined, older households delayed retirement and increased their earned income.
Failed Policy — The 401(k) Shrinks In A Growing Economy - Disturbing new evidence that government policies are propelling us toward a poorer future turns up in a first-ever government examination of retirement savings plans like 401(k)s.The report, from the Internal Revenue Service, shows that even though the economy is improving, the number of workers saving out of their paychecks for old age is shrinking. So is the amount they save, down 6 percent in real terms from 2008 to 2010.Additionally, the number of Americans deferring part of their wages into 401(k)-type plans fell in 2009 and again in 2010. Two-thirds of taxpayers with jobs saved nothing in retirement plans. Among twenty-somethings, only 1 in 8 or so saved.While chock full of important new facts, this pioneering IRS report has not prompted a single news report except for this column at The National Memo. How can it be that the major newspapers, wire services and broadcast outlets all missed this?The answer is simple: Wall Street pours a lot of money into keeping financial journalists focused where it wants attention. That most certainly is not on groundbreaking first-time reports like this one from the IRSStatistics of Income division. With the economy supposedly on the mend, we would expect to see the number of people saving part of their pay for old age rising, not falling. And we would expect people to save more of their pay. But the number of people with work is down, too, by 3.8 million from 2008 to 2010 as measured in the IRS report. That the number of workers fell more than the number saving may seem like good news, but it misses the larger point that for more than a decade the U.S. population has been growing much faster than jobs.
U.S. Government Prepares Mass Pension-Rape - How has the bankrupt United States of America kept its entire (paper) house-of-cards from crumbling all around it? Two words: fraudulent accounting.As many readers know, following the Crash of ’08 U.S. Big Banks were hopelessly bankrupt. They were leveraged well in excess of (the legal) 30:1, with the vast majority of that leverage tied directly to the (fraud-saturated) U.S. housing market – and house prices. The effect of this leverage was that (as a matter of arithmetic) only a 3% decline in U.S. house prices would render all these banks insolvent (3% X 30). In fact the U.S. housing market plummeted lower by roughly ten times that amount (in just its first down-leg). The mere $15+ trillion in hand-outs/loans/guarantees from the Bush regime was only a band-aid which would keep these fraud-factories afloat for a few months, barring other equally extreme action. And so Mark-to-Fantasy accounting was born. Beginning in February 2009, U.S. Big Banks weren’t required to account for their assets (or liabilities) at “market value” (i.e. what people were willing to pay for them in the real world). Instead, the Banksters were allowed to do their accounting on the basis of what they thought their own assets should be worth. Suddenly, the same corporations which had just all been bankrupted ten times over were able to pass a “stress test.” Of course that Cinderella Stress Test proved nothing about the solvency of U.S. banks. However simply being instantly able to cobble-together a façade of solvency did illustrate the magnitude of the fraud in this Mark-to-Fantasy accounting.But for decades prior to this the U.S. federal government had already been engaging in its own Mark-to-Fantasy accounting. Unlike U.S. corporations, which are (accept for the Big Banks) still required by law to acknowledge all debts and liabilities in their accounting; the federal government only acknowledges the liabilities it wants to acknowledge – the small ones.
The Republicans in Michigan Pout with the Passage of the Medicaid Expansion - “I think this expansion of government by 400,000 to 500,000 new people that are depending on the government for health care is more nauseating than probably just about any tax increase that we can put forth simply because it is an entitlement we are not going to be able to be rein in,” Republican Michigan State Senator Joe Hune. State Sen. Joe Hune called the likely expansion of Medicaid to Michigan’s working poor “garbage” he “could not stomach” to support in Tuesday’s Senate vote that narrowly passed the measure. “It’s kinda like we had this really big dinner. We got the dinner done and now some people are asking for dessert. We’re going to skip dessert on this one and move forward.” Senate Majority Leader Randy RICHARDVILLE (R-Monroe) on his chamber’s decision not to take a revote on immediate effect on the Medicaid expansion bill. The delay in implementation will cost the State of Michigan ~$600 million in Federal Aid for the Medicaid Expansion. The Medicaid expansion will not happen till April 1, 2014 as a result of the Republicans sulking.
Georgia governor gets paid through secret PAC to obstruct Obamacare - Georgia Gov. Nathan Deal (R)’s family and business partner have been receiving payments from a secret Political Action Committee called Real PAC. Half a million dollars of the money donated to the PAC has come from corporate health care interests which — like the governor and Georgia state Insurance Commissioner Ralph Hudgens — oppose the implementation of the Affordable Care Act (ACA), also known as “Obamacare.” According to investigative reporter Jim Walls of Atlanta Unfiltered, the PAC hasn’t filed taxes or the required financial disclosures in two years, and the information it did file for 2011 was incorrect. Contributors to Real PAC include Aetna, Humana, Blue Cross, United Health care and other interests that want to keep health insurance premiums and other costs as high as possible. Bryan Long of activist group Better Georgia told Raw Story that the list of donors shows who Gov. Deal really works for. “He goes out and he does their bidding,” Long said, “He’s working for them instead of working for the 650,000 Georgians who don’t have insurance at all or access to the Medicaid expansion.”
It Takes A Government (To Make A Market) - Paul Krugman -- Lots of reporting on the new Kaiser Family Foundation analysis of what we know so far (pdf) about premiums under Obamacare. It definitely looks as if there will be a mild “rate shock” — in the right direction. KFF:While premiums will vary significantly across the country, they are generally lower than expected. What’s going on here? Partly it’s a vindication of the idea that you can make health insurance broadly affordable if you ban discrimination based on preexiting conditions while inducing healthy individuals to enter the risk pool through a combination of penalties and subsidies. But there’s an additional factor, that even supporters of the Affordable Care Act mostly missed: the extent to which, for the first time, the Act is creating a truly functioning market in nongroup insurance. Until now there has been sort of a market — but one that is riddled with problems. It was very hard for individuals to figure out what they were buying — what would be covered, and would the policies let them down? Price and quality comparisons were near-impossible. Under these conditions the magic of the marketplace couldn’t work — there really wasn’t a proper market. With the ACA, however, insurers operate under clear ground rules, with clearly defined grades of plan and discrimination banned. The result, suddenly, is that we have real market competition.
Marginal Tax Rates under Obamacare - Back in 2009, I pointed out in a NY Times column that President Obama's healthcare reform would involve substantial increases in implicit marginal tax rates. I am delighted that Casey Mulligan is now giving the issue some serious attention in two new NBER working papers (here and here). He reports:This paper calculates the ACA’s impact on the average reward to working among nonelderly household heads and spouses. The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect....Measured in percentage points, the Affordable Care Act will, by 2015, add about twelve times more to average marginal labor income tax rates nationwide than the Massachusetts health reform added to average rates in Massachusetts following its 2006 statewide health reform.
U.S. Births Stabilize After Steep Declines -- The U.S. fertility rate has stabilized after years of precipitous declines, according to updated data released by the Centers for Disease Control and Prevention. Based on earlier CDC data, the Journal reported Thursday that the American baby bust is at an end. The latest numbers published Friday confirm the trend.The number of births in 2012 leveled off after years of big drops. There were 3.5 million babies born last year, less than 1,000 fewer than 2011. That compares to a declines of about 50,000 in 2011 and more than 100,000 in both 2009 and 2010. Meanwhile, the fertility rate — number of births per 1,000 women of childbearing age — fell to 63 from 63.2, a new record low. But this is a very small drop compared to previous years. The rate stood at 69.3 in 2007, and dropped steeply and consistently throughout the recession and early years of the recovery.
Nearly Half Of U.S. Births Are Covered By Medicaid, Study Finds - About half the births in the United States are paid for by Medicaid — a figure higher than previous estimates – and the numbers could increase as the state-federal health insurance program expands under the Affordable Care Act, according to a study released Tuesday. All pregnant women with incomes below 133 percent of the federal poverty level, just below $15,300 for an individual, are eligible for Medicaid, and many states provide coverage to women earning well above that amount.While previous research has estimated about 40 percent of the nearly 4 million annual births in the United States were paid for by Medicaid, the latest study by researchers at George Washington University and the March of Dimes looked at individual state data and estimated that in 2010 48 percent of births were covered by Medicaid. Researchers say they hope to use the figure as a baseline to determine the impact of the federal health law that expands Medicaid starting in January. Under the health law, about half the states are expanding Medicaid to cover everyone under 138 percent of the federal poverty level.The percent of births paid for by Medicaid varied widely from a high of nearly 70 percent in Louisiana to below 30 percent in New Hampshire and Massachusetts, the study found (see chart for individual state data).
What’s Killing Poor White Women? - Everything about Crystal’s life was ordinary, except for her death. She is one of a demographic—white women who don’t graduate from high school—whose life expectancy has declined dramatically over the past 18 years. These women can now expect to die five years earlier than the generation before them. It is an unheard-of drop for a wealthy country in the age of modern medicine. Throughout history, technological and scientific innovation have put death off longer and longer, but the benefits of those advances have not been shared equally, especially across the race and class divides that characterize 21st--century America. Lack of access to education, medical care, good wages, and healthy food isn’t just leaving the worst-off Americans behind. It’s killing them. The journal Health Affairs reported the five-year drop in August. The article’s lead author, Jay Olshansky, who studies human longevity at the University of Illinois at Chicago, with a team of researchers looked at death rates for different groups from 1990 to 2008. White men without high-school diplomas had lost three years of life expectancy, but it was the decline for women like Crystal that made the study news. Previous studies had shown that the least-educated whites began dying younger in the 2000s, but only by about a year. Olshansky and his colleagues did something the other studies hadn’t: They isolated high-school dropouts and measured their outcomes instead of lumping them in with high-school graduates who did not go to college.
China's Unspoken "Catastrophe" - 11.6% Of The Population, Or 114 Million, Have Diabetes: More Than The US - While China was absorbing all the best that the "West" had to export to it over the past three decades (credit cards, MTV, inflation, apps, youtube), it was also importing the worst. Such as a sedentary, lazy lifestyle which at a massive social scale, usually has one inevitable conclusion - diabetes. And even as the world is focused on all the other pending crashes China has to offer: housing, credit, demographic, it has been largely ignorant of what is rapidly becoming a "catastrophic" epidemic. According to Bloomberg, which cites just released findings in the Journal of the American Medical Association, "the most comprehensive nationwide survey for diabetes ever conducted in China shows 11.6 percent of adults, or 114 million, has the disease. This means that another 22 million diabetics, or the population of Australia, have been added to a 2007 estimate and means almost one in three diabetes sufferers globally is in China. By comparison in America "only" 11.3% of the population have been diagnosed with diabetes.
The Real Population Problem - Sometimes considered a taboo subject, the issue of population runs as an undercurrent in virtually all discussions of modern challenges. Naturally, resource use, environmental pressures, climate change, food and water supply, and the health of the world’s fish and wildlife populations would all be non-issues if Earth enjoyed a human population of 100 million or less. The subject is taboo for a few reasons. The suggestion that a smaller number would be nice begs the question of who we should eliminate, and who gets to decide such things. Also, the vast majority of people bring children into the world, and perhaps feel a personal sting when it is implied that such actions are part of the problem. I myself come from a long line of breeders, and perhaps you do too. Recently, participating in a panel discussion in front of a room full of physics educators, I made the simple statement that “surplus energy grows babies.” This is motivated by my recognition that population growth bent upwards when widespread use of coal ushered in the Industrial Revolution and bent again when fossil fuels entered global agriculture in a big way during the Green Revolution. These are really just facets of the broader Fossil Fuel Revolution. I was challenged by a member of the audience with the glaringly obvious statement that population growth rates subside in energy-rich nations—the so-called demographic transition. How do these sentiments square against one another? So in the spirit of looking at the numbers, let’s explore in particular various connections between population and energy. In the process I will expose the United States, rather than Africa, for instance, as the real problem when it comes to population growth.
The Real Reason Kansas Is Running Out of Water - Like dot-com moguls in the '90s and real estate gurus in the 2000s, farmers in western Kansas are enjoying the fruits of a bubble: Their crop yields have been boosted by a gusher of soon-to-vanish irrigation water. That's the message of a new study by Kansas State University researchers. Drawing down their region's groundwater at more than six times the natural rate of recharge, farmers there have managed to become so productive that the area boasts "the highest total market value of agriculture products" of any congressional district in the nation, the authors note. Those products are mainly beef fattened on large feedlots; and the corn used to fatten those beef cows. But they're on the verge of essentially sucking dry a large swath of the High Plains Aquifer, one of the United States' greatest water resources. The researchers found that 30 percent of the region's groundwater has been tapped out, and if present trends continue, another 39 percent will be gone within 50 years. As the water stock dwindles, of course, pumping what's left gets more and more expensive—and farming becomes less profitable and ultimately uneconomical. But all isn't necessarily lost. The authors calculate that if the region's farmers can act collectively and cut their water use 20 percent now, their farms would produce less and generate lower profits in the short term, but could sustain corn and beef farming in the area into the next century.
Crop pests and pathogens move polewards in a warming world - Global food security is threatened by the emergence and spread of crop pests and pathogens. Spread is facilitated primarily by human transportation, but there is increasing concern that climate change allows establishment in hitherto unsuitable regions. However, interactions between climate change, crops and pests are complex, and the extent to which crop pests and pathogens have altered their latitudinal ranges in response to global warming is largely unknown. Here, we demonstrate an average poleward shift of 2.7±0.8 km yr−1 since 1960, in observations of hundreds of pests and pathogens, but with significant variation in trends among taxonomic groups. Observational bias, where developed countries at high latitudes detect pests earlier than developing countries at low latitudes, would result in an apparent shift towards the Equator. The observed positive latitudinal trends in many taxa support the hypothesis of global warming-driven pest movement.
Another Climate Change Headache For Farmers: Tropical Crop Pests Move North As Weather Warms Up - Hotter, more extreme weather induced by climate change is already creating huge problems for farmers, who are struggling to keep up production in the face of severe drought and unpredictable storms. Now, a new study finds that climate change is also driving hundreds of new crop pest species towards the poles. The study, published in Nature Climate Change, examined 612 crop pests and pathogens. Tropical insects, fungi, and bacteria are moving at a rate of 1.7 miles a year toward regions normally considered too cold for them to thrive. Warmer weather has greatly expanded these pests’ territories, threatening crops unequipped with defenses against these new enemies.American species are already feeling the effects. The mountain pine beetle, for instance, has migrated to warming forests in the Pacific Northwest, wreaking havoc on millions of acres of forest in what may be the largest forest insect blight ever seen in North America. Fusarium head blight, another pest attracted to warmer and wetter conditions up north, has decimated American wheat and oat crops, costing farmers billions of dollars. Still more pests are steadily making their way northward. Biotech corporations such as Monsanto and Dow have genetically modified crops to resist certain pests, but studies show these crops are prompting evolutions of “super-pests” that can withstand pesticides and eat through entire fields. New genetic modification tactics could help in the short term, but researchers called for a more sustainable shift away from the enormous monocultures of corn and soy fields that dominate North American agriculture.
Major NOAA report: Climate change intensified 2012 record heat in U.S - Manmade climate change played a substantial role in the exceptional warmth in the eastern U.S. during the spring of 2012, a major NOAA-led report concludes. Not only that, it greatly increased the odds of the punishing heat that baked the north central and northeast U.S. during the summer that followed. “Approximately 35 percent of the extreme warmth experienced in the eastern U.S. between March and May 2012 can be attributed to human-induced climate change,” NOAA says about the results of one of the report’s 18 studies. Drawing from another study, NOAA adds: “High temperatures, such as those experienced in the [north central and northeast] U.S. in [summer] 2012 are now likely to occur four times as frequently due to human-induced climate change.” The NOAA report adds weight to a large body of scientific studies that show manmade climate change is very likely affecting the intensity of warm weather now and will in the future. Adding to this, news of record-breaking warmth around the globe is a seeming constant. Although the summer heat in the U.S. in 2013 was rather ordinary and fell well short of matching 2012′s record-setting level, exceptional warmth/heat occurred in many other places, from the South Pole to Shanghai to Siberia.
U.S. Becomes Largest Wood Pellet Exporter,Enviva, Clearcutting Forests and Destroying Wetlands - Utility companies in Europe are making massive investments to convert their power plants to burn wood—known as “biomass”—as a replacement for coal and other fossil fuels. This is despite the fact that recent research shows that burning whole trees in power plants actually increases carbon emissions relative to fossil fuels for many decades—anywhere from 35 to 100 years or more. It also emits higher levels of multiple air pollutants.The result of this new demand has been the explosive growth of wood pellet exports from North America, most of which originate in our Southern forests here in the U.S., putting into peril some of the most valuable ecosystems in the world. At the leading edge of this new industry is Enviva, the South’s largest exporter of wood pellets. Enviva harvests trees from Southern forests, chips them in pellet mills and loads the pellets onto ships bound for Europe, where they are burned in utility-scale power plants to keep the lights on in Europe. Not exactly a cozy picture.New maps and a report published last week by Natural Resources Defense Council (NRDC) and Dogwood Alliance show what’s at stake for the forests surrounding Enviva’s Ahoskie facility—and the multitude of species that depend on them for their habitat. Using Geographical Information Systems (GIS) data layers to show the landscapes and species within the 75-mile radius from which the Ahoskie mill buys trees for wood pellet manufacturing, the results reveal how Enviva has some of the most biologically diverse and environmentally sensitive natural forests in the world in its crosshairs.
Is Congress To Blame For Making California’s Latest Wildfire Even Worse? - Congress’s failure to fund the U.S. Forest Service’s brush-clearing efforts might have intensified the latest wildfire to tear through California, according to a report Reuters released over the weekend. Earlier this year, the National Forest Service requested eight brush-clearing projects in California that “would have thinned the woods in about 25 square miles (65 square km) in the Groveland District of the Stanislaus National Forest, much of which was incinerated by the Rim Fire,” Reuters reports. But funding for those projects was never approved even though, as executive director of the Central Sierra Environmental Resource Center John Buckley told Reuters, they “would have inarguably made the Rim Fire far easier to contain, far less expensive and possibly not even a major disaster.” The Rim Fire, the fifth largest wildfire ever to burn through California, has taken a major toll on the state. It has burned through nearly a quarter of a million acres of land, much of that within national parks, and has cost the state almost $40 million.
Regular coastal towns and cities and sea level rising - Seeing this piece by Andrew Revkin Can cities adjust to a retreating coastline? reminded me to also look closer to home. We all too readily forget that NYC is not a typical problem of a coastal communitiy…so what do planners in smaller towns face? How do they choose responses, for instance, if an engineering report proposes possible loss of 20% of your tax base by 2050 due to rise in sea level predictions and the particular configuration of your coastal areas? The towns of Scituate, Duxbury, and Marshfield in MA face real decision making in terms of planning. As Selectman Rick Murray of Scituate told a friend of mine, “They who keep their heads in the ground will drown.” As an exercise in arguing sea level rise and consequences in or near your own neighborhood, walking the information and language through this lens might help to clarify some of the problems involved that are not at such a large scale point of view and beyond most of our imaginations and expertise, and could be in your own neighborhood or vacation home. (Or is your land sinking?)
UN Chief Scientist Urges Action On Climate Change: ‘We Have Five Minutes Before Midnight’ - Rajendra Pachuari, head of the United Nation’s group of climate scientists, said on Monday that humanity can no longer be content kicking the can down the road when it comes to climate change. “We have five minutes before midnight,” he emphasized.“We may utilize the gifts of nature just as we choose, but in our books the debits are always equal to the credits.“May I submit that humanity has completely ignored, disregarded and been totally indifferent to the debits? Today we have the knowledge to be able to map out the debits and to understand what we have done to the condition of this planet.”The UN’s Intergovernmental Panel on Climate Change (IPCC), which Pachuari heads, is slated to release its long-awaited Fifth Assessment Report (AR5) later this month. Drafts of the report seen by Reuters point to an even greater certainty that humans are the primary drivers of global warming, “It is at least 95 percent likely that human activities — chiefly the burning of fossil fuels — are the main cause of warming since the 1950s.” This is up from 90 percent in the 2007 report, 66 percent in 2001 and just over 50 percent in 1995, “steadily squeezing out the arguments by a small minority of scientists that natural variations in the climate might be to blame.”
Naomi Klein: Green groups may be more damaging than climate change deniers - The Big Green groups, with very few exceptions, lined up in favor of NAFTA, despite the fact that their memberships were revolting, and sold the deal very aggressively to the public. That’s the model that has been globalized through the World Trade Organization, and that is responsible in many ways for the levels of soaring emissions. We’ve globalized an utterly untenable economic model of hyperconsumerism. It’s now successfully spreading across the world, and it’s killing us. It’s not that the green groups were spectators to this – they were partners in this. They were willing participants in this. It’s not every green group. It’s not Greenpeace, it’s not Friends of the Earth, it’s not, for the most part, the Sierra Club. It’s not 350.org, because it didn’t even exist yet. But I think it goes back to the elite roots of the movement, and the fact that when a lot of these conservation groups began there was kind of a noblesse oblige approach to conservation. It was about elites getting together and hiking and deciding to save nature. And then the elites changed. So if the environmental movement was going to decide to fight, they would have had to give up their elite status. And weren’t willing to give up their elite status. I think that’s a huge part of the reason why emissions are where they are. At least in American culture, there is always this desire for the win-win scenario. But if we really want to get to, say, an 80 percent reduction in CO2 emissions, some people are going to lose. And I guess what you are saying is that it’s hard for the environmental leadership to look some of their partners in the eye and say, “You’re going to lose.”
A Carbon Tax That America Could Live With - If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.” A bill introduced this year by Representatives Henry A. Waxman and Earl Blumenauer and Senators Sheldon Whitehouse and Brian Schatz does exactly that. Their proposed carbon fee — or carbon tax, if you prefer — is more effective and less invasive than the regulatory approach that the federal government has traditionally pursued. The four sponsors are all Democrats, which raises the question of whether such legislation could ever make its way through the Republican-controlled House of Representatives. The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine. ...
Blackout: 1 Billion Live Without Electric Light - What did you do when the sun went down? If you’re reading this, chances are you switched on a light. But for the 1.3 billion people around the world who lack access to electricity, darkness is a reality. There is no electric light for children to do their homework by, no power to run refrigerators that keep perishables or needed medicine cold, no power for cooking stoves or microwaves. What light they have mostly comes from the same sources that humans have relied on forever–firewood, charcoal or dung–and the resulting smoke turns into indoor pollution that contributes to more than 3.5 million deaths a year. “For us, life does not stop after dark,” says Michael Elliott, president and CEO of the development nonprofit ONE. “For 550 million people in sub-Saharan Africa and many more than that around the rest of the world, it does.” That lack of electricity is called energy poverty, and it’s a development challenge that hasn’t gotten the attention it deserves. It’s easy to see why. Extreme poverty, global hunger, HIV/AIDS and malaria are all immediate threats to human life. Not having somewhere to plug in a cell phone, by contrast, might seem like an inconvenience at worst. But energy poverty is connected to a host of deeper ills: 90% of the children in sub-Saharan Africa go to primary schools that lack electricity, which means no fans or air conditioners in the equatorial heat, no computers, no lights for evening classes. Economic growth is stunted as a result–60% of African businesses cite access to reliable power as a binding constraint on their operations.
The Only Way Forward: A Pedal-to-the-Metal Plan for Energy System Transformation – (Pt. 1 of 3) The largest-scale, most important and time-sensitive challenge facing humanity is the climate crisis. The capitalist industrial societies of the last two hundred years and the command-and-control industrial economies of mid-20th Century Communist regimes are and were both premised on the idea that the environment is an infinitely capacious dumping ground for the physical by-products of industrial production and consumption. One class of those byproducts that was overlooked in the first waves of concern about the environment in the 1960’s and 70’s, carbon dioxide and other greenhouse gases, has turned out to be the most potentially damaging in the longer term and among the most difficult to bring under control. One of the main difficulties in controlling greenhouse gases relative to other byproducts of industrial civilization is that greenhouse gases are not directly noxious to humans in concentrations that are dangerous to the stability of the climate. Furthermore, over the course of two centuries, most of the newer consumer desires and the supposed efficiencies of the modern economy were built upon activities that with current technology rely on free-to-the-consumer-and-producer greenhouse-gas emissions, enjoyments which are not impaired by inhaling the gases themselves. By contrast smog and soot were from early on considered noxious byproducts of fossil fuel use in industrial production (“the infernal mills”) and environmental regulation of these was, over a period of years, embraced by many as an unalloyed good.
The Only Way Forward: A Pedal-to-the-Metal Plan for Energy System Transformation — (Pt. 2 of 3) - The above list of technological changes to radically reduce and eventually zero-out society’s emissions using current and near-future technologies would represent the largest construction project in the history of humankind by far, occurring over several decades. While these developments are required to preserve something that resembles society and what might be called appreciable human wealth, in themselves they are not objects of desire for significant portions of the public nor do many private investors see attractive returns in them, so that it cannot be said that market demand currently exists for this type of transformation. Still, many individuals would probably come to enjoy, for instance, the amenities offered by the zero-carbon infrastructure once built, as political battles and the battles around finances, land use and the noise and inconveniences of the construction period had receded into the past.Furthermore, as I have argued, even if that demand existed, the visible or invisible hand of the market would be insufficiently skilled at creating the coordinated infrastructural systems that are here prescribed. While it would be ideal if we were to set a price on carbon and let, as is current lore, the “market do its magic”, market actors could not “see” far enough into the future to plan for a net-zero carbon emitting society, nor would it be in their immediate economic self-interests to do so. Many of the foundations of the net-zero carbon society would then be designed either directly by government actors, according to an overall high-level plan or set of principles similar to this one, or by private sector actors following strictly enforced regulatory codes that yield a very-low or net-zero carbon outcome in the near term.
The Only Way Forward: A Pedal-to-the-Metal Plan for Energy System Transformation — (Pt. 3 of 3) [Part 1] [Part 2] [Part 3] With the assumption that government has the right to intervene and shape markets for the public good, the below policies will drive consumers and private investors to help shape the zero-carbon energy system. The motivational forces harnessed by these policy instruments are narrow individual and business self-interest (i.e. increasing monetary income, decreasing monetary costs).
- A) Escalating Carbon Tax and Carbon Tariffs – The point of the carbon tax is not to alone drive the transformation of society but to dampen and eventually eliminate demand for high emitting activities and for fossil fuels.
- B) Fixed Individual Carbon Tax Credits – A carbon tax in its pure form would be regressive and there are proposals that amount to a fixed carbon emissions allowance per person reflected in a refundable individual carbon tax credit (sometimes called a dividend) that would be due to individuals the following year no matter their total tax liability
- C) Carbon Tax Exemptions – Carbon tax advocates have tended to believe that the carbon tax should be applied across the board on all activities that emit carbon. But if the tax then makes investment in a wind turbine or building a ultra-high efficiency building substantially more expensive (because of the embedded carbon in their materials), it defeats the purpose of the carbon tax in the first place; it would function then simply as a damper on investment overall by every entity except monetarily sovereign governments.
- D) Removal of Fossil Fuel Subsidies – Follows from a program of discouraging fossil fuel extraction and use.
Fukushima Radiation Readings 18 Times Higher --Highly radioactive water dripping from a pipe used to connect two coolant tanks patched using tape. An operator at the Fukushima nuclear plant in Japan says radiation readings are 18 times higher than previously measured. The staff member said they had found highly radioactive water dripping from a pipe used to connect two coolant tanks and that it had been patched using tape. The discovery of the pipe came a day after Tokyo Electric Power Co (TEPCO) said it found new radiation hotspots at four sites around coolant tanks, with one reading at 1,800 millisieverts per hour -- a dose that would kill a human left exposed to it in four hours. Last week the plant operator admitted 300 tonnes of toxic radioactive water had seeped out of one of the vast containers - one of around 1,000 on the site - before anyone had noticed.
Fukushima radiation levels ’18 times higher’ than thought - Radiation levels around Japan's Fukushima nuclear plant are 18 times higher than previously thought, Japanese authorities have warned. Last week the plant's operator reported radioactive water had leaked from a storage tank into the ground. It now says readings taken near the leaking tank on Saturday showed radiation was high enough to prove lethal within four hours of exposure. The plant was crippled by the 2011 earthquake and tsunami. The Tokyo Electric Power Company (Tepco) had originally said the radiation emitted by the leaking water was around 100 millisieverts an hour. However, the company said the equipment used to make that recording could only read measurements of up to 100 millisieverts. The new recording, using a more sensitive device, showed a level of 1,800 millisieverts an hour. The new reading will have direct implications for radiation doses received by workers who spent several days trying to stop the leak last week, the BBC's Rupert Wingfield-Hayes reports from Tokyo. In addition, Tepco says it has discovered a leak on another pipe emitting radiation levels of 230 millisieverts an hour. The plant has seen a series of water leaks and power failures. The 2011 tsunami knocked out cooling systems to the reactors, three of which melted down. The damage from the tsunami has necessitated the constant pumping of water to cool the reactors. This is believed to be the fourth major leak from storage tanks at Fukushima since 2011 and the worst so far in terms of volume. After the latest leak, Japan's nuclear-energy watchdog raised the incident level from one to three on the international scale measuring the severity of atomic accidents, which has a maximum of seven. Experts have said the scale of water leakage may be worse than officials have admitted.
Japan unveils $500 million ice wall plan for Fukushima water leaks - Tokyo on Tuesday unveiled a half-billion dollar plan to stem radioactive water leaks at Fukushima, creating a wall of ice underneath the stricken plant, as the government elbowed the operator aside. Acknowledging global concerns over a so-far “haphazard” management of the crisis by Tokyo Electric Power (TEPCO), Prime Minister Shinzo Abe said his administration will step in with public money to get the job done.“The world is paying attention to whether we can realise the decommissioning of Fukushima Daiichi, including the contaminated water problem,” Abe said. Thousands of tonnes of radioactive water is being stored in temporary tanks at the site, 220 kilometres (135 miles) north of the Japanese capital, much of it having been used to cool molten reactors wrecked by the tsunami of March 2011. The discovery of leaks from some of these tanks or from pipes feeding them, as well as radiation hotspots on the ground even where no water is evident, has created a growing sense of crisis. Some of the highly toxic water that has escaped may have made its way into the Pacific Ocean, TEPCO has admitted.
Japan paying millions to freeze soil, find other ways to stop leaks at Fukushima nuclear plant - The Japanese government on Tuesday pledged nearly $500 million to fight toxic water leaks at the Fukushima Daiichi nuclear plant, part of an increasingly precarious cleanup job that Prime Minister Shinzo Abe says requires “radical measures.” Concerns about fast-accumulating contaminated water at the plant, nearly 21 / 2 years after an earthquake triggered a major nuclear accident, have pushed the government to invent on-the-fly solutions.For example, part of the money announced Tuesday will go toward pumping coolant through underground pipes around critical buildings, officials said, freezing soil and creating a “seal” almost a mile long. The greatest challenge, for now, is the water. When a nuclear plant is operating as designed, irradiated water is contained. But the Fukushima plant — battered by the 9.0-magnitude earthquake and the enormous tsunami that followed, and now relying on makeshift equipment — has become a soggy mess. Every day, roughly 400 tons of groundwater flows from surrounding mountains and seeps into reactor buildings, Tepco says. There, it mixes with highly toxic water used to douse and cool the crippled reactor cores.
Fukushima Daiichi Update | Fairewinds Energy Education: Arnie Gundersen is featured on EcoReview’s panel of experts to discuss Fukushima Daiichi. Host Tom Harvey poses the question, what has, is and will likely will happen and what options there are to remedy this cataclysmic event? Other featured experts include David Pu’u, CDO of Blue Ocean Sciences, Eddie Leung, CEO of Secured Environment, and Dr. Andrea Neal, CEO of the Ocean Lovers Collective.
Errors Cast Doubt on Japan’s Cleanup of Nuclear Accident Site - Nearby, thousands of workers and a small fleet of cranes are preparing for one of the latest efforts to avoid a deepening environmental disaster that has China and other neighbors increasingly worried: removing spent fuel rods from the damaged No. 4 reactor building and storing them in a safer place. The government announced Tuesday that it would spend $500 million on new steps to stabilize the plant, including an even bigger project: the construction of a frozen wall to block a flood of groundwater into the contaminated buildings. The government is taking control of the cleanup from the plant’s operator, the Tokyo Electric Power Company. The triple meltdown at Fukushima in 2011 is already considered the world’s worst nuclear accident since Chernobyl. The new efforts, as risky and technically complex as they are expensive, were developed in response to a series of accidents, miscalculations and delays that have plagued the cleanup effort, making a mockery of the authorities’ early vows to “return the site to an empty field” and leading to the release of enormous quantities of contaminated water. As the environmental damage around the plant and in the ocean nearby continues to accumulate more than two years after the disaster, analysts are beginning to question whether the government and the plant’s operator, known as Tepco, have the expertise and ability to manage such a complex crisis.
Fukushima apocalypse: Years of ‘duct tape fixes’ could result in ‘millions of deaths’ - Even the tiniest mistake during an operation to extract over 1,300 fuel rods at the crippled Fukushima nuclear power plant in Japan could lead to a series of cascading failures with an apocalyptic outcome, fallout researcher Christina Consolo told RT. Fukushima operator TEPCO wants to extract 400 tons worth of spent fuel rods stored in a pool at the plant’s damaged Reactor No. 4. The removal would have to be done manually from the top store of the damaged building in the radiation-contaminated environment. In the worst-case scenario, a mishandled rod may go critical, resulting in an above-ground meltdown releasing radioactive fallout with no way to stop it, said Consolo, who is the founder and host of Nuked Radio. But leaving the things as they are is not an option, because statistical risk of a similarly bad outcome increases every day, she said.
Texas Fertilizer Plants Say No Thanks To Fire Inspections, Fire Marshal Sorry To Have Bothered Them: As we all know, Texas is wide open for business, just waiting for your hot throbbing business to come and spray money all over the Lone Star State. And don’t worry about no stupid regulations! If your roller coaster kills someone, go ahead and investigate it your own self. Or if you’re into fracking, come on down and the guys who “regulate” oil and gas will run help you drill and pump as fast as you can. If you want to run a potentially explosive fertilizer plant, you don’t need to worry too much about the state fire code, because there isn’t one. And if you don’t want the state fire marshal’s office seeing anything iffy, NO PROBLEM: Five facilities in Texas with large quantities of the same fertilizer chemical that fueled the deadly plant explosion in West have turned away state fire marshal inspectors since the blast, investigators said Monday.A railway operator that hauls hazardous materials across Texas was also said to have rebuffed a state request to share data since the April explosion at West Fertilizer Co. that killed 15 people and injured 200 others. Even better, when State Fire Marshal Chris Connealy was asked if the plants’ turning away the inspectors raised concerns, he said, “Well, sure.” And then he added, “In their defense, they may have a very good reason[.]” He seems nice, just a “go along to get along” kind of guy. Exactly the sort of person Texas wants regulating big explodey factories.
When It Comes To Natural Gas, Whose Backyard Is My Backyard, Really? - As New York State’s highest court agrees to hear arguments over whether or not towns have the authority to ban fracking within their city limits, North Carolina landowners are learning that they may be forced to permit fracking on their property even against their wishes. In both states, the question revolves around the right of a private property owner to decide what happens on his or her land. In New York, the case centers on a dairy farmer who wants to lease land to a natural gas company, but cannot because of a city-wide fracking ban. In North Carolina, conversely, it’s landowners balking at the idea that they have to sell the natural gas under their property just because their neighbors have chosen to do so. In North Carolina, the proposal by a state study group, expected to be enacted by the legislature this fall, is known as forced or compulsory pooling and allows drilling companies to tap the natural gas reserves under people’s property, even if the landowners oppose.The study group recommended that ninety percent of the acreage in a drilling unit be voluntarily leased before property owners within a typical one square mile drilling unit would be forced to sell the natural gas under their land but, as the News and Observer points out, the state legislature ultimately has the final say. There are already a handful of states with forced pooling laws, including Arkansas, where only one percent of land in a drilling unit needs to be voluntarily leased, and Virginia, which requires that gas companies get at least 25 percent of land freely agreed to by property owners. Other states, such as Pennsylvania and West Virginia have banned forced pooling laws completely.
Chris Discusses Oil, Fracking, Fukushima & Market Bubbles with Max Keiser : Chris Martenson & Max Keiser - Chris was interviewed by Max Keiser this week. As usual, the resulting discussion was animated, insightful & entertaining.
Fracking Boom Seen Raising Household Incomes by $1,200 - Surging oil and natural gas production brought on by hydraulic fracturing is lifting the U.S. economy by lowering energy costs for consumers and manufacturers, according an industry-funded report. In 2012, the energy boom supported 2.1 million jobs, added almost $75 billion in federal and state revenues, contributed $283 billion to the gross domestic product and lifted household income by more than $1,200, according to the report released today from IHS CERA. The competitive advantage for U.S. manufacturers from lower fuel prices will raise industrial production by 3.5 percent by the end of the decade, said the report from CERA, which provides business advice for energy companies. “What really surprised me was how powerful an impact it is having to such a broad base of the economy,” John Larson, vice president of economics and public sector consulting for IHS CERA and lead author of the report, said in an interview. “It makes it to me a story that all Americans really need to come to grips with and understand.” Oil and gas production are near record levels as a result of hydraulic fracturing or fracking, a drilling technique that frees trapped hydrocarbons by injecting water, sand and chemicals into shale rock. Some environmental groups say tougher controls over the process are needed to prevent water contamination and leakage of greenhouse gases into the atmosphere.
Why Oil Companies Want to Drop Acid in California - No, it’s not the brown acid passed around at a 1960s rock concerts. Hydrofluoric acid is the most dangerous chemical you’ve never heard of, and it’s being trucked around California’s back roads and injected into oil wells, with virtually no oversight. How bad is it? HF acid is extremely toxic; it can immediately and permanently damage lungs if inhaled, and a spill on skin is easily absorbed deep into the body’s tissues and changes bone calcium atoms to fluorine atoms. Oh, and it corrodes glass, steel, and rock. This makes it attractive to the state’s oil drillers. They’ve been injecting it underground for years in highly diluted quantities to get out the last dregs of oil from a nearly depleted well. Now, they’re finding that injections in stronger concentrations (they’re tight-lipped about how strong) dissolves oil-bearing shale. California is home to the Monterey Shale, estimated to hold 400 billion barrels of heavy sour crude oil and two-thirds of the total oil reserves remaining in the United States. Until recently, oil production had been declining as the easy-to-get oil was tapped out. However, new forms of well stimulation are making the oil drillers rush into, and offshore, California. Although California activists focus on fracking, acidizing seems to be used more and noticed less.
Fracking practices to blame for Ohio earthquakes: Wastewater from the controversial practice of fracking appears to be linked to all the earthquakes in a town in Ohio that had no known past quakes, research now reveals. The practice of hydraulic fracturing, or fracking, involves injecting water, sand and other materials under high pressures into a well to fracture rock. This opens up fissures that help oil and natural gas flow out more freely. This process generates wastewater that is often pumped underground as well, in order to get rid of it. ----- Before January 2011, Youngstown, Ohio, which is located on the Marcellus Shale, had never experienced an earthquake, at least not since researchers began observations in 1776. However, in December 2010, the Northstar 1 injection well came online to pump wastewater from fracking projects in Pennsylvania into storage deep underground. In the year that followed, seismometers in and around Youngstown recorded 109 earthquakes, the strongest registering a magnitude-3.9 earthquake on Dec. 31, 2011. The well was shut down after the quake. Scientists have known for decades that fracking and wastewater injection can trigger earthquakes. For instance, it appears linked with Oklahoma's strongest recorded quake in 2011, as well as a rash of more than 180 minor tremors in Texas between Oct. 30, 2008, and May 31, 2009.
Obama Trying to Escape Political Fallout From Natural Gas Fracking Proposals - Forbes: The Obama administration is softening its approach to natural gas drilling. But in doing so, it is now trying to escape the political fallout from its most recent proposals on how to regulate hydraulic fracturing. Public comment has just ended with respect to the administration’s proposed rules for fracking, which is applying the use of sand, water and chemicals to retrieve shale gas deposits held in rock formations deep underground. A million letters have been sent to the Department of Interior’s Bureau of Land Management, which oversees 600 million acres of federal and Indian properties. “We accept new regulations all the time,” says Rock Zierman, of the California Independent Petroleum Association, in a phone interview. “We are Okay with new regulations as long as they are realistic and they are accomplishing something. But the federal government set up a system 30 years ago whereby it gave the states the power to regulate, and then it audits them.” Democrats on the House Committee on Natural Resources, however, are taking a high-profile position in opposition to what they say are watered-down rules that allow natural gas producers to avoid publicly disclosing the chemicals they use to drill. They are also concerned that the industry has been able to win concessions from federal regulators, allowing it to self-police and to test only a single well for “fugitive” releases, especially methane that is the most potent of all greenhouse gases.
"Frackademia" By Law: Section 999 of the Energy Policy Act of 2005 Exposed - Steve Horn - With the school year starting for many this week, it's another year of academia for professors across the United States - and another year of "frackademia" for an increasingly large swath of "frackademics" under federal law. "Frackademia" is best defined as flawed but seemingly legitimate science and economic studies on the controversial oil and gas horizontal drilling process known as hydraulic fracturing ("fracking"), but done with industry funding and/or industry-tied academics ("frackademics"). While the "frackademia" phenomenon has received much media coverage, a critical piece missing from the discussion is the role played by Section 999 of the Energy Policy Act of 2005. Although merely ten pages out of the massive 551-page bill, Section 999 created the U.S. Department of Energy-run Research Partnership to Secure Energy for America (RPSEA), a "non-profit corporation formed by a consortium of premier U.S. energy research universities, industry and independent research organizations." Under the Energy Policy Act of 2005, RPSEA receives $1 billion of funding - $100 million per year - between 2007 and 2016. On top of that, Section 999 creates an "Oil and Gas Lease Income" fund "from any Federal royalties, rents, and bonuses derived from Federal onshore and offshore oil and gas leases." The federal government put $50 million in the latter pot to get the ball rolling.
Science Fiction Double Feature: Dan Yergin’s Industry-Funded Frack-Fest & Mischa Barton’s Zombie Fracking Movie - We learned of two new works of fracking science fiction this week. One is a Hollywood-funded post-apocalyptic epic, “Zombie Killers: Elephant’s Graveyard” starring Mischa Barton. The other is an industry-funded pre-apocalyptic epic, “America’s New Energy Future: The Unconventional Oil & Gas Revolution and the US Economy,” from Dan Yergan’s consulting company IHS CERA. As always, here at Climate Progress we strive for the middle ground between the extremists on both sides. On the one hand, we are pretty confident that fracking will not lead to a zombie apocalypse. On the other hand, we are even more confident that fracking has a signficant economic harm that should not be completely ignored in what purports to be a complete analysis of the economic impact of unconventional oil and gas — see, for instance, Economics Stunner: “Oil and Coal-Fired Power Plants Have Air Pollution Damages Larger Than Their Value Added”; Natural Gas Damage Larger Than Its Value Added For Even Low CO2 Prices.
More evidence the shale revolution probably got Obama reelected - A new report from IHS Global Insight highlights just how much impact unconventional oil and gas activity may be having on the US economy. For starters, it increased US disposable income by an average of $1,200 per US household in 2012 thanks to smaller energy bills as well as lower embedded energy costs in all other goods and services. IHS thinks that figure will to grow to just over $2,000 in 2015 and reach more than $3,500 in 2025. Then there are the jobs: The new study widens the breadth of the research to include the full energy value chain (upstream, midstream and downstream energy and energy-related chemicals) and the overall macroeconomic contributions on the manufacturing sector and broader U.S. economy. Midstream and downstream unconventional energy and energy-related chemicals activity currently support nearly 377,000 jobs throughout the economy, the study finds. Combined with upstream activity, the entire unconventional oil and gas value chain currently supports more than 2.1 million jobs. Total jobs supported by this value chain will rise to more than 3.3 million in 2020 and reach nearly 3.9 million by 2025. Without the shale revolution, election year 2012 might have seen the official unemployment over 9% in November instead of 7.8%. And the average American would have faced a higher cost of living and lower income. More importantly now, the US energy industry continues to be a real economic bright spot.
Coping with high oil prices - We've been seeing oil over $100 a barrel and gasoline above $3.40 a gallon for much of the last 3 years. Those prices would have shocked many Americans a few years ago, but have now become the new normal. What has changed and what hasn't as a result? One effect of higher oil prices has been a surge in U.S. oil production coming from horizontal fracturing of shale and other tight formations. These methods would not have been profitable at the oil prices of 2004, and it's not clear how long the new supplies will last. But for now they are making an important contribution to U.S. income and employment. Higher prices have also led to significant changes in U.S. driving habits and the kinds of cars we buy. The result has been that U.S. petroleum consumption, which for years seemed like it could only go up, has been steadily declining. Higher domestic production and lower American consumption have meant declining imports of crude oil and petroleum products-- a reversal of another once seemingly inexorable trend. The price differential between internationally traded crude oil and that produced in central North America gave U.S. refiners a competitive advantage to export refined petroleum products. The quantities are significant, but are still swamped by the volume of crude oil imports portrayed in the graph above. The economic burden of imported oil is represented not by the number of barrels, but instead by the real value of the resources we must surrender in order to obtain the oil. The dollar value of petroleum imports as a share of GDP has come down a little as a result of recent gains in production and conservation, but still remains significantly elevated relative to the levels of a decade ago.
America's Energy Boom And The Rising U.S. Dollar - The energy boom directly reduces the number of U.S. dollars being supplied to the global economy, and that pushes the value of the dollar higher. The petrodollar regime--that oil is bought and sold globally in U.S. dollars--is easy to understand. It boils down to these two principles:
- 1. Petroleum is the lifeblood of the global economy.
- 2. Any nation that can print its own currency and trade the conjured money for oil has an extraordinary advantage over nations that cannot trade freshly created money for oil.
This is why many analysts trace much of America's foreign policy back to defending the petrodollar regime. In the normal course of things, anyone printing money in quantity would soon find the conjured currency bought fewer and fewer barrels of oil as the surplus of conjured currency floating around the world greatly exceeded the supply of oil. Currency can be conjured out of thin air, but oil is increasingly costly to find, extract and process.
Who The US Imports Crude Oil From (graphs) Because latetly there has been some confusion that the US is "energy independent"... July Crude imports amounted to 264.2MM barrels, up from 234.3MM barrels: Total 2013 Year To Date Crude imports amounted to 1,653.5MM barrels, broken down between OPEC (757MM) and non-OPEC (896.5MM)
US military strike on Syria risks broader conflict - Rising energy prices have been the first signs of another potential blow to the US economy due to a military confrontation in Syria (see post) - something the US can hardly afford at this stage. Strangely, after numerous shocks the economy has experienced in the last few years, there has been little dialogue about how well the US may be able to absorb yet another shock to growth (combined with sharply higher rates and the upcoming federal budget fight). The conflict also has the potential of delaying the Fed's exit from its securities purchase program, which will add to the uncertainty.But there is a possibility of an even greater blow to global economic growth. A US military involvement in Syria runs a significant risk of spilling over into a regional conflict. In addition to Russian and Iranian interests in Syria, the possibility of Israel's involvement is not immaterial. Those who remember the first Gulf War will recall Iraq's Scud missile attacks against Israel in an attempt to destabilize the coalition trying to liberate Kuwait. Syria currently possesses Scud missiles which are perfectly capable of targeting Israel. In fact the nation's military has been busy moving some of these weapons in preparation for the US attack. As a comparison to the Gulf War in 1991, the Syria situation is made dangerous by the country's proximity to Israel, improved targeting, and chemical weapons capability. Adding to the risks, Iran now views a retaliation against Israel in case of a US attack on Syria as a near certainty. FARS News: - A senior Iranian parliamentary official dismissed the possibility of a US attack on Syria, saying that Israel would be the first victim of such a war, if it ever breaks out. "No military attack will be waged against Syria," Director-General of the parliament for International Affairs Hossein Sheikholeslam said on Monday. "Yet, if such an incident takes place, which is impossible, the Zionist regime will be the first victim of a military attack on Syria"
Is The US Going To War With Syria Over A Natural Gas Pipeline? -- As we asked (rhetorically, of course) and answered over 3 months ago, why has the little nation of Qatar spent 3 billion dollars to support the rebels in Syria? The answer revolves, as usually is the case in the Middle East, around a pipeline. Could it be because Qatar is the largest exporter of liquid natural gas in the world and Assad won't let them build a natural gas pipeline through Syria? Of course. Qatar wants to install a puppet regime in Syria that will allow them to build a pipeline which will enable them to sell lots and lots of natural gas to Europe. And as we asked last week, why is Saudi Arabia spending huge amounts of money to help the rebels and why has Saudi Prince Bandar bin Sultan been "jetting from covert command centers near the Syrian front lines to the Élysée Palace in Paris and the Kremlin in Moscow, seeking to undermine the Assad regime"?] Well, it turns out that Saudi Arabia intends to install their own puppet government in Syria which will allow the Saudis to control the flow of energy through the region. On the other side, Russia very much prefers the Assad regime for a whole bunch of reasons. One of those reasons is that Assad is helping to block the flow of natural gas out of the Persian Gulf into Europe, thus ensuring higher profits for Gazprom.
China's Official PMI Shows Manufacturing Activity Increased in August: China's factory activity expanded at the fastest pace in more than a year in August with a jump in new orders, official data showed on Sunday, raising hopes that a rapid economic slowdown in the world's second-largest economy may have been arrested. The purchasing managers' index (PMI) figure, published by the National Bureau of Statistics, rose to 51.0 in August from 50.3 in July, the highest level since last April and ahead of market expectations of 50.6 in a Reuters poll. A reading above 50 indicates expanding activity, while a reading below 50 points to a contraction.Beijing has stepped up efforts to prevent a sharp economic slowdown by quickening railway investment and public housing construction and introducing a series of measures to help smaller companies, which could sustain the revival of internal demand in the coming months.
Understanding China’s unbalanced growth - That China’s growth is unbalanced is a fact. Consumption as a share of GDP has declined steadily over the past decade to 35 percent — the lowest of any major economy — while its investment share rose to above 45 percent, correspondingly the highest (Figure 1). But are these imbalances a vulnerability — as most observers believe — or a consequence of China’s economic rise and therefore not inherently problematic? Many analysts attribute these imbalances to low interest rates, supported by an undervalued exchange rate, which are seen as repressing consumption and encouraging excessive investment. But this argument is misleading since the primary reason for these imbalances is not financial repression but a broadly successful urbanisation cum industrialisation process. This process has caused household income to fall as a share of GDP and the savings rate to rise, which together explain the decline in consumption as a share of GDP over the past decade and half. All this was laid out by Arthur Lewis in his Nobel Prize-winning model that showed how the transfer of surplus workers from the rural sector to the modern economy, complemented by rising investment, leads to rapid but unbalanced growth. His analysis also prescribed the conditions when labor supplies tighten, growth slows and the economy becomes more balanced – now commonly referred to as the “Lewis turning point”.
More Megaprojects? What China’s Rebalancing Means for Asia - The China boom has changed far more than China itself: its impact has been felt right across the global system, from the wealthiest states to the poorest.But for China’s neighbors, there has been a particular implication—an opportunity for relatively poor economies to develop themselves, to a greater or lesser extent, in China’s own image.The megaproject is the pièce de résistance of the Chinese development model: huge dams, high-speed rail networks, highways, mines, ports—anything so long as it’s big enough to resonate with vision and prowess. China has given other countries in the region, especially those in developing South and Southeast Asia, the chance to have their own impressive Chinese-style infrastructure or to tap once-unreachable resources by providing the money, the expertise, and in many cases the labor needed to deliver projects way beyond the capacity of the recipient countries.Chinese companies, usually deep-pocketed state-owned enterprises (SOEs), have naturally been involved in hundreds of regional projects that don’t merit the “mega” tag. But the really big projects—the ones that no other investor had the ambition or the capital to undertake—have mattered the most. These have tended to go ahead in places where China has a strategic interest: locations that offer access to critical resources, where new infrastructure can help spur development of China’s own western interior, or where China can develop an extraterritorial west coast via projects in Myanmar and Pakistan, for example. It’s the familiar “win-win” approach, at least in theory: China achieves its regional objectives, while its partners acquire infrastructure and revenue which they would not otherwise have been able to obtain.
Early Look: Chinese Economy Likely Had a Good August - Economists’ forecasts and early data releases suggest China’s economy kept its momentum in August, after a series of positive surprises in July. The factory sector stayed strong, with early signs from the purchasing managers’ index pointing to an uptick in manufacturing activity. Industrial output likely rose 9.9% on-year in August according to the median forecast of 11 economists surveyed by The Wall Street Journal, up from 9.7% in July. The data comes out at 0530 GMT on Tuesday. Underpinning that resilience: strong investment powered by massive credit in the opening months of the year. Government spending on infrastructure, an increase in new building in the real estate sector, and a return to calm in the banking system after a liquidity squeeze earlier in the summer all played a part in stabilizing growth. With evidence of a pick-up mounting, investment bank economists have been rushing to revise their downbeat gross domestic product forecasts for the third quarter. J.P. Morgan now expects 7.6% year-on-year GDP growth up from 7.4%, and Deutsche Bank projects 7.7% versus a previous forecast of 7.5%. Growth in the second quarter was 7.5%. The property sector continues to rise, with house prices up 8.6% on year in August in the 100 cities tracked by data provider China Real Estate Index System, accelerating from 7.9% in July. Local governments in smaller cities like Wenzhou have not been enforcing policies meant to cool the market, CREIS said, even as local governments in Beijing and Shanghai suggest they want to toughen the curbs.
China Urges U.S. to Limit Global Risks From Fed Policy Shifts - China urged the U.S. to limit global risks from shifts in monetary policy, while adding that there’s no need for a rescue plan for emerging markets, as Group of 20 leaders met at a summit in St. Petersburg, Russia. An exit from monetary-easing policies poses a major challenge for the world economy, Vice Finance Minister Zhu Guangyao told reporters in the Russian city today, speaking through a translator. The U.S. should be mindful of spillover effects, said Zhu, who called for greater coordination between nations. Emerging markets, which helped pull the world out of a recession after the global financial crisis, now face an exodus of cash and sliding currencies in anticipation of the Federal Reserve’s eventual tapering of its $85 billion in monthly bond purchases. Developed economies are turning into global growth engines as some emerging-market counterparts decelerate, the International Monetary Fund told G-20 leaders today. Zhu said that now is “no time to be arrogant” on monetary policies.
China Agrees to Give Lion’s Share of $100 Billion BRICS Pool - Leaders from Brazil, Russia, India, China and South Africa have agreed to create a $100 billion pool of currency reserves to guard against financial shocks, Chinese Vice Finance Minister Zhu Guangyao said. “The scale of the reserve arrangement will be $100 billion and China will contribute the lion’s share of this,” Zhu told reporters today at the Group of 20 summit in St. Petersburg, Russia. Leaders from the five emerging market economies known as the BRICS are also discussing the creation of a joint development bank that would invest in infrastructure, Zhu said. Political leaders may give further guidance on the bank’s mandate at an informal meeting this week, he said. South Africa’s rand has depreciated 17.7 percent against the dollar this year, the most among 24 emerging-market currencies tracked by Bloomberg. India’s rupee was second worst, depreciating 16.9 percent, while the Chinese currency has strengthened 1.8 percent. “We see the temporary difficulties of some BRICS countries mainly as difficulties in terms of international balance of payments,” Zhu said in translated remarks. “The policy options in response to such typical balance-of-payments difficulties include increasing interest rates or devaluing currencies.”
China's Not So Hidden Inflation - "It's not worth shopping in China," said one disgruntled middle-class Chinese consumer, adding, "If you can wait, do it elsewhere." The reason is simple - massive price inflation. As the WSJ reports, clothing and other apparel is on average 70% more expensive for consumers in China than in the US. A basic iPad 2 is priced at $488 in China, where average per capita income is around $7,500; but the same tablet is $399 in the US, where average per capita personal income totals $42,693. Consumers pay nearly $1 more for a latte at Starbucks than in the US and stunningly A Cadillac Escalade Hybrid Base 6.0 costs $229,000 in China, compared to just over $73,000 in the US. Government taxes and import tariffs are to blame for some of the price discrepancy, but, the WSJ goes on to note, for years the burgeoning Chinese middle class also seemed willing to pay more for products with consumer cachet, particularly imported goods - especially given the easy availability of credit. But today more Chinese consumers are pushing back, weary of sticker shock - and enlightened by the ability to compare prices elsewhere, thanks to the Internet - and China is starting to crack down on over-zealous pricing.
Fast and Flawed Inspections of Factories Abroad - Inspectors came and went from a Walmart-certified factory in Guangdong Province in China, approving its production of more than $2 million in specialty items that would land on Walmart’s shelves in time for Christmas. But unknown to the inspectors, none of the playful items that were supplied to Walmart had been manufactured at the factory. Fifteen hundred miles to the west, the Rosita Knitwear factory in northwestern Bangladesh — which made sweaters for companies across Europe — passed an inspection audit with high grades. A team of four monitors gave the factory hundreds of approving check marks. In all 12 major categories, including working hours, compensation, management practices and health and safety, the factory received the top grade of “good.” “Working Conditions — No complaints from the workers,” the auditors wrote. In February 2012, 10 months after that inspection, Rosita’s workers rampaged through the factory, vandalizing its machinery and accusing management of reneging on promised raises, bonuses and overtime pay. Some claimed that they had been sexually harassed or beaten by guards. Not a hint of those grievances was reported in the audit. An extensive examination by The New York Times reveals how the inspection system intended to protect workers and ensure manufacturing quality is riddled with flaws. The inspections are often so superficial that they omit the most fundamental workplace safeguards like fire escapes. And even when inspectors are tough, factory managers find ways to trick them and hide serious violations, like child labor or locked exit doors. Dangerous conditions cited in the audits frequently take months to correct, often with little enforcement or follow-through to guarantee compliance.
Package-Delivering Drones Trials In China - Shenzhen-based Chinese delivery company SF Express is in the early stages of putting drones in the skies that can deliver packages to remote areas according to the South China Morning Post. SF Express has begun testing the drones in Guangdong province’s Dongguan city, and SCMP reports that the drones are "outfitted with eight propellers, comes complete with a space where packages can be inserted and can reach a flight altitude of about 100 meters." The idea of using drones for delivery is nothing new. Even delivering pizza's via drone has been contemplated and tried along with all kinds of other unusual things. Though in the United States, a major hurdle for getting drones into the air for such worthwhile endeavors as pizza delivery is hampered by the fact that the Federal Aviation Administration (FAA) does not currently allow drones for commercial use in U.S. airspace. Because of the early stage of commercial drone development and current flight restrictions, UPS and FedEx deliverymen need not worry about losing their jobs to sky robots quite yet. But if courier companies like SF Express — essentially a UPS of the East — can make significant inroads in development and implementation of package-delivering drones, then parcels-via-drone suddenly becomes much closer to reality, at least for smaller package transportation.
Japan panel backs sales tax hike coupled with stimulus - Japan's government won backing for a controversial decision to raise the national sales tax in 2014 after influential members of a special advisory panel said the step would not threaten economic recovery or business confidence if it was coupled with other stimulus. Prime Minister Shinzo Abe convened the panel to hear a wide range of views on whether to press ahead with a planned hike in the consumption tax to 8 percent from the current 5 percent in April. Unless Abe changes the plan, the sales tax will be raised to 10 percent in October 2015. Advocates, including officials at the Ministry of Finance, say raising the tax would be an important first step in trying to lower public debt, which is the worst among industrialized countries at more than twice the size of Japan's economy. When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession.
More Signs Japan Investment on Turn - Capital expenditure data by Japanese companies signaled the economy probably did better in the April-June quarter than official figures suggested two weeks ago – another positive development that could swing the debate over whether to hike the nation’s sales tax. Corporate investment statistics might seem arcane – investment contributes about 10% to Japan’s GDP – but it’s crucial at the moment to the country’s economic outlook. “Abenomics” – Prime Minister Shinzo Abe’s monetary-and-fiscal–stimulus program – has succeeded in boosting consumer spending and exports have been given a kick from a weak yen.But investment has lagged, suggesting companies are less sure about the renaissance after two decades of deflation. Without a pick-up in corporate optimism, wages will stay depressed and fragile consumer confidence might wilt.Advisers to Mr. Abe have cited this worry to oppose a plan to start hiking the nation’s sales tax from April, which proponents say is needed to bring Japan’s mammoth public debt under control. (The government over the weekend claimed support from a series of experts for the hike.) Pteliminary data in mid-August showed GDP grew at an annualized pace of 2.6% in the April-June quarter, much weaker than economists’ expectations of a 3.6% rise. A major culprit for the disappointing number was capital expenditures, which fell 0.1% on quarter.
Two key issues with Abenomics that many economists ignore -On its surface "Abenomics", which is focused on pulling Japan out of its prolonged deflationary environment, seems to be working. The CPI spiked to the highest level since 2009. But there are two key problems with the way this policy is progressing thus far.
1. Price increases have been driven by weaker yen rather than pricing power improvements of domestic producers. Japan is generating the "wrong" kind of inflation - here are a couple of reasons for this recent spike in CPI.
2. This externally driven inflation is creating negative real wage growth domestically. The concept seems to fall on deaf ears in the economics community - we've received numerous emails from seemingly educated economists who don't see anything wrong with the current trajectory of Abenomics. Japan cannot pursue this policy without some badly needed labor reforms. Japan's corporate practice of lower (on average) wages for workers who are older than 50 (see chart) combined with rapidly aging population (increasing numbers of employees older than 50) takes wage growth in the wrong direction. Here is a passage from the WSJ that zeroes in on the problem with Abenomics. WSJ: - ... for the average person in the world's third largest economy, the recent budding signs of rising prices have brought more pain than gain amid sluggish income growth. "I pay more when I go grocery shopping. I also pay more for gasoline," Ms. Kobayashi's woes are shared by millions of others across the country who have seen their purchasing power shrink, and demonstrate that in the absence of solid wage growth, inflation isn't a cure-all for the economy.
Japan Wage Data Not All That Gloomy -- While recent indicators have pointed to an improvement in Japan’s economy, wages have remained stagnant, raising concerns about the fragility of the nation’s economic recovery. A lack of wage growth also has given ammunition to those who argue that the government should put off a plan to hike the nation’s sales tax from April. But a close look at relatively obscure data shows that the outlook for wages isn’t all that gloomy. The “Provisional Report of Monthly Labour Survey,” released by the Labor Ministry this week, showed that base salaries dipped 0.4% in July from a year ago, extending a fall that began in June 2012. But nominal wages, or total earnings, inched up 0.4%, marking the second consecutive monthly gain. Behind the rise was an increase of summer bonus and overtime pay, brought about by a recovery in corporate profits and production. Many economists predict the trend will continue. “Since a recovery of industrial output looks set to gather pace, non-regular wages including winter bonuses are expected to go up,” said Kenji Yumoto, vice chairman of the Japan Research Institute. The weak yen should boost exporters’ earnings and also help the service sector as it draws more overseas visitors to Japan, Mr. Yumoto said.
Japanese Wage Data Not All That Spectacular... The results of Japan's Provisional Report of Monthly Labour Survey for July 2013 are now available. The Wall Street Journal calls the wage data "not all that gloomy," citing the fact that nominal earnings are up 0.4%. According to the article, "That’s good news for Prime Minister Shinzo Abe as he has made wage growth a key measure of success for Abenomics, which seeks to lift Japan out of 15 years of deflation. While the aggressive monetary easing and government spending measures have pushed up production as well as prices, Mr. Abe has acknowledged that without substantial wage growth, there can be no sustainable economic expansion." I think it's too early to claim good news or to call this substantial wage growth. Here are just a few quick points from my skim-through of the survey results. The 0.4% increase that the article refers to is for nominal total cash earnings (compared to the same month a year ago), for all industries. This can be broken down into a 0.3% fall in contractual cash earnings and a 2.1% increase in special cash earnings. Companies are giving summer bonuses but not committing to presumably more permanent base-pay increases. Both the contractual and special cash earning changes vary a lot across industries. In the finance and insurance industry, total cash earnings were up 1.5% and special cash earnings were up 17.8%. On the other extreme is the education and learning support industry, for which total cash earnings were down 6.1% and special cash earnings were down 20.1%. The total real wage is down 0.4% from the same month a year ago. On a seasonally-adjusted basis, the number of regular employees has neither increased nor decreased.
BOJ Beat: Watchers Expect Fresh Easing Next Year - It’s been five months since Bank of Japan Gov. Haruhiko Kuroda declared that the central bank was embarking on a monetary easing campaign on a “different dimension,” taking “all the steps necessary” to avoid an “incremental use of firepower.” And while the BOJ is expected to stand pat on policy again when its policy board meets from Wednesday, speculation is rife that it will be forced to take additional easing measures sometime next year, a reflection of the strong skepticism in financial markets that the central bank may not be doing enough to achieve its goal of 2% inflation in two years. In the latest Dow Jones poll of 10 BOJ watchers, nine said the central bank will have to ease policy further somewhere between next March and July. Some said the planned sales-tax hike in April could trigger fresh central bank action.
Japan: Economy is ‘Recovering Moderately’ -T he world’s third-largest economy is on the road to recovery, the Bank of Japan announced on Thursday. “Japan’s economy is recovering moderately,” the BOJ policy board said in a statement, upgrading its assessment from last month when it said the economy was “starting to recover moderately,” according to Reuters. It’s the strongest language the bank has used since March 2008 when it described the economy as “expanding moderately,” the Wall Street Journal reported. The upgrade could bode well for supporters of a sales-tax hike that the government is considering to introduce early next year. Prime Minister Shinzo Abe is expected to announce in October whether the consumer tax will be raised to 8% from 5% next April. The bank also voted on Thursday to maintain its stimulus program, pledging to increase base money at a yearly rate of 60 trillion yen ($603 billion) to 70 trillion yen ($700 billion.)
Japan to Spend Almost $500 Million on Water Crisis at Fukushima Nuclear Plant - Japan pledged nearly $500 million to contain leaks and decontaminate radioactive water from the tsunami-crippled Fukushima nuclear plant, stepping up government efforts to cope with the legacy of the worst atomic disaster in a quarter of a century. The announcement comes just days before the International Olympic Committee decides whether Tokyo - 230 km (140 miles) from the wrecked plant - will host the 2020 Olympic Games and the government is keen to show the crisis is under control. Madrid and Istanbul are the rival candidates. "The world is watching to see if we can carry out the decommissioning of the Fukushima nuclear power plant, including addressing the contaminated water issues," Prime Minister Shinzo Abe told cabinet ministers, who met to approve the plan. The government intervention represents only a tiny slice of the response to the Fukushima crisis triggered by the March 2011 earthquake and tsunami, which caused reactor meltdowns at the plant. The clean-up, including decommissioning the ruined reactors, will take decades and rely on unproven technology.
Japan budget requests at record $995 billion for next fiscal year - - Japan's government ministries made budget requests totaling a record 99.3 trillion yen ($994.9 billion) for the fiscal year from next April, the finance ministry said on Wednesday, which will test the government's ability to cut spending.Budget requests swelled because the finance ministry requested a record amount for debt-servicing costs. Bulging social welfare spending due to an ageing society also pushed up budget requests.The amount requested matched what sources told Reuters last week ahead of a submissions deadline on Friday. The finance ministry in recent years has typically trimmed the requested total by several trillion yen when it prepares its draft budget in December.Prime Minister Shinzo Abe is struggling to balance the need for economic stimulus and the need to rein in the country's public debt, which is double the size of its GDP - the heaviest such burden among the industrialized nations."We will need to thoroughly examine these requests and prioritize our spending,"
Japanese monetary base hits new record high - Japan’s monetary base soared 42.0 percent in August from a year earlier to JPY172.44 trillion (USD 1.7 trillion), marking an all-time high for the sixth 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 16th month in a row. An expansion in the monetary base has inflationary effect. The rise was the biggest since November 1973, when it logged the 43 percent gain on the year. 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 (USD 600-700 billion).
Obama underscores need to finish Asia-Pacific trade deal this year - President Obama reiterated on Tuesday his desire to complete an Asia-Pacific trade deal this year, arguing that it will not only boost economic growth but shore up global security. During a conversation with Japanese Prime Minister Shinzo Abe, the president once again underscored his stance that the 12 nations involved in negotiating the Trans-Pacific Partnership (TPP) should conclude talks this fall, the White House said. Both leaders agreed to closely consult with one another on how to forge ahead.The nation's trade leaders have said they made progress during the 19th round of the trade talks, which wrapped up recently in Brunei. Those talks were the first full round for Japan. Leaders of the nations in addition to the U.S. and Japan — Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam — have agreed to the aim of finishing by the end of the year. Top negotiators will hold their next meeting Sept. 18-21 in WashingtonFalling Indian rupee, rising oil prices could create Rs1.8 trillion loss: Minister -- Indian, Oil Minister M Veerappa Moily has written to Prime Minister Manmohan Singh saying that unless corrective measures were taken, losses on the sale of subsidised fuel sales will rise to an unprecedented Rs1.8 trillion, according to The Economic Times.In a detailed note, Moily told the Manmohan Singh that the Indian rupee has dropped from Rs54.45 to a US dollar in 2012-13 to Rs68.36, raising cost of importing oil. “If the present position persists, the total under-recovery (revenue loss) would reach to a level of Rs1,80,000 crore in the current financial year as compared to Rs1,61,000 crore during 2012-13,” he wrote to Indian Prime Minister on August 30. Losses on diesel sales at government-controlled rates have widened to Rs10.22 per litre from Rs9.29 a litre at the beginning of the month and less than Rs3 per litre in May, even as prices are raised by 50 paise a litre every month.Besides, the oil companies lose Rs33.54 per litre on kerosene and Rs412 per 14.2-kg cooking gas (LPG) cylinder.
“Final” TPP Round Not Final: Are Even More Secretive Talks Ahead? - After announcing for a domestic audience that the Trans-Pacific Partnership (TPP) negotiations were in their “end game,” U.S. Trade Representative (USTR) Michael Froman will face quite a different reality when he meets with TPP nations united in opposition to many core U.S. TPP proposals this week at the start of the 19th round of negotiations in Brunei. Without text for two TPP chapters and no deals on any of numerous difficult market access issues, from dairy and sugar to apparel and rice, it is clear that the Brunei Round will, in fact, not be the final negotiating session. The real question is whether the TPP negotiations coming after the Brunei Round will be unannounced and even more secretive, Public Citizen said today.Among the most contested aspects of the deal include the U.S. proposals on medicine patents, state-owned enterprises, Internet policy, financial regulatory limits, and environment and labor standards. Only five of the TPP’s 29 chapters pertain to traditional trade matters. The rest would set policies, to which the U.S. Congress and state legislatures would be required to conform, relating to regulation of energy and other services, financial regulation, food safety, procurement policy, patents and copyright policy, and other non-trade issues. The draft pact also includes NAFTA-style foreign investor rules that facilitate job offshoring by removing many of the risks and costs of relocating U.S. production to low-wage countries. Among TPP negotiating countries is Vietnam, the lower-cost offshoring alternative to China.
G20 leaders paper over differences on Fed tapering - FT.com: World leaders on Friday sought to contain tensions over the global economy, as advanced economies agreed to carefully manage the wind-down of its massive monetary stimulus and developing countries backed free trade and tax co-operation. Anxieties in emerging economies about the impact on currency and other financial markets of the US Federal Reserve’s anticipated “tapering” of its $85bn per month bond buying programme dominated the lead-up to this week’s G20 summit. But the leaders gathered in St Petersburg managed to formulate language to paper over the widening cracks in the global economy. As recovering rich countries begin to end ultra-loose monetary policy, the effects are being felt in the developing world as investors withdraw funds, putting pressure on currencies and financial markets. US officials said that while quantitative easing appeared to dominate the public statement of G20 countries at the summit such as China, Brazil and India, the discussion within the summit walls was cordial overall, with most G20 members acknowledging that what is good for the US is good for global growth.
India and the Emerging Market crisis - India has come under siege this summer. The rupee has depreciated sharply since late July, and foreign exchange reserves dropped significantly. The pressure has been triggered by market concerns on the Fed’s intention to ‘taper’ its quantitative easing, against the background of a growth slowdown in China. This column argues that India needs to step up reforms and critical infrastructure investment to reboot growth. Its economic health – and that of other emerging markets – is not as dire as headlines suggest. The alarm and pessimism surrounding emerging markets appears to have run well ahead of any deterioration in fundamentals.
India Might Buy Gold From Citizens to Ease Rupee Crisis - India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency. A pilot project will be launched soon, a source familiar with the Reserve Bank of India's (RBI) plan told Reuters, although the idea was met with some scepticism. India has the world's third-largest current account deficit, which is approaching nearly $90 billion, driven in a large part by appetite for gold imports in the world's biggest consumer of the metal. That has played a major role in driving the rupee to a record low. "We will start a pilot project among some banks where we will allow them to buy back gold from individual households," the source, an official familiar with the central bank's plan, said. "This will start soon, we have discussed (it) with banks."
India's Holy Mary: Converting Sacred Temple Gold Into Dollars - Ten days ago, it was a tongue in cheek suggestion that the Royal Bank of India should lease their gold in a last ditch effort to procure much needed USD and keep the economic engine going. Then it was an offer so good, the citizens could simply refuse (or maybe not if it was enforced) that the millions of ounces of local wealth preserving gold be converted into Rupees in a wholesale gold purchasing campaign by the domestic banks. Now, the India Times, reports that as the dollar-starved desperation deepens, the local central bank is "discussing with banks on how to convince temple trusts to deposit their hoard of idle jewellery that could be converted into bullion." In other words, the government is going for the sacred gold which will be sold to keep the petrodollar economy functioning for another several months. Surely, yet another "transitory" measure. From the Times of India: With all efforts to arrest the rupee's slide coming to a naught, policymakers now plan to knock on the doors of temples - from Tirupati to Shirdi - seeking a boon to feed Indians' fetish for gold without importing it. The Reserve Bank of India, which has been making gold imports more difficult through a series of restrictions, is discussing with banks on how to convince temple trusts to deposit their hoard of idle jewellery that could be converted into bullion, said two bankers familiar with the matter. They refused to be identified because of the sensitive nature of the issue. The Tirupati temple in Andhra Pradesh, Shirdi Sai Baba temple in Maharashtra, Siddhivinayak at Mumbai and Padmanabhaswamy temple in Thiruvananthapuram are among the richest in India with huge reserves of gold and precious metals.
Insight: India's crisis within a crisis; finance minister fights on two fronts (Reuters) - Late last month, with their doors shut to the mounting market panic outside as investors fled the country, India's cabinet ministers gathered to give final approval to a cheap food scheme for the poor. It was hardly a difficult decision for a government that needs to shore up its sagging popularity before elections due by next May. But officials familiar with the discussion say there was one dissenting voice over what is now destined to become one of the world's largest welfare programs. Finance Minister P. Chidambaram, already struggling to convince doubters that he will keep the country's hefty fiscal deficit under control, made a last-minute attempt to trim the huge cost of the plan, estimated at about $20 billion a year. Chidambaram's ultimate failure to win colleagues around - despite his famed eloquence - is emblematic of the predicament he faces: he must stop investors heading for the hills as economic growth skids to its slowest pace in a decade, but he is surrounded by politicians who haven't grasped that there is a crisis at hand and want to spend their way to the ballot box.
India's Manufacturing Output Contracts - WSJ.com: —India's manufacturing sector output fell in August, contracting for the first time since March 2009 as new orders fell, increasing worries for authorities struggling to revive growth in the ailing South Asian economy, a survey showed Monday. The seasonally adjusted HSBC India Manufacturing Purchasing Managers' Index, prepared by Markit, fell to 48.5 in August from 50.1 in July, marking a fourth straight month of declines. A figure above 50 indicates expansion, while a reading below 50 shows contraction. HSBC said new orders received by Indian manufacturers fell sharply, with the pace of the fall accelerating to its fastest since February 2009 as economic conditions remained fragile, damping demand. Export orders also declined, ending 11 months of growth, HSBC said. The findings come close on the heels of India's gross domestic product data, which showed that economic expansion in the three months to June had slowed to the weakest since the first quarter of 2009, when the economy was the worst hit by the global financial crisis of 2008. Government data Friday showed that India's GDP during the quarter increased 4.4% from a year earlier compared with 4.8% in the previous quarter and worse than the 4.6% expansion that economists were expecting. India's economy has slowed sharply over the past couple of years because of high borrowing costs, weakening consumption, bureaucratic hurdles to industrial and infrastructure projects and a slow pace of change in policies needed to improve investor confidence.
India Manufacturing PMI Contracts for First Time Since March 2009; Eurozone Manufacturing PMI 26-Month High of 51.4 - A weak manufacturing recovery of sorts is underway in Europe. How long it lasts remains in question, with France not participating in the recovery. The Markit Eurozone Manufacturing PMI® shows Final Eurozone Manufacturing PMI at 26-month high of 51.4 in August (July: 50.3). The HSBC India Manufacturing PMI™ shows Manufacturing operating conditions deteriorate for first time in over four years. Business conditions in the Indian manufacturing sector deteriorated during August for the first time in over four years, with both output and new orders falling at faster rates. Export orders also declined, ending an 11-month sequence of growth. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index™ (PMI™) fell from 50.1 to 48.5 in August, indicating a moderate deterioration of business conditions. The latest index reading was the lowest in four-and-a-half years and the first sub-50.0 reading since March 2009. Amid reports of fragile economic conditions and subdued client demand, new orders placed at Indian manufacturers fell solidly in August. Furthermore, the rate of contraction accelerated to the fastest since February 2009. Order book volumes across the intermediate goods sector decreased at a sharp and accelerated pace, while consumer goods producers registered a slight decline. New business from abroad also fell, ending an 11-month sequence of growth. Anecdotal evidence suggested that competitive pressures increased and that demand from key export clients was weaker. Consequently, Indian manufacturers reduced their production volumes for the fourth consecutive month in August and at the fastest rate in four-and-a-half years. Clearly this is not good for the Rupee. Nor does the outlook promising for India's preposterous growth target of 6 percent.
India may shut petrol pumps at night: minister - India is considering closing fuel pumps at night as one of a number of "austerity measures" aimed at cutting its ballooning oil import bills, the oil minister said. Oil Minister Veerappa Moily said on Monday that details have not yet been finalised on the new measures expected to be introduced later this month. "We have not worked out the details, how the austerity measures or the conservation mission will have to be launched," But the minister said late Sunday that "shutting petrol pumps during (the) night is one of" the measures under discussion, according to the Press Trust of India (PTI) news agency. "We have not decided. It is just a proposal," Moily told PTI, adding that his ministry would launch austerity measures on September 16. India imports around 80 percent of its oil needs and the import bill has risen dramatically because of high global prices and a plunging rupee.
India scrambling to reduce oil bill inflated by sinking rupee (Reuters) - India's top oil official is grasping at desperate measures to cut the country's oil costs by nearly $20 billion after the rupee's slide to record lows has left India facing an oil bill potentially 50 percent higher than on May 1. Oil Minister M. Veerappa Moily has suggested pricking the ballooning oil bill with everything from a street theatre campaign encouraging lower fuel use, to shutting fuel stations, to increasing imports from Iran. India's crude import bill was $144 billion last fiscal year - the largest part of its overall import costs. India, Asia's third-largest economy, imports about 80 percent of its oil, which accounts for about 30 percent of its energy needs. That has hit India hard over the last four months as the rupee fell 20 percent to record lows near 70 to the dollar. The economy is struggling with decade-low growth, a record current account deficit and a steep fiscal shortfall. International oil prices have gained about 15 percent over the same period. In rupee terms, the Brent oil benchmark has gained nearly 50 percent since May 1, when faith in emerging market growth began to falter just as the U.S. Federal Reserve started signaling it might wind down its monetary stimulus. Economist have long pointed to India's fuel subsidies as an area where it could save money, but raising retail oil prices is a political problem when few of the nation's consumers have ever paid market rates for the fuels they use. And elections are coming up by May 2014.
India seeks Brics support to stem rupee decline - India is seeking support from other emerging market countries for coordinated intervention in offshore foreign exchange markets after a currency rout the past three months, but at least one critical partner, Brazil, said it is not involved in such planning at this time. Mexico and Russia, two other key developing nations, had no comment on such a plan. Concern about the end of cheap dollars from the US Federal Reserve’s stimulus programme has prompted a massive capital flight toward dollar-denominated assets. The rout has been compounded by short-seller attacks in offshore trading centres. “It is now time to stop,” Dipak Dasgupta, the Indian finance ministry’s principal economic adviser, said on Friday, referring to speculative behaviour in offshore markets he said was damaging the stability of the world economy. “It is going to happen in a matter of days rather than weeks,” he said. “Brazil and India can start the move.” Other major emerging market economies have either rejected outright involvement in any intervention, or declined comment. Brazil’s central bank and its finance minister Guido Mantega said the government was not currently participating in any planning for co-ordinated intervention in offshore markets. Mantega said the leading emerging market nations that form the Brics group - including Brazil, Russia, India, China and South Africa - are planning coordinated actions to create a joint bank and a joint reserve fund.
India Looking to Expand Rupee-Payment System - India is exploring possibilities of a rupee-based trade-payment mechanism with several countries, Foreign Minister Salman Khurshid said Tuesday, a move that may help stabilize the local currency and reduce the country's current-account deficit. India already has a rupee-based payment mechanism with Iran, which was worked out by New Delhi and Tehran to skirt Western sanctions against Iran. Under that, Iranian oil would be purchased with Indian rupees, which Iran would use to buy Indian goods, which include food, drugs, consumer products and auto parts. India imports more than three-fourths of the crude oil it requires and a depreciating rupee has increased its energy costs in the local currency, adding to the government's fuel subsidies. The Indian rupee has fallen nearly 20% against the U.S. dollar since early May. "Our commerce [trade] minister is in touch with many countries. Let's see where it is possible," Mr. Khurshid told reporters here. "If it is possible, than it would be of help to us right now," he added.
How much will Indian exports go up? - The rupee is lower, but don’t expect a very elastic supply response. Here is one set of comments:These [sectors] suffer in particular from numerous domestic obstacles, from overly-restrictive labour and land-acquisition laws to poor supporting infrastructure in areas like power and roads, which make rapid ramp-ups in exports difficult.Other industries suffer from similar constraints. DG Shah, secretary-general of the Indian Pharmaceutical Alliance, a trade body, says new domestic regulatory impediments, including limits on clinical drug trials that make exports to western markets more difficult, could negate any boost from the plunging currency. There is also this problem: A look at our major export items suggests there is a change in its composition from price-sensitive items such as leather footwear, dairy products, beverages, textiles and apparel, to less price-sensitive items such as refined petroleum products, chemicals, mineral products (especially, mineral fuels, bituminous substances, etc.), and machinery and transport equipment (engineering goods). The share of petroleum products in India’s export basket increased dramatically from around 2 per cent in 1993 to around 20 per cent in 2012. The surge in exports in the case of petroleum items is because of India’s potential in oil refining activities.
India Prints Weak GDP Number, Adding Further Downward Pressure To Indian Markets -- From the FT: India’s economy slowed sharply in the three months to June piling further pressure on Prime Minister Manmohan Singh’s crisis-hit administration, as it struggles to find ways to support its plunging currency and reassure increasingly anxious foreign investors about its future growth. Asia’s third-largest economy expanded by just 4.4 per cent compared with the same period in the previous year, from 4.8 per cent in the preceding three months. The figure was well below expectations and its worst performance since 2009, raising fresh doubts about government assurances that growth would pick up again later this year. All see this from Bloomberg and Reuters. However, India's real problem is that its growth model is no longer competitive, meaning the country must reallocate labor: Structural problems were inherent in India’s unusual model of economic development, which relied on a limited pool of skilled labor rather than an abundant supply of cheap, unskilled, semiliterate labor. This meant that India specialized in call centers, writing software for European companies and providing back-office services for American health insurers and law firms and the like, rather than in a manufacturing model. Other economies that have developed successfully — Taiwan, Singapore, South Korea and China — relied in their early years on manufacturing, which provided more jobs for the poor. Two decades of double-digit growth in pay for skilled labor have caused wages to rise and have chipped away at India’s competitive advantage. Countries like the Philippines have emerged as attractive alternatives for outsourcing. India’s higher-education system is not generating enough talent to meet the demand for higher skills. Worst of all, India is failing to make full use of the estimated one million low-skilled workers who enter the job market every month.
Indian rupee weakens; calls grow for fuel price hike (Reuters) - The Indian rupee slid a little closer on Tuesday to a record low struck against the dollar last week, as Indian share markets weakened and investors remained doubtful whether the government would act decisively to restore confidence in the economy. With crude oil prices rising due to fears about a potential U.S. military strike on Syria, economists have called for an increase in subsidized fuel prices to help address concerns over a record high current account deficit and a fiscal deficit that is among the highest of all the major emerging market economies. Markets are keenly waiting to see how former International Monetary Fund economist Raghuram Rajan will handle the defense of the rupee once he takes over as governor of the Reserve Bank of India on Thursday, having previously been an advisor to the finance ministry. As elsewhere, traders were also cautiously waiting for U.S. jobs data due out on Friday that could effect expectations about when the Federal Reserve will start tapering its monetary stimulus. The prospect of less easy money from the United States has caused a exodus from many emerging markets over the past few months, but India has fared worse than most because of its precarious deficits. The RBI's rupee defense has so far rested largely on draining money markets, but the rupee has still lost over 19.5 percent against the dollar since the slide began in early May, and higher short term interest rates have raised borrowing costs for struggling corporates at time when the economy's slowdown has become more acute.
Goldman cuts GDP forecast to 4%, sees rupee at 72 - Goldman Sachs has cut India's GDP growth rate forecast to 4% from 6% earlier for the current financial year, reflecting more difficult external funding conditions as markets increasingly anticipate US tapering and eventual exit from unconventional monetary policies. "We are cutting our growth forecasts for India and most of southeast Asia. The largest downward revisions are in India, followed by Indonesia, Thailand and Malaysia," the global investment banking giant said in a report. "This reflects the principle that countries with larger macro imbalances (particularly external deficits) have faced greater financing pressures and consequently more growth headwinds," it added. Goldman's report comes after JPMorgan, HSBC Global Research, Nomura and ICRA cut their growth forecast on India to below 5% for the current financial year (FY14).
The Indian economy: The long view - Even as there is a growing consensus that no rapid recovery is in sight, there are rumblings that India is headed for a prolonged period of low growth. And some even fear that are already in a new normal. Several econometric studies have used either techniques to smoothen time series data or built production functions to show that the growth rate that India can now sustain without setting off an inflationary scare is at least two percentage points lower than what it was five years ago. What I have done here is something far simpler. The data used in the chart is the three-year moving average of Indian growth rates since 1950. It gives us some idea how the economy has done over several decades—and perhaps offers us some easy clues about the future. Economic output had stagnated in the last 50 years of colonial rule. The growth in the first decade after India became a republic was spectacular in comparison. Economic growth averaged 4.09% between fiscal years 1952 and 1965. There was a boom in industrial production. But India could not build on this momentum for various reasons, particularly the rigid controls that choked the economy. India has significantly higher savings and investment rates than it had through most of the past three decades, despite the recent fall in these rates thanks to the deterioration in public finances and corporate balance sheets. India is also an open economy with a large domestic market. And it has a large entrepreneurial class as well as a growing labour force. The management of the Indian economy over the past five years has been terrible, leading to an economy cursed with low growth, high inflation, a fiscal mess and a record current account deficit. But some of the structural factors that have sustained growth for more than three decades since 1980 are still in place.
India Slowdown Adds Urgency to Fix Lowest BRIC Reserves - India’s weakest economic growth since 2009 escalates pressure on the government to increase the smallest foreign-exchange reserves among BRIC nations, as policy makers struggle to contain a sliding rupee. The reserves have dropped about 13 percent to $278 billion since a 2011 peak and are equivalent to less than seven months of imports. Bank of America Merrill Lynch estimates India needs as much as 10 months of import cover for currency stability, a figure still about half the average in Brazil, Russia and China. Prime Minister Manmohan Singh’s potential options to shore up confidence in the rupee include issuing India’s first dollar sovereign bonds, a deposit program to tap the country’s diaspora and bilateral currency-swap agreements. Boosting reserves could avoid the need to support the currency with further interest-rate increases that risk damaging efforts to revive investment.
Collateral scarcity, India edition - FT Alphaville readers are well versed on the potential downsides of collateral scarcity in western markets. But consider how a collateral scarcity problem might unfold in an emerging market in which the most valued form of collateral isn’t national debt denominated in your own debt but rather a commodity like gold, whose supply is dictated by externalities outside of a government’s control?It’s something to keep in mind when assessing the following news via Mineweb on Tuesday:Hinting at more measures to curb gold imports, India’s Prime Minister, Manmohan Singh, admitted in Parliament on August 30th that the current account deficit had gone up sharply and that it was affecting the value of the rupee. In his statement on the current economic situation he made several references to gold that rung alarm bells across the country.The same day, the government raised the tariff value on gold imports while the Forward Markets Commission hiked margins on the precious commodity in futures trading – twin steps that were taken to control inbound shipments of the precious metal and check volatility in its trading. While the tariff value of gold has been hiked to $461 per 10 grams from $432, the commodity markets regulator Forward Markets Commission has hiked initial margins in gold futures to 5%, besides an additional margin of 5% on all gold, effective September 2. It’s understandable why India would be keen to rein in gold imports. The country is struggling to balance its current account deficit, and gold purchases is one important way in which capital leaks abroad.More importantly, money spent on gold imports is money not spent or reinvested domestically, but rather washed through the FX system in a way that depreciates the domestic currency in the process.
India needs to end fiscal dominance over the central bank - Raghuram Rajan‘s arrival in the Governor’s office at the Reserve Bank of India on Wednesday coincides with the worst economic crisis his country has faced since the early 1990s (see this earlier blog). The rupee hit new lows in the foreign exchange markets last week, and there are signs that a gradual erosion of confidence in the currency is turning into a complete rout. The restoration of confidence in the currency is now the sine qua non for any recovery in the economy more generally. Like 2013′s other new central bankers (Governor Kuroda in Japan, and Governor Carney in the UK), Mr Rajan now has the advantages of the new broom, providing him a brief opportunity to seize the initiative and change market perceptions about macro-economic discipline in India. But he does not, by any means, hold all of the cards in his own hand. The Fed’s likely tapering of its asset purchases in September has clearly been the catalyst for the acute phase of the crisis. And the seeds of today’s problems have been sown over many years in which an excessive budget deficit has been partly monetised by the RBI, feeding a credit bubble, and a burgeoning current account deficit. The re-emergence of fiscal dominance over the central bank in India, after a decade or more of impressive macro policy reform prior to 2008, is a matter which the new Governor now needs to address, along with the Finance Minister and the Prime Minister. How they handle this will not only determine whether confidence can be restored in Indian macro-economic policy, but could also have lessons for how the developed economies may handle the exit from unconventional monetary easing in future years. Politicians everywhere enjoy fiscal dominance, and dislike the exit from it.
India's new central banker to face impossible choices -- India is about to get a new new central bank governor, Raghuram Rajan, a University of Chicago economist with outstanding academic credentials. He is expected to start this Thursday, smack in the middle of a financial crisis the likes of which have not been seen in India since the early 90s. He will be dealing with a no-win situation in which he is faced with just two key choices:
1. Let the currency continue to fall and face a dramatic rise in inflation and a corporate sector struggling with increasing import prices. That could lead to a rise corporate failures as margins are squeezed. The currency fall would be exacerbated by the fact that several large Indian firms carry some of their liabilities in dollars. Furthermore, the government deficit will rise further as it continues to subsidize ever more expensive fuel imports.
2. Tighten liquidity further and raise short-term rates risking credit contraction and potentially a recession.
Up to now the RBI has tried to run with #2, but so far it hasn't worked. The rupee traded near all-time lows again today. And now we are seeing this uncertainty and tight liquidity quickly spill over into the "real economy". The GDP growth slipped to nearly a decade low (see chart) and yesterday we saw the manufacturing sector contracting in August for the first time since the Great Recession.
India crisis threatens big hit on banks - FT.com: The arrival of Raghuram Rajan at the Reserve Bank of India has been eagerly awaited by investors anticipating what monetary steps he will take to rescue the rupee, restore economic growth and curb inflation. On his first day as central bank governor, however, Mr Rajan postponed comment on monetary policy until September 20, just after the US Federal Reserve policy meeting, and spoke almost entirely about his plans for liberalising the banking sector, which he regards as essential for poverty alleviation and long-term growth in one of the world’s most underbanked economies. Mr Rajan, formerly chief economist of the International Monetary Fund, is credited with having warned of the financial fragilities that led to the global financial crisis of 2008, and economists and analysts say he is right to focus in his new job on the weaknesses of Indian banks. Fears are rising for the health of India’s banking system as slowing economic growth and rapid currency depreciation threaten to worsen asset quality and reduce demand for bank credit from large industrial companies. Non-performing and restructured loan levels in Asia’s third-largest economy have risen steadily over the past year to stand at about 9 per cent of assets and could reach 15.5 per cent over the next two years, according to Morgan Stanley. A combination of weaker growth, waning business confidence and RBI measures to support the rupee will further dent asset quality, analysts say, in particular as some of the larger industrial companies struggle to repay loans.
Will Raghuram Rajan Do a Volcker? - As the Indian currency keeps sinking against the dollar, some economists say the Reserve Bank of India’s incoming governor might have no choice but to raise interest rates sharply, reminiscent of actions taken by U.S. Federal Reserve Chairman Paul Volcker in the U.S. in the 1980s. Mr. Volcker bucked political pressure to keep rates low and instead hiked benchmark rates to record levels to curb high inflation. But while inflation came under control in the early 1980s, it also left but the U.S. economy in a recession. Some economists say that a similarly drastic step may be needed if Indian authorities are unable to arrest the rupee’s slide soon.
New India Central Bank Chief Announces Reforms -— India’s new central bank chief kicked off his first day in office Wednesday by announcing short-term measures to boost confidence as the troubled Indian economy slows and the currency tumbles. Under pressure amid fears of an economic crisis, Raghuram Rajan acknowledged he is taking over the Reserve Bank of India at a tough time. Still, he insisted that India has “a fundamentally sound economy” and that a mood of doom and gloom is overblown. India’s economic growth slowed to 4.4 percent in the April-June quarter and the Indian rupee has lost more than 20 percent of its value since May. Rajan had not been expected to make specific policy changes on the day he was sworn into office, but he announced short-term measures at a televised news conference. “It involves considerable change, and change is risky,” he said of his agenda. “But as India develops, not changing is even riskier.” Among the measures he promised for coming months were that existing banks would be able to open new domestic branches without RBI permission and that long-awaited new banking licenses would be issued by January. The central bank will also soon issue inflation-indexed savings certificates and take steps to encourage financial services for the poor, including making payments easier through mobile banking, he said.
India's new central bank boss: The saviour trap - RAGHURAM RAJAN took control of India’s central bank last night and promptly made a speech that mentioned Facebook, quoted Rudyard Kipling’s poem “If”, and tickled financial markets pink. After two horrible months the rupee soared in the first hour of trading this morning, on September 5th. One newspaper has renamed the 23rd governor of the Reserve Bank of India (RBI) “Dr Feelgood”. The front pages show photos of ecstatic smiles from the gathered central bank staff and Mr Rajan hugging his predecessor. I’m not sure joy was the reaction Mr Rajan was trying to elicit. As we explain in a profile of him that will shortly be published in the next edition of the newspaper, a big risk is that he is labelled as a saviour when India’s economic destiny is largely in the hands of its government, not its central bank. Nonetheless Mr Rajan did hype-up his speech by arguing his immediate agenda “involves considerable change, and change is risky”. That, to my mind, is an overstatement. The proposals made last night were sensible, but modest, with two exceptions. Both could transform how India works. Both are unlikely to happen soon.
Is The Cult Of Central Bankers Unravelling? - In my experience, markets don't deal well with several crises emerging at the one time. Give them just QE tapering and they may be able to adapt, but throw Syria and an Asian currency mess into the mix, and it can make for a wild ride. Underlying all of the recent volatility though is the first sign that investors are starting to doubt the omnipresent powers of central bankers. Ben Bernanke says there can be QE tapering without rising interest rates and bond markets revolt against that idea. Similarly, the new Bank of England chief Mark Carney says interest rates will remain low for the next three years and bond yields jump given better economic data and rising inflation. This is important because the mother of all bubbles in the modern era hasn't been in subprime, bonds or emerging markets. No, the biggest bubble has been in central banking. It's been a bubble based on faith in central bankers to provide cheap money to smooth out business cycles and prevent serious economic downturns. That faith has been unwavering despite the 2008 crisis and the tepid recovery since. Until now. What does this mean for markets? Recent events may prove a prelude to the ultimate endgame: investors realising that unwinding the extraordinary post-crisis policies will be messy, which gets priced into higher bond yields and exposes the vastly over-indebted developed world and some of the hot money reliant developing countries. I doubt this endgame is imminent though and oversold bond and emerging markets may be due for a bounce. The likes of India and Indonesia will be hoping that time is on their side so they can push through badly needed reforms which will them less exposed to a further crisis down the road.
India Gets Expanded $50 Billion Japan Swap Line After Rupee Drop - India reached an agreement to more than triple its bilateral currency-swap line with Japan as Prime Minister Manmohan Singh’s government seeks to stem a record slide in the rupee. The size of the swap agreement was increased to $50 billion from $15 billion, Japan’s Ministry of Finance said in a statement today. The earlier accord was sealed in December 2011. The increased swap line is an additional support measure for the Indian rupee as policy makers battle its decline amid foreign-capital flight from emerging-market assets. The currency is poised to end this week stronger for the first time in four, as central bank Governor Raghuram Rajan makes it more attractive for lenders to woo dollar deposits. “It is a confidence-boosting measure and provides comfort that the government is putting in place a second line of defense,” In his first briefing since taking office as Reserve Bank of India Governor on Sept. 4, Rajan announced a plan to provide concessional swaps for banks’ foreign-currency deposits. That move will boost the central bank’s reserves by $10 billion, according to Bank of America Merrill Lynch. The currency-swap expansion comes a week after Japan extended its $12 billion line with Indonesia, and the Southeast Asian central bank said today there are discussions for “similar cooperation” with others in the region. Indonesia has also been hurt in the recent market turmoil as the prospect of reduced U.S. monetary stimulus fueled a sell-off in emerging-nation stocks and currencies. The rupiah is Asia’s worst-performing currency this quarter.
IMF Downgrades Indonesia's Economic Growth in 2013 to 5.25% - The International Monetary Fund (IMF) expects the economy of Indonesia to expand by 5.25 percent in 2013, which is considerably lower than the IMF's earlier forecast. In its World Economic Outlook, released in April 2013, the institution set economic growth of Indonesia at 6.3 percent. However, after emerging markets were hit by large capital outflows when the Federal Reserve began to speculate about an end to its quantitative easing program (QE3), Indonesia's GDP growth assumptions were quickly revised downwards. According to the IMF, the main factors that contribute to the downgrade are weak exports and a slowdown in investments. Amid weak global conditions in recent years demand for commodities plunged, resulting in low commodity prices. For Indonesia, which exports mostly commodities, this implies a large negative impact on its trade balance. IMF believes that the country's current account deficit will reach 3.5 percent of GDP in 2013, while inflation is expected to accelerate to 9.5 percent (but to ease to 6 percent in 2014). The IMF advises the Indonesian government to prioritize several matters. Inflation should be limited to a safe rate, the current account deficit should be reduced, and the foreign exchange reserves should be kept at a healthy level. Furthermore, subsidy and tax reforms should be continued in order to provide more room for government spending on infrastructure.
Bruegel | Blogs review: The global dimension of tapering -- What’s at stake: Emerging markets have had a tough summer, as central banks of advanced economies have made clear that the normalization of monetary policy was underway. Although this development has generated a renewed interest in the international transmission of monetary policy and was a central part of the discussion at Jackson Hole, it remains unclear whether this sudden reversal in capital flows will remain mostly benign or will deteriorate into a full-fledged emerging market crisis. John Plender notes that since the great QE tapering debate began in May, external capital addicts such as India, Brazil, Indonesia, Turkey and South Africa have been badly hit by a reversal of the flow. Marco Annunziata writes many emerging markets have had a rough summer. South Africa suffered a deeper depreciation than India year-to-date, as did Brazil before its central bank stepped in announcing a new foreign exchange intervention program.
The Next Emerging Market Crisis - Simon Johnson - Do the world’s middle-income countries – known in the investment business as “emerging markets” – face a serious risk of crisis? If such a crisis unfolds in one country, could there be contagion, with panic spreading around the world? My answer is a cautious “no” on both questions. But it would be a mistake to dismiss or ignore these questions, in part because they are being asked by smart people in financial markets and in part because sometime in the not-too-distant future the answer could be a decisive “yes” – with disastrous consequences. There are three main sources of concern. First, India faces real economic difficulties, building up to a type of crisis, as I explained here last week. Arvind Subramanian, my colleague at the Peterson Institute for International Economics, said in The New York Times over the weekend that the slowdown in Indian growth had longstanding causes and a quick recovery did not seem to be in the cards. Second, there are potential funding issues. In Europe, budget deficits need to be funded – and the main problem is that government finances may not be sustainable when interest rates rise. In some emerging markets, there are budget deficits (e.g., in India and Brazil), but the generally shared characteristic of shaky countries is current account deficits – the country is buying more from the world than it is selling. Third, the macro policy environment in the United States is not helpful to emerging markets. In part, this is because the Fed is inclining toward a less easy monetary policy and may either raise short-term rates or make statements that push up longer-term interest rates (broadly speaking, this is what has happened since the spring).
Survey Shows Brazil’s Industry Contracted Again in August - Brazil’s manufacturing industry contracted for the second consecutive month in August, providing more evidence that industry could be a drag on economic growth in the third quarter. The HSBC Brazil Purchasing Managers’ Index rose to 49.4 in August, a modest improvement from 48.5 in July.Yet the survey “still indicated a contraction in economic activity in the manufacturing sector,” said Andre Loes, HSBC’s chief economist for Brazil. “Both output and new orders continued to contract, but at slower rates than in July.”Industry had been a surprise contributor to stronger-than-expected gross domestic product growth data for the second quarter published on Friday. Economists, however, said that the performance was unlikely to be repeated in the third and fourth quarter, and that growth will suffer in the second half of the year.Meanwhile, prices of goods and services for the manufacturing industry rose at the fastest pace since October 2008, reflecting the impact of the depreciation of the Brazilian real against the U.S. dollar, said Mr. Loes. Average selling prices were raised further, according to the survey. That’s bad news for Brazil’s central bank, which has been raising its key interest rate, the Selic, to choke off stubbornly high inflation. Last week, the central bank raised the Selic to 9% from 8.5%. Faced with spare capacity and fewer projects, Brazilian manufacturers reduced their workforce numbers in August, according to the survey.
Brazil Prints Stronger Than Expected GDP Number; Is New Growth Around the Corner? - While Brazil was once the darling of the investment community for its fast rates of growth, it has struggled over the least few quarters. There are several reasons for this slowdown, with the largest fact the slowdown in China's growth. As China's raw material consumption has dropped, exporters such as Brazil have seen trade revenue fall. In addition, Brazil has structural issues such as weak domestic infrastructure investment, a wide income stratification and a difficult to navigate political system. As a result, the government recently increased stimulus and cut payroll taxes in an effort to nudge growth faster, resulting in the recent GDP print that came in stronger than expected: Here is the primary text from the Brazil's GDP release:In the comparison with the first quarter of 2013, the GDP (Gross Domestic Product) at market prices in the second quarter grew 1.5% in the seasonally adjusted series. The highlight was agriculture (growth of 3.9% in volume of value added), followed by industry (2.0%) and services (0.8%). In the comparison with the second quarter of 2012, the GDP grew 3.3%. The highlight was also agriculture (13.0%), followed by industry (2.8%) and services (2.4%). In the cumulative index in the four quarters ended in the second quarter of 2013 (12 months), the growth was of 1.9% over the immediately previous four quarters. In the first semester, the GDP expanded 2.6% against the same period of 2012. The GDP at current values reached R$ 1.2 trillion in the second quarter. And here are the highlights from Bloomberg:
Shiller Warns of Housing Bubble After 225% Surge - Robert Shiller, who predicted the collapse of the U.S. housing market, is warning that a bubble is emerging in Brazil at a time when a sluggish economy and persistent inflation are eroding investor confidence. .Since January 2008, home prices in Sao Paulo have soared 181 percent and jumped 225 percent in Rio de Janeiro, according to the FIPE Zap index. That’s as much as twice the increase in rent prices, signaling that the housing market has become overheated, according to Shiller, a Yale University professor who helped create the S&P/Case-Shiller Index of U.S. home prices, which has dropped 13.7 percent since 2007. The warning comes as Brazil’s economy heads for its weakest two-year expansion in more than a decade and the central bank raises interest rates by the most in the world to contain inflation. Mortgage lenders such as Caixa Economica Federal will have to pass on rising borrowing costs to consumers already struggling with record debt by boosting the referential rate linked to mortgages, according to the Institute for Applied Economic Research. The average mortgage rate rose to 8 percent in July from a record low 7.74 percent in February.
Fed Uncertainty Seen Keeping Bank of Mexico on Hold - The Bank of Mexico might be sorely tempted to cut interest rates this week after the economy took a turn for the worse in the second quarter and inflation slowed, but consensus is that the specter of Fed “tapering” and its potential fallout in emerging markets will keep policy makers on hold, settling instead for some very dovish language. Since the Bank of Mexico’s five-member board met in July, inflation has moved back within its 2%-4% target range and the government statistics agency has reported that gross domestic product contracted 0.7% in the second quarter from the first, prompting a cascade of downward revisions for full-year GDP growth. Local conditions, most economists agree, are ripe for a cut in the overnight rate from the current 4%, but they’re also almost unanimous in thinking that the bank will be kept from taking the plunge by the prospects of the U.S. Federal Reserve heading in the other direction with a gradual reduction in its asset-buying program. Already, anticipation of Fed tapering has contributed to a 10% depreciation of the peso since early May as higher U.S. yields take the shine off emerging-market assets. On the other side of the Fed equation, a cutback in stimulus would imply that the U.S. economy is on track for stronger growth, which would fuel the expected pick-up in Mexico’s economy.
Berlusconi Threatens to Topple Letta If Expelled From Senate - Silvio Berlusconi threatened to bring down the Italian government if Prime Minister Enrico Letta’s Democratic Party votes to expel the three-time former premier from the Senate. “We’re not available to keep the government going if the left decides to prevent the head of the People of Liberty from remaining in politics,” Berlusconi told a rally organized by the Army of Silvio supporters’ association late yesterday, according to a statement released by the group. Letta is struggling to contain tensions that have strained his coalition government since Italy’s top court upheld Berlusconi’s tax-fraud conviction on Aug. 1. The Democratic Party, the biggest force in the coalition, has said Berlusconi’s expulsion from the Senate is required by an anti-corruption law enacted in December 2012. Berlusconi’s People of Liberty, the second-biggest party, claims the law is unconstitutional and shouldn’t be applied to the former premier, whose conviction stems from tax fraud in 2002 and 2003. The Senate’s committee for immunity and elections will start discussing the issue on Sept. 9.
Portugal CDS spread widens again -- The date is set for the troika inspectors to pay a visit to Portugal. CBS News: - Portugal's Finance Ministry says inspectors from the country's bailout creditors will arrive Sept. 16 to assess Portugal's progress on repairing its public finances and adopting economic reforms. In return for a 78 billion euros rescue package in 2011, the creditors -- the International Monetary Fund, European Central Bank and other euro countries -- demanded spending cuts to reduce debt. They also required measures to modernize the economy. Disbursement of bailout funds depends on Portugal's compliance. Of course these compliance targets have been loosened considerably since the original agreement. Based on the new hurdle level, Portugal should be able to pass the "inspection" this time around. Given the trajectory of the fiscal balance however, the second half of the year is less certain.
European August PMI Hits 26 Month High Despite 19th Straight Month Of Accelerating Manufacturing Job Losses = Following a stronger than expected official manufacturing PMI August print by the Chinese statistics bureau on Friday, printing at 51.0, compared to 50.3 in July and expectations of a 50.6, overnight the secondary Chinese PMI reported by HSBC also showed expansion, rising from 47.7 to 50.1, slightly below estimates of 50.2. Then again considering China officially admitted its PMI data is inaccurate, this is hardly surprising, as it is simply the latest propaganda tool to telegraph what the Politburo wishes for the economy to report. That this came hours before China revised its 2012 GDP from 7.8% to 7.7% only put even more doubts on the accuracy of data whose primary purpose is to preserve confidence in an economy which as recently as June was in a state of disarray following the PBOC's brief and nearly disastrous attempt at rel tightening. After China's weekend PMI release, Monday saw the full data dump of final Manufacturing PMIs from Europe, which on the surface was as good as it could get: with a composite PMI print of 51.4, compared to expectations and a flash reading of 51.3, this was the highest number in 26 months. Curiously it was mostly driven by improvements in the periphery. The breakdown was as follows:
- German Final PMI 51.8, down from 52.0 flash, and below expectations of 52.0
- French Final PMI, 49.7, same as the flash reading and expectations
- Italy Final PMI, 51.3, up from 50.4, and higher than the 51.0 expected: this was the highest since May 2011
- Spain Final PMI, 51.1, up from 49.8: the highest since March 2011
- Greek Final PMI 48.7, up from 47.0 - the highest in 44 months.
• Final Eurozone Manufacturing PMI at 26 – month high of 51.4 in August (July:50.3)
• Growth improves in Germany, the Netherlands, Italy, Austria and Ireland.
• Input prices broadly unchanged since July
The recovery in the eurozone manufacturing sector entered its second month during August. At 51.4, up from a flash reading of 51.3, the seasonally adjusted Markit Eurozone Manufacturing PMI rose for the fourth successive month to reach its highest level since June 2011. National PMIs improved in all nations bar France, while France and Greece were the only countries to register readings below the 50.0 no-change mark. The Netherlands topped the PMI league table,followed by Austria and then Ireland. Growth rates for production, new orders and new export business all accelerated to the fastest since May 2011, with back-to-back increases also signalled for each of these variables. Meanwhile, the outlook for output remained on the upside as the new orders-to-inventory ratio hit a 28-month high and backlogs of work rose marginally.
Short-Term Pain for Long-Term… Pain - It is now almost common knowledge that the roots of the eurozone crisis lie in the growing imbalances between core and periphery. Some blame the lazy southerners, some others point to structural flaws of the single currency. In both cases the current account imbalances that existed between savers and spenders at the outset of the crisis, are to be taken as the trigger. (Looking at current accounts is in my opinion also a way to disentangle the structural imbalances story from the “Berlin View”; but I already discussed this). So, today that the eurozone economy seems to have hit the trough, and prepares to rebound, the question we should be asking is: are these imbalances over? One answer comes from the latest update of the Global Competitiveness Index (GCI)published by the World Economic Forum. I am not a fan of this type of indicators, especially when making comparisons across countries. Still, they may convey some information when we observe their evolution across time. And this is what we see if we look at EMU countries:
Euro area recovery continues; could growth surpass the US? - In spite of an ongoing weakness in credit growth (see post), the Eurozone is continuing to show fairly robust economic improvements. Today's manufacturing PMI (manager surveys) has surprised to the upside.It is interesting to see Greece for example begin to show significant positive momentum, as the nation's multi-year manufacturing contraction is about to end. Weakness in France on the other hand is still a drag on the area's manufacturing sector. Barclays Research: - PMIs now suggest that manufacturing expansion in the euro area is set to continue around a pace of 1.5-2.0% y/y, with Germany and Italy among the strongest. With new order components nicely above 50 points in most countries, the outlook is also significantly improving. That said, PMIs in France remained at an excessively low level, unrelated to positive underlying growth momentum. In the remainder of the euro area, the Netherlands has been staging a significant rebound from 49.1 in April to 56 in August (output component). Other area indicators, such as economic sentiment, are moving in the right direction as well.