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

Saturday, August 2, 2014

week ending Aug 2

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, July 31, 2014 - Federal Reserve Statistical Release: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

FOMC Statement: More Tapering  - Another $10 billion reduction in asset purchases. Two key statement changes: "a range of labor market indicators suggests that there remains significant underutilization of labor resources" and "Inflation has moved somewhat closer to the Committee's longer-run objective". FOMC Statement: Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable. The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.

Fed Watch: FOMC Statement - At the conclusion of this week's FOMC meeting, policymakers released yet another statement that only a FedWatcher could love.  It is definitely an exercise in reading between the lines.  The Fed cut another $10 billion from the asset purchase program, as expected.  The statement acknowledged that unemployment is no longer elevated and inflation has stabilized.  But it is hard to see this as anything more that describing an evolution of activity that is fundamentally consistent with their existing outlook.  Continue to expect the first rate hike around the middle of next year; my expectation leans toward the second quarter over the third.The Fed began by acknowledging the second quarter GDP numbers: Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. With the new data, the Fed's (downwardly revised) growth expectations for this year remain attainable, but still requires an acceleration of activity that has so far been unattainable:That slow yet steady growth, however, has been sufficient to support gradual improvement in labor markets, prompting the Fed to drop this line from the June statement: The unemployment rate, though lower, remains elevated. and replace it with:Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. While the unemployment rate is no longer elevated, this is a fairly strong confirmation that Federal Reserve Chair Janet Yellen has the support of the FOMC.  As a group, they continue to discount the improvement in the unemployment rate.  And as long as wage growth remains tepid, this group will continue to have the upper hand. 

FRB: Press Release--Federal Reserve issues - FOMC statement--July 30, 2014

Parsing the Fed: How the Statement Changed - The Federal Reserve releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank’s economic outlook and the actions it plans to take. Much of the statement remains the same from meeting to meeting. Fed watchers closely parse changes between statements to see how the Fed’s views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language. This is the July statement compared with June.

The Trillion Dollar Question: What Happens When Quantitative Easing Ends? -- One of the great questions being debated right now is how will the market react once QE3 ends this October. Those who believe asset prices (namely stocks, bonds, and real estate) are being supported by the Fed, and not by underlying economic growth, expect a correction or worse once the Fed withdraws its support. Richard Duncan summed up this view quite well in a recent Financial Sense Newshour interview, Prepare for a Correction Once QE3 Ends[T]his is going to be a very interesting experiment because it will show us whether the economy is actually strong enough to grow by itself without government life support...and, unfortunately, I don't think it is. For an economy to grow one or more of the following three things has to happen: either the workforce has to grow in size, wages have to go up, or credit has to expand. And, right now, none of those things are happening on a large enough scale to drive the economy... So when you remove the one thing that has been stimulating the economy and creating effective demand by pushing up asset prices and creating a wealth effect, when you remove quantitative easing, then where's the new source of growth going to come from? I just don't see it. Without sufficient credit growth in the economy, Duncan says that we’ll move back toward recession, which will then force the Fed to engage in a fourth round of quantitative easing:Once liquidity starts to dry up at the end of this year it looks very likely that the yield on 10-year government bonds will go up. That will cause mortgage rates to go up…the property market to come down, a significant correction in the stock market, a negative wealth effect, less consumption and, I think, then the US will start moving back towards recession. In other words, we'll hit another economic soft patch and before that goes too far I think the Fed will once again have to jump in with another round of quantitative easing, QE4, to follow QE3 and QE2 and QE1. It will be the same pattern.

3 reasons Yellen's FOMC remains dovish - What makes Janet Yellen and a number of other FOMC members so dovish with respect to the monetary policy, particularly on rate normalization? A Credit Suisse report sites 3 key factors, which Yellen calls  “unusual  headwinds":
1. Tighter fiscal policy. The combination of lower government spending and tax increases has created a drag on economic growth (see chart). This drag is now diminishing, but given the tepid recovery Yellen still views it as a headwind.
2. Relatively tight credit in the mortgage market.  Janet Yellen: - " ... it is difficult for any homeowner who doesn't have pristine credit these days to get a mortgage. I think that is one of the factors that is causing the housing recovery to be slow. It’s not the only one, but I would agree with that assessment." A recent study by Goldman compared current lending conditions in the mortgage market with the 2000 - 2002 period (supposedly "pre-bubble" period). The results indeed seem to point to tighter lending standards at this time (see chart).
3. Low household wage growth expectations. While US wages have been growing at around 2% per year, expectations for growth remain depressed. Yellen (video below): - " ... households have unusually depressed expectations about their own future income gains. And I think weighs on their feelings about their own household finances and is holding back consumer spending."

You Can’t Taper a Ponzi Scheme: Time to Reboot -  Ellen Brown - One thing to be said for the women now heading the Federal Reserve and the IMF: compared to some of their predecessors, they are refreshingly honest.  Addressing the ticking time bomb of the shadow banking system, here is what two of the world’s most powerful women had to say: MS. LAGARDE: . . . You’ve beautifully demonstrated the efforts that have been undertaken . . . in terms of the universe that you have under your jurisdiction. But this universe . . . has generated the creation of parallel universes. And . . . with the toolbox with all the attributes that you have — what can you do about the shadow banking at large? . . . MS. YELLEN: So I think you’re pointing to something that is an enormous challenge. And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them. And if we can, we won’t be — we won’t have adequate regulatory tools. And that is going to be a huge challenge to which I don’t have a great answer. Limited to her tools, there probably is no great answer. All the king’s horses and all the king’s men could not rein in the growth of the shadow banking system, despite the 828-page Dodd-Frank Act. Instead, the derivatives pyramid has continued to explode under its watch, to a notional value now estimated to be as high as $2 quadrillion. At one time, manipulating interest rates was the Fed’s stock in trade for managing the money supply; but that tool too has lost its cutting edge. Rates are now at zero, as low as they can go – unless they go negative, meaning the bank charges the depositor interest rather than the reverse. That desperate idea is actually being discussed.One reason rates are unlikely to be raised is that they would make the interest tab on the burgeoning federal debt something taxpayers could not support.

Fed’s targeting of asset bubbles leads to contradictions - On July 15 the head of the U.S. Federal Reserve, Janet Yellen, announced during a Senate hearing about the current economic outlook that certain asset markets were overvalued.  For months, commentators had said these trends of high valuation in risky and overvalued markets are unsustainable. But such confirmation from the most powerful banker in the world dramatically alters how central banks see themselves.  Yellen’s comments were a stern warning to participants in these markets that they might be getting out of hand. While the results have largely been mixed, it is not yet clear whether it will actually cool prices in high-yield bond markets.  Asset- and debt-fueled bubbles are needed to ensure that economic growth ticks over at a level high enough to keep unemployment relatively low. During the Clinton and Bush years, the then–head of the Federal Reserve, Alan Greenspan, politely ignored these bubbles. He took a “mop up afterward” approach, meaning that he let bubbles run their course and then tried to fix the problems created when they burst by lowering interest rates. But after the 2008 crisis, many central banks, the Fed included, saw that this was no longer tenable. This leads to a contradiction between various goals being pursued by the Federal Reserve and other central banks. On the one hand, central banks seek to ensure full employment, while they also seek to contain speculation in the financial and housing markets. But if full employment requires speculative bubbles in the financial and housing markets, the central banks are left in a very difficult position. Unfortunately, this is not a problem they can solve alone.

Fear of bubbles hides the danger of stagnation - FT.com: If it turns out the US Federal Reserve has inflated an asset price bubble in recent years then we can breathe a sigh of relief. It would be a hideously embarrassing mistake for the Fed and other central banks, of course, but it would suggest that more dismal fears, including those that go under the label of “secular stagnation”, are wrong as well. Those who think there is a bubble believe that central banks have kept interest rates unjustifiably low. By buying bonds in the name of quantitative easing, they have created a false boom in asset prices. Rising inflation will soon expose this miscalculation, and rates will rise. But that is actually the cheery scenario. It suggests that generating enough demand to keep economic resources fully employed will not be as hard as central banks expect – and thus they have already gone a bit too far with their stimulus.   In that case, we can expect interest rates to rise and asset prices to fall. The economy would suffer in the short term, and it would be painful for investors. But, since the private sector is no longer burdened with unmanageable quantities of debt, the fallout should look more like the bursting of the internet bubble in 2000 than the financial crisis of 2008. The gloomier alternative is that interest rates are low for good reason, and likely to stay that way. In that case, high asset prices make sense, because demand for new investment is miserable and unlikely to accelerate. Investors will not suffer upfront losses on their portfolios, but returns will stay low for a long time. If this is what is going on, mistaking the situation for a bubble would lead to bad policy. Which assessment is correct? The cheery one, in which interest rates are too low but the economy is fundamentally healthy? Or the bleak one, in which central bankers have written the right prescription, but the patient’s condition remains perilously weak? No one knows for sure. But there are several reasons to think it is a version of the latter.

Fed Watch: On That ECI Number: The .7% jump in the employment cost index (ECI) in the second quarter is bearing the blame for today's market sell-off.  This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%. It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later. The ECI gain was driven by the private sector (compensation for the public sector was up just 0.5%, same as the first quarter), and I would be cautious about reading too much into those numbers. The Fed will take the Q2 reading in context of the low Q1 reading: The first two quarters averaged a just 0.46% increase, pretty much the same as recent trends of the past five years. And look at the year-over-year-trend: Nothing to see here, folks. Move along. Benefit costs for private sector workers also accelerated, but I think the Fed will likely interpret this as an anomaly: Again, not out-of-line with readings both before and after the recession. Bottom Line: I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story. But I don't think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends. Watch the upcoming employment reports for signs of diminishing underutilization of labor - that is where the Fed will be looking.

Fed Watch: July Employment Report: The overall tenor of the July employment report was consistent with the song that Yellen and Co. are singing. Labor markets are generally improving at a moderate pace, yet despite relatively low unemployment, there is plenty of reason to believe considerable slack remains in the economy. The headline nonfarm payroll number was a ho-hum gain of 209K with some small upward revisions for the previous two months. Steady above 200k gains this year are lifting the 12-month moving average of jobs higher: In the context of the range of indicators that Fed Chair Janet Yellen has drawn specific attention to: Consistent with the consensus of the FOMC as revealed at the conclusion of this week's FOMC meeting, measures of underutilization of labor remain elevated. Notable is the flat wage growth - clearly a ball in Yellen's court. Moreover, these numbers should override any enthusiasm over yesterday's ECI report, which is obviously overtaken by events. In other news, inflation remains below target: although pretty much right at target over the past three months: Numbers like these gave the Fed reason to upgrade its inflation outlook this week. If these numbers can hold up for the next several months, you will see the year-over-year number gradually converge to the Fed's target, clearing the way for the Fed's first rate hike in the middle of next year (my preference remains the second quarter over the third). On the whole, these data continue to argue for a very gradual pace of tightening. The Fed will not be in rush to normalize policy until labor underutilization approaches normal levels and wage growth accelerates.

The Tradeoff between Inflation and Unemployment: What We Don’t Know Can Hurt Us -  - To assert that economists are having trouble figuring out the relationship between inflation and unemployment is like saying chefs can’t figure out what to do with salt and pepper.  It’s that fundamental.  Yet, we’re befuddled, and that has powerful policy implications. And given how large this relationship looms both as a policy determinant at the Fed and in understanding the dynamics behind their mandate to balance full employment and price stability, this is a serious problem. To be clear, in discussing our lack of understanding of the unemployment/inflation tradeoff, I’m not talking about the rabid inflation hawks who’ve been tilting at an inflationary phantom for years now, though they’re not a trivial group.  I’m thinking about the rest of us, starting at the top—with the Fed—who are struggling to figure out the nature of the tradeoff as the Fed begins to contemplate unwinding.  Given Chair Yellen’s (very appropriate) focus on job-market slack and thus her up-weighting of the full employment side of the mandate, there’s clearly some anxiety building around the potential for overshooting on inflation. A big part of the problem is the evolution of the inverse relationship between unemployment and price growth, i.e., the flattening of the Phillips curve, implying a reduced negative correlation between inflation and unemployment.  This phenomenon is by now fairly well known; the figure below (see here for more explanation) shows how much the correlation has diminished over time.

Will Housing Market Weakness Keep the Fed on the Sideline Longer?: On Wednesday, the Federal Reserve will issue its latest interest rate policy statement for the US economy. The general consensus is for the Fed to continue cutting its asset purchase program but keeping interest rates on hold. But as the US economy has exhibited stronger growth characteristics many analysis have moved up their estimate of the date when the Fed will start to raise interest rates. However, in this post, I want to put forward a different theory: that the slowdown in the US housing market will in fact keep the Fed on the sidelines for some time, perhaps even longer than anticipated. First, housing markets are perhaps one of the best indicators of the health of the US economy. Edward Leamer wrote an extensive article on this which is available from the NBER website. As he notes in the abstract: Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. And right now, there is a great deal of concern about the future as exhibited in the housing market metrics.  Let’s start with the new homes sales market, which is a better arbiter of first time home buyers: As the chart above shows, sales cratered to their lowest level in 2011.  They rose a bit to early 2013, where they have been printing in a very tight range for the last year and a half.  But most importantly, the current level of sales is not only very low by historical levels, but it also indicates the US consumer is at best extremely cautious about his future prospects.

PCE Price Index: Headline and Core Little Changed, Remain Below Target - The Personal Income and Outlays report for June was published this morning by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.60%, down from the previous month's 1.66% (a downward adjustment from 1.77%). The Core PCE index of 1.49% is is a downward ajustment from 1.53% (an upward revision from previous month's 1.49%. As I've routinely observed, the general disinflationary trend in core PCE (the blue line in the charts below) must be perplexing to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year had hovered in a narrow YoY range of 1.21% to 1.10%. The three most recent months have broken above the range, but at this point we don't yet see evidence of an upward trend. The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I've highlighted the narrow 12-month range that has been breached to the upside for the past three months. The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

Inflation Still Below Fed’s 2% Target - Consumer prices grew tepidly in June, a sign inflation pressures remain below the Federal Reserve’s target. The price index for personal consumption expenditures—the Fed’s preferred measure of inflation—climbed 1.6% in June from a year earlier, the Commerce Department said Friday. That was down slightly from May’s year-over-year gain of 1.7%. Excluding volatile food and energy costs, so-called “core” consumer prices rose 1.5% in June from a year earlier, matching May’s pace. From a month earlier, overall prices rose 0.2% in June and core prices climbed 0.1%. Both were slower month-over-month increases than May’s advances. The Fed targets 2% annual inflation as a sign prices are stable and the economy is growing at a healthy pace. Consumer price growth, as measured by the PCE price index, has run below that target for 26 consecutive months. Inflation has picked up since the winter, but the latest figures could ease concerns of prices rising too quickly, which would be a sign of an overheated economy.

Inflation OCD - Paul Krugman -- Brad DeLong does yeoman work in tracking down a veritable host of right-wing proclamations over the past five years that high inflation is just around the corner, or maybe has already landed but the feds are hiding it in Area 51. But I think he falls short in analyzing the phenomenon, trying to attribute it to bad models or just finding it incomprehensible. Clearly, there’s something deeper at work here. After all, clinging to beliefs that have been wrong, wrong, wrong for so long — beliefs that would have cost you money if you acted on them — and remember, Eric Cantor, the lost white knight of the reformicons, did in fact do just that — shows that there is some underlying reason those beliefs are a necessary part of the right-wing identity. What has to be going on is that the general hatred of government activism, the constant complaint that bureaucrats are taking away your hard-earned wealth and giving it to moochers and looters, carries with it an overwhelming need to see fiat money as theft. Even alleged moderate Republicans do it. It’s a form of obsessive-compulsive political disorder, and not susceptible to rational argument.

Hawks Be Gone - Krugman  The inflation hawks went on another mini-rampage yesterday, after the latex number on the employment cost index came in above expectations. Inflation is here!!!!Or, not. Core inflation remains low:Photo Credit And if you look at multiple series on wages, as you should, it’s clear that wage growth remains far below pre-crisis levels, with at most a slight uptick:Photo Credit There is simply no case in the data for tightening now.One more thing: given that the measured unemployment rate is 6.2, inflation expectations appear to be stable, and wage growth still very low, there is nothing in the picture to support claims that there has been a large increase in structural unemployment.

Time to Take Measure of Fuzzy U.S. Growth Accounting - Two years ago the Commerce Department reported that the U.S. economy grew at an annual rate of 2.2% in the first quarter of 2012. Revisions over the next two months marked that number down to 1.9%. Then last summer the Commerce Department revised those and decades-worth of other numbers in comprehensive revisions to its accounting. It turned out the economy actually grew at an annual rate of 3.7% during that period. The revisions all together added $559.8 billion to the government’s estimate of the total U.S. output of goods and services. This revision was about equal to the total gross domestic product of Sweden, the world’s 22nd largest economy. This is an example of the slippery challenge the nation’s bean counters face tallying up how much Americans produce. The Commerce Department will release fresh estimates of second quarter economic growth Wednesday, just as Federal Reserve officials begin their second day of policy meetings. Along with these new estimates, the Commerce Department will release annual revisions to its data, along with revisions to its accounting for international trade. (See Page 6.) It could add some plot twists to the story of how this recovery is playing out. The economy’s anemic growth rate has been a big puzzle for central bankers. It’s been especially hard to reconcile with estimates that job growth has been surprisingly robust. A large first quarter contraction in output looked especially odd, even after accounting for the fact that cold weather was disruptive. But as past revisions show, measuring up this economy is a fluid business. After the new estimates and revisions Wednesday, maybe the pieces of this puzzle will fit together more cleanly.

U.S. Economy Bounces Back With 4% Growth -- U.S. GDP surged by 4% in the second quarter of 2014, beating analysts’ forecasts and more than compensating for the previous quarter’s severe contraction, according to new figures released by the Bureau of Economic Analysis on Wednesday.Analysts had forecast growth rates ranging between 2 to 3%, but the economy bounced back with stronger-than-expected rebounds in consumer spending, exports, and business inventories. The growth wiped out the declines of the first quarter, when the economy contracted by 2.1%, one of the sharpest declines in 5 years. Now, with the second quarter’s rebound, the economy has grown by 0.9% in the first half of the year.The growth was led by a rebound in consumer spending, which took a hit in the previous quarter due to severe winter weather. This quarter consumer spending grew by 2.5%, compared with 1.2% in the previous quarter. Durable goods, in particular, surged by 14%.Exports flipped from a decline of 9.2% in the first quarter to a 9.5% increase in the second quarter

Q2 GDP Surges 4%, Beats Estimates Driven By Inventories, Fixed Investment Spike; Historical Data Revised - Moments ago the Commerce department reported Q2 GDP which blew estimates out of the water, printing at 4.0%, above the declining 3.0% consensus, as a result of a surge in Inventories and Fixed Investment, both of which added over 2.5% of the total print, while exports added another 1.23% to the GDP number. The full breakdown by component is shown below. As the BEA noted, "The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the second quarter, based on more complete data, will be released on August 28, 2014." Some other components:The change in real private inventories added 1.66 percentage points to the second-quarter change in real GDP after subtracting 1.16 percentage points from the first-quarter change.  Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. Real personal consumption expenditures increased 2.5 percent in the second quarter, compared with an increase of 1.2 percent in the first.  Durable goods increased 14.0 percent, compared with an increase of 3.2 percent.  Nondurable goods increased 2.5 percent; it was unchanged in the first quarter. Services increased 0.7 percent in the second quarter, compared with an increase of 1.3 percent in the first.  Real nonresidential fixed investment increased 5.5 percent in the second quarter, compared with an increase of 1.6 percent in the first.  Investment in nonresidential structures increased 5.3 percent, compared with an increase of 2.9 percent.  Investment in equipment increased 7.0 percent, in contrast to a  decrease of 1.0 percent.  Investment in intellectual property products increased 3.5 percent, compared with an increase of 4.6 percent.  Real residential fixed investment increased 7.5 percent, in contrast to a decrease of 5.3 percent.

US Q2 un-blips Q1 -- A healthy Q2 print is no surprise: underlying growth was already known to be much better than the abysmal, weather-traumatised first quarter numbers indicated, while labour market indicators had been portraying an accelerated recovery for months now. But 4 per cent annualised growth, along with a slight positive revision to the first quarter number from -2.9 to -2.1 per cent, was even better than expected. And as we learned from the annual three-year revisions in the report, growth in the second half of last year was better than we knew — 4.5 per cent annualised GDP growth in the third quarter and 3.5 per cent in the fourth quarter. And that was during a government shutdown, and while sequestration cuts were still having an effect. Of course, if there’s one lesson we should remember from the Q1 numbers, and which applies to all GDP readings, it’s that the initial estimate is likely to be revised heavily, as are subsequent estimates. Our guess is that the Q1 numbers in particular will be even further revised upwards later on. GDP is a useful but flawed measure, but as we’ve long advised it’s better to consider the longer-term trends in the underlying components. In this report, at least, all of those components were pointing in this direction. Here’s a quick reaction from Capital Economics:Looking at the second-quarter gain, consumption increased by 2.5%, driven by a 14.0% surge in durable goods consumption. Business investment increased by a solid 5.5%. Residential investment rebounded by 7.5%, presumably driven by a big recovery in brokers’ commissions. Net external trade subtracted 0.6% from overall GDP growth, but only because an 11.7% surge in imports, which reflects the strength of domestic demand, outstripped a nonetheless still impressive 9.5% rebound in exports.Finally, for once the public sector wasn’t a drag on the economy, with a 3.1% rebound in State and local government spending more than offsetting a 0.8% decline in Federal government spending.

BEA: Real GDP increased at 4.0% Annualized Rate in Q2 -- From the BEA: Gross Domestic Product: Second Quarter 2014 (Advance Estimate) Annual Revision: 1999 through First Quarter 2014 Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.0 percent in the second quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 2.1 percent (revised)....The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The advance Q2 GDP report, with 4.0% annualized growth, was above expectations of a 2.9% increase. Also Q1 was revised up. Personal consumption expenditures (PCE) increased at a 2.5% annualized rate - a decent pace.  Private investment rebounded with residential investment up 7.5% annualized, and equipment up 5.3%. Change in private inventories added 1.66 percentage points to growth after subtracting 1.16 in Q1.

Q2 GDP at 4.0% Soars Above Expectations -- The Advance Estimate for Q2 GDP, to one decimal, came in at 4.0 percent, and the annual revision for Q1 GDP lifted it from -2.9 percent to -2.1 percent. The Advance Estimate of the GDP deflator used to calculate real (inflation-adjusted) GDP rose to 1.9 percent from an upwardly revised 1.4 percent in Q1 (previously 1.3 percent). Investing.com had forecast 3.0 percent for today's GDP estimate and the deflator to rise from the Q1 1.3 percent to 1.8 percent.The general consensus among economists was the vicinity of 3.0 percent (more on that topic here). Here is an excerpt from the Bureau of Economic Analysis news release:Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.0 percent in the second quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 2.1 percent (revised). The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and "Comparisons of Revisions to GDP" on page 10). The "second" estimate for the second quarter, based on more complete data, will be released on August 28, 2014. The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. [Full Release]  Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis.

Revised GDP Data Show US Economy Much Stronger than Previously Thought - Today’s report from the Bureau of Economic Analysis shows the US economy to be much stronger than previously thought. The advance estimate for the second quarter of 2014 showed real GDP expanding at an annual rate of 4 percent. The new data revised the dip in GDP for Q1 from -2.9 percent to -2.1 percent, and raised the estimated growth rate for three out of four quarters in 2013. The following chart shows previously reported and revised data for the past seven years.As the following table shows, the turnaround in the economy was very broadly based. Consumption contributed 1.69 percentage points to the growth of GDP, a little above the average of the past two years. Investment was very strong, contributing 2.57 percentage points to growth, far above its recent average. Both fixed investment and inventory investment reversed their declines of Q1. The performance of the government sector was one of the big surprises. Government spending has been a negative factor in economic growth throughout much of the recovery. The federal government contribution to GDP growth, at -.05 percentage points, continued negative, but the contribution of state and local government turned around sharply, with a positive contribution of .35 percentage points. Exports also returned to positive territory. Exports have been one of the few consistent bright spots throughout the recovery, so their dip in Q1 was especially disappointing. In contrast, the positive contribution to growth for Q2 of 1.23 percentage points was the strongest since Q4 2010, suggesting that some exports may simply have been delayed by bad winter weather. Imports enter the national accounts with a negative sign, so the -1.85 percentage point contribution to growth shown in the table for represents an increase in import volume for Q2.

Finally, some economic growth! -- The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 4.0% annual rate in the second quarter. Hopefully that’s the start of something good; but so far, it’s only a start. In part, the growth from Q1 to Q2 looked good because the level for Q1 was so bad. True, the BEA’s new estimate of Q1 growth (a 2.1% drop at an annual rate) was a little improvement over the -2.9% figure the BEA announced last month. But the revised estimates still imply a pathetic annual growth rate below 1% for the first half of the year. And true also, the BEA revised up the estimates for 2013, so that the last 4 quarters clocked a more respectable average growth rate of 2.5%. But upward revisions to 2013 came at the expense of downward revisions to 2011 and 2012– we seem to be always borrowing from Peter to pay Paul. Our Econbrowser Recession Indicator Index, which uses today’s data release to form a picture of where the economy stood as of the end of 2014:Q1, jumped up to 24.1%, reflecting the sharp drop in GDP in the first quarter. Our policy of always waiting one quarter for data revisions and trend recognition before calculating the index is looking particularly wise given the roller coaster ride the BEA has put us through in their different versions of the 2014:Q1 estimates. And our index, unlike the BEA figures, is never revised. According to our gauge, the Q1 drop and slow first half growth were disturbing, but not the start of a recession– our indicator would have to rise to 67% before we would declare that a new recession had begun.

Are We Finally Getting Back To Trend? Probably Not. - (see graphs) The BEA advance estimate for real GDP in the 2nd quarter increased at a saar of 3.948% (the BEA has written 4.0% in their actual release).  This is a welcome estimate after the negative growth rate in the first quarter. Real GDP is now estimated to have contracted by 2.1% in the First Quarter of 2014.  The largest contributions to the turnaround was the swing in investment and a big part of that came from inventories which accounted for 1.5 percentage points of the growth. Consumption increased by a healthy amount after declining in the first quarter. This is a strong and encouraging report but the larger issue is whether it portends a return to more typical growth rates.  Perhaps the biggest topic of discussion among policy makers and observers is whether the U.S. is stuck in low gear and why. GDP is still lagging significantly below its post-war trend  of steady 3% growth and is showing no signs of catching up (figure below). The FOMC has lowered its central tendency of long-run growth to 2.1-2.3%. In addition, low investment, low labor force participation rates, a decline in immigration of skilled workers are all factors that seem to suggest a less dynamic economy.A look at this recovery in comparison to previous recoveries suggests that we may be stuck in a low growth equilibrium as many commentators have warned. The chart below shows the average rate of growth from the trough to the peak over all previous business cycles going back to 1949.  The last bar represents the current recovery.  With yesterday’s strong GDP report we are now growing at an average rate of 2.1% over this recovery.Looking back we see that growth rates of  4% or more were common in earlier recoveries and while there certainly seems to be a long slow-down in growth, none of the recoveries was as tepid as the current one. This does not bode well for the future.  On the one hand, given this tepid recovery it is easy to understand why the Fed is continuing to keep its powder dry with respect to monetary policy even though there is a growing chorus of dissenters. On the other hand, the figure above might suggest there isn’t much the Fed can do to bring output back up to trend, and keeping the punch bowl out too long is as dangerous as pulling it away too quickly. Below we show our “Snapshot” style figures for GDP, Consumption, and Investment. As always, the entire Snapshot is available from the link on our homepage.

GDP for second quarter: Strong headline, weak innards - “Surprise!” say the sell-side, upbeat economy touts. Second quarter GDP growth came in at a 4% pace, well above the expected 3% pace. But that’s as good as the news gets.  It’s best to average two choppy quarters, especially when the first quarter was said to have been depressed – now to a minus 2.1% pace – by special factors, like weather. Well, the average growth rate for the first half of 2014 was 0.95%, quite a lot weaker than the 3% pace expected early in the year by the Fed and most analysts and is, actually, pretty close to stall speed.Inventory changes, change in the stock of unsold goods, exacerbated the volatility of first half growth numbers, accounting for nearly half (1.7 percentage points) of the second quarter growth “rebound.” Final sales, the best measure of demand growth, rose at a modest 2.3% pace after having fallen at a 1% pace during the first quarter. That puts the average pace of US demand growth during the first half of 2014 at 0.65%. We need 4 times that pace to sustain a recovery, especially when the Fed is tapering and talking about raising interest rates next year – as if to declare its confidence in an as-yet-nonexistent, sustainable recovery.Stronger state and local government spending contributed 0.3 percentage points to the second quarter growth rate, something that’s not likely to continue given that the year-over-year trend pace of government spending growth is minus 0.7%, reflecting a continued atrophy of fiscal stimulus. Adjusting for unsustainable inventory building and government spending, the second quarter “rebound” growth number was 2%, just above the average pace of 1.8% since the end of 2010.

GDP: A Few Graphs -- A few graphs based on the GDP report (including revisions). The first graph shows the contribution to percent change in GDP for residential investment (RI) and state and local governments since 2005. This shows the huge slump in RI during the housing bust (blue), followed by the unprecedented period of state and local austerity (red) not seen since the Depression. Click on graph for larger image. State and local government spending bounced back in Q2, and I expect state and local governments to continue to make a positive contribution to GDP in 2014. RI (blue) added to GDP growth for a few years, before subtracting in Q4 2013 and Q1 2014. RI bounced back in Q2, and since RI is still very low, I expect RI to make a positive contribution to GDP for some time. The second graph shows residential investment as a percent of GDP. Residential Investment as a percent of GDP has bottomed, but it still below the levels of previous recessions - and I expect RI to continue to increase for the next few years. I'll break down Residential Investment into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. The third graph shows non-residential investment in structures, equipment and "intellectual property products". I'll add details for investment in offices, malls and hotels next week. Overall this was a solid report. Private investment rebounded in Q2, and that is the key to more growth going forward.

Q2 GDP: Investment Contributions - Private investment rebounded in Q2.   Residential investment increased at a 7.5% annual rate in Q2, equipment investment increased at a 7.0% annual rate, and investment in non-residential structures increased at a 5.3% annual rate.   The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.  For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories. Residential Investment (RI) increased in Q2, but the three quarter average was negative (red). Residential investment is so low - as a percent of the economy - that this small decline is not a concern. However, for the rate of economic growth to increase, RI will probably have to continue to make positive contributions. Equipment and software added 0.4 percentage points to growth in Q2 and the three quarter average moved higher (green). The contribution from nonresidential investment in structures was also positive in Q2. Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery. I expect to see all areas of private investment increase over the next few quarters - and that is key for stronger GDP growth.

One Big Factor in the Economic Uptick: Government Spending - The U.S. economy rebounded strongly in the second quarter and a big contribution to that growth was renewed strength from the government, especially at the state and local level. Government spending climbed by 1.6% at an annual rate, its strongest three months since the third quarter of 2012. State and local government spending was the biggest driver, climbing 3.1% from the prior quarter, the largest such increase since 2009, according to the Department of Commerce. The long decline of government spending in GDP is no surprise. Since the recession, state and local governments have been forced to slash spending and raise taxes to make ends meet and the federal government has been shrinking in order to meet targets imposed in deals over the federal budget. The decline in federal spending was especially sharp in 2013 as the budget cuts known as sequestration went into effect. Like it or not, the government comprises about one-fifth of the U.S. economy and so shrinking budgets directly translate to cuts in GDP. In recent years, what little growth the economy mustered came from the private sector. On its face, the second quarter of 2014 does not appear as strong as the third quarter of 2012 for the government. But in fact the third quarter of 2012 owed its boost almost entirely to a one-off surge in federal defense spending that was entirely reversed the next quarter. The increase reported today was driven by state and local governments with no reason to expect that the rise will be entirely reversed. The federal government shrank by 0.8%, a decline, but the second smallest one since the sequestration kicked in. This report may be a sign that governments at all levels — federal, state and local — are groping toward a new balance and that most of the budget cutting that characterized recent years is now in the rear-view mirror. That could help set the stage for more stable growth in the future.

Curb Your Enthusiasm: One Percent GDP Growth Is Nothing to Get Excited Over - Dean Baker - The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. ...Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration. And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters. The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession.

The BEA's Q2 GDP: A Deeper Analysis - In their first estimate of the US GDP for the second quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.94% annualized rate. When compared to the prior quarter, the new measurement is up over 6% from a -2.11% contraction rate for the 1st quarter of 2014 (which was itself revised upward +0.83% from a previously reported -2.94% contraction). This is the largest positive quarter to quarter improvement in GDP growth in some 14 years. The largest contributions to the 2nd quarter 2014 +6% turnaround in the headline number were from inventories (+2.8%), exports (+2.5), consumer goods expenditures (+1.2%) and commercial fixed investments (+0.9%). Offsetting those positive quarter-to-quarter contribution changes were deteriorating imports (which weakened by -1.5%) and consumer expenditures for services (down -0.3% quarter-to-quarter).Real annualized per-capita disposable income was reported to be $37,449 -- up some $284 from the prior quarter (a 3.1% annualized growth rate) but still down $420 from the 4th quarter of 2012. A significant portion of that increased disposable income went into savings, with the savings rate growing to 5.3% -- the highest savings level since 4Q-2012. For this report the BEA effectively assumed annualized quarterly inflation of 2.00%. During the second quarter (i.e., from April through June) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over one and a half percent higher at a 3.53% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably reflected the real experiences of American households) was three quarters of a percent higher at 2.72%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be growing at a 2.49% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter's growth rate would have been 3.30%.

GDP - Pre/Post Annual Revisions In Pictures -- The first estimate of GDP for the second quarter of 2014 came roaring in at 4% annualized growth. The following is an initial analysis as written by Neil Irwin from the NYT: "First, here’s the overall growth number. As it shows, the 4 percent rate of economic expansion in the April-through-June quarter was the strongest since last summer and the third-strongest quarter in the expansion that began five years ago. But there is an important qualifier. Of the 4 percent reported growth, 1.66 percentage points was attributable to businesses increasing their inventories. But when companies make more goods that end up on store shelves or in warehouses (and not because they’re selling more stuff), that doesn’t tell us much about the future of the economy. So economists often look at 'final sales,' excluding inventory effects, to get a sense of the true underlying pace of growth." This is a good piece of analysis which provides a good starting point for discussing the current state of the economy. The latest release of data also included annual revisions. These revisions are almost always overlooked by analysts since they are "past history" but provide an interesting perspective on how far the estimates have been away from reality. The charts below show both the pre- and post-2014 revisions to the data to provide some context to the economic strength/weakness debate.  Neil is correct, real final sales can tell us much more about the state of the economy than just headline GDP. In the latest quarter, final sales of domestic product rebounded 2.3 percent after dipping 1.0 percent in the first quarter. However, as shown below, real final sales on an annual basis actually declined near levels that are normally associated with recessionary drags in the economy.

Second-Quarter GDP Impresses, But Watch Out for Revisions -- A sharp rebound in economic output this spring has revived hopes the nation’s five-year-old recovery could be poised to move into a higher gear.  Gross domestic product rose at a seasonally adjusted annual rate of 4.0% in the second quarter, according to an advanced estimate from the Commerce Department Wednesday. That was well above the 3% pace forecast by economists surveyed by The Wall Street Journal and more than reversed a 2.1% decline in the first quarter.But the Commerce Department’s Bureau of Economic Analysis will revise its advance GDP estimate multiple times to reflect new data as it becomes available. The revisions can change the outlook for the U.S. economy, as happened last month when a decline in first-quarter GDP was revised down to its fastest rate of decline since the end of the recession.When the Commerce Department publishes its advance estimate nearly one month after the end of each quarter, it doesn’t have data for the full three-month period. For segments of the economy like health care, exports and housing investment the agency is forced to make assumptions largely based on historical trends.As more comprehensive data become available, the Commerce Department publishes a second GDP estimate two months after the quarter’s end and a third estimate three months after. The agency also does annual GDP revisions, usually during the summer and usually for the past three years’ worth of data. It published the results of the latest annual revision Wednesday, along with the advance second-quarter GDP data. The revision showed that output expanded at a stronger pace in the second half of 2013 but showed a weaker overall recovery.  Finally, the Commerce Department does an even more comprehensive revision of its GDP data every five years.

Revisions Boost Growth in 2013, But Show Weaker Overall Recovery -- The U.S. economy expanded at a stronger pace in the second half of 2013 than previously measured, growing at the fastest rate since 2003, according to revised data released by the Commerce Department on Wednesday. But the figures also show that the economy grew at a slower pace than previously estimated during the three-year period that ended last year, expanding at an average annual rate of 2%, down from an earlier published estimate of 2.2%. Each July, the Commerce Department makes annual revisions to gross domestic product, the broadest measure of goods and services produced across the economy. The data, released along with the first reading of second-quarter GDP, incorporates newly available sources of data on trade and incomes to provide a more accurate picture of the economy. Estimates for 2013 were revised up to 2.2% from an earlier estimate of 1.9%, with a particularly strong boost in the second half of the year. The economy grew at a 4.5% annual rate in the third quarter and a 3.5% rate in the fourth quarter, up from initial readings of 4.1% and 2.6%, respectively. The revisions for 2013 show that total government spending was less of a drag on growth than previously estimated, thanks largely to a positive contribution from state and local governments, which added 0.06 percentage points to growth, compared to an earlier estimate of -0.02 percentage points. Federal spending, particularly nondefense spending, resulted in a slightly bigger hit to growth than previously estimated, subtracting 0.45 percentage points from growth, versus an initial reading of -0.41 percentage points. Personal consumption, driven by spending on services, added a bigger boost to growth than previous estimated. Fixed investment and exports were also stronger growth drivers than initial estimates reported.  Estimates of gross domestic income were revised up for 2012. National income was better than expected due to an increase in income for non-corporate businesses such as sole proprietors and partners. Compensation income, which accounts for the majority of income, was revised down slightly.

Revising the Recovery - Five years ago, the economy hit bottom. At the time, experts inside and outside the government expected a quick recovery. Instead of swiftly hitting the 4% annual growth that the Congressional Budget Office predicted, however, the recovery proceeded at a snail’s pace. With Wednesday’s revised gross domestic product numbers, we can look back at the uneven, disappointing progress of a recovery that to many Americans still feels like a recession.   Despite some $350 billion of extra deficits in the first year of the recovery, GDP grew a mere 2.7%. For the next three years, growth slouched along around 2%. In early 2013, the “fiscal cliff” and budget sequestration led to a tax increase and spending cuts. Keynesians saw a potential disaster: almost all of the 2009 stimulus had been spent and aggregate demand was about to shrink from lower spending.   So what happened? Despite the government shutdown, GDP experienced its best six-month stretch of the recovery in the second half of 2013. And as a whole, 2013 had better growth than any four-quarter stretch since 2006. We can never know what would have happened in the absence of active fiscal policy. Nor is fiscal policy the only type that matters for growth–monetary policy, credit regulation and health insurance policy have all experienced major changes and substantial uncertainty throughout the recovery.

Real GDP Per Capita Rises to 3.31% -- Earlier today we learned that the Advance Estimate for Q2 2014 real GDP came in at 3.95 percent (rounded to 4 percent), up from -2.1 percent for the revised Q1 data and well above most forecasts. Real GDP per capita was somewhat lower at 3.31 percent. Here is a chart of real GDP per capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.6% below the regression trend and at a post-recession low.

Our Marginal Economy  -- The mainstream media is delighted to highlight positive economic data, but nobody ever asks about the quality of the borrowers who are behind the rosy numbers. Behind the rosy numbers, sales and profits are increasingly dependent on marginal buyers and borrowers: those buying on credit who would not qualify to borrow money in a system ruled by prudent risk-management. These marginal borrower/buyers are last on, first off: they qualify for loans at the end of a credit expansion, when lenders throw caution to the winds to reap the profits from issuing new mortgages, auto loans, student loans, credit cards, etc. to marginal borrowers. These marginal borrowers are the first to default, because they have insufficient income and collateral to support their loans. This rising dependence on marginal borrowers/buyers leads to an economy of diminishing returns: ever-rising rates of debt expansion are required to generate ever-declining rates of expansion of sales, profits, GDP, etc. The waterfall decline of the quality of debt-based sales is masked by the rosy headline numbers. Auto sales are soaring; nice, but does anyone ask how many of those vehicles were sold to marginal buyers, the kind of borrowers who are one paycheck away from insolvency and default?

Useless Expertise - Paul Krugman -- Justin Wolfers calls our attention to the latest IGM survey of economic experts, which revisits the question of the efficacy of fiscal stimulus. IGM has been trying to pose regular questions to a more or less balanced panel of well-regarded economists, so as to establish where a consensus of opinion more or less exists. And when it comes to stimulus, the consensus is fairly overwhelming: by 36 to 1, those responding believe that the ARRA reduced unemployment, and by 25 to 2 they believe that it was beneficial. This is, if you think about it, very depressing. Wolfers is encouraged by the degree of consensus — economics as a discipline is not as quarrelsome as its reputation. But I think about policy and political discourse, and note that policy has been dominated by pro-austerity views while stimulus has become a dirty word in politics. What this says is that in practical terms the professional consensus doesn’t matter. Alberto Alesina may be literally the odd man out, the only member of the panel who doesn’t believe that the fiscal multiplier is positive — but back when key decisions were being made, it was “Alesina’s hour” in Europe and among Republicans.

Expect higher treasury yields in second half of the year - While many investors refuse to accept this fact, we are clearly marching toward higher treasury yields later in the year and in 2015. Even after today's bond selloff, we are still around the yield levels we had during the dark days of the government shutdown. Here are a couple of key factors that will drive yields higher from here.
1. Many are pointing to record low yields in Europe (see chart), suggesting that on a relative basis treasuries look attractive. Perhaps. But it's important to make that comparison based on real rates rather than nominal. And given the disinflationary environment in the Eurozone (see chart), a significant rate differential between the US and the Eurozone is justified. After all we've had a tremendous differential in nominal yields between the US and Japan for years. Furthermore, economic growth (and expectations for growth) in the euro area and in the US have diverged significantly (see chart).
2. The net supply of treasuries is not static. In particular when it comes to treasury notes and bonds (excluding bills), the Fed has been the dominant buyer (see chart). With the Fed tapering, the net supply is expected to rise.
Foreign buying of notes and bonds has declined and is not expected to replace the Fed's taper. It will be primarily driven by China's rising foreign reserves. But given declining support from the Fed, China is likely to make bills (vs. notes and bonds) a larger portion of its purchases. And bill purchases will have a limited impact on longer dated treasury yields.

Will the U.S. government inflate away the public debt? - For the most part, no, although financial repression is an issue to look out for.  There is a new NBER Working Paper by Jens Hilscher, Alon Raviv, and Ricardo Reis which works through the numbers:We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant. “Financial repression will be a harbinger of inflation” is an underrated sentence.  Another is “short-term debt structure is the new gold standard,” as it limits the revenue gains from higher inflation.  There are ungated copies of the paper here.

The black hole of US government contracting - - In January 2008, a 24-year-old Green Beret from Pennsylvania, Ryan Maseth, was electrocuted and killed while showering at Radwaniyah US base in Iraq. The cause, his family alleges in a negligence suit filed in district court in Tennessee, was improper electrical wiring by Kellog, Brown and Root (KBR), the contracting company in charge of the base. He is one of at least eighteen U.S. soldiers who have been electrocuted in similar situations at U.S. bases in Iraq. Then, in 2012, KBR was found responsible in an Oregon court of knowingly exposing twelve Oregon National Guard soldiers to a toxic chemical, sodium dichromate, at the Qarmat Ali water treatment plant in Iraq. Information from depositions with KBR employees reveals that they were fully aware of the true nature of the yellow dust—which is, according to the chairman of the Department of Environmental Science at NYU Medical School, Dr. Max Costa, “one of the most potent carcinogens known to man” and that can “enter every cell ... and potentially produce widespread injury to every major organ.” Two of the soldiers already died from cancer that their doctors attribute to sodium dichromate exposure. In 2013, KBR was ordered to stand trial yet again, accused of human trafficking in the case of twelve Nepali men, eleven of whom were murdered. The men’s families say that in 2004 they were promised safe jobs in Jordan, but instead were smuggled to Iraq, destined for a KBR-run U.S. Air Force base. They were intercepted by insurgents en route, and their passports confiscated. Eleven were beheaded; the twelfth survived, and is among the plaintiffs in this case, filed in a district court in Texas. This is a partial list of the allegations of negligence, corruption, and human trafficking that KBR has, or is still, facing from its operations in Iraq. “This is the black hole of contracting,” said Tim Shorrock, a researcher who writes about private intelligence companies. “You can pretty much do almost anything and keep your contracts,” he said.

Senate passes highway bill, sends it back to House (AP) — The Senate voted Tuesday to keep federal highway money flowing to the states into December but only after rejecting the House's reliance on what lawmakers called a funding "gimmick" and moving to force a post-election debate on whether to raise gasoline taxes. The House could accept the Senate's changes or reject them and send the bill back to the Senate. Whichever outcome, a highway funding bill is still expected to clear Congress before lawmakers adjourn for the summer later this week.The Senate took up a $10.8 billion bill the House passed last week that would have kept the federal Highway Trust Fund solvent through next May and voted 66-31 to strip out controversial funding provisions, leaving $8.1 billion. That's enough to keep programs going only through Dec. 19. The amendment's sponsors — Democrats Tom Carper of Delaware and Barbara Boxer of California and Republican Bob Corker of Tennessee — said they want Congress to reach a long-term funding solution this year and they hope that will be easier after the November election when partisan tempers will presumably have cooled.

Congress oks VA, highway bills, not border measure - (AP) — Congress ran full-tilt into election-year gridlock over immigration Thursday and staggered toward a five-week summer break after failing to agree on legislation to cope with the influx of young immigrants flocking illegally to the United States. Faring far better, a bipartisan, $16 billion measure to clean up after a scandal at the Department of Veterans Affairs and a second bill to prevent a cutoff in highway funding gained final passage in the Senate and were sent to President Barack Obama for his signature. With lawmakers eager to adjourn, legislation to send Israel $225 million for its Iron Dome missile defense system was blocked, at least initially, by Republican Sen. Tom Coburn of Oklahoma. Three months before midterm elections, the unbreakable dispute over immigration exposed not only enduring disputes between the parties, but also differences inside the ranks of House Republicans and among Senate Democrats. And a new outburst of harsh partisan rhetoric between leading officials in both parties served as yet another reminder that after 18 months in office, the current Congress has little to show for its efforts apart from abysmally low public approval ratings. House Speaker John Boehner accused Democrats of pursuing a "nutso scheme" of trying to seize on the border crisis to try and grant a path to citizenship to millions of immigrants living in the country illegally.

‘Pension Smoothing’: The Gimmick Both Parties in Congress Love : The Federal Highway Trust Fund is set to run out of money. If Congress does not put more money in the fund by Friday, the federal government will start reducing its payments to states for highway projects, and some construction might stop. So the House and Senate are fighting over how to get money in the fund, and the fight has boiled down to “pension smoothing,” a budgetary gimmick worthy of Rube Goldberg.Here’s how it works: You let companies set aside less money in their pension plans. When they put less in their pension funds, they report higher profits and pay more in corporate tax. That generates a little extra revenue, which you can put in the highway fund. Over the long run, this policy doesn’t actually generate any added revenue, since in later years, companies will have to increase their pension contributions to make up for what they didn’t set aside today, and their tax payments will go down. But since Congress measures the costs of laws over a 10-year window, the added revenues in the near term count, and revenue losses far in the future don’t. Pension smoothing is the cornerstone of the House bill to fix the highway fund. The Senate has gone a different way: On Tuesday, 13 Republican senators joined nearly all Democrats to strip pension smoothing out of the highway bill. They replaced it with provisions that raise real revenue, like making banks report more information about mortgages so it’s harder for people to claim income tax deductions they don’t qualify for. The Committee for a Responsible Federal Budget, an anti-deficit group, calls the Senate-passed bill “gimmick-free” and “the most fiscally responsible option” to keep highway construction funded.

Corporate Artful Dodgers, by Paul Krugman - The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.Which brings us to the tax-avoidance strategy du jour: “inversion.” This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.  The most important thing to understand about inversion is that it does not in any meaningful sense involve American business “moving overseas.” Consider the case of Walgreen, the giant drugstore chain that, according to multiple reports, is on the verge of making itself legally Swiss. If the plan goes through, nothing about the business will change; your local pharmacy won’t close and reopen in Zurich. It will be a purely paper transaction — but it will deprive the U.S. government of several billion dollars in revenue that you, the taxpayer, will have to make up one way or another.And Congress could crack down on this tax dodge — it’s already illegal for a company to claim that its legal domicile is someplace where it has little real business, and tightening the criteria for declaring a company non-American could block many of the inversions now taking place. So is there any reason not to stop this gratuitous loss of revenue? No.

Banks Cash In on Inversion Deals Intended to Elude Taxes -  Jamie Dimon, the chief executive of JPMorgan Chase, recently said, “I love America.” Lloyd Blankfein, the chief executive of Goldman Sachs, wrote an opinion article saying, “Investing in America still produces the best return.”Yet guess who’s behind the recent spate of merger deals in which major United States corporations have renounced their citizenship in search of a lower tax bill? Wall Street banks, led by JPMorgan Chase and Goldman Sachs.Investment banks are estimated to have collected, or will soon collect, nearly $1 billion in fees over the last three years advising and persuading American companies to move the address of their headquarters abroad (without actually moving). With seven- and eight-figure fees up for grabs, Wall Street bankers — and lawyers, consultants and accountants — have been promoting such deals, known as inversions, to some of the biggest companies in the country, including the American drug giant Pfizer.Just last week, President Obama criticized these types of transactions, calling the companies engaged in them “corporate deserters.” “My attitude,” he said, “is I don’t care if it’s legal. It’s wrong.” He has suggested legislation, and Senator Carl Levin, the Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, has proposed to make it more difficult for an American company to renounce its citizenship — and tax bill — by merging with a smaller foreign competitor.

Democrats want to ban government contracts for companies that leave the U.S. to avoid taxes - Lawmakers are growing tired of corporate America's persistent efforts to dodge U.S. taxes. In the past month, Congress and the White House have denounced a loophole that lets companies lower their tax rate by moving their headquarters overseas. These so-called "inversions" have been the subject on Congressional hearings and legislation to eliminate the tax benefit. Now, a group of Democrats in Congress want to make sure that any company that incorporates overseas would be barred from doing business with the government. The No Federal Contracts for Corporate Deserters Act (yes, that's really the name), would bar contracts from going to companies that reincorporate, are at least 50 percent owned by American shareholders and have no substantial business in the foreign country where they are incorporated. “We ought to put a stop to all inversions, but at the very least, we should stop these companies from receiving federal funding from the same American families who have to pick up the tax burden inverted companies shrug off,” said Sen. Carl Levin (D-Mich.), who introduced the bill in the Senate with Sen. Richard Durbin (D-Ill.). Reps. Rosa DeLauro (D-Conn.) and Lloyd Doggett (D-Tex.) introduced a companion bill in the House. This is not the first time that Congress has tried to prevent companies that use inversions from doing business with the government. Congress has passed several laws in the last dozen years to address the problem. But companies have been able to avoid the ban by exploiting a key loophole that exempts firms who have merged with or bought a foreign competitor.

Inversions Hurt Individual Investors, Too - Taken from gated post from Vanguard Fund Adviser:  Inversions Hurt Individual Investors, TooAs U.S. corporations move offshore to potentially avoid billions in U.S. taxes, they are sticking their shareholders with an unexpected tax burden over which investors have no control. The Joint Commission on Taxation, a non-partisan congressional research panel, estimates that the U.S. stands to lose as much as $19.5 billion in tax revenues over the next decade if corporate “inversions” are allowed to continue. Yet, while U.S. corporations will gain—by exploiting a loophole to avoid paying billions in U.S. taxes if their deals are successful—shareholders stuck footing a tax bill on capital gains stand to lose.

Regulators worry that the asset-management industry may spawn the next financial crisis -- FINANCIAL crises may seem a familiar part of the economic cycle, but they rarely repeat themselves exactly. In the 1980s the locus was Latin America; in the late 1990s, Russia and South-East Asia; in 2007-08, American housing and banks. Now, some worry that the next crisis could occur in the asset-management industry. The industry manages $87 trillion, making it three-quarters the size of banks; the biggest fund manager, BlackRock, runs $4.4 trillion of assets, more than any bank has on its balance-sheet. After the crisis, regulators tightened the rules on banks, insisting that they hold more capital and have sufficient liquidity to cope with short-term pressures. But that may be a case of generals fighting the last battle. In the absence of lending from banks, many companies have turned to bonds (mainly owned by fund managers) for credit.  Fund managers have caused problems in the past. The collapse in 1998 of Long-Term Capital Management, a hedge fund run by some of the brightest minds on Wall Street and in academia, led to a rescue instigated by the Federal Reserve. Bear Stearns’s bail-out of two hedge funds it had been running contributed to its collapse in 2008. In the same year a money-market fund run by the Reserve group was forced to “break the buck” (impose losses on investors), setting off a run that prompted the Fed to provide a backstop yet again.

Lobbyists Bidding to Block Government Regs Set Sights on Secretive White House Office - When Washington lobbyists fail to derail regulations proposed by federal agencies, they often find a receptive ear within the Office of Information and Regulatory Affairs, an arm of the White House Office of Management and Budget that conducts much of its business in secret. In early 2011, after years of study, the Occupational Safety and Health Administration moved to reduce the permissible levels of silica dust wafted into the air by industrial processes like fracking, mining or cement manufacturing. The move came after years of public comment and hearings, and reflected emerging science about the dangers posed by even low levels of dust. OSHA predicted the rule would save 700 lives annually and prevent 1,600 new cases of silicosis, an incurable, life-threatening disease. The proposal stirred fierce opposition from an array of industries, which argued that the costs of reducing silica levels far outweighed the potential benefits. When OSHA pushed ahead, the lobbyists took their arguments to the Office of Information and Regulatory Affairs, a division of the Office of Management and Budget. Few people have ever heard of OIRA even though it is part of the White House and has broad authority to delay or suggest changes in any draft regulation.  OIRA's deliberations on the silica rule began in February 2011, and lasted two and a half years. During that time, records show, its officials held nine meetings with lobbyists and lawyers for the affected industries, but sat down only once with unions and once with health advocates.Last August, the office sent a revised version of the rule back to OSHA; the worker protection agency has yet to act.

A Grand Unified Theory of Terribleness: Money Laundering by Banks, Terrorism, Genocide, and Tax Cuts - Matt Stoller - Major multi-national bank BNP Paribas just pleaded guilty to money-laundering a little less than $200 billion over the course of the last ten years. According to New York Superintendent of Financial Services Benjamin Lawsky, “BNPP employees – with the knowledge of multiple senior executives – engaged in a long-standing scheme that illegally funneled money to countries involved in terrorism and genocide.” So what happened to the employees who did this? 13 of them were fired, including 5 senior executives. According to Lawsky’s office, a total of 45 were disciplined in some way by the bank, with cuts in pay or demotions. 27 employees who would have been fired had already left the bank, so they were untouchable because, wait a second, what about jail time?  What the? Gee, I wonder if there’s a reason, oh, wait, here you go. Only days before U.S. authorities reached a landmark $8.97 billion settlement with BNP Paribas over the bank’s dealings with countries subject to U.S. sanctions, New York Governor Andrew Cuomo intervened to ensure the state government got a much bigger share of the proceeds, according to three people familiar with the situation… The state’s general fund was already set to receive $2.24 billion from a state regulator’s piece of the settlement, and the eleventh-hour deal pushed the state’s take up to $3.29 billion. That change was contained in a side agreement signed by Vance on June 29, and a lawyer for Cuomo on June 30.   So basically, the bankers actually bought get out of jail free cards. As Lawsky put it, “In order to deter future offenses, it is important to remember that banks do not commit misconduct – bankers do.”

Wall Street’s Regulators Sell Out on Illegal Wash Sales -- Wash sales – one of the most virulent forms of stock manipulation that bankrupted banks and corporate conglomerates in the Great Depression and intensified the stock market crash of 1929 to 1932 – has reached scandalous proportions in today’s markets. The response from regulators? Gut the rules that make it a crime. On March 18 of last year, Bart Chilton, then a Commissioner at the Commodity Futures Trading Commission (CFTC), stunned CNBC viewers with the announcement that wash sales were rampant in the futures markets. Volume is hardly the only problem with wash sales: the age old tactic of a wash sale is to pump a stock’s price so insiders can bail out at the top and transfer the losses of a worthless or inflated security to uninformed investors. This is done by the same party conducting or authorizing simultaneous buying and selling in the stock, typically making sure trades occur at ever rising prices until the operators have unloaded their stock. Without that support, the price crashes.Laws making it illegal for one party to be on both the buy and sell sides of a stock transaction were implemented during the legislative reforms of Wall Street in the 1930s. They have had legal certainty for the past 80 years until this May 1 when Wall Street’s coddling, captured regulators, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA), gutted the wash sale rules beyond recognition – even changing the name of the illegal practice from “wash sale” to the benign “self trade.”  The CME Group, which runs the Chicago Mercantile Exchange, the largest futures market in the world, similarly gutted its rule language in June of last year,

Wall Street Journal Reporter: “The Entire United States Market Has Become One Vast Dark Pool” -- In 2012, Wall Street Journal reporter, Scott Patterson, released his 354-page prescient overview of U.S. market structure titled, Dark Pools: High Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. Patterson comes to an epiphany on page 339 of his book, writing in the notes section: “The title of this book doesn’t entirely refer to what is technically known in the financial industry as a ‘dark pool.’ Narrowly defined, dark pool refers to a trading venue that masks buy and sell orders from the public market. Rather, I argue in this book that the entire United States stock market has become one vast dark pool. Orders are hidden in every part of the market. And the complex algorithm AI-based trading systems that control the ebb and flow of the market are cloaked in secrecy. Investors – and our esteemed regulators – are entirely in the dark because the market is dark.”  We totally agree with Patterson that U.S. markets are the darkest they have ever been in history – from their early origins in the bright sunlight under the Buttonwood tree at 68 Wall to today’s secretive, unregulated stock exchanges known as dark pools that trade in private across America – the lights have gone out. And as each light has flickered and dimmed, public confidence has drained from the system, leaving it today as the unsafe battlefield of hedge funds, high frequency traders and dark pool operators.

Bank of America ordered to pay $1.27 billion for 'Hustle' fraud (Reuters) - A federal judge on Wednesday ordered Bank of America Corp (BAC.N) to pay a $1.27 billion penalty for fraud over shoddy mortgages sold by the former Countrywide Financial Corp. U.S. District Judge Jed Rakoff in Manhattan ruled after a jury last October found the second-largest U.S. bank liable for the sale by Countrywide of defective loans to government-controlled mortgage companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) Rakoff also ordered former mid-level Countrywide executive Rebecca Mairone, who was also found liable and was the only individual charged, to pay $1 million, citing her "leading role" in the fraud and calling some of her testimony "implausible." true While the bank's penalty was below the $2.1 billion sought by the U.S. Department of Justice, it marks another legal defeat for Bank of America over its disastrous July 2008 purchase of Countrywide, which has cost tens of billions of dollars in litigation, loan buybacks and writedowns.

New York Fed Worried About Gambling in Casablanca, Um, Ethics Problem at Big Banks --  Yves Smith - This story would be funny if it weren’t so pathetic. Yesterday, the Financial Times reported that the New York Fed woke up out of its usual slumber and realized that the crisis has changed nothing and that banks still are in the business of looting have unaddressed ethics issues. From the Financial Times: The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis… Fed officials were surprised that some of that reported behaviour occurred after the 2008 crisis, leading them to believe bankers had not curbed their poor conduct. To make sure the biggest banks are paying enough attention to ethics and culture, NY Fed bank evaluations have begun incorporating new questions emphasising such issues. Topics include whether the right performance structure is in place to punish bad behaviour, especially when it comes to compensation.The NY Fed does not have the authority to write regulations, but it plays a crucial role in the regulatory landscape, overseeing banks in its jurisdiction that include Goldman Sachs, JPMorgan, Citigroup, Barclays and Deutsche Bank. It assesses banks through evaluations, which often do not contain specific criteria but which provide guidance for standards. The steps taken by the NY Fed come after its president, William Dudley, gave a surprisingly scathing speech in November saying tougher capital requirements may not solve the problem of banks’ “apparent lack of respect for law and regulation”.This is simply ludicrous. How do you get bankers to behave in an ethical manner? You have serious consequences if they don’t, particularly for those in supervisory and executive positions.

Feds Say Big Banks Are Still Too Big to Fail -- Six years after the financial crisis, the largest US banks are likely still too-big-to-fail, according to a study released Thursday afternoon by the Government Accountability Office (GAO). That means that these massive financial institutions are still so important to the wider financial system that they can expect the government to bail them out again if they are close to collapse. Even though the GAO study found that this advantage banks enjoy dropped off significantly in 2013, "this is a continuing issue," Sen. David Vitter (R-La.), who has introduced legislation aimed at ending bank bailouts, told Bloomberg Thursday. "Too-big-to-fail is not dead and gone at all. It exists." During the financial crisis, the government forked out $700 billion to bail out the nation's biggest banks. The 2010 Dodd-Frank financial reform act imposed new requirements on Wall Street designed to prevent this from happening again. The law gave federal Wall Street regulators more authority to dismantle failing financial institutions, mandated that banks hold more emergency funds on hand, and required banks to submit to yearly stress tests to ensure that they can withstand another crisis.

GAO Report on Too Big to Fail Strives to Be All Things to All Observers  -  At one level, the Government Accountability Office’s long-awaited report on whether banks receive subsidies on their borrowing costs by virtue of being Too Big to Fail is somewhat anticlimactic. In the interim, small-c conservative institutions like the Federal Reserve and the International Monetary Fund came down squarely on the side of a subsidy, quantifying it as high as $70 billion a year. Similarly, GAO’s first report on this subject matter found that government support during the crisis was much cheaper than alternatives, was secured by junk collateral, tended to be used more by bigger banks, and basically represented all that stood between the biggest institutions and insolvency. That kind of tells you what you need to know. The nature of the subsidy during a credit crisis simply matters more than during a time of relative calm. But it’s certainly worth taking a look at whether Dodd-Frank altered this dynamic, and GAO’s report does matter in that respect. Members of both parties who are anxious to do something about the Too Big to Fail problem have been anticipating this moment. My story last year about the bipartisan movement around ending Too Big to Fail put the report front and center:In January, Brown and Vitter unanimously passed legislation on the Senate floor requiring the nonpartisan Government Accountability Office (GAO) to conduct a study to determine whether mega-banks enjoy borrowing subsidies from their Too Big to Fail status, the subsidy conservatives believe to be at the heart of the problem. While the House never took it up, GAO agreed to conduct the studySo what did the report say? Well, see if you can catch the minor flaw in the very first sentence:While views varied among market participants with whom GAO spoke, many believed that recent regulatory reforms have reduced but not eliminated the likelihood the federal government would prevent the failure of one of the largest bank holding companies.

Let's Hope the GAO Report Ends the Too-Big-to-Fail Subsidy Distraction - The GAO just released its long-awaited report on whether Wall Street receives an implicit subsidy for still being seen as Too Big To Fail (TBTF). I'm still working through the report, but the headline conclusion is that "large bank holding companies had lower funding costs than smaller ones during the financial crisis" and that there is "mixed evidence of such advantages in recent years. However, most models suggest that such advantages may have declined or reversed." For a variety of reasons, whether this subsidy exists has become a major focal point in the discussion about financial reform. The Obama administration wants the headline that TBTF is over, and the President's opponents want to argue that Dodd-Frank has institutionalized bailouts. Hopefully this GAO report puts that "permanent bailouts" talking point to rest.

Good News on Financial Reform - Paul Krugman - There is an important new GAO report suggesting that reform is mattering a lot on one key hot-button issue: too big to fail. I’m not, however, seeing much clear writing about this; the always excellent Mike Konczal is on the case, but I suspect that most readers won’t know enough about the background to appreciate what’s going on.Republican leaders fiercely opposed financial reform — and claimed that resolution authority actually made too-big-to-fail worse, because it institutionalized bailouts. This always seemed implausible; bailouts will happen in crises, one way or another. And if financial reform was a giveaway to the banks, why did Wall Street, which used to look relatively favorably on Democrats, turn overwhelmingly Republican after reform passed?  Still, you’d like some evidence. And GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008. This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization. Of course it should have been stronger; and I don’t expect it ever to look as good as Obamacare increasingly does. But claims that it was counterproductive now look like claims that black is white. Are you surprised?

Unofficial Problem Bank list declines to 452 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 25, 2014.   As anticipated, the FDIC provided an update on its enforcement action activity which contributed to many changes to the Unofficial Problem Bank list this week. In all, there were 11 removals this week pushing the list count down to 452 institutions with assets of $146.1 billion. A year ago the list held 729 institutions with assets of $260.9 billion. For the month, the list count fell by 16 after 10 action terminations, four mergers, and two failures. This is the smallest monthly count decline since a net drop of 12 during the month of June 2013. This may be the leading edge of a slowdown in action terminations. The FDIC surprised us by closing GreenChoice Bank, FSB, Chicago, IL ($73 million) this Friday. This is the 14th failure this year approximating the pace last year when 16 banks had failed by this point. GreenChoice is the 60th Illinois-based institution to fail since the on-set of the Great Recession. The count in Illinois only trails the 88 in Georgia and 71 in Florida. Most likely there will be few changes to the list next week.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 452.

Exclusive: JPMorgan's proposed $4.5 billion deal to be accepted for most trusts (Reuters) - Trustees representing investors in JPMorgan Chase & Co's (JPM.N) $4.5 billion settlement over money-losing mortgage-backed securities are expected to accept the bank's proposal for the vast majority of their trusts, according to a person familiar with the matter. The seven trustees overseeing the securities will accept the deal for all but perhaps two dozen of the 330 trusts included in the offer, the person said. Trustees may poll bondholders in some trusts to see if they would pursue claims if the offer is rejected, the person said. true JPMorgan reached the $4.5 billion agreement in November with 21 institutional investors in 330 residential mortgage-backed securities trusts issued by JPMorgan and Bear Stearns, which it took over during the financial crisis.

Is the Private Mortgage-Bond Market Dead or Dormant? - WSJ: It’s been nearly seven years since the market for so-called private-label mortgage bonds, or those that aren’t backed by government-related entities, dried up. For years, government policy makers and financiers have speculated over when those markets might meaningfully revive. But given the weak issuance of such private mortgage-backed securities since the financial crisis deepened, there’s a good case to be made that that market is dead, said Joseph Tracy, a senior adviser at the New York Federal Reserve Bank, at a conference sponsored by Zillow last week in Washington. Lawmakers and U.S. officials in recent years have suggested that limiting the reach of mortgage companies Fannie Mae and Freddie Mac FMCC -0.96%, both by restricting the firms to purchasing smaller mortgages and raising the fees that the companies charge lenders, might help “crowd-in” private investment to the mortgage-bond market. These markets may sound obscure but they have served in the past as a key source of financing for U.S. homeowners, particularly for borrowers seeking loans that don’t conform to the standards of Fannie, Freddie or government agencies, which generally can’t guarantee loans that exceed $417,000. (Select high cost markets, such as San Francisco and New York, have ceilings as high as $625,500.) More than $1 trillion in private-label mortgage-backed securities were issued by Wall Street firms in 2005 and 2006, but the market imploded in late 2007. In 2010 and 2011, a handful of deals came to market, consisting entirely of “jumbo” mortgages that are too large for government backing. Post-crash issuance hit a high–relatively speaking–last year of around $20 billion, according to data tracked by J.P. Morgan Chase & Co., but dropped off after mortgage rates jumped. Securities firms have issued around $2.7 billion so far this year.

Freddie Mac: Mortgage Serious Delinquency rate declined in June, Lowest since January 2009 - Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 2.07% from 2.10% in May. Freddie's rate is down from 2.79% in June 2013, and this is the lowest level since January 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are mortgage loans that are "three monthly payments or more past due or in foreclosure".  Although this indicates progress, the "normal" serious delinquency rate is under 1%. The serious delinquency rate has fallen 0.72 percentage points over the last year - and at that rate of improvement, the serious delinquency rate will not be below 1% until late 2015 or early 2016. Note: Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications. So even though distressed sales are declining, I expect an above normal level of distressed sales for perhaps 2 more years (mostly in judicial foreclosure states).

Fannie Mae: Mortgage Serious Delinquency rate declined in June, Lowest since October 2008 - Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in June to 2.05% from 2.08% in May. The serious delinquency rate is down from 2.77% in June 2013, and this is the lowest level since October 2008.  The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Last week, Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 2.07% from 2.10% in May. Freddie's rate is down from 2.79% in June 2013, and is at the lowest level since January 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". The Fannie Mae serious delinquency rate has fallen 0.72 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in late 2015 or early 2016.

Lack of Defaults/Foreclosures/Short Sales; A Serious Housing & Spending Headwind - Most think of the effects of foreclosures & short sales (distressed) only in the first derivative…that they are bad for housing and prices. As such, bullish leaning headlines of plunging defaults, foreclosures and short sales over the past two years are everywhere, often. Some journalists and bloggers actually follow and publish the data weekly presenting them as further irrefutable evidence that “this” is the real “recovery”. But, of course, when it comes to new-era housing what instinctively sounds like a positive, or negative, is more often than not the exact opposite. And what’s ironic is that the lagging default, foreclosure, and short sale data they publish in the bullish sense is actually leading indicating data of a bearish trend-reversal in housing happening right now, which will lead to the third stimulus “hangover” in the past seven years.  So, the next time you see the headline “Mortgage Defaults (or Foreclosures) at a 6-year Low!!!” you might want to say to yourself “humm, that’s a real problem for purchase demand, house prices, construction labor, materials, appliance sales” and so on. m When it comes to defaults, foreclosures and short sales and how they really fit into the macro housing and economic mosaic less is bad. Foreclosures and short sales “were” a significant housing and macro economic tailwind that drove transactions, prices, home improvement retail, labor, materials, and durable goods sales, which now — down 75% since 2012 — have turned into a stiff headwind.

MBA: Mortgage Purchase Applications Increase Slightly in Latest MBA Weekly Survey - From the MBA: Purchase Applications Increase Slightly in Latest MBA Weekly Survey Mortgage applications decreased 2.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 25, 2014. ...The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier. ...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.33 percent, with points increasing to 0.24 from 0.23 (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 75% from the levels in May 2013. As expected, refinance activity is very low this year. The second graph shows the MBA mortgage purchase index. According to the MBA, the unadjusted purchase index is down about 12% from a year ago.

Weekly Update: Housing Tracker Existing Home Inventory up 15.6% YoY on July 28th - Here is another weekly update on housing inventory ... There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data released was for June and indicated inventory was up 6.5% year-over-year).    Fortunately Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data, for 54 metro areas, for the last several years. This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. In 2013 (Blue), inventory increased for most of the year before declining seasonally during the holidays. Inventory in 2014 (Red) is now 15.6% above the same week in 2013. (Note: There might be an issue with the Housing Tracker data over the last couple of weeks - Ben is checking - but inventory is still up significantly). Inventory is also about 2.4% above the same week in 2012. According to several of the house price indexes, house prices bottomed in early 2012, and low inventories were a key reason for the subsequent price increases. Now that inventory is back above 2012 levels, I expect house price increases to slow (and possibly decline in some areas).

Black Knight (formerly LPS): House Price Index up 0.9% in May, Up 5.9% year-over-year - The timing of different house prices indexes can be a little confusing. Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: U.S. Home Prices Up 0.9 Percent for the Month; Up 5.9 Percent Year-Over-Year Today, the Data and Analytics division of Black Knight Financial Services released its latest Home Price Index (HPI) report, based on May 2014 residential real estate transactions. The Black Knight HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. The year-over-year increases have been getting steadily smaller for the last 8 months - as shown in the table below:

Case-Shiller: Comp 20 House Prices increased 9.3% year-over-year in May - S&P/Case-Shiller released the monthly Home Price Indices for May ("May" is a 3 month average of March, April and May prices). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). From S&P: Home Price Gains Continue to Moderate According to the S&P/Case-Shiller Home Price Indices  Data through May 2014, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... show the Composite Indices increased at a slower pace. The 10-City Composite gained 9.4% year-over-year and the 20-City 9.3%, down significantly from the +10.9% and +10.8% returns reported last month. All cities with the exception of Charlotte and Tampa saw their annual rates decelerate. In the month of May, the 10- and 20-City Composites posted gains of 1.1%. For the second consecutive month, all twenty cities posted increases. Charlotte posted its highest monthly increase of 1.4% in over a year. Tampa gained 1.8%, followed by San Francisco at +1.6% and Chicago at +1.5%. Phoenix and San Diego were the only cities to gain less than one percent with increases of 0.4% and 0.5%, respectively. ... “Home prices rose at their slowest pace since February of last year, Month-to-month, all cities are posting gains before seasonal adjustment; after seasonal adjustment 14 of 20 were lower." The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 18.1% from the peak, and down 0.3% in May (SA). The Composite 10 is up 24.0% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 17.2% from the peak, and down 0.3% (SA) in May. The Composite 20 is up 24.7% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices. Prices increased (SA) in 6 of the 20 Case-Shiller cities in May seasonally adjusted. (Prices increased in 20 of the 20 cities NSA) Prices in Las Vegas are off 43.2% from the peak, and prices in Denver and Dallas are at new highs (SA). This was lower than the consensus forecast for a 9.9% YoY increase and suggests a slowdown in price increases.

Housing Prices Jump Though Top of Market Cools Off - The start to the story is the same as it has been for months: the most recent housing price data came in, and prices jumped. However, the influence of extremely speculative markets (think: Miami and Vegas) is moderating, causing the national numbers to begin coming in at a slower pace.For the year, this meant that the 20-City S&P/Case-Shiller Home Price Index, which had clocked a yearly gain of 10.8% in April, slowed to high single digits, posting a yearly gain of 9.3% for the twelve months ending in May.On a monthly basis, prices were up 0.1% for the index. For the year, every one of the twenty cities showed price increases.However, gains for the cities at the top of the market slowed, which may presage softer numbers for the index as a whole in the coming months. Call it “hot hot” instead of “hot hot hot.” Las Vegas, which last month showed a yearly gain of 18.8%, decelerated to a yearly gain of 16.9%; Miami slid from 14.7% to 13.2%, and Phoenix slowed from a yearly rate of 9.8% to 8.2%.The cities with the slightest gains were Cleveland (up 1.2% month-to-month, and 2.4% annually); Charlotte (up 1.4% month-to-month, and 4.7% annually), and New York (up 1.0% from April, and 4.8% annually).

Home-Price Growth Slows Sharply -- Home prices across the U.S. slowed sharply to a single-digit pace in May on a year-over-year basis, the slowest rate since February 2013, according to a home-price report. A survey covering 10 major U.S. cities increased 9.4% in the year ended in May, said the S&P/Case-Shiller Home Price Index survey released Tuesday. The 20-city price index increased 9.3%. That is down from a 10.8% yearly pace in April and much lower than the 9.9% expected by economists. On an unadjusted basis, the 10-city index and the 20-city composite each increased 1.1% in May over April. Seasonally adjusted, both indexes declined 0.3%. Past increases in home prices coupled with stagnant wage growth have recently eroded housing affordability. Home sales have struggled in the first half, and early data suggest more problems in the third quarter. The National Association of Realtors reported Monday that pending home sales fell 1.1% in June to stand 7.3% below year-ago levels.  "Housing has been turning in mixed economic numbers in the last few months," said David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. "Prices and sales of existing homes have shown improvement while construction and sales of new homes continue to lag." Regionally, 18 of 20 cities had slower year-over-year growth in May than in April. San Francisco and San Diego saw their year-over-year figures decelerate by about three percentage points, the report said.

Case-Shiller Home Prices Tumble Most Since Dec 2011, Miss 2nd Month In A Row -- But it was supposed to be the weather? S&P/Case-Shiller home prices dropped in May and missed expectations for the 2nd month in a row. Against a forecast rise on 0.3%, prices dropped in May by 0.3% - the biggest drop since December 2011. It appears we are going to need more Chinese hot money flow buyers. Of note, while in April Case-Shiller reported only 5 cities out of the tracked 20 posting sequential price declines, in May this number has soared to 14. And so the fourth dead cat bounce in housing appears to be over. Finally, from the report itself:“Home prices rose at their slowest pace since February of last year,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The 10- and 20-City Composites posted just over 9%, well below expectations. Month-to-month, all cities are posting gains before seasonal adjustment; after seasonal adjustment 14 of 20 were lower. “Year-over-year, nine cities – Las Vegas (16.9%), San Francisco (15.4%), Miami (13.2%), San Diego (12.4%), Los Angeles (12.3%), Detroit (11.9%), Atlanta (11.2%), Tampa (10.2%) and Portland (10.0%) – posted double-digit increases in May 2014. The Sun Belt continues to lead with seven of the top eight performing cities. Eighteen of 20 cities had lower year-over-year numbers than last month; San Francisco and San Diego saw their year-over-year figures decelerate by about three percentage points.

Housing Slowdown? The Case-Shiller Index in Five Charts - As expected, the pace of U.S. home price gains has slowed this year. Prices rose 9.3% from a year earlier in May in 20 cities tracked by the Standard & Poor’s/Case-Shiller index, down from the 10.8% increase reported last month for April. Price gains have been expected to flatten out after sales slowed last summer following a sustained run-up in mortgage rates and prices. The Case-Shiller index is also heavily influenced by the share of homes selling out of foreclosure, and as the share of distressed sales fell two years ago, home prices began to look much better. Now that foreclosures are fading from the market, prices may show less volatility. Some economists were surprised Tuesday by the index’s seasonally-adjusted series, which showed that prices actually fell in May. Home prices tend to rise in the spring and summer because there are more transactions, and prices aren’t as strong in the fall and winter, when transaction volumes decline. To account for this, Standard & Poor’s applies a seasonal adjustment to the series. But in 2010, S&P warned that the seasonal adjustment wasn’t behaving normally because of the distorting effects of foreclosed-property sales. Because mortgage companies sell homes throughout the year, those sales followed less of the seasonal pattern exhibited by normal owners. Since April 2010, the index committee at S&P hasn’t given much attention to the seasonally adjusted data, given concerns over its reliability. Bearing that in mind, the 1.1% monthly price gain in May became a 0.3% decline after adjusting for seasonal factors. While all 20 cities showed monthly gains in home prices, some 14 cities showed monthly declines after the seasonal adjustment was applied.

House Prices: Real Prices and Price-to-Rent Ratio decline in May -  - I've been expecting a slowdown in year-over-year prices as "For Sale" inventory increases, and the slowdown is here!   The Case-Shiller Composite 20 index was up 9.3% year-over-year in May; the smallest year-over-year increase since January 2013. This is still a very strong year-over-year change, but on a seasonally adjusted monthly basis, the Case-Shiller Composite 20 index was down 0.3% in May.  This was the first monthly decrease since prices bottomed in early 2012.  (Note: The seasonal factor is skewed by foreclosures). On a real basis (inflation adjusted), prices actually declined for the second consecutive month.  The price-rent ratio also declined in May for the Case-Shiller Composite 20 index. It is important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2014), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through May) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to mid-2004 levels (and also back up to Q2 2008), and the Case-Shiller Composite 20 Index (SA) is back to October 2004 levels, and the CoreLogic index (NSA) is back to January 2005. Real House Prices The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 2001 levels, the Composite 20 index is back to July 2002, and the CoreLogic index back to January 2003. In real terms, house prices are back to early '00s levels.This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to Q1 2002 levels, the Composite 20 index is back to November 2002 levels, and the CoreLogic index is back to May 2003.

San Francisco million-dollar home sales hit record - (AP) — A record number of million-dollar homes were sold in the San Francisco Bay Area during the second quarter, a research firm said Thursday, another sign that affording a place to live is a growing challenge for anyone who isn't tied to the booming technology economy. There were 5,734 homes sold for at least $1 million in the nine-county region from April through June, nearly double the 3,162 sales that hit the threshold in the first quarter and up 19 percent from 4,821 sales during the same period of 2013, CoreLogic DataQuick said. There were 1,117 homes sold for at least $2 million, also a record and nearly double what fetched that amount during the previous three months. Million-dollar homes are not just for the region's wealthiest elite. The median sales price in the city of San Francisco was $1 million in June, up 13 percent from $883,000 a year earlier. The median price for the region was $618,000 last month, the highest since November 2007 and not far off its peak of $665,000 during the previous housing cycle. San Francisco set a record for million-dollar sales, as did Santa Clara County, in the heart of Silicon Valley. Six of the Bay Area's nine counties set records for sales of at least $2 million. The region's home sales, like in many parts of the country, have been sluggish overall largely because prices have soared out of reach for many potential buyers and inventories are thin. The California Association of Realtors reported a 2.4-month supply of unsold homes in the Bay Area in June, well below a normal supply of five to seven months. Price increases have moderated since a torrid climb during the first half of 2013.

Zillow: Case-Shiller House Price Index expected to slow further year-over-year in June - The Case-Shiller house price indexes for May were released this morning. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.    From Zillow: Case-Shiller Forecast: Expecting Further Slowdowns Ahead The Case-Shiller data for May 2014 came out this morning, and based on this information and the June 2014 Zillow Home Value Index (ZHVI, released July 20th), we predict that next month’s Case-Shiller data (June 2014) will show that both the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased by 8.1 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from May to June will be flat for the 20-City Composite Index and 0.1 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for June will not be released until Tuesday, August 26. So the Case-Shiller index will probably show a lower year-over-year gain in June than in May (9.3% year-over-year).

NAR: Pending Home Sales Index decreased 1.1% in June, down 7.3% year-over-year - From the NAR: Pending Home Sales Slip in June The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 1.1 percent to 102.7 in June from 103.8 in May, and is 7.3 percent below June 2013 (110.8). Despite June’s decrease, the index is above 100 – considered an average level of contract activity – for the second consecutive month after failing to reach the mark since November 2013 (100.7). The PHSI in the Northeast fell 2.9 percent to 83.8 in June, and is 3.2 percent below a year ago. In the Midwest the index rose 1.1 percent to 106.6, but remains 5.5 percent below June 2013. Pending home sales in the South dipped 2.4 percent to an index of 113.8 in June, and is 4.3 percent below a year ago. The index in the West inched 0.2 percent in June to 95.7, but remains 16.7 percent below June 2013. Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in July and August.

Pending Home Sales Tumble From Recovery Highs, Biggest Miss In 2014 -- Following last week's collapse in new home sales (and last month's massive beat and surge in pending home sales), it was likely not a total surprise that pending home sales would slow, but the -1.1% MoM print is the worst in 2014 (and the biggest miss in 2014). The median existing home price continues to rise (up 4.3% year-over-year) but this is the slowest rate of gain since March 2012. NAR is quick with the excuses and this time.. no weather is to blame.

The housing market halfway through 2014: a comprehensive report  - Wtih this morning's report on pending home sales, housing data from the first half of 2014 is in the books. At the end of last year, I politely disagreed with Bill McBride a/k/a Calculated Risk, about the direction of the market this year.  Bill thought average starts and sales would be up 20%.  Based on increased interest rates, I believed they would be down by about -100,000 at some point this year.  Except for one outlier in housing starts in April, neither has panned out so far, with data coming somewhere in the middle.  With that summary, let's take a detailed look at housing through midyear. As I wrote last month, the housing market tends to cycle in a regular order:

  • 1st, interest rates turn
  • 2nd, permits, starts, and sales turn
  • 3rd, prices turn
  • 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  Let's look at where each of those points in the cycle stands.

What's behind Housing's June Swoon? -- Atlanta Fed's macroblog -- The housing market appears to have endured a particularly cruel month in June. Fairly good numbers on existing home sales provided some antidote to a second consecutive monthly decline in housing starts and a sharp decline in new home sales. But that palliative is less comforting than it might otherwise be given the fact that existing sales were still 2.3 percent below the June 2013 rate, and budding optimism diminished further with this week's unexpected drop off in the pace of pending home sales.  In her recent remarks before the Senate Committee on Banking, Housing, and Urban Affairs and before the House Committee on Financial Services, Federal Reserve Chair Janet Yellen took particular note of ongoing weakness in residential real estate:  The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing. In a March post in the Atlanta Fed's SouthPoint, affordability issues—specifically, interest rates and prices—constituted two of the top three explanations given by our broker and builder contacts in the Southeast for recent slower growth in the housing market. Earlier, we had examined the affordability issue in an Atlanta Fed Real Estate Research post. In it, we decomposed the affordability index that the National Association of Realtors (NAR) produces each month. We used our decomposition to show that the rebound in housing prices in 2012 served as a huge drag on affordability and, after six years of contributing to affordability, mortgage interest rates became a drag in mid-2013.

U.S. homeownership at 18-year low in second quarter - - Homeownership in the United States fell again in the second quarter to the lowest level since the third quarter of 1995, suggesting many Americans are becoming renters. The seasonally adjusted homeownership rate fell to a seasonally adjusted 64.8% from 65.0% in the first quarter, the Commerce Department said Tuesday. The residential rental vacancy rate dropped to 7.5% in the second quarter, the lowest level since 1997 and well below the peak of 11.1% in 2009.The increased demand to rent is driving prices higher. In the second quarter, the median asking monthly rent was $756, up from $735 one year ago. In another closely-watched sector, the homeownership rate among those under 35 was 35.9% in the second quarter, down from 36.7% one year earlier. Many analysts say the housing sector will remain weak until first-time buyers return to the market.

HVS: Q2 2014 Homeownership and Vacancy Rates -  - The Census Bureau released the Housing Vacancies and Homeownership report for Q2 2014 this morning.  This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey. This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate, except as a guide to the trend. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate decreased to 64.7% in Q2, from 64.8% in Q1. I'd put more weight on the decennial Census numbers - and given changing demographics, the homeownership rate is probably close to a bottom. The HVS homeowner vacancy decreased to 1.9% in Q2. It isn't really clear what this means. Are these homes becoming rentals? Once again - this probably shows that the general trend is down, but I wouldn't rely on the absolute numbers.

Construction Spending Falls 1.8 Percent in June - U.S. construction spending fell in June by the largest amount in more than three years as housing, non-residential construction and government spending all weakened. Construction spending dropped 1.8 percent in June on a seasonally adjusted basis after rising by a revised 0.8 percent in May, the Commerce Department reported Friday. It was the biggest setback since a 2.8 percent fall in January 2011. The weakness was widespread with spending on housing down for a second straight month, falling 0.3 percent, while non-residential building activity fell 1.6 percent, the biggest decrease since January. Spending on government projects dropped 4 percent, the biggest decline in more than a decade. The June performance represented a setback to hopes stronger construction activity will help support overall economic growth. The decline in housing reflected a 1.4 percent fall in spending on single-family construction which offset a 2.5 percent rise in the smaller apartment sector. Even with the two months of declines, housing construction is still 7.4 percent above the level of a year ago. The drop in non-residential activity reflected weakness in hotel construction and the category that includes shopping malls. Non-residential building is 11.2 percent higher than a year ago. The 4 percent fall in government projects was the biggest one-month setback since government building tumbled by 6 percent in March 2002. The June weakness reflected a 5.2 percent decline in state and local government projects which offset a 10.4 percent rise in spending on federal building projects.

Construction Spending decreased in June -  Earlier the Census Bureau reported that overall construction spending decreased in June: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2014 was estimated at a seasonally adjusted annual rate of $950.2 billion, 1.8 percent below the revised May estimate of $967.8 billion. The June figure is 5.5 percent above the June 2013 estimate of $900.3 billion. Both private and public spending declined in June: Spending on private construction was at a seasonally adjusted annual rate of $685.5 billion, 1.0 percent below the revised May estimate of $692.0 billion. Residential construction was at a seasonally adjusted annual rate of $355.9 billion in June, 0.3 percent below the revised May estimate of $357.0 billion. Nonresidential construction was at a seasonally adjusted annual rate of $329.5 billion in June, 1.6 percent below the revised May estimate of $335.0 billion. ... In June, the estimated seasonally adjusted annual rate of public construction spending was $264.7 billion, 4.0 percent below the revised May estimate of $275.7 billion. . This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 47% below the peak in early 2006, and up 56% from the post-bubble low. Non-residential spending is 20% below the peak in January 2008, and up about 46% from the recent low. Public construction spending is now 19% below the peak in March 2009 and about 1.6% above the post-recession low.

Study: 35% of Americans Facing Debt Collectors — More than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released Tuesday by the Urban Institute. These consumers fall behind on credit cards or hospital bills. Their mortgages, auto loans or student debt pile up, unpaid. Even past-due gym membership fees or cellphone contracts can end up with a collection agency, potentially hurting credit scores and job prospects, said Caroline Ratcliffe, a senior fellow at the Washington-based think tank.  “It can tip employers’ hiring decisions, or whether or not you get that apartment.”  The study found that 35.1 percent of people with credit records had been reported to collections for debt that averaged $5,178, based on September 2013 records. The study points to a disturbing trend: The share of Americans in collections has remained relatively constant, even as the country as a whole has whittled down the size of its credit card debt since the official end of the Great Recession in the middle of 2009.As a share of people’s income, credit card debt has reached its lowest level in more than a decade, according to the American Bankers Association. People increasingly pay off balances each month. Just 2.44 percent of card accounts are overdue by 30 days or more, versus the 15-year average of 3.82 percent.Yet roughly the same percentage of people are still getting reported for unpaid bills, according to the Urban Institute study performed in conjunction with researchers from the Consumer Credit Research Institute. Their figures nearly match the 36.5 percent of people in collections reported by a 2004 Federal Reserve analysis.lion bpd by 2025.

A third of consumers with credit files had debts in collections last year - About 77 million Americans have a debt in collections,  a new report finds.That amounts to 35 percent of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group's Consumer Credit Research Institute. "It’s a stunning number," said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. "And it threads through nearly all communities."The report analyzed 2013 credit data from TransUnion to calculate how many Americans were falling behind on their bills. It looked at how many people had non-mortgage bills, such as credit card bills, child support payments and medical bills, that are so past due that the account has since been closed and placed in collections.Researchers relied on a random sample of 7 million people with data reported to the credit bureaus in 2013 to estimate what share of the 220 million Americans with credit files have debts in collection. About 22 million low-income adults who did not have credit files were not represented in the study. This is the first time the Urban Institute calculated the collection figure, but Americans may have been struggling with debt for a while: Researchers noted that the 35 percent is basically unchanged from when the Federal Reserve studied the issue in 2004 and found that 36.5 percent of people with credit reports had debt in collections.

Deadbeat Nation: A Shocking 77 Million Americans Face Debt Collectors - We have been warning for years that as a result of the Fed's disastrous policies, America's middle class is being disintegrated and US adults are surviving only thanks to insurmountable debtloads. But not even we had an appreciation of how serious the problem truly was. We now know, and it is a shocker: according to new research by the Urban Institute, about 77 million Americans have a debt in collections.The breakdown by region: As the Washington Post reports, that amounts to 35 percent of consumers with credit files or data reported to a major credit bureau, according to the study released Tuesday by the Urban Institute and Encore Capital Group's Consumer Credit Research Institute. "It’s a stunning number," said Caroline Ratcliffe, senior fellow at the Urban Institute and author of the report. "And it threads through nearly all communities."

Delinquent Debt in America: By Region and Metro Area, Where Is It?  - The Urban Institute has an interesting 14-page synopsis on Delinquent Debt in America.  By percentage, the number of people in collections is largely concentrated in the South, while amount owed shows no geographic pattern. The Urban Institute uses 2013 credit bureau data from TransUnion to measure how many Americans are reported as at least 30 days late, not including late payment of mortgages. The institute also examines how many Americans have debt in collections and the amount of this debt.  In order to have credit card debt, one first must have credit. However, some without traditional credit show up as delinquent on account of late utility, medical, or other bills. Study Findings:

  • 5.3% (Roughly 1 out of 20) of people with a credit file are at least 30 days late on a credit card or other non-mortgage account (e.g., automobile loan, student loan). In other words, they have debt that has been reported as past due to the credit bureau.
  • The share of people with debt past due ranges from 4.6% in the West, North Central, and Middle Atlantic divisions to 7.5% in the West South Central division.
  • Three states have less than 4% of the population with debt past due: Utah, Washington, and New Jersey. 
  • Three states have more than 7% of the population with debt past due: Louisiana, Texas, and Mississippi.
  • Nearly 40% of the high-concentration census tracts in the country are in Louisiana or Texas.
  • Areas with lower household incomes have more people with debt past due, but the correlation is only -0.3. So, while income matters, the concentration of delinquent debt is not simply an income story.
  • Of those with credit files, an alarming 35% have debt in collections.
  • Debt in collection ranges less than $25 to more than $125,000. The average amount owed in collections is $5,178.

Real Median Household Income Rose 0.69% in June: The Sentier Research monthly median household income data series is now available for June. The nominal median household income was up $506 month-over-month but up only $1,791 year-over-year. Adjusted for inflation, it was up $368 MoM and only $710 YoY. The real numbers equate to a 0.69% MoM increase and a 1.34% YoY increase. June marks the second month of real increases following two months of declines. In real dollar terms, the median annual income is 6.6% lower (about $3,800) than its interim high in January 2008.  The first chart below is an overlay of the nominal values and real monthly values chained in June 2014 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.

Consumer Spending Rose By Most In 3 Months Driven By Higher Energy Costs -- For the third month in a row, personal spending missed Bloomberg's median expectation. However, as incomes rose 0.4% in June so spending also rose 0.4% - its best MoM rise in 3 months. The biggest MoM rise was in energy goods and services (+1.67% MoM - the biggest rise this year) - hardly the things sustainable recoveries are built on. The personal savings rate was flat MoM at 5.3% - the same 'peak' level it hit in the middle of 2013.

The Latest on Real Disposable Income Per Capita - With this morning's release of the June Personal Incomes and Outlays we can now take a closer look at "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator was significantly disrupted by the bizarre but predictable oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The June nominal 0.37% month-over-month increase shrinks to 0.12% when we adjust for inflation. The year-over-year metrics are 3.21% nominal and 1.58% real.  The BEA uses the average dollar value in 2009 for inflation adjustment. But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 59.9% since then. But the real purchasing power of those dollars is up only 20.5%.

Consumer Confidence Explodes Higher To October 2007 Highs - On the heels of UMich confidence tumbling to 4-month lows, the Conference Board's consumer confidence exploded higher to the highest since October 2007. This is the 3rd monthly rise in a row and the biggest beat in 13 months all led by a spike in future expectations to its highest since Feb 2011. The Conference Board proclaims this is due in part to a "brighter outlook for personal income," though reality of falling real hourly wages suggests that is simply false. The last time the conference board confidence diverged this much from UMich confidence was June 2007 and that did not end well...

Consumer Confidence Surges; Highest Since the 2007 Market Peak - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through July 17. The headline number of 90.9 was an improvement over the revised June final reading of 86.4, an upward revision from 85.2. Today's number dramatically beat the Investing.com forecast of 85.3. The current level is the highest since October 2007, the month the S&P 500 peaked prior to the Great Recession. Here is an excerpt from the Conference Board press release: “Consumer confidence increased for the third consecutive month and is now at its highest level since October 2007 (95.2). Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations. Recent improvements in consumer confidence, in particular expectations, suggest the recent strengthening in growth is likely to continue into the second half of this year.”  Consumers’ assessment of current conditions improved in July. Those claiming business conditions are “good” edged down to 22.7 percent from 23.4 percent, while those stating business conditions are “bad” was virtually unchanged at 22.7 percent. Consumers’ appraisal of the job market was more favorable. Those saying jobs are “plentiful” increased to 15.9 percent from 14.6 percent, while those claiming jobs are “hard to get” remained unchanged at 30.7 percent.  The percentage of consumers expecting business conditions to improve over the next six months increased to 20.2 percent from 18.4 percent, while those expecting business conditions to worsen held steady at 11.5 percent. Consumers were more positive about the outlook for the labor market. Those anticipating more jobs in the months ahead increased to 19.1 percent from 16.3 percent, while those anticipating fewer jobs declined to 16.4 percent from 18.4 percent. Slightly more consumers expect their incomes to grow, 17.3 percent in July versus 16.7 percent in June, while those expecting a drop in their incomes declined to 11.0 percent from 11.4 percent.

600 Retailers Ensnared in Major New Malware Attack, Cybersecurity Firm Says - The number of businesses ensnared in a new malware attack revealed in a Department of Homeland Security report this week may run to six hundred, according to a cybersecurity firm that helped DHS prepare the report.  Hackers are using point-of-sale (PoS) malware to steal consumer payment data, including credit and debit card information, from businesses that use remote desktop applications, according to the DHS report out Thursday. The department is now investigating the breaches.But cybersecurity company Trustwave says at least six hundred businesses across the country have had the malicious software, dubbed “Backoff,” installed on their networks since Oct. 2013, allowing hackers to steal data. The DHS declined to comment to TIME on the scope of the attack.Many of the 600 are small independent brick-and-mortar shops, said Karl Sigler, threat intelligence manager at Trustwave, but large national chains have been caught up as well. A DHS official who spoke on the condition of anonymity said that large chains were specifically vulnerable when acquiring a smaller business that could have weaker security protections.The hackers target businesses that use remote desktop applications, according to the DHS, of the same kind used by technical support to access a computer from an off-site location. Once they find businesses with basic I.T. security or weak passwords, they can gain the same remote access to systems that technical assistance might have and easily install the malware.“Backoff” then scrapes memory from the victims’ machines, searches for track data and logs keystrokes to reap sensitive data such as credit card information. “Once the malware sees a credit card system in memory, or typed in, it grabs that credit card information, then encrypts it and ships it out to another system under criminals’ control,” Sigler explained.

Restaurant Performance Index declined in June -- From the National Restaurant Association: Restaurant Performance Index Declined in June Amid Softer Customer Traffic Due in large part to softer customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) registered a moderate decline in June. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.3 in June, down from a level of 102.1 in May and the first decline in four months. Despite the drop, the RPI remained above 100 for the 16th consecutive month, which signifies expansion in the index of key industry indicators. The index decreased to 101.3 in June, down from 102.1 in May. (above 100 indicates expansion).  Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month - and even with the monthly decline this is a solid reading.

Gasoline Price Update: Down Another Five Cents - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium both dropped another five cents, the fourth week of price declines. Regular is up 35 cents and Premium 34 cents from their interim lows during the second week of last November.According to GasBuddy.com, two states (Hawaii and Alaska) have Regular above $4.00 per gallon, down from three last week, and three states (California, Oregon, Washington) are averaging above $3.90, unchanged from last week.

U.S. Light Vehicle Sales decline to 16.4 million annual rate in July -- Based on an WardsAuto estimate, light vehicle sales were at a 16.4 million SAAR in July. That is up 5% from July 2013, and down 2.5% from the 16.9 million annual sales rate last month. This was below the consensus forecast of 16.7 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for July (red, light vehicle sales of 16.4 million SAAR from WardsAuto). Note: AutoData estimates sales at 16.48 million SAAR for July.  The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Vehicle Miles Driven: A Structural Change in Our Driving Behavior - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through May.  Travel on all roads and streets changed by 0.9% (2.4 billion vehicle miles) for May 2014 as compared with May 2013 (see report). The less volatile 12-month moving average is up 0.07% month-over-month. If we factor in population growth, the 12-month MA of the civilian population-adjusted data (age 16-and-over) is down 0.01% month-over-month and down 0.3% year-over-year. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1990. My start date is 1971 because I'm incorporating all the available data from earlier DOT spreadsheets. As we can readily see, the post-recession pattern suggests a structural change in our driving habits. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most meaningful analysis, especially if we want to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.  Clearly, when we adjust for population growth, the Miles-Driven metric takes on a much darker look. The population-adjusted all-time high dates from June 2005. That's approaching nine years ago. The latest data is 9.26% below the 2005 peak, fractionally off the post-Financial Crisis low two months earlier. Our adjusted miles driven based on the 16-and-older age cohort is about where we were as a nation in January of 1995.

Dallas Fed: Manufacturing "Activity Picks up Pace Again" in July - From the Dallas Fed: Texas Manufacturing Activity Picks up Pace Again Texas factory activity increased again in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 15.5 to 19.1, indicating output grew at a faster pace than in June.  Other measures of current manufacturing activity reflected significantly stronger growth in July. The new orders index doubled from 6.5 to 13. The capacity utilization index also posted a strong rise, moving to 18 from 9.2 in June. The shipments index rose 12 points to 22.8, reaching its highest level since January 2013. The July readings for these indexes were all more than twice their 10-year averages, suggesting notably robust manufacturing growth.
Labor market indicators reflected continued employment growth and longer workweeks. The July employment index posted a second robust reading, although it edged down from 13.1 to 11.4. ... The hours worked index edged up from 4.7 to 6.3, indicating a slightly stronger rise in hours worked than last month. 
Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Chicago PMI declines to 52.6 -- From the Chicago ISM: Chicago Business Barometer Down 10.0 points to 52.6 in July  The Chicago Business Barometer dropped 10.0 points to 52.6 in July, significantly down from May’s seven month high of 65.5, led by a collapse in Production and the ordering components, all of which have been strong since last fall. A monthly fall of this magnitude has not been seen since October 2008 and left the Barometer at its lowest level since June 2013. In spite of the sharp decline this month, feedback from purchasing managers was that they saw the downturn as a lull rather than the start of a new downward trend. This was especially so given the recent strong performance and the fact that Employment managed to increase further in July. This was well below the consensus estimate of 63.0.

Chicago PMI Collapses To 13-Month Lows, Biggest Miss On Record -- We warned last month that under the covers Chicago PMI looked a lot weaker than the headlines and this morning's collapse confirms that. Against expectations of a small rise to 63.0, Chicago PMI plunged from 62.6 to 52.6 (13-month lows) for the biggest miss on record. According to the release itself, "A monthly fall of this magnitude has not been seen since October 2008 ." The was an 8 standard-deviation miss from analyst expectations (Joe Lavorgna was on the high side at 63.0). New orders, inventory, production, order backlogs, and prices paid all dropped (but employment rose?). This is the biggest 2-month drop since Lehman (and 2nd biggest since 1980). We await the seasonal adjustment "correction" as MNI get the call from Yellen.

US Manufacturing PMI Misses By Most In 11 Months, Employment Plunges, Blames Russia & Gaza -- US Manufacturing PMI in July dropped to 3-month lows at 55.8, missing expectations by the most since Augiust 2013 as employment growth moderated to its slowest in 13 months. The 'excuse' this time - Russia and Gaza. PMI tumbled... and employment plunged... Don't worry, we have an excuse for that: “The one area of concern is the slacking pace of employment growth signalled by the survey, which suggests companies have become increasingly cautious about taking on new staff given growing uncertainties, such as the escalating situations in Russia and Gaza. “With overseas worries likely to hit demand in key export markets, and exports having already stagnated in the past two months, overseas trade looks likely to continue to act as a drag on the US economy.“

ISM Manufacturing index increased in July to 57.1 - The ISM manufacturing index suggests faster expansion in July than in June. The PMI was at 57.1% in July, up from 55.3% in June. The employment index was at 58.2%, up from 52.8% in June, and the new orders index was at 63.4%, up from 58.9% in June. From the Institute for Supply Management: July 2014 Manufacturing ISM® Report On Business®  . "The July PMI® registered 57.1 percent, an increase of 1.8 percentage points from June's reading of 55.3 percent, indicating expansion in manufacturing for the 14th consecutive month. The New Orders Index registered 63.4 percent, an increase of 4.5 percentage points from the 58.9 percent reading in June, indicating growth in new orders for the 14th consecutive month. The Production Index registered 61.2 percent, 1.2 percentage points above the June reading of 60 percent. Employment grew for the 13th consecutive month, registering 58.2 percent, an increase of 5.4 percentage points over the June reading of 52.8 percent. Inventories of raw materials registered 48.5 percent, a decrease of 4.5 percentage points from the June reading of 53 percent, contracting after five months of consecutive growth. Comments from the panel are generally positive, while some indicate concern over global geopolitical situations."

ISM Manufacturing Surges To 3 Year Highs, Construction Spending Plunges Most Since Jan 2011 - The numbers have been 'adjusted' and all is well in the world. Never mind Chicago PMI, or US PMI, the ISM Manufacturing index for July printed 57.1 - the highest since April 2011 - well above expectations and last month's 55.3. Employment rose notably (the opposite of US PMI) and inventories contracted. That's the great news. Then there's the meh news - consumer confidence slipped lower in July. Then there's the horrible news - construction spending collapsed at 1.8% MoM - its biggest drop since Jan 2011. Take your pick which will define your bias.

NSA Costs U.S. Tech $35 Billion Over Three Years -- U.S. technology companies are in danger of losing more business to foreign competitors if the National Security Agency’s power to spy on customers isn’t curbed, researchers with the New America Foundation said in a report today. The report, by the foundation’s Open Technology Institute, called for prohibiting the NSA from collecting data in bulk, while letting companies report more details about what information they give the government. Senate legislation introduced today would fulfill some recommendations by the institute, a Washington-based advocacy group that has been critical of NSA programs. Citing concerns from top executives of Microsoft, Cisco Systems Inc. and other companies, the report made a case that NSA spying could damage the $150 billion industry for cloud computing services. Those services are expanding rapidly as businesses move software and data to remote servers.

Export-Import Bank to Win Renewal, With Changes, Republican Says -- The U.S. Congress probably will reauthorize the Export-Import Bank before its charter expires in two months, adding tools to crack down on misconduct by employees, a Republican House committee chairman said. “It’s an important agency, but it clearly has corruption problems,” House Oversight and Government Reform Committee Darrell Issa of California said yesterday in an interview on Bloomberg Television. The 80-year-old bank is facing its toughest test as it seeks reauthorization before its financing powers end Sept. 30. Manufacturers such as Boeing Corp. as well as Wall Street banks back the lender, while the Republican-leaning Heritage Foundation and the Club for Growth, oppose the bank as “crony capitalism.” Issa said incoming House Majority Leader Kevin McCarthy, a fellow California Republican, told him in a meeting yesterday that he would consider a short-term extension of the charter as long as changes are made to the agency’s operations. McCarthy last month in a television interview said the bank’s authority to help overseas companies buy U.S. goods should expire with the charter.

More Fun and Games With Export-Import Bank - Dean Baker -- It is great fun watching the establishment get so upset over the possibility that Boeings' the Export-Import Bank may not be reauthorized to issue more loans. Just to remind everyone, the Export-Import Bank issues the overwhelming majority of its loans and guarantees to benefit a small number of huge corporations. It is a straightforward subsidy to these companies, giving them loans at below market interest rates. Anyhow, today's fun is a column in the NYT (major media outlets have an open door policy to anyone who wants to argue to preserve the subsidies) by William Brock, a former senator and trade representative under President Reagan. Brock tackles head on the argument made by folks like me that only a small portion of our exports are subsidized by the bank: "Opponents of the bank say that it supports just 2 percent of all exports. Still, 2 percent amounts to $37.4 billion of American products made by American workers in American plants. That translates into tens of thousands of jobs from every state in the country." Wow, that's pretty compelling. But wait, suppose we ended the subsidies to Boeing. Would it never sell another plane abroad? Fans of economics everywhere know that the end of the Ex-IM subsidies simply means that it would stand to make less money on each plane. For the most part this would be a story of lower profits, but there would be some reduction in exports, probably in the range of 10 to 30 percent of the amount being subsidized. That translates into $3.7 to $11.2 billion in exports that we would lose without the Ex-Im Bank.

US Services PMI Beats After Last Week's Manufacturing PMI Record Miss, Employment Plunges -- With US manufacturing PMI having missed by the most on record last week, it was only "fair" that the Services PMI from recent IPO Markit would beat expectations and hold at record highs. At 61.0 this is equal to the best print in history... but there is somethng wrong here. The surge in employment in June has been eviscerated as the index plunged back from record exuberance at 56.1 to 52.8 with some respondents noting "a degree of caution about the business outlook." This is not good news for long-awaited wage inflation that promises to lift all boats...

The Other Aging of America: The Increasing Dominance of Older Firms | Brookings Institution: Like the population, the business sector of the U.S. economy is aging. Our research shows a secular increase in the share of economic activity occurring in older firms—a trend that has occurred in every state and metropolitan area, in every firm size category, and in each broad industrial sector. The share of firms aged 16 years or more was 23 percent in 1992, but leaped to 34 percent by 2011—an increase of 50 percent in two decades. The share of private-sector workers employed in these mature firms increased from 60 percent to 72 percent during the same period. Perhaps most startling, we find that employment and firm shares declined for every other firm age group during this period. We explore three potential contributing factors driving the increasing share of economic activity occurring in older firms, and find that a secular decline in entrepreneurship is playing a major role. We also believe that increasing early-stage firm failure rates might be a growing factor. We are unable to find strong evidence of a direct link between business consolidation and an aging firm structure. Though we document a clear rise in consolidation during the last few decades, it doesn’t appear to be a major contributor to business aging directly—which has been occurring across all firm size classes, and the most in the smallest of businesses. This leaves some questions unanswered, but it clearly establishes that whatever the reason, it has become increasingly advantageous to be an incumbent, particularly an entrenched one, and less advantageous to be a new entrant.

We're 650,000 Start-Ups Shy of a Revolution --- Here is a shocking statistic, which has walked right by most mainstream media without much notice: According to the 2011 Census, for the first time in recorded history (since 1978), there were more small business deaths in America, than small business births. If we don’t turn this around, America’s years as the world’s super power are numbered. That said, I see a rainbow, following this storm. According to Gallup research, 70% of all jobs in America come from small businesses with five hundred or fewer employees, and half of all jobs in America come from small businesses with one hundred or fewer employees. Gallup Chairman and CEO Jim Clifton adds, “There are approximately six million small businesses in the United States, and they are the very backbone of the country’s democracy. Those businesses fund significantly more American jobs and [gross domestic product] than big business does.”

Weekly Initial Unemployment Claims at 302,000, 4-Week Average Lowest since April 2006 - The DOL reports: In the week ending July 26, the advance figure for seasonally adjusted initial claims was 302,000, an increase of 23,000 from the previous week's revised level. The previous week's level was revised down by 5,000 from 284,000 to 279,000. The 4-week moving average was 297,250, a decrease of 3,500 from the previous week's revised average. This is the lowest level for this average since April 15, 2006 when it was 296,000. The previous week's average was revised down by 1,250 from 302,000 to 300,750.   There were no special factors impacting this week's initial claims.  The previous week was revised down to 279,000. The following graph shows the 4-week moving average of weekly claims since January 1971.

ADP: Private Employment increased 218,000 in July -- From ADP: Private sector employment increased by 218,000 jobs from June to July according to the July ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis...Mark Zandi, chief economist of Moody’s Analytics, said, "The July employment gain was softer than June, but remains consistent with a steadily improving job market. At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016.”This was below the consensus forecast for 235,000 private sector jobs added in the ADP report. 

Payrolls Watch: July Challenger Job Layoffs Surge Most In Over 2 Years - With the world waiting for tomorrow's "most important data of the year" payrolls report as their signal to BTFD or follow Yellen Capital's recommendation and "sell," we thought it perhaps of note that this morning's Challenger jobs data was extremely weak. Layoffs in July surged 49% (the most since May 2012) to 46,887. This is the 2nd most layoffs in 11 months. The heaviest layoffs were in the Western region and also most concentrated in the auto industry.

July Employment Report: 209,000 Jobs, 6.2% Unemployment Rate - From the BLSTotal nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 6.2 percent, the U.S. Bureau of Labor Statistics reported today.  The change in total nonfarm payroll employment for May was revised from +224,000 to +229,000, and the change for June was revised from +288,000 to +298,000. With these revisions, employment gains in May and June were 15,000 higher than previously reported.The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes). This was the sixth month in a row with more than 200 thousand jobs added, and employment is now up 2.57 million year-over-year.  Total employment is now 639 thousand above the pre-recession peak. The second graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was increased in July to 62.9%. This is the percentage of the working age population in the labor force. A large portion of the recent decline in the participation rate is due to demographics. The Employment-Population ratio was unchanged at 59.0% (black line). I'll post the 25 to 54 age group employment-population ratio graph later. The third graph shows the unemployment rate. The unemployment rate increased in July to 6.2%. Although below expectations, this was another solid employment report - including the positive revisions to prior months. 2014 is on pace to be the best year for employment gains since 1999.

209K New Nonfarm Jobs in July, Unemployment Rate Rises to 6.2% -- Here are the lead paragraphs from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:Total nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 6.2 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, manufacturing, retail trade, and construction.  Today's report of 209K new nonfarm jobs was below the Investing.com forecast of 233K. The unemployment rate rose from 6.1% to 6.2%. The Investing.com expectation was an unchanged 6.1%.The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.4% all-time peak in April 2010. It dropped below 3% in April of last year, and for the past two months has hovered around its 2.0% post-recession low.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

July 2014 jobs report: excellent job creation, poor wage and participation omens -  HEADLINES:

  • 205,000 jobs added to the economy
  • U3 unemployment rate rose from 6.1% to 6.2%

Wages and participation rates

  • Not in Labor Force, but Want a Job Now: up 144,000 to 6.259 million
  • Employment/population ratio ages 25-54: down from 76.7% to 76.6%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: up +0.2% or $.04 from $20.58 to $20.61, up 2.0% YoY
May was revised upward by 5,000 to 229,000. June was also revised upward by 10,000 to 298,000.  Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for July show little progress being made on those two fronts.Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually slightly risen this year. As noted above they were 6.3 million in July.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.After inflation, real hourly wages for nonsupervisory employees were probably unchanged from June to July. The YoY change in average hourly earnings is +2.0%, essentially equal to the inflation rate, so workers are making no real progress at all.  Finally, while the unemployment rate rose, it rose for the "good" reason.  The civilian labor force rose measured by the household survey rose by 329,000, while the number of new jobs in the same survey rose by 131,000.

July Payrolls: 209K, Below Estimate; Unemployment Rate Rises To 6.2%; Wage Growth Below Estimate - If today's market desperately needed some bad news, it got it moments ago when the July payrolls printed at 209K, below the 230K expected, and far below the June upward revised 298K (was 288K). Of note is that this is the 6th month in a row of 200K+ job gains, the longst since 1998 . Away from the establishment survey, the household survey showed an even worse print, with just 131K job growth in July, down from 407K in June, so if any algos are scrambling to convince themselves that the data was horrible, look at this. But is the momentum slowing enough to force the Fed to push QE back? The unemployment rate rose modestly from 6.1% to 6.2%, beating expectations of an unchanged print driven by a decline in the people out of the labor force from 92.1 million to 92.0 million while the labor force participation rate rose by a tiny 0.1% to 62.9%.

Nonfarm Payrolls 209,000, Unemployment 6.2%, Employed +131,000  -- Counting the upwardly revised 298,000 nonfarm payroll report in June (originally reported as 288,000), this was a decent report. Yet, digging into the details, the household survey showed a gain in employment of only 131,000. Thus, for the second consecutive month, the household survey was substantially weaker than the headline number. The number of unemployed rose by 197,000 (0.1%) thanks to a rise in the labor force. May BLS Jobs Statistics at a Glance:

  • Nonfarm Payroll: +209,000 - Establishment Survey
  • Employment: +131,000 - Household Survey
  • Unemployment: +197,000 - Household Survey
  • Involuntary Part-Time Work: +275,000 - Household Survey
  • Voluntary Part-Time Work: -33,000 - Household Survey
  • Baseline Unemployment Rate: +0.1 at 6.1% - Household Survey
  • U-6 unemployment: +0.1 to 12.2% - Household Survey
  • Civilian Non-institutional Population: +209,000
  • Civilian Labor Force: +329,000 - Household Survey
  • Not in Labor Force: -119,000 - Household Survey
  • Participation Rate: +0.1 at 62.9 - Household Survey
  • The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
  • In the past year the working-age population rose by 2,226,000.
  • In the last year the labor force declined by 330,000.
  • In the last year, those "not" in the labor force rose by 1,939,000
  • In the past year, the number of people employed rose by 2,067,000 (an average of 172,250 a month)

July Jobs Report: First Impressions - Payrolls grew by 209,000 last month and the unemployment rate ticked up to 6.2% according to today’s report from the Bureau of Labor Statistics. The payroll gain was below expectations of around 235,000, and well below June’s upwardly revised gain of 298,000. However, while the payroll number is somewhat disappointing, given the jumpiness of monthly numbers, it would be a mistake to conclude that the engine of job growth has significantly downshifted. Given the monthly noise, it makes sense to take an average of the monthly payroll results. Below is this month’s version of JB’s Jobs Day Smoother, wherein I show average monthly job growth over the past three, six, and twelve months—a useful way of pulling recent trends out of the bouncy monthly data. The underlying pace of payroll job growth over both the past three and six months is about 245,000 compared to 214,000 for the year-long average. This suggests a moderate underlying improvement in the pace of employment growth, but the safest conclusion given the limits of the data is that the job market is solidly adding over 200,000 jobs per month. This is a decent pace of job growth, but given the existing extent of un- and underemployment, it implies the full employment is still years, not months, away.  Speaking of unemployment, it ticked up slightly from 6.1% to 6.2%, but for “good reasons:” the household survey, from which these data are derived, showed more job growth, but even more people entering the labor market.

Chart of the day: Strongest 6-month job gain since 2006 --Some highlights from today’s Employment Situation report:

  • 1. The increase in US payrolls over the last six months through July (1,465,000) was the strongest six months for hiring in the US since April 2006, see chart above (HT: Annalyn Kurtz). More than 200,000 new jobs were added in each of the last six months — the last time that happened was 1997!
  • 2. Oil and gas extraction jobs increased in July to a 28-year high of 212,300, and were up by 7.5% compared to a year ago.
  • 3. July construction payrolls increased by 22,000 from June to the highest level since May 2009, more than five years ago.
  • 4. US manufacturers added 28,000 jobs in July, bringing factory payrolls to their highest level since March 2009.
  • 5. Employment for the “Temporary Help Services” category increased in July to a new record high of 2.88 million jobs, an 8% increase over a year ago.

US Job Market Turns in Best Six-Month Run Since Recovery Began -- Today’s report from the BLS showed that the US economy added 209,000 payroll jobs in July. With upward revisions for May and June, total job growth for the past six months comes to 1,400,000, making it the best six-month stretch since the recovery began. Private sector employers added jobs in both goods and services. The government sector reported 11,000 new jobs, all at the local level. Federal employment was unchanged while state governments shed 1,000 jobs.The household survey also showed solid gains. The civilian labor force grew by 239,000, well above the average monthly gain of recent years. Total employment increased by 131,000. (Because of sampling error and methodological differences, the number of new payroll jobs in the survey of employers often differs from the change in employment according to the household survey.) With so many workers entering the job market, the number of unemployed increased by 197,000, sending the unemployment rate up slightly to 6.2 percent. The broad unemployment rate, U-6, which takes discouraged workers and involuntary part-time workers into account, also rose by a tenth of a percentage point. There were few dramatic changes elsewhere in today’s report. The percentage of workers unemployed for more than 26 weeks edged up by a tenth of a percentage point, but the mean duration of unemployment decreased slightly. The number of people working part-time for economic reasons increased a bit as a share of the labor force, but total part-time workers decreased.  On the whole , today’s data, which represent the first major release for the third quarter of 2014, suggest that the strong GDP growth reported for the second quarter should continue during the late summer and fall.

Job Growth Slows in July, by Dean Baker --  Wage growth slowed slightly in the last quarter to 1.8 percent from 2.0 percent in the last year. The economy added 209,000 jobs in July, a sharp slowing from its 277,000 average over the prior three months. The slowdown was widely spread across sectors, although temporary help -- which added just 8,500 jobs -- and health care -- which added just 7,000 -- were notably weak. Construction -- which added 22,000 jobs -- and manufacturing -- which added 28,000 jobs -- were surprisingly strong. The unemployment rate was essentially unchanged at 6.2 percent, as there was little change in either the size of the labor force or the number of unemployed. Involuntary part-time employment edged down slightly, reversing part of a jump in June. It is now 669,000 below its year-ago level. Voluntary part-time employment decreased modestly, but is still 502,000 above its year-ago level. This would be consistent with some workers opting to work part-time now that they no longer need to get health insurance through their job as a result of the Affordable Care Act.There was little change in employment or unemployment rates for most demographic groups, although the employment-to-population ratio for African Americans edged up to 54.6 percent -- its highest level since January of 2009. Workers over age 55 accounted for all the reported employment growth in July, with an increase in employment of 159,000 compared to 131,000 overall. However, their 43.4 percent share of employment growth over the last year is considerably less than it had been earlier in the recovery. The duration measures showed little change, with average duration of unemployment falling back 1.1 weeks to 32.4 weeks, while both the median duration and share of long-term unemployed increased slightly. The share of unemployment due to people voluntarily quitting their jobs was essentially unchanged from the prior two months at 8.9 percent. This is up from 8.5 percent last July, but still well below the 11-12 percent shares in the years before the downturn.

Comments on Employment Report - A few key points:
• At the current pace (through July), the economy will add 2.75 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private job growth since 1999.
• Wage growth is still subdued, from the BLS: "In July, average hourly earnings for all employees on private nonfarm payrolls edged up by 1 cent to $24.45. Over the past 12 months, average hourly earnings have risen by 2.0 percent."
• Inflation is not a concern this year. The BEA reported this morning that the PCE price index is up 1.6% year-over-year, and core PCE prices are up 1.5%.
• With the unemployment rate at 6.2%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but currently with low inflation and little wage pressure, the Fed can and will be patient.
A few numbers: Total employment increased 209,000 from June to July, and is now 639,000 above the previous peak.  Total employment is up 9.349 million from the employment recession low. Private payroll employment increased 198,000 from June to July, and private employment is now 1,105,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment). Private employment is up 9.895 million from the low.Through the first seven months of 2014, the economy has added 1,609,000 payroll jobs - up from 1,370,000 added during the same period in 2013 - even with the severe weather early this year.   My expectation at the beginning of the year was the economy would add between 2.4 and 2.7 million payroll jobs this year.

Economists React to July’s Jobs Report: ‘Not Weak, But…’ -- U.S. nonfarm employers added 209,000 jobs in July, slightly below forecasts and slower than earlier gains, while the unemployment rate ticked up to 6.2% from June. But employers have now added 200,000 or more jobs in six consecutive months for the first time since 1997. Economists were mixed in how they view the report: some have called it “encouraging,” while others consider it “disappointing.”

  • It is a sign of how far the U.S. economy has come in recent months that the 209,000 increase in non-farm payroll employment in July will probably be viewed as a disappointment in the markets. The consensus forecast was as high as 230,000. Admittedly, the unemployment rate also edged up to 6.2% last month, from 6.1%, but that increase was principally because 329,000 people joined the active labor force last month. –Paul Ashworth, Capital Economics
  • The July employment data were not weak, but they did not show the kind of acceleration that would force the Fed leadership to rethink “considerable period” or their preference for a gradual pace of policy normalization. A few other tidbits: The composition of payroll growth was encouraging, with above trend gains in construction and manufacturing and smaller advances in retail, leisure and hospitality, and other service industries (e.g. education). The short-term unemployment rate ticked up from 4.0% to 4.1%, while long-term unemployment rate was steady at 2.0%. –Michelle Girard, RBS Securities
  • The bottom line for employment reports these days is what it means for the Federal Reserve. With wage growth coming in less than expected and the unemployment rate ticking up one tenth, the Fed probably feels comfortable at this time with its stance. That said, one month is not a trend and the trend remains in place; job growth north of 200K is occurring more regularly and wage and inflation pressures should build over time. In that regard, today’s report doesn’t really advance the ball for either side. –Dan Greenhaus, BTIG

The Unemployment Rate Was Higher, but the Employment Rate Held Steady - The U.S. unemployment rate increased slightly to 6.2% in July and a broader rate that includes discouraged workers also ticked up to 12.2%, but don’t be discouraged. Those numbers rose mostly for the right reason. It looks like people who gave up during the recession and slow recovery are encouraged by recent gains and are coming back into the labor force. Last month, the Journal noted that economists have been expecting this trend to take hold, but too often they have been wrong. One month’s move isn’t enough to declare the wounds of the recession are healed, but after some stagnation earlier this year, the numbers suggest movement in the right direction. The jobless rate is calculated by taking the total number of unemployed people and dividing it by everyone in the U.S. who is working or looking for work — what the Labor Department calls the labor force. People who have given up looking for work don’t count in that calculation. When they come off the sidelines, and start looking for work, it adds to the number of unemployed and can raise the unemployment rate. It can be hard to tell the reasons why the number of unemployed rise, since it’s a net number that takes into account millions of people moving through the labor force every month. But the indications are generally positive. More of the newly unemployed came from out of the labor force than from the ranks of the employed. There also was a rise in the number of people unemployed for more than six months, indicating some of the long-term unemployed may have come back into the labor market. Separately, the broader measure of unemployment, known as the “U-6″ for its data classification by the Labor Department, looks like it also rose for the right reasons. That rate includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The rate rose even though there were fewer part-time workers who wanted full-time jobs. Meanwhile, the ranks of the marginally attached workers is below year-earlier levels.

Jobs Report Shows High-Wage Sectors Finally Digging Out - Employers this year are adding to payrolls at the best clip of the recovery, 230,000 a month, and with that acceleration comes better hiring in typically higher-paying fields such as construction, manufacturing and the government. Construction payrolls have grown, on average, by 23,500 a month in 2014, according to the Labor Department‘s jobs report released Friday. That’s a jump from the average monthly gain of just 8,600 the prior three years. Manufacturers have added 15,000 jobs each month this year, compared with just under 10,000 the prior three years. And after mostly shedding jobs in recent years, the public sector has averaged nearly 10,000 workers added each month in 2014. The development is potentially good news for future economic growth. Stronger gains is better-paying fields helps support income growth, which should then lead to increased consumer spending. Lower paying fields, such as retail and hospitality (including restaurants), are still aiding overall growth, but the acceleration in those sectors has been less dramatic this year. The retail industry is hiring about 18,000 per month this year—a smaller monthly gain than construction. The retail monthly average is up a bit from 15,000 during prior three years. Hospitality has added 30,000 a month in 2014, versus 26,500 from 2011 through 2013. Those higher-wage jobs are digging out of deep holes.

Old Workers Hit New Record High As Jobs For Key 25-54 Age Group Slide By 142K - Another month, another case where the primary age group of the US work force, those aged 25-54, gets shafted. According to the BLS' household survey, while overall July jobs rose, if modestly less than the 209K revealed by the establishment survey, there was no joy for those aged 25-54: historically the most important and highest earning age group (in case anyone is wondering where all that missing average hourly earnings growth is) within the US labor force. As the chart below shows, while all other age groups posted a jobs uptick, it was those 25-54 that saw a 142K jobs decline in the past month.

Slack in the Labor Market: Who are the involuntary part-time workers and what are their outcomes? - The establishment data issued this morning by the BLS showed continued gains in the labor market with establishments reporting an increase in payrolls of 209,000 workers. While it is slightly lower than the last few months, with slower growth in the service sector (140,000), goods producing performed better than the last few months, increasing 58,000. The diffusion index, however, fell from 65.3 to 61.9, meaning slightly fewer firms reporting employment gains as compared to last month. The household data revealed a slight increase in the unemployment rate, from 6.1% to 6.2%, with the number of unemployed persons rising 197,000 and the civilian labor force increasing by 329,000. So while the labor force expanded, the hiring did not keep pace, leading to an overall increase in the unemployment rate.It is also worth noting that, even though employment is increasing, it is not creating upward pressure on wages. Average hourly earnings remained essentially stagnant the past month and have increased very little over the past year.  This is an important reason why the Fed doesn’t see increased inflation pressure coming from the labor market. Following several months of positive reports on the labor market , tepid first quarter GDP growth and strong second quarter GDP growth, the central question for policy makers remains: Is ‘liftoff’ of the federal funds rate near? The answer to that question in June was no. The answer in July is also no. The expectation appears to be to keep the target for the federal funds rate between 0 and 1/4 percent “for a considerable period after the asset purchase program ends”. You don’t have to read very far into the report to Congress or this week’s FOMC announcement to see why the Fed is so hesitant to move rates. From the first paragraph of the summary (emphasis added): The overall condition of the labor market continued to improve during the first half of 2014. Gains in payroll employment picked up to an average monthly pace of about 230,000, and the unemployment rate fell to 6.1 percent in June, nearly 4 percentage points below its peak in 2009. Notwithstanding those improvements, a broad array of labor market indicators—such as labor force participation, hiring and quit rates, and the number of people working part time for economic reasons—generally suggests that significant slack remains in the labor market.

Long-Term Unemployed Likely to Return to Job Market, Study Finds - The long-running debate about the causes of America’s high rate of long-term unemployment is far from settled. A new working paper from the National Bureau of Economic Research wades into the discussion and its findings fall squarely on the side of those who see the labor market’s woes as a product of a weak business cycle. The other so-called structural explanation is that a mix of demographic shifts and the deep recession could have done permanent damage to the labor force, meaning no amount of policy support, fiscal or monetary, could lift employment growth back to its historical trend. Some Federal Reserve officials, including Richmond Fed President Jeffrey Lacker, have favored such explanations. The NBER paper’s authors, led by Kory Kroft of the University of Toronto, aren’t buying that argument. “Compositional shifts in demographics, occupation, industry, region and the reason for unemployment jointly account for very little of the observed increase in long-term unemployment,” they write. For one thing, long-term joblessness–defined as unemployment for 27 weeks or more–increased “for virtually all groups” as opposed to affecting a specific part of the population or income strata. The long-term unemployed accounted for 32.8 percent of the unemployed in June, down from 34.6% in May. The rate is now way down from the peak of 45% in September 2011, but still roughly double the rates that prevailed in the three years before the 2008 financial crisis.

Truths and myths about the rise of part-time jobs - David Cay Johnston - When the Bureau of Labor Statistics announced that 288,000 jobs had been added in June, critics cried foul. They said the news was misleading: The details showed a deteriorating job market, which many critics blamed on the Affordable Care Act requirement that employers provide workers with health insurance or risk prosecution or penalties. But an examination of the data tells an entirely different story about what has hobbled the recovery from the Great Recession, which started in December 2007 and ended in the summer of 2009. June marked 52 consecutive months of job growth. However, the number of full-time jobs actually fell in June by more than 530,000 compared with May. Total jobs increased only because part-time jobs grew by about 800,000. At first blush these numbers are alarming. But the details reveal a more nuanced, and in some ways more disturbing, picture.Most troubling of all, the number of people who want to work full-time but can find only part-time work shot up from 4.6 million in 2007 to 7.5 million last month. This involuntary part-time employment explains, statistically, the entire increase in part-time jobs in the last six-plus years. Had we maintained the 2007 ratio of full-time to part-time jobs today, we would have 2.5 million more full-time jobs and 2.5 million fewer part-time jobs, according to my calculations from the official data. We would still need another roughly 7 million jobs to fulfill all the demand people have for work. The shift to part-time work took place before Obama’s policies had any effect and well before Congress passed the Affordable Care Act in March 2010.

Can We Have Too Many STEM Workers? -  - I read two pieces about the STEM (science, technology, engineering, and math) workforce this morning: an op-ed in USA Today and an editorial in the Washington Post. Both reference a recent Census Bureau study, which found that only a quarter of bachelor’s degree graduates in STEM fields end up working in those fields. But from there, the two pieces head in very different directions. The Post’s editors believe there’s no such thing as an oversupply of STEM graduates, but their editorial doesn’t review the boom and bust history of STEM graduate oversupply, or even mention what effect oversupply might have on the earnings or aspirations of the students who have paid for and worked to complete STEM bachelor degrees. By contrast, the USA Today authors (some of whom have done research with EPI before), all of whom are academics with close ties to actual students, do care about what happens to STEM grads after they leave school and look for work. They are rightly concerned that the wages of IT personnel have been flat for 16 years, and they worry that overproducing STEM grads, coupled with industry’s immigration proposal to triple the number of IT guestworkers, will suppress wage growth and deny IT workers the middle class security most would like, let alone a fair share of the tech industry’s fabulous profits.

McDonald’s Liable for Employees’ Treatment, Labor Board Rules - In a key decision that could pave the way to unionization for thousands of fast food workers, the National Labor Relations Board ruled Tuesday that McDonald’s isjointly responsible for employees’ treatment by the brand’s franchise owners.McDonald’s has long held that it isn’t liable for the treatment of its employees at the approximately 90% of its 14,000 restaurants that are owned by franchisees. But the recent decision could make McDonald’s liable for the labor practices of thousands of independent operators at its locations, and where employees have claimed they were fired for trying to unionize.The NLRB said in a statement that of the 181 complaints involving McDonald’s since November 2012, McDonald’s will be named as a joint respondent in 43 of them, making it responsible for actions taken at thousands of its restaurants.Labor organizers have long argued that McDonald’s should be held accountable as a joint employer because it controls menus, uniforms, supplies and many other terms of operations. The New York Timesreports that in the past McDonald’s has urged franchises to lower wages.“McDonald’s can try to hide behind its franchisees, but today’s determination by the NLRB shows there’s no two ways about it: The Golden Arches is an employer, plain and simple,”

Where Is The Monopsony Power? - You hear it claimed relatively often today that low wage employers have monopsony power. For example, this is a sometimes cited explanation for the claim that there is no disemployment effect of the minimum wage. A monopsony is when an employer has market power in the labor market, sort of the employer equivalent of a monopoly. The argument is that a monopsonist is able to hold wage below the equilibrium level, just like a monopolist would hold prices below the competitive equilibrium. Economic theory suggests that in response to a price floor that increases prices slightly, a monopsonist might not decrease labor demand. However, a recent study provides empirical evidence that seems somewhat at odds with this: large retailers pay more than small retailers. You can find more about the study here, I’ll quote myself summarizing the results:  The researchers found some starting facts. For instance, after controlling for individual and store characteristics, firms with at least 1,000 employees pay 9% to 11% more than those employing 10 or fewer. Looking at individual establishments rather than firms, large stores pay 19% to 28% more than small ones. This is consistent with research in non-retail industries that finds, all else equal, big firms tend to pay more. In addition, they find that retail managers make more per hour than non-managers in manufacturing, and that there are more managers in retail than in manufacturing

Unemployment and the “Skills Mismatch” Story: Overblown and Unpersuasive -- Brookings -- The jobless rate has dipped to 6.1 percent, and businesses are already complaining about a skills shortage. ... To an economist, the most accessible and persuasive evidence demonstrating a skills shortage should be found in wage data. ...Where is the evidence of soaring pay for workers whose skills are in short supply? We frequently read anecdotal reports informing us some employers find it tough to fill job openings. What is harder to find is support for the skills mismatch hypothesis in the wage data..., there is little evidence wages or compensation are increasing much faster than 2% a year [i.e. outpacing inflation]. Even though unemployment has declined, there are still 2.5 times as many active job seekers as there are job vacancies. At the same time, there are between 3 and 3½ million potential workers outside the labor force who would become job seekers if they believed it were easier to find a job. ..Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job. Higher pay, better benefits, and more accommodating work hours are usually good reasons for job applicants to prefer one employment offer over another. When employers are unwilling to offer better compensation to fill their skill needs, it is reasonable to ask how urgently those skills are really needed.

Seeing a Supersize Yacht as a Job Engine, Not a Self-Indulgence - DENNIS M. JONES was struck by an intriguing coincidence when he took delivery of his custom-built 164-foot superyacht: The $34 million he paid for it was equal to the $34 million he had donated to charity since 2000. The contributions helped the neediest around St. Louis get an education, get healthy or get a fresh start.But the money spent on the yacht helped save the shipbuilder and the jobs of the hundreds of people it employed.Could the purchase of a such a yacht be more than an act of self-indulgence? Could it provide something as significant, Mr. Jones wondered, as the financial aid he has given to children, homeless people, drug addicts and groups that promote education and entrepreneurship?Mr. Jones, who made his fortune when he sold Jones Pharma, a niche drug company, to King Pharmaceuticals for $3.4 billion in 2000, is under no illusions that a superyacht is an essential item, even for someone in the 0.1 percent.“It’s a very expensive enterprise,” he said. “It’s the ultimate for people who want the ultimate.”

Employees’ Pay in U.S. Is Smaller Slice of Income Pie -  Worker pay was a smaller piece of the U.S. income pie than earlier estimated as some Americans collected significantly more in interest and dividend payments over the past two years. Employee compensation, including wages and benefits, was lower for each year from 2011 to 2013 than previously calculated, according to revised data from the Commerce Department issued today in Washington. The figures highlight the debate over inequality that flared this spring with French economist Thomas Piketty’s work showing that the wealthy pull ahead by reaping disparate rewards from financial capital. “It’s even more money going to very high-income people relative to the rest of the country,” said Harry Holzer, professor of public policy at Georgetown University and former Labor Department chief economist. “We were a little worried about it and now we’re a little more worried about it.” With the revisions, employee compensation was reduced by $9.5 billion in 2011, $5.1 billion in 2012 and $14.6 billion last year, Commerce data showed. It accounted for 52 percent of gross domestic income in the last quarter of 2013, down from a prior estimate of 52.2 percent. The government revised GDI data back to 2003, before adjusting for inflation.

Wage growth improved in Q2, remains low -- From a note by Nomura on the usefulness of the Employment Cost Index, which climbed by 0.7 per cent from the first quarter to the second:The Employment Cost Index (ECI) is the most reliable measure of labor cost that we have. It has two primary advantages. First, it is a fixed-weight measure. Changes in the ECI are a weighted average of changes across a matrix of occupational categories and industries. Thus, the ECI is less susceptible to changes in the mix of employment as opposed to changes in actual occupational categories than other measures. Second, the ECI measures not just wages and salaries but other components of compensation, most notably healthcare costs. The main disadvantage of the ECI is that it is only estimated quarterly. The primary monthly measure of wages is average hourly earnings. These data are collected in the same monthly survey of businesses that is the source for payroll employment. The primary disadvantage of average hourly earnings is the fact that it is affected by changes in the composition of employment. For example, if employment growth in high-wage industries and/or professions is particularly strong, then average hourly earnings can increase even if wage rates are unchanged.JP Morgan strategists also concluded that the ECI is most comprehensive wage measure for capturing inflationary pressures. And of course we’ll get the July average hourly earnings on Friday in the payrolls report. We journalists love the “X grew at the fastest pace since Y” construction, but although it’s true that the ECI had best quarterly climb since 2008, such a pace was no big deal in the pre-crisis years:

How Do You Spell "Inflation Hawks on the Warpath?" ECI - The release of new data from the Employment Cost Index (ECI) has the inflation hawks really excited. It showed that compensation rose by 0.7 percent in the months from March to June. This is a sharp uptick from the 0.3 percent rate in the months from December to March. This could be just what is needed to force the Fed to raise interest rates to slow the economy and keep people from getting jobs. That's pretty exciting stuff.  Before we start designating people to give up their jobs in the war against inflation, it's worth looking at the data a bit more closely. The 0.3 percent ECI growth reported for the winter months was actually unusually low. It had been rising at a 0.5 percent quarterly rate (2.0 percent annual rate) for the last four years. Fans of arithmetic can average together the 0.3 percent measure from the first quarter with the 0.7 percent measure from the second quarter and get (drum roll, please) ....... 0.5 percent.   In other words, the 0.7 percent rise in the ECI kept exactly on the growth track we have been for the last four years. It is not evidence of an uptick in the rate of wage growth (which would be good news).

Five Decades of Middle Class Wages: Here's a perspective on personal income for production and nonsupervisory private employees going back five decades. The Bureau of Labor Statistics has been collecting data on this workforce cohort since 1964. The government numbers provide some excellent insights on the income history of what we might think of as the private middle class wage earner. The first snapshot shows the growth of average hourly earnings. The nominal data exhibits a relatively smooth upward trend.There are, however, two critical pieces of information that dramatically alter the nominal series: The average hours per week and 2) inflation. The average hours per week has trended in quite a different direction, from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. The post-recession recovery has seen a disappointingly trivial 0.7 bounce (that's 42 minutes). What about inflation? The next chart adjusts hourly earnings to the purchasing power of today's dollar. I've use the familiar Consumer Price Index for Urban Consumers (usually abbreviated as the CPI) for the adjustment. Theoretically, the CPI is designed to reflect the cost-of-living for metropolitan-area households. Now let's multiply the real average hourly earnings by the average hours per week. We thus get a hypothetical number for average weekly wages of this middle-class cohort, currently at $694 -- well below its $827 peak back in the early 1970s. Note that this is a gross income number that doesn't include any tax withholding or other deductions. Disposable income would be noticeably lower. If we multiply the hypothetical weekly earnings by 50, we get an annual figure of $34,677. That's a 16.2% decline from the similarly calculated real peak in October 1972. In the charts above, I've highlighted the presidencies during this timeframe. My purpose is not necessarily to suggest political responsibility, but rather to offer some food for thought. I will point out that the so-called supply-side economics popularized during the Reagan administration (aka "trickle-down" economics), wasn't very friendly to production and nonsupervisory employees.

'Five Myths about the Gender Pay Gap' Here are the myths described by Vivien Labaton:

    • 1. The pay gap is closing rapidly. ...
    • 2. Women earn less because they work in industries that pay less. ...
    • 3. Women earn less because they don’t negotiate well. ...
    • 4. Women earn less because mothers choose to work less. ...
    • 5. To close the pay gap, we should focus on deterring discrimination. ...

Details here.

Purchasing Power Sits Idle in the Basement: The Pew Research Center estimates that in 2012, 57 million Americans lived in multi-generational households, which is defined as two or more adult generations under the same roof. This is more than twice the number of people in such arrangements in 1980.  To be clear, no one thinks there’s a rush to bring the aging parents of boomers back into the family home. This is all about the kids who, at this point, have finished their education but have yet to move out (whether by choice or circumstance)… or have moved back with their parents, new families in tow, because of unemployment or financial troubles. There are a million jokes and humorous stories about kids that won’t leave, even a movie (Failure to Launch, 2006), but for those of us with kids in college, this is not a laughing matter. What if they never leave? This question goes well beyond my fears of seeing more cars in the driveway and dishes in the sink. It’s at the heart of our nation’s ability to grow.

Let’s Get Rid of Wage Labor -I’m serious: make it illegal. But not before we have a universal basic income. A UBI will encourage self-employed or cooperative ventures freely chosen by those who engage in it. In the absence of a UBI, many of us have a job not because the activities associated with the job allow us to pursue our goals, but because the job comes with a salary and because this salary can buy the necessities of life. We then either pursue our goals during our leisure time, or convince ourselves that the goals of our jobs are somehow also our own goals. A UBI has to cover the costs of the necessities of life: a decent place to live, sufficient food, clothing, basic healthcare (catastrophic healthcare costs would be paid for by a fund for which people are forced to buy insurance), transportation and some appliances, machines or utilities (a car, a washing machine, a fridge, a cell phone etc.). Because it covers the costs of necessities, a UBI liberates us to pursue the goals we set for our lives, goals which all too often get pushed aside by the urgencies of the daily struggle to survive, to have a decent house and to have some savings for when times get bad. Would a UBI not be sufficient to allow people to pursue their goals? Why also prohibit wage labor? A UBI indeed loosens us from the system of wage labor – it provides a financial cushion that removes the risks inherent in abandoning a job and pursuing our “true destiny” – but it doesn’t go far enough. It gives us the freedom to turn down unattractive work but the pursuit of life’s goals often requires cooperation. Only the prohibition on wage labor makes cooperative ventures more common. A UBI by itself only pushes us towards more satisfying jobs and leaves some of the drawbacks of wage labor intact:

Universal Basic Income: A Thought Experiment - Pretty much all current public programs to assist households with low incomes suffer from the same seemingly unavoidable problem: As the household's income rises, the amount of assistance provided by the public program is phased out. For example, a person who earns an extra $100 might find that eligibility for public assistance has been reduced by $50. Economists call this reduction in benefits as income rises a "negative income tax," and it is not unusual for studies to find that certain working poor families face negative income tax rates in the range of 50% of the marginal dollar earned, 60%, or even higher (for examples, see here and here). These high negative income tax rates diminish work incentives for those with low incomes. There's a way out called "universal basic income." Ed Dolan explores "The Pragmatic Case for a Universal Basic Income" in the Third Quarter 2014 issue of the Milken Institute Review (free registration may be required for access). The idea of a universal basic income is that every U.S. citizen would be entitled to a chunk of money each year. This amount would not vary based on income level, or employment, or disability, or age, or any other reason.  Specifically, when a low-income person works and earns income, the universal basic income check would not be reduced in any way.  The "negative income tax" rate is zero percent. The idea of a universal basic income raises obvious questions. How much would it be per person? How would it be financed? Are the politics of such a program conceivable? Let's tackle these in turn.

Higher Minimum Wage, Faster Job Creation - The standard argument against a higher minimum wage is that it will lead to job loss as employers, unable to pay more, lay off current workers or don’t hire new ones.It’s important to state up front that research and experience don’t bear that out. The minimum wage has been raised many times without hurting employment. Rather than cut jobs, employers have offset the cost of higher minimums through reduced labor turnover. Employers also cope with a higher minimum by giving lower raises further up the wage scale, raising prices modestly or other adjustments. Bolstering what we already know, new evidence shows that job creation is faster in states that have raised their minimum wages. The Center for Economic and Policy Research used federal labor data to tally job growth in 13 states* that raised their minimums in 2014. In all but one, New Jersey, employment was higher in the first five months of 2014 (after the wage increase) than it was in the last five months of 2013 (before the wage increase). In nine of the 12 states with faster growth, employment gains were above the national median.That doesn’t mean that a higher minimum wage caused the job growth, a point clearly stated by the researchers at CEPR. But it indicates that raising the minimum didn’t hurt job growth, as opponents claim ad nauseam.

Income Inequality And the Ills Behind It - Whatever the reason, suddenly inequality seems to be not only at the top of the liberal agenda, but in the thoughts of concerned American voters.Yet amid the denunciations of inequity as the major evil of our era, persistent voices — mostly but not exclusively from the political right — have been nibbling away at the concern over distribution that is taking over the zeitgeist.Some of these counterclaims are somewhat dubious — relying, for instance, on novel definitions of income and wealth to conclude that inequality is in fact declining.Some find support in the ant and the grasshopper. As one reader articulated in a recent email: “Those who deserve to be poor should be poor. Those who desire to be rich should be rich. That is what justice looks like.”Still, aside from these extreme views, the critique does add up to a coherent argument: The income gap cleaving society between the rich and the rest may, in fact, be a red herring.   It is not only that the accumulation of income at the apex of the pyramid of success is not the nation’s main problem. There is little we can do to redress it anyway. “The returns to growth are going to people in other countries, most notably China, and generally to people with high I.Q., no matter where they live,” said Tyler Cowen, a professor of economics at George Mason University. “I don’t really know how you could undermine this dynamic, short of wrecking the world. Trying to deny that logic is going to fail or worse, backfire.”

Wealth Inequality May Be a Bigger Problem in the U.S. Than Income Inequality | St. Louis Fed On the Economy: U.S. income inequality has been a focal point of public discussion and debate in recent years, with claims that it is severe and that the distribution is becoming increasingly unequal over time. However, wealth inequality is a much greater dilemma, according to a recent article from The Regional Economist, published by the Federal Reserve Bank of St. Louis. Income Inequality Research Director and Economist Christopher Waller and Senior Research Associate Lowell Ricketts, both with the St. Louis Fed, noted that, “Households in the top 10 percent of the income distribution have earnings so great that they raise mean income over the median for the entire population.” In 2010, the median household income was about $46,000, while the mean income was close to $78,500. They also noted that some inequality in the U.S. income distribution naturally develops between age groups and that a lot of it is determined by educational attainment. Waller and Ricketts used a simple measure to see how income inequality in the U.S. compared to other countries around the world (which will be discussed on this blog Thursday) and how it compared to wealth inequality in the U.S. They used the ratio of the median income of the top 10 percent of the income distribution ($203,900) divided by the median income of the bottom 10 percent ($9,900). “The resulting ratio of 21 quantifies the substantial divide between the rich and the poor in the U.S.”

The Average American Family Is Poorer Than It Was 10 Years Ago -- The typical American household was significantly poorer in 2013than it was ten years earlier as a result of the Great Recession, a new study shows, an effect that is compounded by growing wealth inequality in the United States.The net worth of the typical American household in 2003 was $87,992, adjusting for inflation. Ten years later, it was just $56,335, a decline of 36 percent, according to a study by the Russell Sage Foundation.But even as the average American household’s wealth declined, the net worth of wealthy households increased substantially. The average wealth of the American household in the 95th percentile was $1,192,639 in 2003, and $1,364,834 ten years later, an increase of 14 percent.The authors of the study said the reason for the disparity was that affluent households were able to ride the success of the surging stock market after the 2008 crash, while middle class families were severely impacted by the decreasing value of their homes.Wealth declined for everyone in the aftermath of the Great Recession, but better-off families were able to rebound. Households at the bottom of the wealth distribution, on the other hand, lost the largest share of their wealth.

The Typical Household, Now Worth a Third Less - Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too. The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially. The Russell Sage study also examined net worth at the 95th percentile. (For households at that level, 94 percent of the population had less wealth and 4 percent had more.) It found that for this well-do-do slice of the population, household net worth increased 14 percent over the same 10 years. Other research, by economists like Edward Wolff at New York University, has shown even greater gains in wealth for the richest 1 percent of households.  For households at the median level of net worth, much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier. “The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,”

America's Lost Decade: Typical Household Wealth Has Plunged 36% Since 2003 - Does it feel like you're poorer? There is a simple reason why - you are! According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline... Welcome to America's Lost Decade. Simply put, the NY Times notes, it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too. The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss.  As Russell Sage Foundation concludes, through at least 2013, there are very few signs of significant recovery from the loss of wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

Median Wealth Is Down by 20 Percent Since 1984 - Dean Baker - A NYT article reported on a study from Russell Sage reporting that median household wealth was 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.  This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)

Why the Rich Should Call for Income Redistribution - After the craze over Thomas Piketty’s Capital in the Twenty First Century, nobody should be surprised to learn that inequality has been increasing over the last several decades. The question is what to do about it. One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. There are no signs at all of internal mechanisms within capitalists systems that automatically move us toward an equitable income and wealth distribution, and if Piketty is correct we need to worry about the opposite – that increasing inequality is an inherent feature of capitalist systems. Those who argue rising inequality isn’t actually a problem, a claim often made by those at the top of the income and wealth distributions who are fearful that any attempt to correct the disparities will mean they pay more in taxes, are taking a large risk. If inequality continues to rise, as it almost surely will if we do nothing about it, more and more people will come to believe the system is unfair and eventually we will hit a dangerous tipping point for society. Once that happens, those at the top will be lucky if the social changes are limited to income and wealth redistribution.

Quick Thoughts on Ryan's Poverty Plan: What Are the Risks? - Paul Ryan released his anti-poverty plan yesterday, and lots of people have written about it. . I'm still reading and thinking about it, but in the interest of answering the call for constructive criticism, a few points jump out that I haven't seen others make yet. But it's worth noting that within a year of Democrats and liberal thinkers getting actively behind a serious increase in the minimum wage, and many activists making strides toward it on the local level, Paul Ryan just wholesale adopted President Obama's EITC expansion program. That demonstrates the value of pushing the envelope. Ryan's plan, correctly, makes a big deal out of the complexity of receiving the EITC. The difficulty of navigating the system, the large number of improper payments, people not receiving what they should, people having to use tax-prep services to get the credit, and so on. This is why I'm a huge fan of higher minimum wages as a complement to the EITC. Instead of 40 pages of rules and a dozen potential forms to fill out, you just put a sign that reads "$10.10 an hour" on the wall. Bosses and workers can't trick each other or get confused about this, and nobody has to pay a tax-prep service to figure it out. Easy peasy. Ryan wants to "direct the Treasury Department to investigate further" how to fix this, but in practice Treasury just turns around and yells at the IRS. And if the IRS knew how to fix it, they'd probably be on it. There is also a simpler plan to fix this issue: just have the government mail people their tax forms already filled out, for them to either sign or correct. When a trial version of this, "Ready Return," was tried in California, people immediately saw the potential for this to fix EITC delivery issues. Perhaps anti-poverty advocates can help provide momentum on this front.

The Poor Don’t Need a Life Coach - What if the poor need more than disposable income to escape poverty? What if they need a life coach?That’s the position of House Budget Chairman Paul Ryan, who in his new anti-poverty plan wants poor families to work with government agencies or charitable nonprofits to craft “life plans” as a condition of receiving federal assistance under his proposed “opportunity grants.” “In the envisioned scenario providers would work with families to design a customized life plan to provide a structured roadmap out of poverty,” Ryan writes. At a minimum, these life plans would include “a contract outlining specific and measurable benchmarks for success,” a “timeline” for meeting them, “sanctions” for breaking them, “incentives for exceeding the terms of the contract,” and “time limits”—presumably independent of actual program limits—for “remaining on cash assistance.” Even for conservatives—who champion welfare drug tests and robust work requirements—this is breathtakingly paternalistic. As Annie Lowrey notes for New York magazine, “[I]t isolates the poor. Middle-class families don’t need to justify and prostrate themselves for tax credits. Businesses aren’t required to submit an ‘action plan’ to let the government know when they’ll stop sucking the oxygen provided by federal grant programs.” What’s more, as she also points out, it treats the poor as if they want to stay that way and all but punishes “the poorest and most unstable families for their poverty and instability.” As with other measures that tie aid to “accountability”—like family caps for welfare—a sanction can spark a downward spiral to deeper poverty.

Poor Parents Need Work-Life Balance Too - The recent reports of moms getting arrested for leaving their kids unattended while they work or go to a job interview shows the reality of “work-life balance” when you’re living paycheck to paycheck. The burden for many low-wage hourly workers isn’t seeking balance, it’s walking a tightrope. Millions of workers have nonstandard schedules, irregular shifts or on-call jobs without set hours, so they scramble from shift to shift, from daycare to night classes, or anxiously call in each day in hopes of getting a few hours of work. Having no control over your work schedule means your boss controls not only how much you’re paid but how much time you spend with your kids.Labor advocates are calling for workplace policies that give workers more stable schedules and more control over their hours. Now Washington may step in with legislation to check the volatility of the daily grind. The “Schedules that Work” bill (introduced by Representatives George Miller and Rosa DeLauro and Senators Tom Harkin and Elizabeth Warren) is the proletarian answer to the workplace “flex” policies that are common in corporate offices. After all, poor parents need flexibility more than anyone, as they cope with the chaos of economic hardship and work unstable jobs with few benefits..The bill provides workers a so-called “right to request,” or the ability to engage in a dialogue with their boss about a schedule change ahead of time, without fear of retaliation. In some cases, the employer would be mandated to accommodate a family or medical issue. Shift and on-call workers in some low-wage industries would also gain protections against arbitrary schedule changes.

The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch -- The Child and Dependent Care Tax Credit (CDCTC) does not work for low-income families. It fails on three counts – the credit is nonrefundable, covers only a portion of expenses, and comes long after expenses have been incurred.  Senators Jeanne Shaheen (D-NH), Barbara Boxer (D-CA), Patty Murray (D-WA), and Kristin Gillibrand (D-NY) have proposed the Helping Working Families Afford Child Care Act to address the first two problems. The bill would also limit benefits for families with incomes in excess of $200,000. The Tax Policy Center ­estimates the bill would cost about $38 billion over the 10-year budget window from 2015–2024. It’s a great start for helping low-income families pay for child care. A better option would be one that delivers benefits contemporaneous with expenses. The Senate bill would allow families to receive a refundable 20 percent credit for childcare expenses of up to $8,000 per child ($16,000 max per family). That translates to a credit of up to $1,600 ($3,200 for families with more than one child). Because the credit would be refundable, low-income families would get the full value they qualify for, rather than only that part of the credit that offsets the taxes they owe. That’s important for low-income families, most of whom do not pay federal income tax.

How We Reduce Poverty, and How “The Market” Doesn’t -- Matt Bruenig gives us a great breakdown of what poverty would look like if we relied on the market to solve it (as we did almost exclusively for thousands of years before the emergence of enlightened modern welfare states over the last two centuries). The poverty rate among the elderly would be > 45%. (Old folks with long memories: sound familiar?) Thanks to Social Security, Medicare, etc., it’s 9%. Here are Matt’s numbers in graphical form for easy digestion:  Read the whole thing.

In U.S. custody, migrant kids are flown thousands of miles at taxpayer expense - Now the teenage Honduran sisters are frequent fliers, crisscrossing America on government chartered jets and settling into commercial airliner seats at taxpayer expense. In the harried and jumbled scramble to house a wave of unaccompanied minors illegally entering the United States, U.S. officials have ordered the girls flown from Texas to Arizona, from Arizona to Oklahoma and from Oklahoma back to Arizona — all in a matter of weeks.Their jagged 3,000-plus mile trek is one of hundreds outlined in confidential Department of Homeland Security e-mails and extensively detailed Honduran diplomatic journals reviewed by The Washington Post. The documents show that Central American children, almost all of whom will be released to relatives while they await court hearings, are being sent on meandering, circular and often illogical odysseys. Frequently, children are being apprehended in the border states where their families live and flown thousands of miles to shelters and detention facilities, only to be flown back to the border states where their U.S. journeys started. The pinballing in the skies over America illustrates the extent to which the U.S. immigration system has been caught unprepared. Too many kids, too few beds and intense political pressure on officials to deal quickly with the flood of young migrants have resulted in an expensive, inefficient shuffle.

Border Crisis: Fictions v. Facts (Part 2 of “Children from Central America”) - Part 1 - Despite extensive media coverage, there is probably much that you don’t know about the history of the border crisis—and what we can or should do in response. Too often the headlines are designed to stir passions, rather than inform.At the end of next week, Congress will leave for its five-week August Recess. Between now and then legislators will be debating the issues, and no doubt many of your friends will be taking positions.Here are the facts you need when weighing what you hear–whether on television or at a neighbor’s barbecue.

Obama Infuriates Republicans With Latest Plan To Deport Fewer Illegal Immigrants - After Eric Cantor's shocking defeat at the hands of an unknown Tea Party member several months ago, US immigration reform was said to be all but dead, a condition which has been substantially exacerbated by recent tensions over the influx of Central American children crossing the southern US border. However, contrary to initial appeals that Obama is limited in what he can do without a cooperative Congress, the president now appears set to take his latest unilateral decision, one that is set to set republicans fuming and the ranks of future potential democrat voters soaring, when as the WSJ reports, Obama may take "broad action to scale back deportations that could include work permits for millions of people, according to lawmakers and immigration advocates who have consulted with the White House."

Why the Children Fleeing Central America Will Not Stop Coming -  David’s murder wasn’t widely reported in the country. It was yet another incident of violence—a terrible one, but one of many. The day before David was killed, two other teenagers, 15 and 16, had their throats slit and were dumped in another abandoned field on the outskirts of the capital. To avoid becoming the victims of gang violence, tens of thousands of children like David have fled El Salvador, Guatemala and Honduras for the United States. As their numbers skyrocket, lawmakers in Washington have sought to “repatriate” these refugees as quickly as possible. The Obama administration initially sought to change the 2008 Trafficking Victims Protection Reauthorization Act to allow the 52,000 or so child migrants who have arrived on US soil in the last nine months to be deported without going before an immigration judge. (Under the TVPRA, unaccompanied minors from countries that do not share a border with the United States are handed over to the Department of Health and Human Services, then go before an immigration court that will determine their fate; those hailing from Mexico, on the other hand, can accept “voluntary deportation” and return immediately.) The White House has since backed off this proposal and has instead asked Congress for $3.7 billion to ramp up enforcement and hire more judges to expedite the removal process. Republicans in the House of Representatives—including the GOP’s standard-bearer on immigration issues, Ted Cruz—continue to press for the TVPRA to be changed.

U.S. Growth, Update on the States - Besides just stronger national growth, another way for top line U.S. job figures to improve is for more states or regions to share in the recovery. Back in December I noted that the Northeast and Midwest were growing much faster than their housing boom rates, while the South and West were lagging (in particular given low population growth and the housing bust). Expectations were that the South and West would accelerate moving forward, but in order for national figures to improve the Northeast and Midwest would need to hold onto those stronger rates of growth. So how are things looking today? Well, the acceleration has come along the West Coast and in the South but much of the Northeast and Midwest has slowed down. Map of Census Regions and Divisions. This leaves us with a national job growth figure that is slightly stronger so far in 2014 than in recent years but much of the movement in the U.S. employment picture is happening below the surface, down at the state and county level. As seen below, the number of states experiencing job growth of 1 or 2 or 3% hasn’t really changed. However this is due to the shifting nature of job growth across the country. The only states to see sustained acceleration in job growth (improvements of 1 percentage point or more, relative to 2011-12 rates) are Delaware, Florida, Nevada and Oregon. The latter three of which were hard hit by the housing boom and bust and as housing rebounded in 2013, growth picked up. However these states’ improvement was offset by deceleration of 1 percentage point or more in Alaska, Michigan, N Dakota and Virginia. As evidenced in the graph below, the geographic footprint of the recovery really is not broad based with just a dozen or so states experiencing job growth of 2% or more.

Moore of the Same - Krugman - A few months ago the buzz was that the Heritage Foundation was getting serious after a series of blatant errors and ludicrously biased “research”. The supposed evidence for this turn was the hiring of Stephen Moore from the Wall Street Journal to become chief economist. I was, shall we say, unimpressed.Ahem. Conservative Media’s Favorite Economist Caught Distorting Facts About Taxes And Job Creation:On July 7, Moore published an op-ed in The Kansas City Star attacking economic policies favored by Nobel Prize-winning economist Paul Krugman. The op-ed claimed that “places such as New York, Massachusetts, Illinois and California … are getting clobbered by tax-cutting states.” Moore went on to attack liberals for “cherry-picking a few events” in their arguments against major tax cuts, when in fact it was Moore who cited bad data to support his claims.On July 24, The Kansas City Star published a correction to Moore’s op-ed, specifically stating that the author had “misstated job growth rates for four states and the time period covered.” What gets me here is the sheer laziness; it looks as if Moore pulled numbers from an old piece of his, and never bothered to update. How hard is it to check state job numbers?

North Carolina’s Misunderstood Cut in Jobless Benefits : Since North Carolina effectively eliminated unemployment benefits last year for people unemployed 20 weeks or more, the state has become a symbol in the partisan wars over economic policy. People on either side of those wars have argued that it proves the economic advantages — or damage — of providing the long-term jobless with cash payments.But digging into the data suggests North Carolina should really be a case study in people seeing what they want to see. Over the last year, the state’s economy has performed remarkably like the economy in nearby states.North Carolina is more than a case study, too. It is a laboratory for the rest of the country, given that at the start of this year, the federal government eliminated all benefits for the long-term unemployed. Both political sides have looked to North Carolina for evidence to bolster the positions they have taken in this debate. Republicans, who voted against extending unemployment benefits, argue that ending benefits will spur the long-term jobless to look harder for work; with more eager workers, employment will rise, conservatives say. Democrats, many of whom voted to continue jobless benefits for the long-term unemployed, say that ending benefits will force the unemployed to cut their spending, which may have broader ripple effects that could slow the labor market recovery. My reading of the North Carolina experiment is that it provides little support for either side.

On State Unemployment Rates, It’s Analyst Beware - In an Upshot article for this week’s Sunday Review section, I analyzed the data on employment growth in North Carolina versus South Carolina and argued that there was no evidence that making the long-term unemployed inegible for unemployment benefits, as North Carolina did, spurred more jobs there. Let’s start with the most obvious issue: There’s no point in analyzing data on the number of people receiving jobless benefits in North Carolina. Kicking the long-term unemployed off benefits will mechanically reduce the number of people receiving benefits. This tells us nothing about the central question, which is whether those people ultimately landed jobs or not.In order to reliably estimate the national unemployment rate, the Current Population Survey asks 60,000 households nationwide about their employment situation. Even then, the estimated unemployment rate is measured with error. But when you zero in on North Carolina, it’s surveying closer to 1,200 households, which probably includes only around 100 unemployed people, and as few as several dozen long-term unemployed directly affected by the benefit cut. Although the Current Population Survey is sufficiently large that it can somewhat reliably estimate the unemployment rate for the country as a whole, even statisticians at the Bureau of Labor Statistics think it’s wildly insufficient for measuring unemployment or long-term unemployment in any particular state.

State Cuts to Jobless Benefits Did Not Help Workers or Taxpayers -  The first section of this brief provides an overview of the U.S. UI system, explaining the interaction between federal and state financing flows and detailing the workings of the federal Unemployment Trust Fund. The next section reviews the academic and research literature on the impact of UI benefits on the U.S. labor market. The last section looks at those states that decided to shorten the duration of jobless benefits, reviewing possible reasons why state policymakers made this decision, and examining the (admittedly thin) data record of pre- and post-duration changes to see if the shortened durations had measurable impact on state labor markets. Following are key findings of the brief:

  • Most state accounts in the federal Unemployment Trust Fund became insolvent in the wake of the Great Recession. The accounts of only 15 states (Alaska, Iowa, Louisiana, Maine, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Oregon, Utah, Washington, West Virginia, and Wyoming) plus Washington, D.C., and Puerto Rico, remained solvent.
  • It was largely trust fund adequacy before the Great Recession—not significantly less-severe state-level recessions—that differentiated the states with solvent UTF accounts from other states: Fourteen of the 15 states that retained solvency in their UTF accounts ranked in the top half of states on a key measure of trust fund adequacy (a ratio of fund balance to future payouts) going into the Great Recession.
  • The adequacy of state UTF accounts before the Great Recession was largely driven by whether the states collected enough revenue during the economic recovery and expansion between 2001 and 2007:
  • Failure to adequately fund state UTF accounts does not just lead to fiscal problems. It can weaken the function of UI as an automatic stabilizer and make the UI system as a whole less countercyclical than it should be by requiring tax hikes or benefit cuts during periods of depressed aggregate demand.

Jobless Rate Down in 48 out of 49 Big U.S. Cites - Real Time Economics - WSJ: The jobless rate declined in all but one large U.S. metropolitan area in June, with Chicago and Las Vegas leading the way. Unemployment in the Chicago metro area fell to 7.1% in June, down 2.8 percentage points from a year earlier, according to the U.S. Bureau of Labor Statistics. It was the largest drop of any major U.S. city, defined as the 49 metro areas with a population of 1 million or more in the 2000 Census. Birmingham, Ala, was the only major city to see unemployment increase. Unemployment there rose to 6.2% from 6.1% a year earlier, the report said.Unemployment fell 2.5 percentage points in Las Vegas, 2.3 percentage points in Riverside, Calif and a 2.2 percentage points in Charlotte, N.C.Among all 372 metro areas tracked  by the government, Chicago’s was the seventh-largest decline. So what’s going on in Chicago?Illinois officials say the state has been adding jobs in professional and business services as well as education and health of late, even as the state experiences a contraction in government jobs. However, a portion of the unemployment decline may stem from workers dropping out of the labor force, as the area experienced a 0.7% yearly gain in non-farm employment in July. The federal report brought positive signs for the economy. Unemployment rates in June were lower than a year ago in nearly 97% of U.S. metro areas, with 359 areas experiencing declines

Mass Incarceration: 21 Amazing Facts About America’s Obsession With Prison - Nobody in the world loves locking people behind bars as much as Americans do.  The US has more people in prison than any other nation on the planet.  The US also has a higher percentage of the population locked up than anyone else does by a very large margin.  But has all of this imprisonment actually made the US safer?  Well, the last time we checked, crime was still wildly out of control in America and for the most recent year that we have numbers for violent crime was up 15 percent.  The number of people that we have locked up has quadrupled since 1980, but this is not solving any of our problems.

Century-old pipe break points to national problem - (AP) — The rupture of a nearly century-old water main that ripped a 15-foot hole through Sunset Boulevard and turned a swath of the University of California, Los Angeles, into a mucky mess points to the risks and expense many cities face with miles of water lines installed generations ago. The flooding sent more than 20 million gallons of water cascading from a water main in the midst of California's worst drought in decades and as tough new state fines took effect for residents who waste water by hosing down driveways or using a hose without a nozzle to wash their car. Much of the piping that carries drinking water in the country dates to the first half of the 20th century, with some installed before Theodore Roosevelt was in the White House. Age inevitably takes a toll. There are 240,000 breaks a year, according to the National Association of Water Companies, a problem compounded by stress from an increasing population and budget crunches that slow the pace of replacement. "Much of our drinking water infrastructure is nearing the end of its useful life," the American Society of Civil Engineers said in a report last year, noting that the cost of replacing pipes in coming decades could exceed $1 trillion. The association of water companies says nearly half of the pipes in the U.S. are in poor shape, and the average age of a broken water main is 47 years. In Los Angeles, a million feet of piping has been delivering water for at least 100 years.

Detroit water department placed in mayor’s hands -   Control of Detroit’s massive municipal water department, which has been widely criticized by the United Nations and others for widespread service shutoffs to thousands of customers, has been returned to the mayor’s office. The move comes a week after the department said it would temporarily suspend shutoffs for customers who were 60 days or more behind on bills for 15 days, and a few months ahead of the expected handoff of financial control of the bankrupt city from a state-appointed manager back to Detroit’s elected leaders. Detroit’s water system serves about 700,000 city residents and 4 million people in southeastern Michigan, but the city-owned water system has about $6 billion in debt that’s covered by bill payments. As of July 1, more than $89 million was owed on nearly 92,000 past-due residential and commercial accounts. Water officials began an aggressive shut off campaign in March, disconnecting 500 customers that month. More than 3,000 lost service in April and about 4,500 in May. The shutoffs topped 7,200 in June and collected $800,000 last month compared to about $150,000 in June 2013. But several groups appealed to the U.N. for support, and three U.N. experts responded the shutoffs could constitute a violation of the human right to water.

The Charter School Profiteers -- This is the second installment in our two-part series looking at charter schools in New Orleans and Detroit. The juxtaposition is no accident — these two cities have the highest percentage of charters in the country. In New Orleans, charters have almost entirely replaced traditional public schools; in Detroit, about half the schools are charters. Both cases show the perils of privatization and the way in which elites manipulate crises to transform social goods. Similar themes are explored in Class Action: An Activist Teacher’s Handbook, a joint project of Jacobin and the Chicago Teachers Union’s CORE. The booklet can be downloaded for free, and print copies are still available.

NPR’s Education Coverage Funded By Pro-Privatization Billionaires - Yasha Levine - Last week, I wrote about the nation’s first successful “parent trigger” privatization of a public school, in a isolated town on the edge of the Mojave Desert. In that piece, I mentioned how parents and teachers had become disillusioned by the biased reporting of parent trigger in the media.“  No matter what article I read, it seemed to me that the common perspective that was shared was pro-Parent Revolution,” said La Nita M. Dominique, the local Adelanto president of the state teachers union, referring to the outside pro-charter front group that descended on their community and used harassment, deception and thinly veiled threats of deportation to push parents into signing a petition that handed over their kids’ school to a private contractor.  Lori Yuan, a mother of two kids Desert Trails and a member of Adelanto’s planning commission, described feeling that she was caught in some kind of grand conspiracy that was bigger and more powerful than anything she could imagine. It’s easy to paint this as the paranoia of parents who feel like the media doesn’t understand their concern about parent trigger. That was my first impulse too. And then I started reading some of the coverage. It didn’t matter if it was Fox News, NPR, the Washington Post, LA Weekly or the local right-wing newspaper: coverage of parent trigger issues would invariably have the same pro-privatization bias, even down to their use of the same stock phrases about “parent empowerment” and the need give parents the ability to “reform” a system that protects lazy public school teachers and their sleazy their union cronies.All very strange — until you start connecting the dots between the financial backers of pro-parent trigger groups like Parent Revolution and the media industry.

Education Left Behind -- Years after National Commission on Excellence’s promise was made, The Roosevelt Institute | Campus Network and Young Invincibles have banded together under the NextGen Illinois project in order to bring a youth-led agenda to state government officials. It is time to assess what has been done and what needs to be improved to completely fulfill the dream of equal access to the quality education and equality of opportunity for young people in the state of Illinois.To that end, the NextGen project is hosting a series of caucuses across the state that offer an opportunity for young people to brainstorm and create a youth-lead policy agenda for the state of Illinois on issues that matter most to them. They foster discussion about state level politics and some of the most significant problems that are facing Illinois today. Through their participation, young adults offer their own insight about potential solutions to those problems that can result in positive change in their communities. The NextGen project held its second caucus at DePaul University on Tuesday, May 27, where students pointed out several problems with the current education system in Illinois, including inequality in the distribution of education funding and challenges created by a centralized curriculum. In this system both teachers and students feel pressures created by the demands of accountability and insufficient resources.

Young college grads’ wage growth is falling farther and farther behind - If you've been reading economic news in the last few years, you know that recent college graduates face an ugly job market, and many are stuck in their parents' basements. And it also appears that those lucky enough to have jobs are falling farther and farther behind in terms of pay. A new analysis from the San Francisco Fed finds entry-level earnings for new college grads — defined as working graduates age 21 to 25 — grew only by 6 percent from April 2007 to April 2014. In comparison, median weekly earnings for all workers grew two-and-a-half times as fast, at 15 percent. And while recent grads tend to fall behind after any recession, the gap since the Great Recession has been both wide and long-lasting. Even while other workers see their wages slowly climb, the return on a shiny new college diploma seems to be waning. (Though to be clear, this chart shows wage growth, not levels — it's still true that college diplomas tend to mean higher wages than high school diplomas.) So what's going on? Just a bad economy, write San Francisco Fed researchers Bart Hobijn and Leila Bengali. They find wages have stagnated across the board, in a variety of occupations. That, they conclude, signals that the flat wage trend is cyclical, not structural — or, in non-econ-speak, it means the stagnant wages are due to a bad economy, not something fundamentally wrong with graduates or jobs, like a mismatch between recent grads' skills and open positions.

Student loan crisis: Student debt 'relief' is not always relieving: Millions of Americans are struggling to pay off their student loans and desperate to find a way to lower those monthly payments. Scammers know this, so they've created phony student loan "debt relief" companies that promise to help—for a price. Law enforcement has taken notice of this relatively new industry. Illinois Attorney General Lisa Madigan is cracking down on companies that can't deliver on their "too good to be true claims" to reduce or eliminate student loan debt. Earlier this month, Illinois became the first state to file a lawsuit against a student loan debt relief agency. Madigan charged two companies with deceptive marketing for selling bogus or worthless services. Some of these ads promised to help clients enroll in the "Obama Forgiveness Program"—there is no such program. According to the lawsuit, the companies charged as much as $1,200 to do nothing more than fill out paperwork for free government programs.  Telephone agents often falsely claimed the company was affiliated with the U.S. Department of Education, the lawsuit alleges.

Financial Predators Move On From Foreclosure Rescue, Enter Student Debt, Military Lending Spaces - At one level, a crackdown on foreclosure rescue scams and not the overarching mortgage and foreclosure fraud is like letting the arsonist who set fire to the house go while busting the guy who took five bucks off the dresser before the house started to burn. Nevertheless, these scams do represent some of the worst elements of our society, featuring the kind of people who see suffering and vulnerability and think about dollar signs. One of my first entrees into this world of foreclosure nightmares was through a friend who had fallen behind on his payments, and then paid somebody up-front money to help him secure a loan modification. That person did nothing to help and then skipped town with the cash.  So it’s good to see CFPB finally take a crack at this, in conjunction with the Federal Trade Commission and 15 states (Eric Schneiderman’s press release gives a sense of the activity around this). These scams are basically all the same: empty promises about obtaining a modification in exchange for up-front cash, with all the promises broken down the road. In this case, the offending parties happen to be law firms, who made the impression on the victims that they would provide legal representation in securing a modification. It gives a bad name to the legal aid societies and counselors who do actually help homeowners, and scars the entire industry. 

L.A. Will Appeal Pension Rollback, Mayor’s Office Says -  Los Angeles will appeal an administrative panel’s decision to roll back changes in public employee pensions that were expected to save as much as $4.3 billion over 30 years, a spokesman for Mayor Eric Garcetti said. The second most-populous city’s Employee Relations Board concluded yesterday that officials failed to properly consult with municipal employee unions before pushing through the changes in a City Council vote in October 2012. “This drives a stake through” the city’s efforts to change retirement benefits for new hires, said Ellen Greenstone, a lawyer for the Coalition of LA City Unions, which represents about 20,000 civilian employees. “The city has to meet and confer if it wants to change pension benefits.”

Reading the 2014 Social Security Report: Released July 28  The 2014 Report of the Trustees of Social Security is scheduled to be released at 12:15PM Eastern, or 15 minutes after the scheduled publication time of this post. Assuming that the file name conventions of past Reports are maintained each of the following links should come alive coincident with the public release of the Report in DC, at least in past years the release to the web has been instantaneous. But I guess we will see, and I will be testing and editing links as necessary. The full Report is released in HTML and PDF. Those who want to read the Report in leisure can download it in PDF here: 2014 Social Security Report. On the other hand those who want to share impressions immediately would do better to work from the HTML version and its breakout of all the relevant Tables and Figures. 2014 Social Security Report linkable HTML version Those readers who prefer their Reports unmediated feel free to dive in to either format. But for those who want some pointers as to valuable places to start and/or pointers on what those various Tables and Figures are trying to say can follow me below the fold. (Update: It’s out, links work. See you in Comments)

Slower U.S. healthcare cost rise extending life of Medicare fund: trustees (Reuters) - Tamer spending at U.S. hospitals and expected savings from President Barack Obama's healthcare overhaul are shoring up the funding outlook for the Medicare program for the elderly, trustees of the program said on Monday. Medicare's trust fund for hospital bills will run out of money in 2030, four years later than previously estimated, the trustees said in a report. The trustees, however, reiterated a warning that the Social Security program would run out of money to fully pay disability benefits by 2016 and could not meet all of its obligations on pensions after 2033. The report gives mixed messages about the urgency of reforming America's biggest social welfare programs, which together make up about 40 percent of federal spending. true While the arrival date for Medicare's crunch has been pushed into the future, an aging population is already stressing the finances of programs that provide income for the disabled. "The long-term picture this year looks very similar to last year's report. The short-term picture has grown more urgent," Charles Blahous, the lone Republican on the board of trustees, said at a news conference. U.S. Treasury Secretary Jack Lew, who is one of the trustees, said the disability program could be temporarily patched up by Congress redirecting revenues from another Social Security fund. That would buy time to work out a long-term solution, he said.

Medicare report shows Obamacare is bending the cost curve  - The 2014 Medicare Trustees Report has just been released, and it shows that the program is on noticeably sounder financial footing than it was just a year ago. One of the biggest signs of this is that the projected depletion date of the Hospital Insurance (Part A) Trust Fund has been pushed back by four years just since last year’s report. Indeed, Sarah Kliff points out that Part A actually spent $600 million less in 2013 than in 2012, even though it insured 1.6 million more people. As she emphasizes, the big news in this is that per capita Medicare Part A spending has been falling. This is a great sign that there is forward movement in controlling the actual cost of care. This is a big deal because not only are Baby Boomers like myself inching towards Medicare eligibility in large numbers, but hospitals and other providers (unfortunately, these two groups are merged in OECD statistics) account for most of the excess of US health care spending compared to other industrialized nations. In fact, comparing the United States to Canada, specifically, I found that payments to providers made up 85% of the per capita cost difference between the two countries.  Moreover, as Kliff points out, even when you include Part B and Part D into the calculation, Medicare’s per capita cost showed no increase in 2013. Zero. Indeed, if you want to see a very graphic demonstration in the change in the cost curve, Louise Sheiner and Brendan M. Mochouk of the Brookings Institute have just what you’re looking for.

Medicare isn’t going broke, but don’t celebrate just yet - Today marks the annual release of the Medicare trustees' report, when those guarding the health-care program's finances make their best guesses about Medicare's fiscal future. This year's verdict: Medicare's hospital insurance trust fund will be solvent through 2030, which gives the program four more years of solvency than projected in the trustees' 2013 report. It's also 13 years later than the prediction issued by the trustees just before passage of the Affordable Care Act in 2010. The Medicare trust fund is backed by payroll taxes, so today's report essentially tells us for how long the trustees expect those revenues will be sufficient to foot the entire bill for Medicare's hospital bills. The trust fund is just one part of Medicare, though. It doesn't include doctors' visits and other medical services, which are covered by general revenues and beneficiaries' premiums. There's other good news in the trustees report. Per capita spending in the program grew just 0.8 percent over the past four years. Medicare premiums in the program covering medical services are expected to remain the same as they were in 2013 and 2014. The insolvency target for Medicare's trust fund has been shifting a bit over the past few years. Just three years ago, the trustees said the trust fund would reach insolvency in 2024 — five years earlier than their previous forecast. Last year, the trustees moved their insolvency projection back to 2026. They're now moving the target back to 2030 partially because of ACA changes and projections that per capita health-care spending will, at least in the short term, grow slower over the next several years.

Stealth Single Payer - Paul Krugman -- The Kaiser Family Foundation has a new survey (pdf) on Obamacare in California, and it’s full of remarkably good news. For those who haven’t been following this, CA — with its now-dominant Democratic Party — is where Obamacare was implemented the way it was supposed to be implemented: the website worked pretty well from the beginning, Medicaid expansion was implemented, and the state worked hard on outreach. It was also a place that really needed reform: the uninsured were a high percentage of the population, and an individual market without community rating meant that the mere hint of a preexisting condition was enough to prevent coverage.  So it now appears that most of California’s uninsured — 58 percent of the total, or well over 60 percent of those eligible (because undocumented immigrants aren’t covered) have gained insurance in the first year. Considering the complexity of the scheme, that’s really impressive, and it strongly suggests that next year, once those who missed out have had a chance to learn via word of mouth, California will have gotten much of the way toward universal coverage for legal residents.  But there’s something else the Kaiser report drives home: most of those gaining coverage are doing so not via the exchanges (although those are important too) but via Medicaid. And that’s important as an answer to critics of Obamacare from the left.

California Health Insurance Rates Rise Up to 88% in ’14 - Health-care insurance premiums for individuals in California rose between 22 percent and 88 percent in 2014 from last year, even after the federal health-care overhaul, the state’s insurance commissioner said. The rate increases, with variation for geography and age, were masked by federal subsidies that the Patient Protection and Affordable Care Act provides to 88 percent of the 1.4 million Californians who purchased health care through the state’s exchange, Insurance Commissioner Dave Jones said. Jones, a Democrat, is pushing a statewide ballot measure for November known as Proposition 45 that would give him regulatory say on proposed premium increases. The measure is opposed by insurance companies, which have said that it would actually cause rates to rise while harming the quality of care. “Unless Proposition 45 is passed or some other law is enacted to provide health-insurance rate regulation and the requirement that health insurers and HMOs justify their rates, we are going to continue to see dramatic year-over-year increases,” Jones said in a telephone briefing with reporters. The California health-care insurance exchange, called Covered California, is expected to announce its 2015 rates later this week. Jones said he expects those increases to be “modest at best” because insurance companies will want to avoid providing voters reason to approve Proposition 45.

Obamacare rate hikes in California to average 4% in 2015 -  Despite concerns that insurance rates would skyrocket by 20% to 30% in year two of the Affordable Care Act, officials supervising the nation’s biggest market for health coverage said Thursday California will see premiums climb by an average of just over 4% for 2015. The announcement comes on the heels of an analysis from the state’s insurance commissioner, who said that individual plan rates jumped nearly 90% for some policies between 2013 and 2014, when carriers were adjusting their premiums to fit Obamacare guidelines. Officials for Covered California, which oversees the state’s health exchange say the 10 insurers offering plans for 2015 are requesting an average 4.2% increase in rates. Peter V. Lee, Covered California’s executive director, says 16% of policyholders will either see no hike or a decrease in their rates, though in most cases it may be just a few percentage points. Roughly 35% of consumers will see rate hikes of 1-5%, while another 36% will see increases of 5-8%. About 13% will see rate hikes of 8% or more, with nearly 90% in that category at 8-10%.

Varying health premium subsidies worry consumers - Government officials say Close — and other consumers who have received different subsidy amounts — probably made some mistake entering personal details such as income, age and even ZIP codes. The Associated Press interviewed insurance agents, health counselors and attorneys around the country who said they received varying subsidy amounts for the same consumers. As consumers wait for a resolution, some have decided to go without health insurance because of the uncertainty while others who went ahead with policies purchased through the exchanges worry they are going to owe the government money next tax season. These difficulties faced by Close and others are unfolding separately from the legal battle that flared this week when two federal appeals courts issued contradictory rulings on the subsidies in states that rely on the federal health exchange. The Obama administration says policyholders will keep getting financial aid as it sorts out the legal implications. The government said consumers who received multiple subsidy estimates or disagree with their subsidy amount can appeal. The government hopes to resolve most of the appeals paperwork this summer. It's unclear how many people received or appealed varying subsidy amounts. Still, Centers for Medicare and Medicaid Services spokesman Aaron Albright said consumers "should feel confident that they received an accurate determination based on the information they provided in their application."

Probe exposes flaws behind HealthCare.gov rollout - Major flaws in managing HealthCare.gov contractors led to tens of millions of dollars in extra costs and contributed to the botched rollout of the federal Obamacare website last fall, according to a review by a nonpartisan government investigator released Wednesday. The report also identifies ongoing challenges for the contractor hired to get HealthCare.gov into better shape after CGI, the original contractor, was replaced. Enough improvements were made to allow millions of people to sign up, but aspects of the website are still unfinished, especially the financial management tools insurers need to help balance their books. Health and Human Services Secretary Kathleen Sebelius resigned in April, and Sylvia Mathews Burwell replaced her.Much of the history of the disastrously flawed start to Obamacare enrollment has already been dissected during congressional hearings, but the GAO report adds specifics about the mismanagement and the spending.   “In summary, we found that CMS undertook the development of HealthCare.gov and its related systems without effective planning or oversight practices, despite facing a number of challenges that increased both the level of risk and the need for effective oversight,” William Woods of the Government Accountability Office wrote in testimony prepared for a House Energy and Commerce Oversight hearing Thursday on Obamacare contractors. The GAO report itself was released late Wednesday. “The Obama administration was not up to the job, and American taxpayers are now paying the price,” said Rep. Tim Murphy, chairman of the Oversight subcommittee. “We have many questions tomorrow, but will the administration finally have answers on how we got into this near billion dollar mess?”

Obamacare Web Cost Approaches $1 Billion as Fixes Needed - The price tag for healthcare.gov, the Obamacare website, is approaching $1 billion even as key features remain incomplete, congressional auditors said. The budget to get the site ready for the next round of enrollments, starting in November, jumped to $840 million as of March, according to the Government Accountability Office. That’s a $163 million increase since December. Accenture Plc (ACN), the company that took over building the site that failed at its introduction this past October, is expected to be paid $175 million as of June, an $84 million increase from the estimate in January when it signed a contract. The data are part of testimony for a congressional hearing today in the Republican-led House. The GAO places blame for the site’s rising price on poor planning and supervision of contractors who built the federal health exchange. If the management doesn’t improve “significant risks remain that upcoming open enrollment periods could encounter challenges,” William Woods, the GAO’s director of acquisition and sourcing management, is scheduled to testify according to prepared remarks released by the Energy and Commerce Committee.

Health insurers press to exempt millions from ACA - You would think that with the latest news that the health insurance lobby is still laundering money for attack ads against Democrats who supported ObamaCare, the Democratic leadership would slam the door on any requests from the industry. But no. Democrats in the Senate are seriously considering passing a health insurance industry bill that would weaken Affordable Care Act (ACA) consumer protections for 13 million people. The New York Times reported that AHIP, the health industry trade association, laundered $1.6 million through a fund controlled by the National Federation of Independent Business to run ads against Arkansas Democratic Senator Mark Pryor this past December. Pryor faces a tough reelection fight this fall. AHIP, which stands for the warm and fuzzy name America's Health Insurance Plans, has a long history of laundering money through business front groups to finance anti-ACA attack ads, including at least $86 million through the U.S. Chamber of Commerce. Now, at the behest of major AHIP members including CIGNA, MetLife and Aetna, the Senate is looking at a bill passed by the House, the Expatriate Health Coverage Clarification Act of 2014 (H.R. 4414 as amended or "EHCCA"), which would exempt 13 million people from ACA consumer protections. The legislation, which the National Immigration Law Center has correctly called "using a bat to swat a fly," is supposed to deal with a narrow issue: health inurance polices sold to 330,000 Americans who work abroad for more than six months per year. But the bill enacted by the House would actually exclude 13 million people, including green-card holders who have made the U.S. their permanent home and low-wage immigrant workers, such as farmworkers and caregivers.

The Panic Containment Team Speaks: Ebola Poses "Little Risk" To The US, CDC Claims: Is It Wrong? -- In the aftermath of the news from the past week that at least two US citizens have been infected with the Ebola virus, a very unpleasant if nagging question has appeared: can the virus spread to the US? According to NBC, "the Ebola virus, which has infected two U.S. humanitarian workers in Liberia, is only a short plane ride from any city on Earth. But federal health officials say it’s not a big worry for most Americans." Maybe it should be.  Recall that last week's Ebola stunner came when not only did an Ebola patient die from the disease in the world's 4th most populous city, Nigeria's Lagos, but when he was intercepted while at the airport: how many people he may have come in contact with is anyone's guess even if the government swears they have all been quarantined.  It’s the first time this virus has moved by jet, even though public health experts love to warn that any disease is just a flight away from anywhere with an airport.  Perhaps the fact that the CDC had to go out as far as making an official statement for the record shows just how increasingly worried Americans are. According to the Centers for Disease Control, "Ebola poses little risk to the U.S. general population,” Stephan Monroe of CDC’s National Center for Emerging & Zoonotic Infectious Diseases told reporters in a conference call. It’s because you have to be in direct contact with someone who is ill to become infected.

Liberia shuts schools as Ebola spreads, Peace Corps leaves three countries (Reuters) - Liberia will close schools and consider quarantining some communities, it said on Wednesday, rolling out the toughest measures yet imposed by a West African government to halt the worst outbreak on record of the deadly Ebola virus. "This is a major public health emergency. It's fierce, deadly and many of our countrymen are dying and we need to act to stop the spread," Lewis Brown, Liberia's information minister, told Reuters. "We desperately need all the help we can get." Security forces in Liberia were ordered to enforce the action plan, which includes placing all non-essential government workers on 30-day compulsory leave. true Highly infectious Ebola has been blamed for 672 deaths in the West Africa nations of Liberia, Guinea and Sierra Leone, according to the World Health Organization. Liberia accounted for just under one-fifth of those deaths. The first cases of this outbreak were confirmed in Guinea's remote southeast early this year. It then spread to the capital, Conakry, and into neighboring Liberia and Sierra Leone. The fatality rate of the current outbreak is around 60 percent although the disease can kill up to 90 percent of those who catch it. The illness, called viral hemorrhagic fever, has symptoms that include external bleeding, massive internal bleeding, vomiting, and diarrhea. The U.S. Peace Corps said on Wednesday it was temporarily withdrawing 340 volunteers from Liberia, Sierra Leone and Guinea and that two of its volunteers had been isolated and were under observation after coming in contact with a person who later died of the Ebola virus. The Peace Corp has 102 volunteers in Guinea, 108 in Liberia and 130 in Sierra Leone working in education, health and agriculture.

Emergency Efforts in Africa to Contain Ebola as Toll Rises - As the death toll mounted from the worst outbreak of the Ebola virus, West African leaders quickened the pace of emergency efforts on Thursday, deploying soldiers and authorizing house-to-house searches for infected people in an effort to combat the disease.  International efforts to contain the virus also gained momentum and urgency. The World Health Organization announced a $100 million plan on Thursday to get more medical experts and supplies to the overwhelmed region, as the head of the Centers for Disease Control and Prevention in the United States committed the agency to sending 50 more experts there in coming weeks.  First recognized in March in Guinea, the Ebola outbreak has surged through porous borders to invade neighboring countries, quickly outstripping fragile health systems and forcing health officials to fight the battle on many fronts. Past outbreaks have been more localized, but the current one has spread extensively over a vast region. The stepped-up effort is long overdue, according to some analysts. They say the initial response was inadequate on both the national and international level and allowed the disease to mushroom from a local outbreak to an international threat.The viral illness has exacted a terrible toll, killing 729 people, including top physicians in Liberia and Sierra Leone, nations that already faced an acute shortage of doctors. The outbreak has also sickened two American aid workers, who were being rushed back to the United States for treatment.

WHO Warns Ebola Outbreak Out Of Control, "High Risk Of Spread To Other Countries" As AP reports, the Ebola outbreak that has killed more than 700 people in West Africa is moving faster than the efforts to control the disease, the head of the World Health Organization warned. Dr. Margaret Chan pulled no punches in her direct statement, "If the situation continues to deteriorate, the consequences can be catastrophic in terms of lost lives but also severe socio-economic disruption and a high risk of spread to other countries." Time to panic?  As AP reports, Dr. Margaret Chan, director-general of the World Health Organization, said the meeting in Conakry "must be a turning point" in the battle against Ebola, which is now sickening people in three African capitals for the first time in history. ... At least 729 people in four countries — Guinea, Sierra Leone, Liberia and Nigeria — have died since cases first emerged back in March. Two American health workers in Liberia have been infected, and an American man of Liberian descent died in Nigeria from the disease, health authorities there say. While health officials say the virus is transmitted only through direct contact with bodily fluids, many sick patients have refused to go to isolation centers and have infected family members and other caregivers. The fatality rate has been about 60 percent, and the scenes of patients bleeding from the eyes, mouth and ears has led many relatives to keep their sick family members at home instead. ... "Constant mutation and adaptation are the survival mechanisms of viruses and other microbes," she said. "We must not give this virus opportunities to deliver more surprises."

Forget Ebola, Florida Issues "Flesh-Eating Bacteria" Public Health Warning -- As Ebola spreads mercilessly across the world, it appears Florida has a problem that sounds just as awful. As CBS reports, Florida health officials are warning beachgoers about a seawater bacterium that can invade cuts and scrapes to cause flesh-eating disease. At least 11 Floridians have contracted Vibrio vulnificus so far this year and two have died, according to the most recent state data.

The Science Behind The Rise In Deadly Flesh-Eating Bacteria In America’s Waterways  -- Some vacationers have been getting more than they bargained for during visits to the beach and pools this summer. Vibrio vulnificus – a warm water-dwelling, flesh eating bacteria – has infected more than a dozen people this year, some of whom have succumbed. Recent cases in Florida and the D.C. metropolitan area – including one where a Stafford, Va. man was admitted to a hospital after a swim in the Potomac River – have brought attention to an increase in seawater temperatures that experts say make the bodies of water the perfect breeding ground for deadly bacteria. In 2011, members of the Chesapeake Bay Foundation likened the Chesapeake Bay to “a warm pond with a broth of nutrients at the right temperature to breed algae and bacteria.” According to a report conducted by the environmental group, cases of Vibrio vulnificus more than doubled in the last decade in Virginia and Maryland, a period during which seawater temperatures in the region increased by half of a degree Fahrenheit. The study also identified the increasing presence of mercury, nitrates, and blue green algae in warm bodies of water. Unfortunately, Vibrio vulnificus is not the first warm water-dwelling bacteria to wreak havoc on swimmers and marine animals. For the last three years, a brain-eating amoeba by the name of Naegleria fowleri – often confined to fresh water in southern states like Arizona and Texas – has infected and killed people in Kansas, Virginia, and Minnesota who swam in warm rivers, lakes, and improperly chlorinated swimming pools.

Styrene Officially Linked to Cancer -- Styrene is used to make styrofoam and other plastics. Styrene is all over the place. It lines your refrigerator, it’s in building insulation, in your carpet, it’s in latex and rubber and other products. So okay, maybe you can’t afford to ditch the refrigerator and carpet today. What can you do?Start by avoiding:

  • 1. Foam cups for holding coffee and hot tea.
  • 2. Foam plates and bowls that could hold hot foods.
  • 3. Takeout containers made from foam.
  • 4. The number 6 on plastic products. They don’t look like foam but do have styrene.

Here’s some advice from Dr. Weil’s well known website: Styrene isn’t known to leach out of hard plastics, but some evidence suggests that it can leach out of foam food containers and cups when food or drinks are hot–not when they’re cold. Based on what we now know, you’re probably safe using styrene foam cups for cold drinks, but I wouldn’t use them for hot coffee or tea, and I would avoid using plastic containers for hot foods.

Your chicken is about to get more full of feces - If you buy your chicken from the supermarket, here are a few things about its life that might make you less eager to eat it. As a chick, your chicken's beak was cut off so that it wouldn't attack other chickens in the overcrowded cage in which it was raised. Your chicken was fed so much grain so quickly – supplemented with antibiotics – that, by the time it was ready for slaughter at the age of five weeks, its breasts were swollen and disproportionately large, rendering it unable to walk. Once your chicken was slaughtered, it was tossed into a chlorinated bath or doused with other industrial-grade chemicals so that your chicken would reach you "clean". But "clean", when it comes to meat, is a relative standard. Most chickens spend the bulk of their short lives covered or standing in feces (to say nothing of the conditions in which cows, pigs or even turkeys are raised), and the way in which they are dispatched in the modern era is so sordid that farm states are actually passing laws to keep you from ever bearing witness to the slaughter.  The one small hope for human health has been that the US Department of Agriculture has inspectors to watch over those processing plants and make sure we don't eat sick chickens or chickens covered in their own feces as they make their way through the processing plant. That is, it's been the one hope until now.The USDA is moving toward final approval of a rule that would replace most government inspectors with untrained company employees, and to allow companies to slaughter chickens at a much faster rate. (The rule is called the "Modernization of Poultry Slaughter Inspection", but advocates like the Center for Food Safety and Food and Water Watch are calling it the "Filthy Chicken Rule".) It could be approved as soon as this week.

Brazil farmers say GMO corn no longer resistant to pests (Reuters) - Genetically modified corn seeds are no longer protecting Brazilian farmers from voracious tropical bugs, increasing costs as producers turn to pesticides, a farm group said on Monday. Producers want four major manufacturers of so-called BT corn seeds to reimburse them for the cost of spraying up to three coats of pesticides this year, said Ricardo Tomczyk, president of Aprosoja farm lobby in Mato Grosso state. "The caterpillars should die if they eat the corn, but since they didn't die this year producers had to spend on average 120 reais ($54) per hectare ... at a time that corn prices are terrible," he said. Large-scale farming in the bug-ridden tropics has always been a challenge, and now Brazil's government is concerned that planting the same crops repeatedly with the same seed technologies has left the agricultural superpower vulnerable to pest outbreaks and dependent on toxic chemicals. Experts in the United States have also warned about corn production prospects because of a growing bug resistance to genetically modified corn. Researchers in Iowa found significant damage from rootworms in corn fields last year.

Unprecedented California Drought Restrictions Go Into Effect -- California implemented emergency water-conservation measures today as it struggles to cope with an ongoing drought that has sapped reservoirs and parched farms across the state.The new rules — the first statewide curbs on water use since the current drought began nearly three years ago — can lead to fines of up to $500 per day for using a hose to clean a sidewalk, running ornamental fountains that do not recirculate water and other wasteful behaviors. The regulations will be in effect for 270 days, unless they are repealed earlier.Officials have said they don’t expect to issue too many tickets. Instead, they hope the rules will promote conservation by making it clear how serious the drought in California has become.“We were hoping for more voluntary conservation, and that’s the bottom line,” Felicia Marcus, chair of the State Water Resources Board, told TIME when the body voted to approve the regulations on July 22. “We hope this will get people’s attention.”An earlier effort to do that landed with a thud. In January, Governor Jerry Brown issued an emergency declaration and called for residents to voluntarily cut their water use by 20%. Earlier this month, a state survey found that California actually used more water in May than the previous three year average for that month. With the entire state experiencing some degree of drought and 80% of it in an extreme drought, the new measures are the latest effort to wake residents to the crisis.“We can’t count on it raining next year or even the next,”

California Is Now Experiencing Its Most Severe Drought Ever Recorded - California’s drought has reached levels so high and widespread that it’s now the most severe drought ever recorded by the federal government in the state, according to new data released Thursday. The U.S. Drought Monitor, which began issuing drought reports in 1999, showed that the majority of the state is now in the worst category of drought conditions. Specifically, roughly 58 percent of California is considered to be in “exceptional drought” — a category marked by dark red in the picture below — which is the most severe of five drought categories. “I think we’re looking at a once in a generation type of event,” National Drought Mitigation Center climatologist Mark Svboda told Andrew Freedman at Mashable. Here's how the #CADrought has gone from bad to worse to horrible. @DroughtGov pic.twitter.com/Pg1PImioIb Freedman also pointed out that even though the Drought Monitor has only been keeping record of dryness since the late 1990s, there’s evidence that this particular drought is “more severe in many ways than a landmark drought in the late 1970s, and is comparable, if not worse than, events that occurred since instrument records began in the mid-19th century.” The severity of the drought now is also increasingly threatening the state’s $44.7 billion agricultural industry, the Drought Monitor noted, saying California’s topsoil moisture reserves are “nearly depleted.” It’s impacting people’s lives, too — earlier this month, California agreed to impose fines of up to $500 on residents who were caught doing things like washing cars with running hoses, watering lawns during the hottest parts of the day, and letting water from outdoor sprinklers run down sidewalks. Some Californians are even taking to social media to call out and shame neighbors and businesses that are wasting water.

The Drought Goes From Bad To Catastrophic -- As we previously commented, when scientists start using phrases such as "the worst drought" and "as bad as you can imagine" to describe what is going on in the western half of the country, you know that things are bad. However, in recent weeks the dreadful situation in California has gone from bad to catastrophic as the U.S. Drought Monitor reported that more than half of the state is now in experiencing 'exceptional' drought, the most severe category available. And most of the state – 81% – currently has one of the two most intense levels of drought. As WaPo reports, While California’s problems are particularly severe, that state is not alone in experiencing significant drought right now. There are wide swaths of moderate to severe drought stretching from Oregon to Texas, with problems impacting numerous states west of the Mississippi River. Some of the most severe droughts outside of California are impacting large pockets in Oklahoma, Texas and, particularly, Nevada, where more than half of the state is currently experiencing one of the two most intense drought conditions

Watch Drought Take Over the Entire State of California in One GIF -- California, the producer of half of the nation's fruits, veggies, and nuts, is experiencing its third-worst drought on record. The dry spell is expected to cost the state billions of dollars and thousands of jobs, and farmers are digging into groundwater supplies to keep their crops alive. We've been keeping an eye on the drought with the US Drought Monitor, a USDA-sponsored program that uses data from soil moisture and stream flow, satellite imagery, and other indicators to produce weekly drought maps. Here's a GIF showing the spread of the drought, from last December 31—shortly before Gov. Jerry Brown declared a state of emergency—until July 29.

Overuse of Groundwater in California Threatens Future Farming and Human Habitation and Requires Enormous Amounts of Electricity -  K. McDonald --As this California drought intensifies, this week I caught the first headline warning that people may need to be migrated out of areas where its groundwater has been depleted from pumping until exhaustion. As it turns out, there is little or no oversight on using up groundwater in the state, and so the busiest industry there of late has been well drilling. Stanford is doing a series on groundwater use and policy problems in California, beginning with a great title, “Ignore it and it might go away“, referring to its unregulated use. They tell us that six million Californians rely on groundwater solely for their water supply (mostly in the Central Valley or Central Coast); 85% of California’s population relies on it to some degree; and California’s $45 billion agriculture industry relies upon it. Unfortunately, the state’s antiquated laws concerning groundwater use allow for secrecy, unfettered use, and depletion.  A lesser known story is how much electricity is required to pump this groundwater, and as it depletes, the amount of electricity needed grows ever larger to pump from deeper depths. Earlier this year, a news reporter friend of mine told me that a large landowner in California’s Central Valley was paying 3 million dollars per month for electricity to pump water. Previously, I wrote about how much energy is required to move water in California.  According to the Association of California Water Agencies, water agencies account for 7 percent of California’s energy consumption and 5 percent of the summer peak demand.

El Niño 2014: Weather Phenomenon Will Arrive Later And Be Weaker Than Initially Expected, Forecasters Say - The elusive El Niño will likely arrive later and appear weaker than forecasters had initially expected. As Pacific Ocean waters warm at a slower pace or cool off in some spots, the necessary conditions for such a tropical weather event seem to be stalling, researchers say. El Niño will probably develop as a weak event in the late summer or early fall, according to MDA Weather Services. Another forecaster, Commodity Weather Group LLC, said the system could be delayed for several months, Bloomberg News reported on Friday.  During an El Niño, warm water that typically pools in the western Pacific is propelled eastward by shifting winds and waves. As a result, rain-forming clouds abandon Asia and Australia -- leaving the region with unusual dryness -- and drench South America and California. The change-up also raises the overall surface temperatures of the Pacific, which in turn warms the world’s atmosphere. While the Australian Bureau of Meteorology is keeping an alert for the event, it has pushed the start time from July to September or later, and it says a strong event is unlikely, Bloomberg noted. Last month, the World Meteorological Organization put the odds of an El Niño at 60 percent between June and August, climbing to up to 80 percent between October and December. Scientists this spring saw signs that the 2014 El Niño might be as powerful as the devastating 1997-98 event that was blamed for thousands of death and more than $33 billion in damages.

Worldwide water shortage by 2040 - Two new reports that focus on the global electricity water nexus have just been published. Three years of research show that by the year 2040 there will not be enough water in the world to quench the thirst of the world population and keep the current energy and power solutions going if we continue doing what we are doing today. It is a clash of competing necessities, between drinking water and energy demand. Behind the research is a group of researchers from Aarhus University in Denmark, Vermont Law School and CNA Corporation in the US.  In most countries, electricity is the biggest source of water consumption because the power plants need cooling cycles in order to function. The only energy systems that do not require cooling cycles are wind and solar systems, and therefore one of the primary recommendations issued by these researchers is to replace old power systems with more sustainable wind and solar systems. The research has also yielded the surprising finding that most power systems do not even register how much water is being used to keep the systems going. "It's a huge problem that the electricity sector do not even realise how much water they actually consume. And together with the fact that we do not have unlimited water resources, it could lead to a serious crisis if nobody acts on it soon",

Humanity May Face Choice By 2040: Conventional Energy or Drinking Water  -- Yves here. It is surprising that it is only now that the idea of water as a scarce resource is getting the attention it deserves in advanced economies. A related issue, which this post addresses to a degree, is that dealing with water, energy, and food supply limits are an integrated problem, yet are typically handled as isolated issues. We see, for instance, the use of corn-based ethanol placing strains on global cereal supplies (the amount of corn used to make ethanol in the US in 2009 contained enough calories to feed 330 million people for a year at average daily intake levels).  Similarly, as Americans are learning, fracking uses large amounts of water and often damages aquifers, putting pressure on water resources. But many processes that produce potable water from otherwise unsafe water, like desalination, require significant amounts of energy. So while articles like this are an important step forward in bringing attention to the fact that these issues are interconnected, they still fall short of discussing its larger dimensions. Originally published at OilPrice: A set of studies based on three years of research concludes that by 2040, the need for drinking water and water for use in energy production will create dire shortages. Conventional electricity generation is the largest source of water use in most countries. Water is used to cool power plants to keep them functional. Most power utilities don’t even record the amount of water they use.

Companies proclaim water the next oil in a rush to turn resources into profit Companies proclaim water the next oil in a rus: “Is now the time to buy water?” enquired the email that showed up in my inbox earlier this week. Its authors weren’t worrying about my dehydration levels. Rather, they were urging me to think of water in quite a new way: as a commodity to invest in. Making money from water? Is this what Wall Street wants next? After spending nearly 30 years of my life writing about business and finance, including several years dedicated to the commodities market, the idea of treating water as a pure commodity – something to bought and sold on the open market by those in quest of a profit rather than trying to deliver it to their fellow citizens as a public service – made me pause. Sure, I’ve grown up surrounded by bottled mineral water – Evian, Volvic, Perrier, Pellegrino and even more chi-chi brands – but that has always existed alongside a robust municipal water system that delivers clean water to whatever home I'm occupying. All it takes is turning a tap. The cost of that water is fractions of a penny compared to designer bottled water. This summer, however, myriad business forces are combining to remind us that fresh water isn’t necessarily or automatically a free resource. It could all too easily end up becoming just another economic commodity. At the forefront of this firestorm is Peter Brabeck, chairman and former CEO of Nestle. In his view, citizens don’t have an automatic right to more than the water they require for mere “survival”, unless they can afford to pay for it. For context, the World Health Organization sets such “survival” consumption levels at a minimum of 20 liters a day for basic hygiene and food hygiene – higher, if you add laundry and bathing. If you’re reading this in the United States, the odds are that flushing your toilet consumes 50 liters of water a day.

America Might Soon Witness A Dust Bowl-Like Migration -- Debates still persist about the impact of climate change, but from my perspective, the early results are in. We are now reaching the point where cities, metro areas and states will have to consider taking bold and assertive measures to even maintain their current quality-of-life levels. And we are also reaching the point at which alternate futures for our cities must be considered.  That future could very well mean fewer people in the dry West and coastal areas of the East and South, and more people in the comparatively water-rich Midwest. And if you're looking for a historical analogy that could illustrate the change, look no further than the 1930s-era Dust Bowl.  East of the Rockies, and particularly in the Midwest, the summer has been cool and wet. Meanwhile, all of California has been suffering from severe to exceptional drought conditions, with the Texas Panhandle and Oklahoma not far behind. Texas was certainly in the drought bull's-eye last year, and while conditions have improved, the state is not out of the woods yet. Is this a harbinger? It's probably safe to say that exceptional drought conditions won't stay in California forever, just as conditions have eased in Texas this year. But the persistence of conditions conducive to drought may turn water into an increasing dwindling resource, rather than a renewable one, over time.I'm no scientist, and certainly no climate expert. But I do know cities, and I have an understanding of the impact that a critical resource like water, or lack of it, can have on a local economy, and prospects for future growth and ultimate viability. And the Rust Belt better get ready.

Limited potential of crop management for mitigating surface ozone impacts on global food supply - Abstract - Surface ozone (O3) is a potent phytotoxic air pollutant that reduces the productivity of agricultural crops. Growing use of fossil fuel and climate change are increasing O3 concentrations to levels that threaten food supply. Historically, farmers have successfully adapted agricultural practices to cope with changing environments. However, high O3 concentrations are a new threat to food production and possibilities for adaptation are not well understood. We simulate the impact of ozone damage on four key crops (wheat, maize, rice and soybean) on a global scale and assess the effectiveness of adaptation of agricultural practices to minimize ozone damage. As O3 concentrations have a strong seasonal and regional pattern, the adaptation options assessed refer to shifting crop calendars through changing sowing dates, applying irrigation and using crop varieties with different growth cycles. Results show that China, India and the United States are currently by far the most affected countries, bearing more than half of all global losses and threatened areas. Irrigation largely affects ozone exposure but local impacts depend on the seasonality of emissions and climate. Shifting crop calendars can reduce regional O3 damage for specific crop-location combinations (e.g., up to 25% for rain-fed soybean in India) but has little implication at the global level. Considering the limited benefits of adaptation, mitigation of O3 precursors remains the main option to secure regional and global food production.

"Reductions in India's crop yield due to ozone," - Abstract - This bottom-up modeling study, supported by emission inventories and crop production, simulates ozone on local to regional scales. It quantifies, for the first time, potential impact of ozone on district-wise cotton, soybeans, rice and wheat crops in India for the first decade of the 21st century. Wheat is the most impacted crop with losses of 3.5 ± 0.8 Mt, followed by rice at 2.1 ± 0.8 Mt, with the losses concentrated in central and north India. On national scale, this loss is about 12% of the cereals required every year (61.2 Mt) under the provision of recently implemented National Food Security Bill (September-2013) by Government of India. The nationally aggregated yield loss is sufficient to feed 94 million people living below poverty line in India.

Rising heat hits Indian wheat crop, particularly rising nighttime temperatures - Satellite imaging highlights the growing need to change agricultural practices in South Asia as higher average temperatures cause the reduction of crop yields on the Indo-Gangetic plain. − Researchers in the UK have established a link between changing climate and agriculture that could have significant consequences for food supplies in South Asia. They have found evidence of a relationship between rising average temperatures in India and reduced wheat production, which was increasing until about a decade ago but has now stopped. The greatest impact that the hotter environment has on wheat, they say, comes from a rise in night-time temperatures.  “Our findings highlight the vulnerability of India’s wheat production system to temperature rise. We are sounding an early warning to the problem, which could have serious implications in the future and so needs further investigation.” The team is the first to use satellite imagery to establish the link between warming and crop yields. The images were taken at weekly intervals, from 2002 to 2007, of the wheat-growing seasons to measure the “vegetation greenness” − an indicator of crop yield. The imagery, of the north-west Indo-Gangetic plain, was taken at such a high resolution that it was able to capture variations in local agricultural practices. The plains stretch over much of northern and eastern India, and into parts of Pakistan, Nepal and Bangladesh. The study, published in the journal Global Change Biology, found that warmer temperatures reduced crop yield. Greater warmth during the reproductive and ripening periods, in particular, had “a significant negative impact on productivity”. But it was the warmer nights that did the greatest harm.

MIT: Climate Change a Greater Threat to Global Food Production than Previously Thought -- Climate change could pose an even greater threat to global food production than previously thought, according to new research. Rising temperatures will not only damage heat-sensitive crops – they’ll also increase toxic air pollution, which will harm crops even further. The study, out this week in the journal Nature Climate Change, is the first to explore how this interaction between warming temperatures and air pollution affects staple crops. Scientists have long known that the two can independently damage crops and reduce yields, but “nobody has looked at these two together,” Colette Heald, one of the co-authors and an associate professor of civil and environmental engineering at MIT, said in a statement. She said the findings highlight the need for stronger air-quality regulations, especially given the looming global food crisis. The world is expected to need about 50% more food than it does today by 2050, due to population growth and the increasing demand for cereal-based diets in the developing world. But warming temperatures may reduce global crop yields by about 10 percent over that same period; left unchecked, air pollution could bump that number up even higher, the authors said. Last week, a separate study by U.S. researchers found that the odds of a reduction in corn and wheat production are 20 times higher than they would be without human-induced global warming. Earlier this year, a United Nations climate change report found that falling agricultural yields would hit impoverished people the hardest.

More proof that climate change is ruining seafood for everyone -  A new study conducted by the National Oceanic and Atmospheric Administration has bolstered convictions that many marine biologists and climate scientists have had for over a decade: Climate change is seriously threatening the world’s shellfish supply. The study focused specifically on Alaskan fisheries, known for red king crab and other desirable fare, because the local communities are so reliant on them for their economic well-being. Researchers said changes in ocean chemistry could make it harder for mollusks and other small creatures to build and keep their skeletons or shells. Previous studies have shown red king crab and tanner crab grow more slowly in more acidic water and that red king crab died in highly acidified conditions. Communities in southeast and southwest Alaska face the highest risk from ocean acidification because of their reliance on fishing, relatively lower income levels and fewer job alternatives than other parts of Alaska, the report states. For communities with high food and energy costs, ocean acidification could be another hit, the research says.

June Was The Hottest Month On Record For The Ocean - The  oceans in June may have set an all-time heat record, according to data from the U.S. National Oceanic and Atmospheric Administration (NOAA). The global average sea surface temperature may have topped 17 °C for the first time in any month of any year since 1880.  The NOAA State of the Climate analysis reported that last month was the warmest June on the planet since records began, thanks in large part to ocean warmth. It was the 7th warmest June on land but the warmest June in the ocean, with the highest departure from normal recorded in the data set for any month. The temperature of 17.04°C should be seen as an estimate, given the challenge of defining “normal” for the oceans. However, we can still say with some confidence June may have been the warmest month for the ocean since these records began. The record ocean warmth is seen particularly in the tropical Pacific, where currents, winds and temperature measurements have scientists forecasting a possible El Nino event.

'The Northern Hemisphere Is on Fire' - "Rarely has the continent been covered so extensively with smoke."  Typically, those aren't the sort of opening words you want to read on a website tasked with monitoring the nation's air quality. But it's how Dr. Raymond Hoff, the physicist and professor emeritus at the University of Maryland who helps run the US Air Quality blog, framed his weekend edition.  "Canadian wildfires and fires in the Pacific Northwest have conspired to make much of the northern half of the US a hazy, smoky mess," Hoff writes.  As of the end of last week, here's how much of the continent was covered in smoke plumes—the light grey—and fires themselves, indicated with the red dots.

Climate Change Already Having Profound Impacts on Lakes in Europe – New evidence from studies in Europe shows that a warming climate, in particular, is already having a profound impact on lakes, according to Dr. Erik Jeppesen at Aarhus University in Denmark. As I have noted in earlier posts, this is an important issue because other studies show that lake temperatures are on the rise throughout the world.Two leading European freshwater research programs are REFRESH, studies of adaptive strategies to mitigate the impacts of climate change on freshwater ecosystems, and MARS, focused on the management of freshwater lakes, rivers and streams under multiple stressors, including climate change. Among the impacts of climate change I’ve already written about, climate warming exacerbates lake eutrophication, a natural aging process whereby a lake becomes more enriched with nutrients and algal growth over time. This process, sometimes called “cultural” eutrophication because it is accelerated by nutrient pollution from humans (think Lake Erie), has become one of the greatest problems facing lakes throughout the world. As water temperature increases, it has a similar effect on a lake as increasing nutrient loading, although the mechanisms are different, Jeppesen says. The natural mechanisms that control phytoplankton growth weaken in a warmer climate. The lake’s growing season is longer, the nutrients are more readily available, and predation on phytoplankton is lower. This leads to more algal growth.

Coastal Flooding More Frequent In U.S. Due To Sea Level Rise And Sinking Land, Study Finds - Flooding is increasing in frequency along much of the U.S. coast, and the rate of increase is accelerating along the Gulf of Mexico and Atlantic coasts, a team of federal government scientists found in a study released Monday.   The study examined how often 45 tide gauges along the country's shore exceeded National Weather Service flood thresholds across several decades. The researchers found that the frequency of flooding increased at 41 locations. Moreover, they found that the rate of increase was accelerating at 28 of those locations. The highest rates of increase were concentrated along the mid-Atlantic coast.  The thresholds are usually associated with minor flooding, also called nuisance flooding, which can overwhelm drainage systems, cause road closures and damage infrastructure not built to withstand frequent flooding or exposure to salt water. Such flooding is one of the more recognizable effects of rising seas, as opposed to less frequent but more damaging extreme storms, such as hurricanes, the scientists said.  In the 1950s, nuisance flooding occurred once every one to five years, the study found. By 2012, the frequency had increased to about once every three months at most NOAA gauges.   "It takes a lesser storm to inundate similar (elevations)."  The study is the latest to examine whether minor flooding is increasing as seas rise. Reuters published the results of its own independent analysis earlier this month that found that the number of days a year that tidal waters reached or exceeded flood thresholds more than tripled in many places. Another study, found that flooding outside of storm events has increased in frequency and duration. The results of their study are expected to be published later this year.

Tracking and combatting our current mass extinction -- At various times in its past, the Earth has succeeded in killing off most of its inhabitants. Although the impact that killed the non-avian dinosaurs and many other species gets most of the attention, the majority of the mass extinctions we're aware of were driven by geological processes and the changes in climate that they triggered. Unfortunately, based on the current rate at which animals are vanishing for good, we're currently in the midst of another mass extinction, this one driven by a single species: humans. (And many of the extinctions occurred before we started getting serious about messing with the climate.) This week's edition of Science contains a series of articles tracking the pace of the extinction and examining our initial efforts to contain it.   Estimating the total number of animal species is a challenging task, but numbers range from roughly five to 10 million. Of those, we seem to be exterminating about 10,000 to 60,000 every year. Up to a third of the remaining vertebrate species are thought to be threatened or endangered. Amphibians have it even worse, with over 40 percent of species considered threatened. Those are grim numbers, but the authors of one review of the data point out that vanishing species aren't the only problems. "From an abundance perspective," the authors state, "vertebrate data indicate a mean decline of 28 percent in number of individuals across species in the past four decades." In other words, in just over the past decade, species that still exist have seen their membership decline drastically. The authors use the term "defaunation," a play on deforestation, to describe the plunging number of animals alive today.

Naomi Klein: Big Green is in denial - I go back to something even like the fight over NAFTA, the North American Free Trade Agreement. 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.”

Has Antarctic sea ice expansion been overestimated? - New research suggests that Antarctic sea ice may not be expanding as fast as previously thought. A team of scientists say much of the increase measured for Southern Hemisphere sea ice could be due to a processing error in the satellite data. The findings are published today in The Cryosphere, a journal of the European Geosciences Union (EGU). Arctic sea ice is retreating at a dramatic rate. In contrast, satellite observations suggest that sea ice cover in the Antarctic is expanding – albeit at a moderate rate – and that sea ice extent has reached record highs in recent years. What's causing Southern Hemisphere sea ice cover to increase in a warming world has puzzled scientists since the trend was first spotted. Now, a team of researchers has suggested that much of the measured expansion may be due to an error, not previously documented, in the way satellite data was processed. "This implies that the Antarctic sea ice trends reported in the IPCC's AR4 and AR5 [the 2007 and 2013 assessment reports from the Intergovernmental Panel on Climate Change] can't both be correct: our findings show that the data used in one of the reports contains a significant error. But we have not yet been able to identify which one contains the error,"

"Vast methane plumes escaping from the seafloor" discovered in Siberian Arctic Sea -  Vast methane plumes have been discovered boiling up from the seafloor of the Arctic ocean on the continental slope of the Laptev Sea by a dream team of international scientists. Over the last decade a warming tongue of Atlantic ocean water has been flowing along the Siberian Arctic ocean's continental slope destabilizing methane ice, hypothesize the team of Swedish, Russian and American scientists. The research team will take a series of measurements across the Siberian seas to attempt to understand and quantify the methane release and predict the effect of this powerful greenhouse gas on global and Arctic warming. Because the Siberian Arctic contains vast stores of methane ices and organic carbon that may be perturbed by the warming waters and Arctic climate, Arctic ocean and Siberian sea methane release could accelerate and intensify Arctic and global warming.

Methane Mega Flare - Mega flare. What is a Mega flare? We hunt Mega flares. Mega flare hunting is big game hunting. We need an arsenal of weapons to hunt Mega flares. First we use the Multibeam and mid-water sonar to check for indications as we steam in a tight grid pattern. Back and forth, back and forth. We are now on the way to station 22. Back and forth. Indications of flares and the mid-water sonar goes red. We throw everything we got in the water and turn on all ship system to maximum for logging data.We are “sniffing” methane. We see the bubbles on video from the camera mounted on the CTD or the Multicorer. All analysis tells the signs. We are in a Mega flare. We see it in the water column we read it above the surface an we follow it up high into the sky with radars and lasers. We see it mixed in the air and carried away with the winds. Methane in the air. Where does it come from? Is it from the old moors and mosses that used to be on dry land but now has sunken into the sea. Does it come from the deep interior of the earth following structures in the bedrock up into the sand filled reservoirs collecting oil and gas then leaking out upwards, as bubbles through the sea bed into the water, into the mid-water sonar, the Niskin bottles the analysis and into our results?  Where does the methane come from? Is it organic or not? What’s the volume? How much is carried up into the air? Is there an effect on the climate? One Mega flare does not tell the truth. It’s not evidence enough. We carry on for the next station.

Major Methane Releases at Laptev Megaflare Spot --According to Örjan Gustafsson, Stockholm University, "the leaking methane from the seafloor of the continental slope may have its origins in collapsing “methane hydrates,” clusters of methane trapped in frozen water due to high pressure and low temperature." The methane saturation levels were the big surprise, "results of preliminary analyses of seawater samples pointed towards levels of dissolved methane 10-50 times higher than background levels."What is causing the seeps to increase?  "Örjan Gustafsson thinks that the mechanism behind the presence of methane seeps at these depths may have something to do with the ”tongue” of relatively warm Atlantic water, presumably intruding across the Arctic Ocean at 200-600 m depths.” Some evidence have shown that this water mass has recently become warmer. As this warm Atlantic water, the last remnants of the Gulf Stream, propagates eastward along the upper slope of the East Siberian margin, it may lead to destabilization of methane hydrates on the upper portion of the slope. This may be what we are now seeing for the first time.

Is the climate dragon awakening? [METHANE!] - Jason Box - Using a vast and credible set of climate measurements and physics, James Hansen’s Storms of My Grandchildren makes the case that humans overloading the atmosphere with carbon would eventually trigger the release of vast additional carbon stores locked in shallow sea gas hydrates and from Arctic tundra.   We have been too long on a trajectory pointed at an unmanageable climate calamity; runaway climate heating. If we don’t get atmospheric carbon down and cool the Arctic, the climate physics and recent observations tell me we will probably trigger the release of these vast carbon stores, dooming our kids’ to a hothouse Earth. That’s a tough statement to read when your worry budget is already full as most of ours is. December 2013, I found myself in a packed room at the world’s largest science meeting, the AGU fall meeting. The session: “Cutting-Edge Challenges in Climate.”  My take-home from the session was well paraphrased by Bruhwiler, citing a sparse observational network, concluding “we just can’t say much yet.”  That was then…  Clearly, considering the vastness of the Arctic, the network of ground-based observing stations does appear sparse, with a solitary station representing Siberia, at Tiksi, you’re left thinking that governments should do more to keep their finger on this pulse. On the pulse side, however, the measurements happening at Tiksi (and other sites in the network such as Alert and Pt. Barrow northern Alaska), I can tell you, are really high end, with BSRN radiometers, eddy covariance gas fluxes, gas flask sampling, etc., impressive and not inexpensive.

Are Siberia’s methane blow-holes the first warning sign of unstoppable climate change? - The end of the world could be starting right now — in a frozen Siberian wasteland known as Yamal. It translates as “The End of the Land”. The first mysterious crater was spotted by oil workers earlier this month. It was an 80m wide cavern that reached deep into the earth. Since then, the Siberian Times reports goatherds have found a further two enormous vents in the ground. Russian researchers have returned from their investigation of the first find and taken water and soil samples to help resolve how the hole was formed. Some say aliens. Some say they’re “hellmouths” — gateways to the undead. But scientists already have a pretty good idea. Explosive vents of vast quantities of methane gas. Now a new, ominous, name could be attached to them: Dragon’s mouths. Here’s where a blog posted by American professor in glaciology Dr Jason Box at the weekend comes in: “The dragon breath hypothesis has me losing sleep.” Dr Box highlights signs of alarmingly huge spikes of methane being released into the atmosphere above Siberia. It’s what that means which has him alarmed. He’s not mincing his words. He’s issued a no-holds barred call to action. “This is an all hands on deck moment,” he writes. “We’re in the age of consequences.” And he has the “WTF” results from atmospheric measurements to back him up.

Siberian tundra holes are a mystery to me - Jason Box - An Australian news piece juxtaposes mysterious Siberian holes with my Arctic tundra carbon release concerns but I have no idea about the cause of the holes. As a physical geographer, I’m aware of pingos that these features resemble but these features are holes and pingos are mounds. If you ask me, talk to field scientists with expertise in permafrost. For further reporting on the mysterious holes, see here.

Climate Tipping Requires Precautionary Accumulation of Capital and an Additional Price for Carbon Emissions - Many ecological systems feature ‘tipping points’ at which small changes can have sudden, dramatic, and irreversible effects, and scientists worry that greenhouse gas emissions could trigger climate catastrophes. This column argues that this renders the marginal cost-benefit analysis usually employed in integrated assessment models inadequate. When potential tipping points are taken into account, the social cost of carbon more than triples – largely because carbon emissions increase the risk of catastrophe.

World Bank Preparing To Scrap Protections For The Environment, Indigenous People --- A leaked document from the World Bank says that the international lending organization is about to scrap key safeguards that protect indigenous peoples and the environment in their project sites. The World Bank, which lends up to $50 billion a year to developing nations, instituted the protective policies after several high-profile development projects in the 1980s and ’90s led to grave human rights abuses and environmental degradation.  The draft policy would allow countries receiving World Bank loans to “opt-out” of abiding by the organization’s rules protecting the rights of indigenous peoples. In response, a coalition of NGOs, activists, and community groups issued a statement to the World Bank warning that the proposed change in policy “represents a profound dilution of the existing safeguards and an undercutting of international human rights standards and best practice.” Even some of the World Bank’s top leaders have expressed reservations about the plan.   If the World Bank presses ahead with the changes, we could see repeats of flagrant abuses from the past that alienate more people than they help, leading to fierce criticism of the international financing system from the left at the turn of the century. Here are three of the World Bank’s past blunders the current safeguards would have prevented that are definitely not worth repeating:

Sun, wind and drain | The Economist - SUBSIDIES for renewable energy are one of the most contested areas of public policy. Billions are spent nursing the infant solar- and wind-power industries in the hope that they will one day undercut fossil fuels and drastically reduce the amount of carbon dioxide being put into the atmosphere. The idea seems to be working. Photovoltaic panels have halved in price since 2008 and the capital cost of a solar-power plant—of which panels account for slightly under half—fell by 22% in 2010-13. In a few sunny places, solar power is providing electricity to the grid as cheaply as conventional coal- or gas-fired power plants. But whereas the cost of a solar panel is easy to calculate, the cost of electricity is harder to assess. It depends not only on the fuel used, but also on the cost of capital (power plants take years to build and last for decades), how much of the time a plant operates, and whether it generates power at times of peak demand. To take account of all this, economists use “levelised costs”—the net present value of all costs (capital and operating) of a generating unit over its life cycle, divided by the number of megawatt-hours of electricity it is expected to supply.The trouble, as Paul Joskow of the Massachusetts Institute of Technology has pointed out, is that levelised costs do not take account of the costs of intermittency.* Wind power is not generated on a calm day, nor solar power at night, so conventional power plants must be kept on standby—but are not included in the levelised cost of renewables. Electricity demand also varies during the day in ways that the supply from wind and solar generation may not match, so even if renewable forms of energy have the same levelised cost as conventional ones, the value of the power they produce may be lower. In short, levelised costs are poor at comparing different forms of power generation.

Too Much At Stake: Moving Ahead with Energy Price Reforms - IMF Blog -- Energy plays a critical role in the functioning of modern economies. At the same time, it’s at the heart of many of today’s pressing environmental concerns—from global warming (predicted to reach around 3–4 degrees Celsius by the end of the century) and outdoor air pollution (causing over three million premature deaths a year) to traffic gridlock in urban centers. In a new IMF book, we look at precisely how policymakers can strike the right balance between the substantial economic benefits of energy use and its harmful environmental side effects. These environmental impacts have macroeconomic implications, and with its expertise in tax design and administration, the IMF can offer sound advice on how energy tax systems can be designed to ensure energy prices fully reflect adverse environmental impacts. We do this by developing a sensible and reasonably simple way to quantify environmental damages and applying it, in over 150 countries, to show what these environmental damages are likely to imply for efficient taxes on coal, natural gas, gasoline, and road diesel. For example, the human health damages from air pollution are calculated by estimating how many people are exposed to power plant and vehicle emissions in different countries and how this exposure increases the risk of various (e.g., heart and lung) diseases. Although there are some inescapable controversies in this approach (e.g., concerning the valuation of global warming damages or how people in different countries value health risks), the methodology is flexible enough to easily accommodate alternative viewpoints—it is a starting point for debate, not a final point of arrival.

IMF urges higher energy taxes to fight climate change - (Reuters) - Energy taxes in much of the world are far below what they should be to reflect the harmful environmental and health impact of fossil fuels use, the International Monetary Fund said in a new book on Thursday. For the first time, the IMF laid out exactly what it views as appropriate taxes on coal, natural gas, gasoline and diesel in 156 countries to factor in the fuels' overall costs, which include carbon dioxide emissions, air pollution, congestion and traffic accidents. Under its chief, Christine Lagarde, the IMF has delved into the impact of climate change, arguing that tackling the fund's core mission of economic instability is impossible without also addressing environmental damage. At the book's launch in Washington, Lagarde said countries should not have to wait for global agreement on climate policies, and instead should move ahead in adjusting energy prices on their own. Nations are now working on a United Nations deal for late 2015 to rein in greenhouse gas emissions that have hit repeated highs this century, but progress has been slow as nations fret about the impact any measures could have on economic growth.

Residents within 5 km of Kyushu nuclear plant given iodine tablets  — About 4,700 residents living within five kilometers of Kyushu Electric Co’s Sendai plant in Satsumasendai, Kagoshima Prefecture, were given iodine tablets as a precautionary measure on Sunday. The Nuclear Regulation Authority (NRA) approved the upgraded design and safety features of the Sendai plant earlier this month, paving the way for its likely restart sometime in the fall. The Kagoshima prefectural and Satsumasendai governments distributed the iodine tablets under the new guidelines drawn up by the NRA in 2012. Iodine tablets are used to protect thyroids from radiation. The NRA guidelines recommend that those living within a 30-km radius of a nuclear crisis of the magnitude of that at the Fukushima Daiichi nuclear power plant should be given iodine as quickly as possible. The authority’s research suggests that this should reduce by about 20% radiation that comes into contact with the thyroid gland while breathing. The recommendation was also made by the World Health Organization decades earlier. In a 1999 guideline, the WHO recommended the stockpiling of stable iodine. However, it added, “For adults over 40, the scientific evidence suggests that stable iodine prophylaxis not be recommended unless doses to the thyroid from inhalation are expected to exceed levels that would threaten thyroid function. This is because the risk of radiation induced thyroid carcinoma in this group is very low while, on the other hand, the risk of side effects increases with age.”

US Exports Help Germany Increase Coal, Pollution  - One of Germany’s newest coal-fired power plants rises here from the banks of a 100-year-old canal that once shipped coal mined from the Ruhr Valley to the world. Now the coal comes the other way. The 750-megawatt power plant relies completely on coal imports, about half from the U.S.  Coal mining’s demise in Germany comes as the country is experiencing a resurgence in coal-fired power, one which the U.S. increasingly has helped supply. U.S. exports of power plant-grade coal to Germany have more than doubled since 2008. In 2013, Germany ranked fifth, behind the United Kingdom, Netherlands, South Korea and Italy in imports of U.S. steam coal, the type burned in power plants.  On the American side of the pollution ledger, this fossil fuel trade helps the United States look as if it is making more progress on global warming than it actually is. That’s because it shifts some pollution — and the burden for cleaning it — onto another other country’s balance sheet. “This is a classic case of political greenwashing,” said Dirk Jansen, a spokesman for BUND, a German environmental group. “Obama pretties up his own climate balance, but it doesn’t help the global climate at all if Obama’s carbon dioxide is coming out of chimneys in Germany.” It’s a global shell game that threatens to undermine Obama’s strategy of reducing the gases blamed for global warming and reveals a little-discussed side effect of countries acting alone on a global problem.  The explanation for Germany’s increase is simple: Coal is cheaper than alternatives, particularly natural gas. So, too, are the prices on the carbon market in Europe. Companies can afford to buy the right to release more pollution.

Controversial Sale Of Federal Coal Yields Low Prices With Only One Bidder - Amid growing public concern over the federal government’s coal program and its substantial contribution to climate change, the U.S. Department of the Interior’s Bureau of Land Management (BLM) auctioned off 8 million tons of coal in western Colorado today as part of its “Spruce Stomp” lease sale. The only bid at the coal sale was from Bowie Resources, LLC, the same company that proposed the parcel be auctioned through the BLM’s controversial lease by application process, which critics claim is noncompetitive and gives industry too much control over the leasing process. The Spruce Stomp sale is not unique in this respect; since 1990, roughly 90 percent of all “competitive” federal lease sales have only had one bidder. Bowie Resources bid 36 cents per ton for the coal — or $2.9 million in total for the lease. A recent analysis from Greenpeace found that the average price for publicly-owned coal was $1.03 per ton. The company says this additional coal will help facilitate the expansion of its Bowie No. 2 Mine. The mining and burning of the coal sold today will emit more than 21 million metric tons of carbon pollution into the air, or the equivalent carbon emissions of 4.5 million cars.. In the days prior to the sale, environmental groups urged Secretary of the Interior Sally Jewell to halt the sale amid concerns that coal from the Spruce Stomp sale will be exported.

Greenpeace Report: Obama Administration Exporting Climate Change by Exporting Coal - Greenpeace USA has released a major new report on an under-discussed part of President Barack Obama's Climate Action Plan and his U.S. Environmental Protection Agency (EPA) carbon rule: it serves as a major endorsement of continued coal production and export to overseas markets. “Leasing Coal, Fueling Climate Change: How the federal coal leasing program undermines President Obama’s Climate Plan” tackles the dark underbelly of a rule that only polices coal downstream at the power plant level and largely ignores the upstream and global impacts of coal production at-large.  The Greenpeace report was released on the same day as a major story published by the Associated Press covering the same topic and comes a week after the release of another major report on coal exports by the Sightline Institute that sings a similar tune. Rolling Stone's Tim Dickinson framed what is taking place similarly in a recent piece, as did Luiza Ch. Savage of Maclean's Magazine and Bloomberg BNA.  As the Greenpeace report points out, the main culprit for rampant coal production is the U.S. Bureau of Land Management (BLM), which leases out huge swaths of land to the coal industry. Greenpeace says this is occurring in defiance of Obama's Climate Action Plan and have called for a moratorium on leasing public land for coal extraction.

China’s Energy Plans Will Worsen Climate Change, Greenpeace Says -- China’s plans for 50 coal gasification plants will produce an estimated 1.1 billion tons of carbon dioxide per year and contribute significantly to climate change, according to a report released Wednesday by Greenpeace East Asia. The plants, aimed in part at reducing pollution from coal-fired power plants in China’s largest cities, will shift that pollution to other regions, mostly in the northwest, and generate enormous amounts of carbon dioxide, the main greenhouse gas produced by fossil fuels, said the organization, which is based in Beijing. If China builds all 50 plants, the carbon dioxide they produce will equal about an eighth of China’s current total carbon dioxide emissions, which come mostly from coal-burning power plants and factories, the organization said. Two of the plants have already been built as pilot projects, three more are under construction, 16 have been given the green light to be built and the rest are in various planning stages, according to the report.

Coal reserves offer no relief for India fuel crunch: India sits on one of the world's biggest coal reserves, yet its power stations are starved of the fuel with some idle and others running dangerously low on supplies. Coal accounts for nearly 60 percent of India's electricity, and the country's biggest utility company warned the government this month that supplies at many plants were severely depleted. While the government has rushed to avert an immediate crisis, analysts say much longer-term solutions are needed to spur recovery of the sluggish economy, which is hugely dependent on coal imports despite large domestic reserves. "India needs more power -- a lot more, and fast,"  The crippled state of India's power supply was on full display in the capital New Delhi during its hottest months in May and June when long power outages led to street protests and uproar in parliament. Last week, the government admitted 46 of 100 major coal-fired plants had stocks for less than a week after the National Thermal Power Corporation (NTPC) warned it could face emergencies at many plants.

Largest coal mine in Australia: federal government gives Carmichael go-ahead - The Australian environment minister, Greg Hunt, has approved a $16.5bn resources project that will lead to the creation of the largest coal mine in Australia, and one of the largest in the world.  Hunt has imposed 36 conditions, primarily aimed at protecting groundwater, on the Carmichael coal mine and rail project, which will dig up and transport about 60m tonnes of coal a year for export.  The huge Carmichael project, overseen by the Indian mining company Adani, will consist of a network of open cut and underground mines in the Galilee Basin region of central Queensland. This area is about seven times the size of Sydney harbour and will be the largest coal mine in Australia and possibly the world. Coal will be taken via a new rail line to the port of Abbot Point, north of Bowen, where Adani already has approval to build a coal export terminal. Five million tonnes of seabed will be dug up and dumped within the Great Barrier Reef Marine Park in order to expand Abbot Point for these exports, primarily to India.The Carmichael mine, which was given the green light by the Queensland government in May, has been fiercely opposed by environmentalists due to its potential impact upon the reef, groundwater at its site and its hefty carbon emissions.

Natural gas injection season continues on pace for record refill - Today in Energy - U.S. Energy Information Administration (EIA)-- Nearly midway through the summer storage injection season, working natural gas in storage is on pace to meet EIA's expectations for a record overall build. The current Short-Term Energy Outlook projects a record build of close to 2,600 billion cubic feet (Bcf) from the beginning of April through the end of October, which would put inventories at 3,431 Bcf at the end of October.  Following an extremely cold winter, storage inventories at the end of the heating season were only 857 Bcf, the lowest level since 2003. Inventories were around 1,000 Bcf less than the five-year (2009-13) average. While the refill season began slowly in April, injections quickly ramped up in May and have substantially exceeded five-year average levels each week since then. For eight straight weeks, the weekly net injection was greater than 100 Bcf. In the 10 weeks between the week ending April 25 and the week ending July 4, net injections into storage inventories totaled 1.04 trillion cubic feet; this was the quickest trillion cubic foot increase since 2003. As a result, the gap between current storage and the five-year average narrowed substantially; currently, inventories are 683 Bcf below the five-year average.  In the Short-Term Energy Outlook, EIA expects that demand from the electric power sector from April through October will remain flat compared with last year, while natural gas production is about 3 Bcf per day greater this summer compared to last summer. EIA forecasts that the gap between current and five-year average inventory levels will continue to narrow over the rest of the injection season.  Strength of supply is also reflected in lower natural gas prices; as inventories have increased at a record pace, prices have fallen to six-month lows.

EPA Is Failing To Stop Methane Leaks From Pipelines, Inspector General Says - The Environmental Protection Agency isn’t doing enough to prevent methane from escaping from natural gas pipelines, according to a new report from the agency’s internal watchdog. The report, published Friday by the EPA’s Inspector General, stated that in 2011, more than $192 million worth of natural gas was lost due to leaks in pipelines. The report said that the agency, which until now has “placed little focus and attention on reducing methane emissions from pipelines in the natural gas distribution center,” needs to take steps to better prevent methane from escaping. It recommended that the EPA work with the Pipelines and Hazardous Materials Safety Administration (PHMSA) to try to fix the problem, a partnership President Barack Obama has also called for. Up until now, however, the EPA has only implemented a program that encourages natural gas companies to reduce their methane emissions voluntarily, but doesn’t require them to do so. So far, that program hasn’t done enough, the report states.  Methane is a potent greenhouse gas that traps 86 times more heat as CO2 does over a 20-year period. Scientists have warned that methane emissions from the natural gas industry are a significant contributor to climate change,  The EPA has agreed to take the Inspector General’s recommendations to partner with PHMSA and create a plan to deal with the financial losses of methane leaks, but it has not yet agreed to other recommendations in the report, including setting performance goals for leak reduction and tracking methane emissions from natural gas pipelines.

Obama To Issue Series Of Executive Actions Tackling Methane Leaks From Pipelines -- President Obama will announce a series of executive actions on Tuesday designed to tackle the increasing problem of methane leaks from natural gas pipelines, which are significantly contributing to global warming, according to a White House press call. White House Director of Energy and Climate Change Dan Utech told reporters on Monday that the actions would be part of President Obama’s strategy to cut methane emissions, a key directive under his Climate Action Plan announced last summer. Under the plan, Obama vowed to combat climate change despite inaction from Congress by using his executive powers to curb greenhouse gas emissions. Utech said the executive actions would consist of newly announced partnerships with natural gas producers, a $30 million Department of Energy program supporting technology to decrease methane leaks, and a series of white papers from the Environmental Protection Agency to help identify “potentially significant” sources of methane beyond pipeline leaks.

Sorry, the shale revolution won’t save the US economy - Even with an unexpectedly strong second-quarter GDP report, the current economic recovery is the weakest since World War II. Even worse, many long-term forecasts — including those from the Congressional Budget Office, Federal Reserve, and White House — see future growth far slower than the postwar average. But the economy would be even weaker, and those forecasts gloomier, if not for the shale revolution. Here is Goldman Sachs economist Jan Hatzius: … we estimate that the overall impact from the increase in US energy supply on real GDP growth is currently in the range of 0.2-0.3pp per year. Most of this is due to the direct effects from increased energy output and drilling activity, while the spillovers to other industries or via lower household energy bills have been more modest. So, lots of energy industry investment and output. But a sector story rather than a macro story.

  1. 1.) Hatzius goes on to note that lower energy prices have not given a significant boost to energy-intensive industries: ” … output in the most energy-intensive manufacturing industries has in fact grown more slowly than in less energy-intensive ones.”
  2. 2.) Nor have US energy intensive industries outperformed energy-intensive industries in other countries. And Goldman hasn’t been able to find much evidence for a significant increase in capital spending in energy-intensive industries” other than chemical manufacturing.
  3. 3.) As for the potential boost to consumer spending from lower household energy costs, Hatzius points out that energy outlays as a share of disposable income have finally flattened the past few years. Assuming that the shale revolution get full credit, the bank economist guesstimates “the impact on US GDP growth through this channel may have been in the range of 0.05-0.1 percentage point per year.”

Here is Hatzius’s bottom line on the shale revolution’s total economic impact:Whether this is a large effect or a small effect is probably in the eye of the beholder. Our view is that it is quite sizable when cumulated over a longer period, even if the spillover effects remain limited and more so if they grow. But it is probably not a first-order issue from the perspective of business cycle forecasters or macro investors who are primarily focused on the quarter-to-quarter and year-to-year fluctuations in business activity.

Wishful Thinking About Natural Gas: Why Fossil Fuels Can’t Solve the Problems Created by Fossil Fuels -- Albert Einstein is rumored to have said that one cannot solve a problem with the same thinking that led to it. Yet this is precisely what we are now trying to do with climate change policy.  The Obama administration, the Environmental Protection Agency, many environmental groups, and the oil and gas industry all tell us that the way to solve the problem created by fossil fuels is with more fossils fuels.  We can do this, they claim, by using more natural gas, which is touted as a “clean” fuel -- even a “greenfuel.Like most misleading arguments, this one starts from a kernel of truth. That truth is basic chemistry: when you burn natural gas, the amount of carbon dioxide (CO2) produced is, other things being equal, much less than when you burn an equivalent amount of coal or oil. It can be as much as 50% less compared with coal, and 20% to 30% less compared with diesel fuel, gasoline, or home heating oil.  So if someone asks: “Is gas better than oil or coal?” the short answer seems to be yes.  And when it comes to complicated issues that have science at their core, often the short answer is the (basically) correct one. In the case of gas, however, the short answer may not be the correct one. Replacing coal with gas in electricity generation is still probably a good idea — at least in the near term — but gas isn’t just used to generate electricity.  It’s also used in transportation, to heat homes and make hot water, and in gas appliances like stoves, driers, and fireplaces.  Here the situation is seriously worrisome. It’s extremely difficult to estimate GHG emissions in these sectors because many of the variables are poorly measured. One important emission source is gas leakage from distribution and storage systems, which is hard to measure because it happens in so many different ways in so many different places.  Such leaks are sometimes called “downstream emissions,” because they occur after the gas has been drilled.

Fracking Makes California’s Drought Worse -- California is in the middle of an epic water shortage, with nearly 80 percent  of the state experiencing “extreme or exceptional” drought conditions. Check out this animated map to get a sense of how extensively the drought has impacted the Golden State. Given the situation, anti-fracking activists say it’s time for Governor Jerry Brown to put a stop to water-intensive fracking, claiming that the controversial oil and gas production method is exacerbating the problem.“We’re talking about a triple threat to our water from fracking,” says Adam Scow, the California director for Food & Water Watch.The first threat: The fracking process requires a lot of water, which then becomes unsuitable for any other use: “In the middle of the worst drought in 50 years, they’re taking 140,000 to 150,000 gallons of water out of the water cycle per frack job. They’re destroying that amount of water on a daily basis.”   It’s also possible that fracking fluid could leach into underground aquifers, and of course the toxic wastewater left over from fracking has to be disposed of somehow—and therein lies the second threat to California’s water supply. The third threat to California’s water supply, according to Scow, is that all of the oil and gas we’ve produced via fracking will eventually get burned and thus contribute to global warming, “which leads to more droughts.”

Fracking Waste Puts Americans’ Drinking Water at Risk |- Yesterday the Government Accountability Office (GAO) released an eagerly awaited report on the state of something called the Underground Injection Control program. This program, aka “UIC,” is designed to protect underground sources of drinking water from the underground injection of fluids, under the authority of the Safe Drinking Water Act (SDWA). Extensive investigations by ProPublica and complaints from communities in Ohio, West Virginia and Texas have made clear that the UIC program is completely unprepared to safely regulate the huge amount of dangerous oil and gas wastewater. That is why Natural Resources Defense Council has called for, among other things, federal regulations that would ensure this waste is subject to hazardous waste safeguards. This new GAO report confirms what communities across the country have known for years: drinking water is at risk. Here are some of GAO’s key findings:

  • At least 2 billion gallons of oil and gas wastewater are injected underground in the U.S. every day.
  • More than 90 percent of produced water in the U.S. is injected into Class II wells.
  • Regulations for Class II wells have remained largely the same since 1980. While EPA reviews in 1988 and 1992 recommended changes, they were never made.
  • Of the six states reviewed, four had less than ten Class II inspectors. There are more than 170,000 Class II wells nationwide.
  • EPA has identified six major pathways by which UIC wells can lead to ground water contamination, including faulty casing, an inadequate confining layer, and the presence of nearby wells that were not properly plugged.

GAO Report: Drinking Water at Risk from Underground Fracking Waste Injection -- The U.S. Government Accountability Office (GAO) publicly released its report today finding that the U.S. Environmental Protection Agency (EPA) is “not consistently conducting two key oversight and enforcement activities for class II programs” for underground fluid injection wells associated with oil and gas production. The report shows that the EPA’s program to protect drinking water sources from underground injection of fracking waste needs improvement.  According to the report, “The U.S. EPA does not consistently conduct annual on-site state program evaluations as directed in guidance because, according to some EPA officials, the agency does not have the resources to do so.” The report also found that “to enforce state class II requirements, under current agency regulations, EPA must approve and incorporate state program requirements and any changes to them into federal regulations through a rulemaking.” “The federal government’s watchdog is saying what communities across the country have known for years: fracking is putting Americans at risk,” said Amy Mall, senior policy analyst at the Natural Resources Defense Council. ”From drinking water contamination to man-made earthquakes, the reckless way oil and gas companies deal with their waste is a big problem. Outdated rules and insufficient enforcement are largely to blame. EPA needs to rein in this industry run amok.”

GAO: Fracking Could Threaten Clean Drinking Water -- A new report from the Government Accountability Office suggests the federal Environmental Protection Agency has fallen somewhat short in its duties to ensure that  gas production in Pennsylvania — using the “fracking” process, particularly — leaves behinds safe, clean drinking water. StateImpact Pennsylvania reports:The GAO faults the EPA for inconsistent on-site inspections and guidance that dates back to the 1980s. Of the more than 1,800 class II wells in Pennsylvania, the GAO reports only 33 percent were inspected in 2012. Some states, including California, Colorado and North Dakota, require monthly reporting on injection pressure, volume and content of the fluid. The GAO also faulted the EPA for poor data collection. StateImpact adds: “Much of Pennsylvania’s fracking waste water gets shipped to Ohio, since the Keystone state has just seven operating oil and gas waste disposal wells. Since January, the EPA has issued permits for three more waste water injection wells in Clearfield, Elk and Indiana Counties. All are being challenged by local communities. A fourth permit for an injection well in Venango County has received final approval, but is not yet active.” The GAO report can be found here.

Leaky Gas Well ? Good Fracking Luck -- Once a shale gas well starts to leak, there’s nothing much you can do about it. Although the frackers may pretend otherwise. Because sooner or later most of them are going to leak outside of the steel casing (before it rusts away) and outside of the cement sheathing, which will shrink away from the well wall, then crack. The gas will just go around whatever you pump down the hole – leaking between the cement and the well wall. Make the  well wall bigger, pump more cement down, gas goes around it. Bigger hole, more cement. Repeat.  As they are finding out the hard way in Fracksylvania:  Shale Gas Wells Leaking Methane for Years.Five natural gas wells in Bradford County have leaked methane for years because of persistent casing and cement problems, according to state Department of Environmental Protection records.  For four of the wells — Rightmire 2H, Melchionne 1H, Wenger 1H and Miccio 1H — EOG reported its violations to the DEP after its safety inspector measured gas venting from the wells’ annuli in 2011. The company blamed “defective, insufficient or improperly cemented casing.” The DEP also inspected the Oberkamper 1H well on May 22 after a July 2013 inspection found EOG piped the vents in a way that prevented accurate measurement. The inspector found methane outside the surface casing The annulus is the space between layers of pipe. Operators fill these layers with cement in part to prevent gas and other fluids from migrating outside the wells. Each well has four layers of steel pipe. EOG’s inspector found gas flowing from two to three annuli per well, ranging from 709.5 to 1,134 cubic feet per day, cumulatively. Nothing prevents this methane from flowing into the atmosphere, where it acts as a greenhouse gas. Methane has a global warming potential 21 times more potent than carbon dioxide, according to the U.S. Environmental Protection Agency.

Pennsylvania AG Looking Into Claims That State Willfully Ignores Fracking-Related Health Complaints -- Are employees of the Pennsylvania Department of Health really being told to ignore complaints from citizens who complain they’re being sickened by hydraulic fracturing and natural gas drilling? If they are, is it criminal? That’s the question that the state Attorney General’s office will attempt to answer in the coming weeks, as officials contact and interview multiple residents who say they reached out to state health officials about symptoms they think could be related to drilling, and received no response. In an e-mail to the advocacy group Food & Water Watch, seen by ThinkProgress, a special agent from the attorney general’s environmental crime unit confirmed that they would look into residents’ complaints. “Please forward me the list of PA residents… along with their addresses and phone numbers,” the agent’s e-mail to the group reads. “I will contact them for an interview as schedules permit.” Food & Water Watch, a consumer rights group focusing on food, water, and fishing issues, had asked Pennsylvania Attorney General Kathleen Kane’s office to investigate claims that health concerns over drilling were ignored — claims like those of Pam Judy, a resident of Greene County. Judy says her family began getting sick in 2008 after a natural gas compressor station was built 780 feet from their home. “The first place I contacted seeking information and assistance was the DOH,” she said. “They were unable to direct me to anyone who may be able to help us.” An influx of similar stories sparked concern that the DOH may have been willfully ignoring the complaints. Those concerns were magnified when two former DOH employees told StateImpact Pennsylvania that they were instructed not to return phone calls from citizens who said they may be experiencing sickness from fracking and other natural gas development.

ExxonMobil, Chevron Locked In Bidding War To Acquire Lucrative Pennsylvania Senator -- HARRISBURG, PA—With both sides increasing their initial offers for the prized asset, multinational energy companies ExxonMobil and Chevron Corporation are currently locked in a fierce bidding war to obtain a lucrative Pennsylvania senator, sources confirmed Monday. “This legislator represents an incredibly valuable commodity in the energy world, and both ExxonMobil and Chevron appear to be willing to pay whatever is necessary to acquire him,” said oil and gas industry analyst John Blakey of the ongoing, back-and-forth bidding process for U.S. Sen. Patrick Toomey (R-PA), noting that both of the politician’s potential owners are enthusiastic about the prospect of utilizing the treasured beltway resource for multiple terms. “Granted, securing such a highly profitable elected official won’t be cheap—it never is. Both of these companies know that if they are fortunate enough to gain possession of this senator, the acquisition will pay dividends for years to come.” At press time, sources confirmed that ExxonMobil and Chevron had entered talks with Pacific Gas and Electric, British Petroleum, Royal Dutch Shell, and Duke Energy to share claims in the senator for the foreseeable future.

Safe Water in Unfracked New York  -- There is no better way to contaminate thousands of square miles of groundwater than via fracking. Horizontal shale wells are more than 4 (four) times as likely to vent methane into groundwater than conventional vertical wells, as the chart from this report shows: (In Canada, where this report is from, horizontal wells are referred to as “deviated” wells. Drilled by deviants, which is what frackers are called in Canada)  A new report by a team of researchers has found that water in the proposed Frack Zone in New York is safe. Probably because it’s unfracked. . . Groundwater Safe in Potential New York Frack Zone   Two Cornell hydrologists have completed a thorough groundwater examination of drinking water in a potential hydraulic fracturing area in New York’s Southern Tier. They determined that drinking water in potable wells near conventional natural gas wells in Chenango County is safe to drink and within federal guidelines. The researchers report their findings in July’s Journal of Hydrology – Regional Studies. “In Pennsylvania, reports of natural gas in the groundwater started to occur after the state began to allow hydraulic fracturing. Nobody had thought to test the well water there beforehand, and no one had a sense of the water quality prior to fracking. We’ve conducted a comprehensive baseline study of the water,” said Todd Walter, associate professor of biological and environmental engineering, the paper’s senior author.

Fracking Takings Publicity Stunt - After two strikes, Shale Shyster Scott Frackoski is going for a complete fracking strike out- as soon as he can milk some legal fees out of some clueless dairy farmersTo Scott Kurkoski, the problem is obvious.New Yorkers expected to reap a profit on natural gas buried in the Marcellus Shale. Government officials got in the way, and now landowners want compensation. “It’s a basic property rights issue,” Kurkoski said. “Here we have people who are prepared to develop their oil and gas, and the government is telling them they can’t do it. That’s a basic constitutional protection in the United States.”Kurkoski is an upstate New York lawyer who for years has represented landowners who want the state to lift its six-year moratorium on hydraulic fracturing and horizontal drilling. If state and local regulators don’t budge, the landowners say the restrictions amount to a regulatory taking, and the government must pay for their lost economic opportunity. “Other people had their chance to make millions, now it’s my chance,” said Jon Kark, a client of Kurkoski’s who owns 380 acres near Binghamton. “I have gas under my property. Definitely it would make my life a lot easier if I could pump it.”

Frackers Spill Olympic Pool’s Worth Of Hydrochloric Acid In Oklahoma - An acid spill on Monday in rural Kingfisher County northwest of Oklahoma City, Oklahoma could turn out to be the largest spill “in relation to fracking materials” in the state according to an Oklahoma Corporation Commission spokesman. Spokesman Matt Skinner said 480 barrels of fracking-related hydrochloric (HCL) acid, nearly enough to fill an Olympic-sized swimming pool, emptied out of a tank where it was stored. Acid is used in the fracking process to both clean wells and stimulate the flow of oil and gas. The cause of the spill, which occurred in an alfalfa field, is under investigation.  Skinner told ThinkProgress this is the largest frack-related spill he is aware of in the state’s history. He was unable to comment on the cause of the spill because it is currently under investigation, but said they “think they know the cause.” “Our main concern is to get the area back to the way it was before the spill happened,” said Skinner. While there are no water wells in the immediate vicinity, there were concerns if not properly taken care of the acid could taint the nearby town of Hennessey’s water supply. A nearby creek flows into the town’s water system and a a rainstorm could result in contamination. However, Skinner said the area was bermed off and the remediation company was able to contain the chemicals through any rain so far.

In 2014, Colorado Oil And Gas Spills Are Happening Twice A Day - The more they drill, the more they spill. And the part about telling residents about it, not so much. A Denver Post analysis of Colorado oil and gas spills so far in 2014 reveals that they are happening twice a day “and usually without anyone telling residents.” That rate, 467 spills for the first 7 months of this year, suggests that the state will surpass last year’s record of 575, the paper reported, due to a surge in oil and gas development and more stringent reporting rules. The state oil and gas commission said that tougher enforcement is also a factor. Colorado now has about 52,000 active oil and gas wells, with much of the recent growth occurring along the populous Front Range north and northeast of Denver. The rapid pace of drilling and its proximity to many communities has sparked a simmering revolt, with the prospect looming of an epic election season battle over ballot proposals to allow more local control of oil and gas development. A drive to obtain enough signatures to place those measures on the ballot will conclude on August 4.  Since 2010, the paper reported, about 21 percent of the nearly 2,500 reported spills have contaminated either ground or surface water.

Investigating Earthquakes in Fracking Regions: The idea that recent sequential earthquake activity, particularly in Ohio and Oklahoma, is related to hydraulic fracking and water disposal operations is gaining traction in some key drilling states. While there is no hard data to conclusively support the theory, action on the part of regulatory agencies will potentially present oil and gas companies with a fresh set of challenges – and opportunities. In April, the Ohio Department of Natural Resources put new seismic-related requirements in place for fracking, and Oklahoma recently put restrictions and reporting requirements in place for disposal wells. The Texas oil and gas regulatory agency hired a full time seismologist.  The Oklahoma Independent Petroleum Association established a working group on seismic activity with the Oklahoma Geological Survey and the Oklahoma Corporation Commission. The Interstate Oil and Gas Compact Commission and Ground Water Protection Council also joined with regulators and geological surveys. “Suspicions about a link of disposal wells to earthquakes go back at least to 2010,” . “Until recently in Ohio, these incidents could be rationalized as using too high an injection pressure on a disposal well. If it was corrected, the earthquakes would go away.” Then, in Ohio, state regulators for the first time apparently were convinced that fracking, not water disposal, was the cause of a quake. “This is leapfrogging into a whole new territory in terms of how you manage, explain and somehow reconcile it going forward. So it is pretty significant,”

Got Science? Ohio Wake-up Call on Fracking Disclosure Laws - At a Halliburton fracking site in Clarington, Ohio, in the southeastern part of the state, a fire broke out on a recent Saturday morning. What happened next should be a wake-up call to every U.S. citizen, especially the millions of Americans who live in communities where fracking is planned or underway.  Ohio firefighters battled the blaze for an entire week. Before they managed to fully extinguish it, the fire caused some 30 explosions that rained shrapnel over the surrounding area; 20 trucks on the site caught fire; and tens of thousands of gallons of chemicals -- including a toxic soup of diesel fuel, hydrochloric acid, and ethylene glycol -- mixed with runoff into the nearby creek, killing an estimated 70,000 fish as far as five miles downstream. State officials physically removed the decomposing remains of more than 11,000 fish and other aquatic life in their efforts to reduce the damage to the waterway.  If the severe damage to a local creek weren't troubling enough, this particular waterway feeds into the Ohio River roughly five miles away where, just another 1.7 miles downstream, a public water intake on the West Virginia side of the river serves local residents.  But here's the most disgraceful thing of all about the accident: despite the fish kill and potential contamination of drinking water, the public still doesn't know the full list of chemicals that polluted the air and water supply. In fact, the fire raged and runoff occurred for five full days before Halliburton provided state and federal EPA officials with a full list of the proprietary fracking chemicals the company used at the site.

Kasich Joins Push To Give Fracking Ingredients To First Responders » WOSU News: Big changes could be coming to Ohio’s fracking regulations in terms of chemical disclosure. It’s a transparency issue environmental groups have been pushing to advance for years, and it appears another step is in the works following a major chemical spill. Late last month a large fire broke out at a hydraulic fracturing—or fracking—pad in Monroe County. According to a report from the U.S. Environmental Protection Agency—fire crews doused the site with more than 300,000 gallons of water—forcing nearly a dozen drilling-related chemicals to runoff the site. Several of those chemicals were then discovered in a nearby creek where, as the report explains, more than 70,000 fish were killed along a five-mile stretch of the creek. In responding to the fire in Monroe County—Gov. John Kasich says it might be time to change laws again to make sure all first-responders have more access to all the chemical information. “Cause we do have—I’m told—the most transparent of all the fracking liquid in the country. But if it’s not getting to enough people then we need to widen it. Because I don’t want to have people walking around saying ‘well I don’t know what was there,’” Kasich said late last week. Companies are already required to provide a list of the chemicals used at the site. The only chemicals not on the list are those protected by trade rights, which are reported to the Ohio Department of Natural Resources.

Prosecutors seek 3-year sentence in fracking case - (AP) — Federal prosecutors are seeking a three-year sentence and a $250,000 fine for the owner of a northeast Ohio oil and gas drilling company accused of dumping large amounts of toxic brine down a storm sewer and into a creek that feeds the Mahoning River. Sixty-four-year-old Ben Lupo of Poland, Ohio, pleaded guilty in March to one count of unpermitted discharge into U.S. waters. His sentencing is Tuesday in Cleveland.

The fracking-rule changes that North Carolinians must demand - N.C. DENR and the Mining and Energy Commission have repeatedly promised North Carolina the “safest hydraulic fracturing rules in the country.” The current draft rules are actually some of the worst rules in the 31 states that have fracking.DENR has an obligation to keep its promise to North Carolina and to revise the draft guidelines before it is too late. The state must listen to the public at scheduled hearings in August. Up until now, DENR has demonstrated disregard for the public’s comments, both written and verbal. DENR is supposed to work for us, not the big oil and gas companies. It has already caved in to pressure from Halliburton on the nondisclosure of toxic fracking fluids to public. We can live without shale gas, but we cannot live without clean air and clean water.To come close to having the best rules in the country, the following changes must be made to DENR’s draft rules:

  • • Toxic fracking fluids should not be stored in open pits – currently planned for only 200 feet from bodies of water. They must be stored in closed tanks. Any open pit with the distance from the top of the fracking fluid to the top of the pit of only 2 feet is inadequate.
  • • Fracking wells, fracking fluid storage tanks and underground fracking pipes must be at least 2,000 feet (not a mere 200 feet) from all bodies of water – rivers, tributaries and reservoirs, lakes ponds – as elsewhere in the United States
  • • Fracking wells must be at least five miles from Lake Harris and the Shearon Harris Nuclear Power Plant. These are, respectively, two to four miles from the Jonesboro fault line. Allowing fracking and its associated induced earthquakes anywhere near Lake Harris (the largest repository of spent control rods in the country) and Shearon Harris nuclear power plant is unacceptable.
  • • Fracking wells must be at least 1,000 feet (not a mere 650 feet) from dwellings as in other states. Spilt toxic fracking fluid, very heavy trucks and excessive noise are dangerous to the public.

Why Forced Pooling Should Not Apply to Fracking - Forced pooling – the compulsory integration of mineral rights owners into a well – does not technically or legally apply to shale gas wells – and therefore should not be applied to them by the state.  Trying to apply compulsory pooling to shale gas wells can only mean one thing: the privatization of eminent domain by the state on behalf of the frackers – who have paid for the privilege via bribes to the legislature and regulators. Forced pooling is intended to consolidate multiple vertical wells that drain a common pool of oil or gas into one shared well. This assumes that the pool is contained in rock that is porous and permeable enough (think an open cell  sponge or foam) to allow the gas or oil to move towards the well bores that drain it. Forced pooling is intended to combine multiple vertical wells into one shared well that can drain the shared reservoir more cost-effectively than drilling multiple wells on smaller spacings.  Forced pooling does not apply to shale gas horizontal laterals for the simple reason that shale gas is not a “pool” – a shale gas does not “drain” a porous, permeable reservoir of oil or gas, it tunnels thru impermeable rock. A shale gas lateral only taps the rock it can fracture – via the frack. Beyond the end of the lateral it does not “drain” any oil or gas.  Therefore, horizontal shale gas laterals should not be illegally lengthened by forced pooling. As this video explains.

Oilprice Intelligence Report: The Shale Revolutions Next Winner: The Permian Basin: While North Dakota and South Texas garner much of the attention by energy investors, West Texas is fast becoming the backbone of the shale story in the United States. West Texas is home to the Permian basin, which was originally discovered nearly a century ago. It was home to much of Texas’ oil production for decades, but peaked in the 1970’s – along with many other American oil fields – and entered into a period of gradual decline. That all reversed course over the last few years, with the familiar story involving hydraulic fracturing and horizontal drilling unfolding on the dusty plains of West Texas. And although other regions across the U.S. have nearly a decade of fracking under their belt, the surge in production (or resurgence, as the case may be) in the Permian basin has really only ramped up over the last two years. Between 2007 and mid-2014, oil production in the Permian jumped from 850,000 barrels per day (bpd) to over 1.6 million bpd. Last year, the region accounted for about one-fifth of total U.S. oil production. That is enough to make the Permian basin home to the most productive oil basin in the United States in 2014. More notable shale plays got an earlier start than the Permian, but that also means they may peak and plateau earlier. Some analysts expect the Bakken and the Eagle Ford to peak before 2020. Meanwhile the Permian could continue to rise through the middle of the next decade, perhaps hitting 3.5 million bpd

How Fracking Is Blowing Up Balance Sheets of Oil and Gas Companies - Wolf Richter - Fracking has caused an uproar in local communities and split some in two. It has brought environmentalists to a boil. It allegedly caused tap water to go up in flames. A documentary was made in its honor. It caused earthquakes in Oklahoma and other places. It caused Wall Street to froth at the mouth. And now it is causing the balance sheets of oil and gas companies to blow up. It always starts with a toxic mix. Now even the Energy Department’s EIA has checked into it and after crunching some numbers found: Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion. To fill this $110 billion hole that they’d dug in just one year, these 127 oil and gas companies went out and increased their net debt by $106 billion. But that wasn’t enough. To raise more cash, they also sold $73 billion in assets. It left them with more cash (borrowed cash, that is) on the balance sheet than before, which pleased analysts, and it left them with a pile of additional debt and fewer assets to generate revenues with in order to service this debt. It has been going on for years. In 2010, the hole left behind by fracking was only $18 billion. During each of the last three years, the gap was over $100 billion. This is the chart of an industry with apparently steep and permanent negative free cash-flows:  And those shortages in each year forced the companies to raise more debt and sell assets to fund more drilling, other capital expenditures, operational costs, dividends, and stock buybacks. Of the three sources of cash – operations, net increase in debt, and asset sales – during the first quarters going back six years, net increases in debt accounted for over 20% of the incoming cash since 2012.

Gourmand Claims that Gas Wells Don’t Leak in Canada -  Presumably because they’re so well behaved, eh ?  Au contraire, ma graisse frackier. Not only do they leak as much as gas wells south of the border, but the horizontal ones leak four times more than the vertical ones. As this study from Canada shows. Gas Minister Claims Canadian Gas Wells Don’t Leak :  Cornell engineer takes issue with Coleman’s claim that BC is leak-free. Leaky wells happen everywhere,’ retorts scientist in response to Natural Gas Minister Rich Coleman’s claims. One of North America’s top experts on well oil integrity and the mechanics of hydraulic fracturing says recent comments by Rich Coleman, British Columbia’s minister of natural gas development, are not only ignorant but delusional. In May, Coleman told the Vancouver Sun that oil and gas wells in British Columbia don’t leak. He also hinted that scientists who made such statements just wanted more money for unnecessary studies. The deputy premier made the comments in response to a scientific report that recommended a go-slow approach to fracking unconventional shale resources due to large science gaps, leaky wellbores and increasing climate liabilities.

Fracking licences to be granted by government: BBC - The bidding process for UK licences to explore for shale gas will begin later, the government has announced. Applications are expected for areas that have yet to be explored. Companies that are then granted a licence to begin test drilling will still need to gain planning permission and environmental permits. The coalition sees shale gas - which is extracted by the process fracking - as an important potential energy source for the UK. In announcing the so-called 14th onshore licensing round, Business and Energy Minister Matthew Hancock said: "Unlocking shale gas in Britain has the potential to provide us with greater energy security, jobs and growth. "We must act carefully, minimising risks, to explore how much of our large resource can be recovered to give the UK a new home-grown source of energy." He added that shale gas was a "key part" of the the government's plans to tackle climate change and "bridge to a much greener future".

Half of Britain to be opened up to fracking - Ministers are this week expected to offer up vast swathes of Britain for fracking in an attempt to lure energy companies to explore shale oil and gas reserves. The Department for Energy and Climate Change is expected to launch the so-called “14th onshore licensing round”, which will invite companies to bid for the rights to explore in as-yet untouched parts of the country. The move is expected to be hugely controversial because it could potentially result in fracking taking place across more than half of Britain. Industry sources said the plans could be announced at a press conference tomorrow. The Government is a big proponent of fracking and last year revealed that it would “step up the search” for shale gas and oil. Ministers said they would offer energy companies the chance for rights to drill across more than 37,000 square miles, stretching from central Scotland to the south coast.Michael Fallon, the former energy minister, has previously described shale as “an exciting prospect, which could bring growth, jobs and energy security”. A previous government-commissioned report said as many as 2,880 wells could be drilled in the new licence areas, generating up to a fifth of the country’s annual gas demand at peak and creating as many as 32,000 jobs. However, the report warned that communities close to drilling sites could see a large increase in traffic. Residents could face as many as 51 lorry journeys each day for three years, the study said.

Nearly Half Of U.K. Opens To Fracking Exploration, Including Protected Areas - On Monday, the United Kingdom’s government opened its 14th onshore oil and gas licensing round, the first in six years, giving fossil fuel companies the chance to bid for licenses across nearly half the region. It is also the first round of licensing since the initial exploratory shale gas wells were drilled in the U.K. around four years ago. This latest round was delayed three years after seismic tremors caused by prior exploration pushed back the process.  The announcement doesn’t actually grant permission for companies to start fracking, but paves the way for exploratory licenses to move forward. The government published a roadmap of other permissions that are required before actual drilling can take place. For the next two months until October 28th, the firms will be bidding for exclusive rights to search for oil and gas beneath 6.2 by 6.2 square mile blocks. The total available land for bidding is about 37,000 square miles. The total area of Great Britain — England, Scotland, and Wales — is 88,745 square miles, meaning the bidding area covers just over two-fifths of the country. The licenses will cover exploration for shale gas as well as conventional gas and oil. This includes parts of National Parks, Areas of Outstanding Natural Beauty, and World Heritage Sites. However, applications will only be accepted for these areas in “exceptional circumstances and in the public interest”, according to the government. Firms that want to frack in or near European projected areas will also have to pass through additional requirements. The outcome of this decision is not yet known, with the U.K.-based Carbon Brief reporting that “the precise impact of this wording will remain unclear until tested during the planning process and ultimately in the courts.”

The U.S. Can Export Putin To His Knees - President Obama, are you listening? Even though Russian missiles shot down Malaysian Airlines Flight MH17, no one in the international community wants to use military force or even meaningful sanctions to counteract Russia. But the United States has another weapon at our disposal, liquid natural gas exports. Increasing our exports of liquid natural gas would help Ukraine and our other allies who are dependent on Russia for energy. It would hit Russia where it hurts, in the wallet. It would help the American economy by providing buyers for our natural gas, some of which is just being flared, or wasted.   Anne Applebaum, author of the Pulitzer Prize winning book Gulag: A History, described how oil and gas drives Russia's influence. Russia's population is smaller than that of Nigeria or Pakistan, and its economy is the size of Italy's, but it controls European oil and gas companies. Applebaum explains, "Russia has political influence in Europe because of the nature of Moscow's European business counterparts and partners: very large companies, usually connected to oil and gas, that make very large donations to political parties..." Of the 18.7 trillion cubic feet of natural gas consumed by Europe in 2013, according to the Energy Information Administration, Russia supplied 30 percent. About 50 percent to 60 percent of Russian natural gas exports go through Ukraine.  The Energy Department is delaying approval of two dozen applications to export natural gas, some from 2011 and 2012. In total, potential exports of 29 billion cubic feet per day of natural gas are being held up by slow reviews from the Department of Energy. This amount highlights the strength of both domestic supply and international demand for natural gas. Undoubtedly, if the export process were not so onerous, there would be even more companies willing to invest in natural gas exports and apply for export permits.

Big Oil's New Pitch: Fracking Means Never Having To Fear Putin -- As Ukraine sinks deeper into crisis, the oil and gas industry is pressing the United States to deploy its abundant natural gas supply as a weapon against Russia—and lawmakers of both parties are lining up behind the proposal. "We have this natural-gas boom," Rep. Pat Tiberi (R-Ohio) said last week, "We can use this newfound energy as a diplomatic tool to give the European leaders some backbone in standing up to the Russians."  Roughly half the natural gas Russia ships to Europe flows through Ukraine. During past disputes, Russia has clamped down on the nation's gas supply, creating turmoil in European energy markets. Many US politicians fear this dynamic could dampen Europe's response to the Ukraine crisis and have begun looking to the bounty of natural gas from the domestic fracking boom to counter Russia's energy dominance. As House Speaker John Boehner put it in a March Wall Street Journal Op-Ed, "The ability to turn the tables and put the Russian leader in check lies right beneath our feet, in the form of vast supplies of natural energy." Washington has also seen a flurry of proposals to speed up natural gas exports. Last month, following a lobbying blitz by oil and gas companies, including ExxonMobil, Koch Industries, Halliburton, and Chevron, the House passed a bill requiring the Department of Energy (DOE) to rule on proposed natural gas export terminals within 90 days. The Senate has weighed similar bills and amendments. While they haven't managed to bypass the prevailing Senate gridlock, these measures have considerable bipartisan support, and backers are determined to push them through.  As Congress prepares to adjourn for its August recess, opponents of expanding exports are bracing for a new onslaught.

Russia And Germany Allegedly Working On Secret "Gas For Land" Deal -- While many were amused by this photo of Putin and Merkel during the world cup final showing Europe's two most important leaders siding side by side, some were more curious by just what the two were scheming: Thanks to the Independent, we may know the answer, and it is a doozy, because according to some it is nothing shy of a sequel to the Molotov-Ribbentrop pact: allegedly Germany and Russia have been working on a secret plan to broker a peaceful solution to end international tensions over the Ukraine, one which would negotiate to trade Crimea's sovereignty for guarantees on energy security and trade. The Independent reveals that the peace plan, being worked on by both Angela Merkel and Vladimir Putin, "hinges on two main ambitions: stabilising the borders of Ukraine and providing the financially troubled country with a strong economic boost, particularly a new energy agreement ensuring security of gas supplies."

Obama Leasing Millions of Gulf Acres for Offshore Oil and Gas Drilling - Gaius Publius: More and more it’s looking like Obama’s global warming and climate change “initiative” is just a legacy play. He says the right words, then does the wrong deeds.  First the fine words. Here’s Obama speaking to the bright-eyed grads at UC Irvine just this summer:[S]ince this is a very educated group, you already know the science.  Burning fossil fuels release carbon dioxide.  Carbon dioxide traps heat.  Levels of carbon dioxide in our atmosphere are higher than they’ve been in 800,000 years. … So the question is not whether we need to act.  The question is whether we have the will to act before it’s too late.  For if we fail to protect the world we leave not just to my children, but to your children and your children’s children, we will fail one of our primary reasons for being on this world in the first place.  On the deeds side of the ledger, Obama has just opened millions of acres of Gulf of Mexico to oil exploration. Here’s Steve Horn writing at the invaluable DeSmogBlog: President Barack Obama’s Interior Department gave the green light on Friday, July 18 to companies to deploy seismic air guns to examine the scope of Atlantic Coast offshore oil-and-gas reserves. It is the first time in over 30 years that the oil and gas industry is permitted to do geophysical data collection along the Atlantic coast. Though decried by environmentalists, another offshore oil and gas announcement made the same week has flown under the radar: over 21 million acres of Gulf of Mexico offshore oil and gas reserves will be up for lease on August 20 in New Orleans, Louisiana at the Superdome. On July 17, the U.S. Department of Interior’s Bureau of Ocean Energy Management (BOEM)  announced the lease in the name of President Obama’s “all of the above” energy policy. "the bureau will offer more than 21 million acres offshore Texas for oil and gas exploration and development in a lease sale that will include all available unleased areas in the Western Gulf of Mexico Planning Area,”proclaimed a July 17 BOEM press release. The release says this equates to upwards of 116-200 million barrels of oil and 538-938 billion cubic feet of natural gas and falls under the banner of the U.S.-Mexico Transboundary Hydrocarbon Agreement.  [...]

Why doesn't the 'long emergency' feel like an emergency? --  In 2006 when James Howard Kunstler published his breakthrough book The Long Emergency, the next two years seemed to vindicate his warning that the oil age was coming to an end with perilous consequences. Oil soared to $147 a barrel in mid-2008. A few analysts suggested that it was headed for $200; but that was not to be. By autumn the stock market had collapsed and with it the world economy. Oil, too, then collapsed, trading in the mid-$30 range by December as demand for oil fell off a cliff with the economy. It seemed for months that the world was headed for an economic depression.  But extraordinary stimulative spending by governments around the world and emergency measures by central banks reversed the trend and led to a weak, but extended recovery of sorts that lasts to this day (though not for everyone--just ask the Greeks). Oil prices have rebounded and have remained at or near record levels for more than three years when measured by the average daily price of the world benchmark Brent Crude. That high price (higher on average than the year of the spike) is holding back economic growth. It is creating a seeming puzzle for economic policymakers who don't understand why their extraordinary measures have not led to extraordinary growth. They are blind to the central role of energy and particularly oil in the economy. What appears to be masking the ongoing emergency is the rise in stock and bond markets (which has disproportionately benefited the rich who hold the most stocks and bonds). The disconnect between the still sluggish economy and the stock market which keeps hitting new highs is one indication that dangers lurk in the world economy.

5 Industries Worried About Peak Oil - The debate over the impact of peak oil has been raging for decades. Although few deny that the end of mass oil consumption is drawing nearer, educated estimates now range between 2020 and 2030. But more important than the timeframe of peak oil are its consequences. Some seek to spell the end of life as we know it, so reliant is the world upon black gold. Others, equally extreme in their views, embrace the news, looking forward to a time when humanity will magically clean up its act. The truth is somewhere in the middle. Clean energy sources are making major advances as they become cheaper and easier to implement while almost all OEMs have launched lavish research programs into vehicles powered by other means. But the consequences of peak oil are not to be underestimated. Society would undergo a difficult time, given the sheer spread of oil on our culture. Doomsday predictions of civilization having to survive without electricity, or planes being grounded are one thing, but petroleum is a heavy component of many more industries than that.

Ilargi: Say Bye to the Bubble  - Is the age of stimulus over? It may well be. That would expose global markets as the naked emperors they always were. From the point of view of America, it makes sense to taper. Not because of invented jobless and GDP growth data, though they do make it harder for the Fed not to quit QE. No, it makes sense because the negative impacts will be hugely outweighed by the positive ones. Or, to put it in different terms, the death of the bubble will hurt the US too, and probably badly, but it will hurt others much more. And that can be – seen as – a good thing. Emerging economies, smaller and larger ones, have grown themselves over the past few years by gobbling up dollar-denominated debt, and using it as the foundation for highly leveraged credit instruments. Much of this (short-term) foundation needs to be rolled over on a regular basis. And that’s where the taper will start to bite something bad, soon. Because everybody on the planet is in the same predicament. Except the US. Moreover, most commodities are traded in dollars. Countries may sign the occasional bilateral deal in other currencies, but that’s hardly relevant. The world’s life-blood, fossil fuels, will easily remain 90-95% traded in US dollars. And that at a point in time when everyone will at least start to fear a permanent shrinkage of supplies. Shell, like its peers, announced large profits today. But Shell knows, as do Exxon and BP, that those profits look to be a fluke. And that’s before they’ve even considered their fresh Russian sanctions problems. The simple fact is, they’re running out of reserves, and they apparently have little hope more will be found anytime soon, even if they’ll never say it out loud. Look what they do, not what they say. The Guardian: Shell To Spend $30 Billion On Share Buybacks And Dividends

U.S. Judge Orders Seizure of Kurdish Oil from Tanker Off Texas Coast - At the request of the government of Iraq, a U.S. judge has ordered the seizure of 1 million barrels of Kurdish crude oil from a tanker off the Texas coast near Galveston. The oil had been pumped from wells in Iraq's northern Kurdish region, then sent via a new pipeline to Cehyan, on Turkey’s Mediterranean coast, before being loaded onto the tanker United Kalavrvta and shipped across the Atlantic Ocean to the Gulf of Mexico, The ship, which stopped near Galveston Bay with its $100 million cargo, is too big to enter ports in the area. On July 26, the U.S. Coast Guard gave it clearance to move its cargo from its offshore position to smaller craft that would deliver it to the mainland. But on July 28, the Iraqi Oil Ministry argued before U.S. Magistrate Nancy K. Johnson in Galveston that the Kurdistan Regional Government had sold the oil without Baghdad’s permission and that the transaction amounts to smuggling oil belonging to all Iraqis. Johnson said the tanker must remain in place so that U.S. Marshals Service can seize the oil, evidently with the help of companies that might have been used to bring the oil to market. After the ship has given up its cargo, it would be free to go, she said. Oil pumped in Kurdistan is a major source of friction in Iraq, a country already divided between majority Muslim Shi'as, who control the government of Prime Minister Nouri al-Maliki, and minority Sunnis, who resent his rule. Add to that the desire by Sunni Kurds in the north for a large measure of autonomy, if not independence.

Mongolia Raises Rates Amid Debt Pressure -- Mongolia’s central bank raised interest rates this week by 1.5 percentage points to 12% to help stabilize an economy that’s been buffeted by high inflation and falling foreign investment in its mining sector.Foreign investment in Mongolia’s mines has fallen rapidly, in part due to frequent changes in local regulations governing the sector. To compensate, the government has pushed expansionary fiscal and monetary policies, funded by a rise in external debt to more than 150% of gross domestic product. Exports, especially of coal, have slowed as China’s economic growth has moderated. But demand for imported consumer goods has remained strong because of the government’s stimulus policies and pushed inflation into double digits. Moody’s Investors Service last month warned the situation was untenable and downgraded Mongolia’s foreign currency government bond rating to B2 from B1. The agency warned that foreign exchange reserves have fallen to $1.6 billion in May from $2.2 billion at the start of the year. Mongolia’s current-account deficit and its rising external debt burden have become harder to finance as foreign investment has fallen. Instead, the government has run down foreign exchange reserves, Moody’s said.

Thailand's ruling junta approves China rail links worth $23bn -  Thailand's ruling junta has approved a $23 billion (£13.6bn) transport project that will see two high-speed railways link up directly with China by 2021, in a move seen as a further consolidation of Chinese power in the region. The National Council for Peace and Order (NCPO), headed by Gen Prayuth Chan-ocha - who took control of Thailand in a bloodless military coup in May - unveiled plans this week connecting the northern border town of Nong Khai with Map Ta Phut, located south-east of Bangkok. Chaing Khong, just south of the Laos capital Vientiane, will also be connected to Ban Phachi, in the central Ayutthaya regions. The railway lines will link up directly to Kunming, in China's southern Yunnan province, in what analysts have termed Chinese "high-speed railway diplomacy". China is looking to build a 3,000km (1,860m) high-speed line from Kunming all the way down to Singapore, passing through Laos, Thailand and Malaysia — a project that would increase China's GDP and those of the involved nations by $375b, a former Chinese railway chairman told the China Daily. According to China Railway Corp, it appears the Kunming-Singapore line will be constructed in four stages, from Kunming to Vientiane, Vientiane to Bangkok, Bangkok to Kuala Lumpur, and Kuala Lumpur to Singapore. Construction of the Thai lines is planned to begin next year as part of the new eight-year 741.4 billion baht ($23.3bn) infrastructure development project connecting Bangkok and other key cities with airports, seaports, border areas and cargo depots, the Bangkok Post reported, with some 106 new trains added to the existing fleet. Six dual-track railway lines will also be constructed under the same scheme.

Chinese Data Don’t Add Up - The downturn in steelmaking activity in places like Tianjin is a direct cause of a 30% year-to-date decline in the international iron-ore price, a matter of concern for miners in ore-rich nations such as Australia and Brazil following a similar price drop in the prior year. It also suggests that multinational companies and others should temper their enthusiasm over recent improvements in economic data. China’s second-quarter growth came in at a 7.5% annual rate, up from 7.4% in the first quarter, bringing it in line with the government’s full-year target. That, along with reports such as Thursday’s stronger-than-expected preliminary purchasing managers index from HSBC, has fueled talk of China’s “stabilization,” an apparent end to the unsettling slowdown of the past year. Such optimism is premature, and not only because of the perpetual suspicion surrounding the accuracy of China’s statistics. The economy still has to work through tens of millions of square feet of unoccupied apartment space— symbolized by the notorious “ghost cities” in places like Inner Mongolia—and hundreds of billions of dollars of unused factory capacity, most of it debt-financed. So, how is China achieving 7.5% growth if it is powering down steel plants and letting copper stockpiles build up? With debt.  Despite official instructions to banks to curtail lending to overstretched developers and municipalities, loans are still increasing at rates twice as fast as the economy—and those numbers exclude a so-called shadow-banking lending system estimated at more than $5 trillion, or 80% of gross domestic product.

China’s financial risk -- The basic idea behind the NYU measure of systemic financial risk is to use real-time summaries of the valuations and correlations across different equities to analyze how much of a drop would be expected in the stock valuation of a given financial institution if the country were to face another financial crisis, defined as a 40% decline in the broad market stock index over a space of 6 months.  This loss in equity value is then compared with the institution’s current assets and liabilities to calculate how much additional capital might be needed in order to keep the institution solvent in the event of a financial crisis. The sum of this cost across all financial institutions then gives a measure of a country’s overall systemic risk at any point in time.For example, here’s what their measure looks like for the United States. It peaked at over a trillion dollars in the fall of 2008, but has improved significantly since, and is now down to about $300 billion.By contrast, sovereign debt concerns pushed the index for Europe in 2011-12 back up near values from the financial crisis of 2008. The measure of systemic risk for Europe has since abated, though it remains quite elevated at about $1.3 trillion.And reason for concern about Japan has actually increased substantially in the years following the 2008 financial crisis. Notwithstanding, the policies adopted early in 2013 popularly described as “Abenomomics” seem to have helped. But here’s what really caught my eye– the NYU measure of systemic financial risk for China this year reached an all-time high. This seems to be a result of the fact that liabilities of the Chinese banks have continued to grow rapidly while stock valuations of the institutions appear quite vulnerable to a downturn.

China’s Banks Pose World’s Largest Systemic Risk - The cost of propping up China’s banks in the event of a financial crisis have nearly quadrupled in the past three years to $526.2 billion, the largest of any banking system, according to the latest analysis by the Volatility Laboratory at New York University’s Stern School of Business .The V-lab uses data from publicly-listed banks to estimate how much additional capital would be needed to keep them solvent if stocks fell by at least 40% in six months. The exact methodology is explained in this research paper. It’s heavy going, but suffice to say it uses the banks’ balance sheets and stock prices to mimic the kind of stress tests central banks use to determine whether banks have enough capital to withstand financial storms on the same scale as the global financial crisis in 2008. China’s banks, if the V-Lab’s calculations are any indication, do not. Beijing’s efforts to revive growth since March have succeeded in nudging GDP growth back up to 7.5% in the second quarter from 7.4% in the first three months of 2014 . Government spending rose a quarter in June from a year earlier, according to the finance ministry. But the so-called mini-stimulus has also renewed a boom in domestic credit, with loan growth climbing 25% in June from the year before to 1.08 trillion yuan ($174.2 billion). V-Lab doesn’t explain why the costs are rising, but the increase is in line with the explosion in bank lending in recent years. With the economy slowing and the risk of defaults rising, investors have pushed banks’ stock prices to record low levels relative to the book value of the banks’ loans. Bank of China, for example, trades at less than its book value.

It’s a Woman’s World in Japan’s Jobs Recovery - Women appear to be gaining ground in Japan’s workforce as the employment situation brightens. Prime Minister Shinzo Abe has trumpeted the need to get more women in the workforce as key to putting the world’s third-largest economy on the path to long-term growth. The proportion of females in Japan’s overall labor force lags many other rich nations and with the population rapidly aging, economists say maintaining growth will depend on getting more women working. As growth has picked up over the past 18 months, economists say that’s happened naturally as firms desperate for workers hire more women. Tuesday’s closely watched jobs data also showed women securing the most of jobs growth. The number of working-age women employed rose by 1.7% on year in June, according to official figures, the 21st month of increase. That compared to a 0.4% increase for men, and brought the employment rate of women between 15 and 64 to 64%, the highest since the government began compiling such data in 1968. The unemployment rate rose to 3.7% in June from 3.5% in May but this appears to have been because more women are now seeking work. The jobs-to-applicant ratio climbed to 1.1 – the highest since 1992. Capital Economics said this was a sign that consumer spending will soon pick up, helping to underpin Japan’s economic recovery.

Japan factory output falls fastest since 2011 earthquake: Japan's factory output fell 3.3% from May to June, the latest sign to highlight that the recent sales tax rise is affecting consumer demand. It is the biggest decline in output since the 2011 earthquake and tsunami. Japan raised its sales tax, also known as consumption tax, from 5% to 8% in April this year. There have been concerns that the move - which makes goods more expensive - may see consumers cut back on spending and hurt domestic consumption. The weak output numbers follow data released on Tuesday which showed retail sales in June declined more than forecast, down 0.6% from a year ago. Meanwhile, household spending in the country has also fallen in recent months. Analysts said the weak demand was in part due to the fact that consumers and businesses had rushed to make purchases ahead of the tax rise. "The pent-up demand ahead of the sales tax hike was bigger than expected so the consequent downturn is pretty steep, which is probably why output fell so much in June," said Junko Nishioka, chief Japan economist at RBS Securities. "We don't expect output to keep falling in the current quarter as the tax hike effect is fading," she said.

Fork in Road for Japan Corporate Profits, Growth - Japan’s corporate sector and the overall economy have come to a unusual fork in the road: even as exports and growth at home seem to be sputtering, domestic firms are posting stellar earnings. Economists say this peculiar dichotomy, which defies the view that corporate profits will power the economy forward, reflects the fact that many Japanese companies have moved production overseas. Car makers, for example, now largely make vehicles they sell overseas at factories overseas, meaning even if they reap bumper profits, it still won’t contribute to brighter exports or output data at home. At the same time, Japan’s growth is expected to have contracted dramatically in the aftermath of an April sales tax increase, which has prompted households to cut back on spending. According to forecasts by economists surveyed by The Wall Street Journal and the Nikkei, Japan’s gross domestic product is expected to have contracted 7.6% in the April to June period. On Tuesday, the government said industrial output fell for the first time in six quarters in the same period, marking the biggest decline since the aftermath of the March 2011 disaster.  Household spending fell for the third straight month in June.

Japan’s Second Quarter Slump Could Be Worse Than ‘97 - A handful of data and surveys this week show that Japan’s recent economic recovery may be stalling, as the effects of April’s consumption tax increase take hold and external forces such as rising energy costs constrain growth. While the tax increase was expected to have a pronounced negative short-term effect, some economists now doubt if the virtuous circle of a tightening labor market driving up wages, and subsequently consumption, will actually happen. What is troubling in this regard is that June saw an unexpected rise in unemployment from 3.5 percent to 3.7 percent, the first rise in 10 months. First of all, a Nikkei survey of economists found that the effects of April’s tax increase on GDP may be greater than the last tax hike in 1997, which led to a prolonged recession. The survey estimates that year-on-year growth for the second quarter shrank 7.1 percent. While the economy is expected to bounce back in the third quarter somewhat, predictions range from as low as 2.8 percent to as high as 7.9 percent on increased capital spending and large summer bonuses. A separate survey found that energy costs are beginning to have a significant impact on Japan’s biggest companies. Compared to fiscal 2010 (the year before Japan’s nuclear reactors went offline), the cost of electricity is expected to be 22 percent higher in fiscal 2014. The increased cost of fossil fuel imports for Japan’s major utility companies has largely been passed on to companies and household consumers, with prices per kilowatt hour rising 28 percent and 19 percent respectively between fiscal 2010 and 2013.

Japan flirts with recession after output, exports drop  - Japan could be flirting with recession after the weakest factory output since 2011, which, following a surprising fall in exports last week, could pressure the central bank to ease policy and complicate a decision on whether to raise taxes. The severe contraction in output and pileup of inventories after an April increase in the national sales tax are much worse than after the previous tax hike in 1997, which ushered in a steep recession, government data showed on Wednesday. Two months of unexpected export declines from the world's third biggest economy, meanwhile, are calling into question the Bank of Japan's case that shipments overseas would by now be taking up the slack from the tax hike's blow to consumption. The sputtering recovery is a far cry from Prime Minister Shinzo Abe's early success in lifting growth and halting deflation through aggressive monetary stimulus and government spending. "We may not have a recession, but you cannot say that the economy is on track,"  "The government will become more reluctant to raise taxes,"

Japan must hike sales taxes again to conquer debt: IMF - Japan must raise its sales tax again to conquer one of the world's heaviest public debt burdens, the International Monetary Fund said on Thursday (July 31), as it called for deep economic reforms. The recommendations, outlined in the Washington-based fund's annual country report, come several months after Tokyo ushered in its first sales levy increase in 17 years, which sparked concern it would derail a recovery in the world's number-three economy. Boosting the tax rate to 8.0 per cent from 5.0 per cent was aimed at bringing down Japan's staggering debt, but Prime Minister Shinzo Abe has wavered on whether Tokyo would approve a second rate hike to 10 per cent, still low compared with some Western nations. The IMF report said the country had little choice. "Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline," it said. Millions across Japan made a last-minute dash to stores in a national buying spree before prices rose on April 1 - followed by an immediate drop in spending that some feared would dent producers and curb their expansion plans.

BOJ Beat: Hollowing-Out of Car Manufacturing Weighs on Exports - With Japanese exports showing little sign of life despite a weaker yen and a rebounding U.S. economy, Bank of Japan officials are growing concerned they have underestimated the impact of the country’s industrial hollowing-out–particularly in the auto industry. Auto exports are barely rising more than a year after the central bank caused the yen’s value to fall 20% against the dollar through monetary easing. That was supposed to reduce the prices of Japan-made goods and make them more competitive overseas. But according to data from the Ministry of Finance, the volume of auto shipments to overseas fell in four of the first six months of this year. One reason is that car makers have already shifted a large portion of their supply chains to overseas markets, where the prospects of growth and demand for autos are generally brighter than in Japan. In the January-March period, Japanese manufacturers produced nearly two of three cars at overseas factories, according to the Japan Automobile Manufacturers Association. BOJ officials have “a bit underestimated the effects of production shift by auto makers,” a person close to the central bank said. He pointed to the opening of new plants in Mexico earlier this year by Honda Motor Co. and Mazda Motor Corp.

Japan’s Export-Champ Days Are Left Behind - The CHART OF THE DAY shows the value of Japan’s exports is 23 percent below a March 2008 peak, even as those of South Korea, the U.S. and Germany have grown. The yen has lost 16 percent in value against the dollar since Prime Minister Shinzo Abe took office in December 2012. That hasn’t been enough to spur growth in outbound shipments. Japan’s government and central bank have blamed weak overseas demand, especially in emerging markets, for export sluggishness. This weakness is negative for an economy that suffered a blow to domestic demand from an April sales-tax increase.  “Japan is being left behind in the export recovery mainly because Japanese companies accelerated the shift of production abroad when the yen appreciated after the Lehman shock,” said Toru Suehiro, a market economist at Mizuho Securities Co. in Tokyo. “The loss of global market presence by Japan’s companies, especially electronic appliance makers, is also a factor.” The impact of the move overseas by Japanese companies is striking in the U.S. automobile market, said Suehiro. U.S. sales for Japanese automakers in the six months through June rose 6.2 percent from a year earlier to 3.04 million, according to researcher Autodata Corp. Auto exports from Japan to the U.S. for the same period were down 8.5 percent, according to finance ministry data.

Rare Beltway Bipartisanship: Bashing Japan Trade Policy -- A letter sent to Mr. Obama Wednesday, signed by 140 members of Congress from both sides of the aisle, argues that Japan’s protectionist tendencies toward its farmers is holding up an Asia-Pacific trade agreement, the Trans-Pacific Partnership. Mr. Abe has made joining the U.S.-led TPP a key plank of his efforts to reform Japan’s economy – but a full-fledged overhaul of the farm sector is for now off the table. “We write to express our deep concern over Japan’s current market access offer within the ongoing Trans-Pacific Partnership (TPP) negotiations,” opens a letter sent to Mr. Obama Wednesday. The signers included the top Republican and Democrat on the trade subcommittee of the House Ways and Means Committee, California Republican Devin Nunes and New York Democrat Charles Rangel. It was Mr. Abe’s early-2013 declaration that Japan would join the ambitious regional free-trade agreement that helped boost his standing, at home and abroad, as a bold reformer at the outset of his term.  He cast Japanese membership in the deregulatory pact as a centerpiece of his program of reforms designed to shake up the country’s moribund economy. Now he’s facing growing questions about the impact and implementation of his Abenomics revival package. The broadside from Congress echoes skepticism from economists, politicians, and investors more broadly.  Specifically, they complained about Japan’s offer – made by Mr. Abe to Mr. Obama in Tokyo in April – to lower, but not scrap tariffs in agricultural products like beef and pork.  The letter also raises concerns about Canada as well. And it concludes by urging Mr. Obama to consider excluding Japan and Canada from the pact if they don’t ramp up their concessions.

Could India Be Japan Inc.’s Next Big Investment Target? - Japanese companies appear to be expanding their focus to India this year, lured by the country’s giant market of young consumers, tensions with China and slow growth at home. Japan’s FDI into India in the first four months of 2014 was 69 billion rupees ($1.1 billion), according to the latest figures from India’s commerce ministry. That’s equivalent to almost 90% of all Japanese FDI into India last year and just shy of half Japanese FDI into the country in 2011, a record year. Political tensions with China and ultra-low interest rates at home have accelerated a shift of Japanese corporate investment into faster-growing markets with younger consumers such as Southeast Asia. Japan’s combined FDI into Indonesia, Malaysia, the Philippines and Thailand more than doubled last year to a record $16.6 billion, according to the Japan External Trade Organization. FDI to China, by contrast, fell by almost a third to $9.1 billion. The shift is welcome news for India’s new government. Not only is the country starved of foreign investment, but it relies on inflows of cash from abroad to offset a persistent current account deficit. Morgan Stanley estimates that FDI to India will pick up to 2.5% of GDP this year, helping to provide a stickier source of funding than fickle portfolio investments. These flows, which include investments in stocks and bonds, account for 73% of all foreign capital going into India, Morgan Stanley estimates, compared with roughly a quarter in other emerging economies.

Amazon Investing Another $2 Billion in India -- Amazon plans to invest an additional $2 billion in its India operations, the company announcedWednesday, in an attempt to grab a growing slice of the country’s online retail market.“We see huge potential in the Indian economy and for the growth of e-commerce in India,” CEO Jeff Bezos said in a statement. “India is on track to be our fastest country ever to a billion dollars in gross sales.”Amazon launched its e-commerce site in India last year, going head to head with Flipkart, a local company founded by two former Amazon employees. On Tuesday, Flipkart announced that it had raised $1 billion in funding, the largest-ever sum raised by an Indian internet firm, the BBC reports, but still only half of what Amazon could retrieve from its deep pockets.“A big ‘thank you’ to our customers in India,” Bezos added, “we’ve never seen anything like this.”

Private Schools vs. Caste Discrimination - Nearly 30% of children in India (ages 6-14) attend private schools and in some states and many urban regions a majority of the students attend private schools. Compared to the government schools, private schools perform modestly better on measures of learning (Muraldiharan and Sundararaman 2013, Tabarrok 2011) and much better on cost-efficiency. Moreover, even though the private schools are low cost and mostly serve very poor students they also have better facilities such as electricity, toilets, blackboards, desks, drinking water etc. than the government schools (e.g. here and here). In an op-ed Vipin Veetil and Akshaya Vijayalakshmi argue that the private schools may also reduce caste discrimination: It’s no secret that government schools in India are of poor quality. Yet few know that they are also breeding grounds for caste-based discrimination, with lower-caste students in government schools often asked to sit separately in the classroom, insulted in front of their peers and even forced to clean toilets. This despite the fact that caste discrimination is illegal in India.…Government-school teachers aren’t necessarily more prejudiced than their private-school counterparts. But private-school teachers find it more costly to discriminate.

US sees 'crisis' in WTO over customs disaccord with India, others - The World Trade Organisation is facing a "crisis" because of disagreement, most notably with India, over improved customs procedures, the United States said Friday. "We are deeply disappointed that backsliding on Trade Facilitation has brought the WTO to the brink of crisis," the US ambassador to the world trade body, Michael Froman, said in a statement. "The current state of play on Trade Facilitation threatens to deal a serious blow to the credibility of the multilateral trading system and to set back the development needs of many countries around the world," he said. He was referring to a deal on making customs procedures faster and more efficient. A draft version was agreed at a Bali conference in December last year and was meant to be finalised by the end of this month. But it can only come into effect if two-thirds of the WTO's 160 members ratify it. India, however, is refusing to ratify the deal, reportedly because it is unhappy with other trade negotiations over farm subsidies and food stocks.

WTO Fails to Ratify Trade Agreement - WSJ: The World Trade Organization failed Thursday to ratify an agreement designed to streamline the global trade system, frustrating a late push by U.S. officials to convince India to reach a compromise that would have secured a deal. "I do not have the necessary elements that would lead to me to conclude that a breakthrough is possible," WTO Director General Roberto Azevedo said. "We got closer—significantly closer—but not quite there." The WTO reached an agreement in December on the Indonesian resort island of Bali to streamline customs procedures. The deadline to ratify that agreement was Thursday, but India declined to do so without a parallel agreement allowing developing countries more freedom to subsidize and stockpile food. Some economists have estimated that the Bali agreement, which seeks to standardize customs practices and remove red tape, could save WTO members more than $1 trillion eventually. Failure to achieve a consensus before the WTO's own deadline deals a severe blow to the Geneva-based body's credibility, already tenuous after years of stalled talks on tariff reductions. The trade-easing deal was viewed as a way to create some momentum. As a raft of regional trade deals moves ahead, the WTO's ability to act as a catalyst for global trade liberalization is in doubt.

India Slams US Global Hegemony By Scuttling Global Trade Deal, Puts Future Of WTO In Doubt -- In the last few days a new and curious question has emerged: would India embrace the US/Japan axis while foregoing its natural Developing Market, and BRICS, allies, Russia and China. We now have a clear answer and it is a resounding no, because in what was the latest slap on the face of now crashing on all sides US global hegemony, earlier today India refused to sign a critical global trade dea. Specifically, India's unresolved demands led to the collapse of the first major global trade reform pact in two decades. WTO ministers had already agreed the global reform of customs procedures known as "trade facilitation" in Bali, Indonesia, last December, but were unable to overcome last minute Indian objections and get it into the WTO rule book by a July 31 deadline. WTO Director-General Roberto Azevedo told trade diplomats in Geneva, just two hours before the final deadline for a deal lapsed at midnight that "we have not been able to find a solution that would allow us to bridge that gap."

BRICS Bank: The New Kid on the Block -  The 6th BRICS summit at Fortaleza saw the creation of two important entities in the spectrum of development finance; a $100 billion New Development Bank (NDB)and an emergency $100 billion BRICS Contingent Reserve Arrangement (CRA), to tackle infrastructure deficits and halt short-term liquidity pressures. The NDB will have an authorized capital of $100 billion, with the initial subscribed capital of $50 billion divided equally amongst the founding members. A total of $2 billion will be invested over the span of the next seven years with each founding member having an equal vote, and the remaining $50 billion will be in the form of guarantees. The bank aims to allocate resources for infrastructure and sustainable development purposes amongst the BRICS and other emerging and developing economies. The CRA, on the other hand, will have contributions based on the strength of the member economies; China will contribute $41 billion; Brazil, Russia and India will contribute $18 billion; while South Africa will contribute $5 billion. Though the finer points regarding the functioning of these entities are yet to be confirmed, many articles argue whether such an institution can legitimately substitute the World Bank in providing funds to emerging economies. There are three fundamental questions that need to be addressed before a verdict can be passed.

IMF: Rising rates, emerging market slowdown could dampen global growth - A new report by the International Monetary Fund underscores the high stakes facing the Federal Reserve as it meets Tuesday in Washington to debate how to unwind years of stimulus that have propped up not only the U.S. recovery but also the world economy. The IMF pointed to a rocky return to normal policy by the Fed, as well as the Bank of England, as one of the main threats to growth over the next two years. That could reduce output in the United States and the United Kingdom as much as 2 percent through 2016, according to the IMF’s analysis. Volatility in these advanced economies could ripple through some emerging markets, similarly depressing their growth. “Normalization will carry far-reaching spillovers depending on how the recovery evolves and how well an asynchronous policy exit can be managed given the challenges involved,” the IMF said in its report. The Fed is in the midst of reducing the amount of money it is pumping into the U.S. economy and plans to end the program in October. Then it will begin considering when to raise its target for short-term interest rates, which have been at zero for six years. That process is untested, unprecedented and fraught with uncertainty -- all of which means markets could be in for a bumpy ride. The IMF pointed to the abrupt spike in U.S. interest rates and rapid outflow of capital from emerging markets last year after the Fed suggested it could reduce stimulus faster than expected as an example of the turmoil a misstep could cause.

Citi trims global growth forecast, cites Russia risk - Citigroup has cut its global growth forecast to 2.9% for 2014, citing further downgrades to emerging market such as Russia and Mexico. Chief Economist William Buiter said in a note dated Wednesday that the firm's economists now see global growth for 2014 at 2.9% from 3% last month and 3.3% at the start of the year. He said the 2015 forecast of 3.5% is intact, but various issues such as Russia spillovers, geopolitical issues or a sharper slowdown in China could change that. Buiter sees stronger growth in the U.S. and an above-trend pace for 2015, confirmed by gross domestic product data from Wednesday. Growth forecasts were cut for Russia, Indonesia, Nigeria and Mexico, but China's forecast was lifted to 7.5% from 7.3% last month. Citi's growth forecast is more downbeat than that of the International Monetary Fund, which recently cut its global growth forecast for 2014, to 3.4% from an April projection of 3.7%

World Income Inequality Even Worse Than Within U.S.: St. Louis Fed - The income gap between rich and poor nations is more severe than the more highly publicized disparities between the top and bottom of the U.S. income ladder,  according to a new study from the Federal Reserve Bank of St. Louis. “While not to diminish the ample income inequality in the U.S., a focus on absolute inequality would suggest income disparity among the world’s population is a far greater concern,” write Lowell Ricketts and Christopher Waller, economic researchers at the St. Louis Fed. Income inequality has been a hot topic of political debate in the U.S. following the worst recession in generations. President Barack Obama last year called inequality “the defining challenge of our time.” The issue drew heightened attention during the post-financial crisis Occupy movement and, more recently, with the release of the best-selling book “Capital in the Twenty-First Century,” by French economist Thomas Piketty. The St. Louis Fed researchers argue the U.S. problem is dwarfed by the global income gap. The median income for the poorest 10% of Americans is still more than seven times greater than the median income of the population in the poorest 19 developing nations, they say. “Upward income mobility is out of the question when basic human rights (food and water, medical care, safety) are not available,” the authors write.

Argentina braced for sovereign debt default - FT.com: The growing prospect of default has begun to focus minds on what would come next. Economists broadly expect a recession in the country would deepen, inflation to rise and capital flight – possibly triggering a second devaluation of the peso this year. Still, few believe the consequences of a default would be as dire as 13 years ago, when unemployment reached nearly 25 per cent and forced tens of thousands of Argentines on to the streets to scavenge for cardboard to sell to recycling plants. The economy is not in as deep a crisis as in 2001, when Argentina had suffered from a four-year recession before defaulting. The size of the forgone debt would also be smaller – a maximum of $30bn compared with $80bn. A default is also unlikely to have consequences across emerging markets. Unlike in 2001, Argentine debt is now held by a smaller pool of investors, such as hedge funds, who are accustomed to sharp price swings and greater volatility. “There are simply no fears of broad contagion here. Most investors know Argentina is unique and that this situation is not indicative of what is going on in the rest of the region,” says Siobhan Morden, head of Latin American strategy at Jefferies investment bank. For Argentina, the immediate impact of a default would be felt in the markets, with investors in credit default swaps seeking payment and rating agencies downgrading Argentine bonds. After big losses in the past week, fuelled by growing doubts that a settlement would be reached, their prices could fall further.

Argentina to hold last-gasp debt talks with mediator Tuesday (Reuters) - Argentina will on Tuesday meet the U.S. mediator in its battle with 'holdout' debt investors suing the country for last-minute talks to avert a second default this century, but hopes for a deal are fading fast. Mediator Daniel Pollack said on Monday the Argentine government advised him it was sending a delegation of technical, financial and legal representatives to meet him at 11 a.m. EDT (1500 GMT) on Tuesday in his office in New York. However, Argentine government sources said Economy Minister Axel Kicillof, the country's chief dealmaker who has brokered deals with foreign creditors and investors this year, will be in Caracas, attending a meeting of the South American trade bloc Mercosur. true "I again urged direct, face-to-face conversations with the bondholders, but that will not happen tomorrow," Pollack said, referring to the holdout creditors.

Argentine debt defiance may strengthen holdouts' legal position (Reuters) - Argentina has fought in court for a dozen years against the claims of holdout investors in its defaulted debt, and Argentina has lost. The holdouts, led by Paul Singer's Elliott Capital Management and Mark Brodsky's Aurelius Capital Management, are still waiting to collect a single penny or peso. Argentina defied court-ordered demands to pay all its bondholders by a June 30 deadline, and a 30-day grace period runs out this week. Argentina says a payment to its trustee bank insulates it against charges it doesn't pay its bills on time. It has described the holdouts as vultures and the judge who made the orders as unjust. The country has enough foreign currency to cover about five months' worth of imports, and billions of dollars of debt coming due next year. Until it pays the holdouts, it will remain locked out of international capital markets. Having talked itself into a corner, Argentina now has to either swallow its pride and pay the holdouts, or keep its pride, accept another default and face isolation and penury. Making things worse for President Cristina Kirchner and Economy Minister Axel Kicillof, continued refusal will likely end up strengthening Elliott and Aurelius, two distressed-debt specialists who haven't amassed billions of dollars in assets by backing down from a fight. true "My sense is that the holdouts might get a stronger hand in a much worse situation because default is a Pandora's box,"

Argentina fails to reach debt agreement, default looms (Reuters) - Argentina failed to strike a deal to avert its second default in more than 12 years after talks with holdout creditors ended without a settlement on Wednesday. The country's economy minister, Axel Kicillof, speaking at a news conference at the Argentine consulate in New York, repeatedly referred to the holdout hedge funds as "vultures" after two days of talks failed to produce an agreement. "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," Daniel Pollack, the court-appointed mediator in the case, said in a statement on Wednesday evening. true Kicillof said Argentina offered the holdouts similar terms as other creditors who recently negotiated with the country as it attempts to regain the good graces of international capital markets that it has been frozen out of since its default. Those terms were rejected, Kicillof said. After defaulting in 2002, Argentina restructured its debt in 2005 and 2010. More than 90 percent of the bondholders agreed to accept new bonds with reduced payments. The holdouts refused the terms, and were awarded $1.33 billion, plus interest, by a U.S. judge.

Argentina Defaults According to S&P as Debt-Dispute Talks Fail - Standard & Poor’s declared Argentina in default on its foreign-currency obligations after the government missed a deadline for paying interest on $13 billion of restructured bonds. The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P.

Unable to reach deal with creditors, Argentina goes into default - Argentina failed to strike a deal to avert its second default in more than 12 years after talks with holdout creditors ended without a settlement on Wednesday. The country’s Economy Minister, Axel Kicillof, speaking at a news conference at the Argentine consulate in New York, repeatedly referred to the holdout hedge funds as “vultures” after two days of talks failed to produce an agreement.“Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default,” Daniel Pollack, the court-appointed mediator in the case, said in a statement on Wednesday evening. Mr. Kicillof said Argentina offered the holdouts similar terms as other creditors who recently negotiated with the country as it attempts to regain the good graces of international capital markets that it has been frozen out of since its default. Those terms were rejected, Mr. Kicillof said.

It's the end of Argentina as we know it, and the world economy will be just fine -- Every once in a while you get a crazy financial story that makes you wonder how smart the people in charge really are. Argentina’s recent flirting with economic default is proof that the average consumer, managing a few thousands, could probably do a better job than politicians with billions at their disposal. If you read the papers, you would believe that the land of tango, gauchos, Malbec and great steaks is on the verge of self-destruction: “Argentina dances with default”, groused a Wall Street Journal headline. “Argentina nears cliff in risky debt game”, chided the Financial Times.Sounds dire, doesn’t it? It is possible – but very unlikely, despite ongoing talks – that Argentina may willfully destroy its own economy in an ill-fated political attempt to look tough on foreigners, particularly in the form of mostly American hedge-fund managers. You don’t have to watch old episodes of Dallas to know that “rich Americans” is shorthand for “evil”. That stereotype has helped Argentina. In a silly form of financial rebellion, the nation refuses to pay the hedge funds $1.5bn in interest it owes on money it borrowed from them, way back in 2001.  The entire point of Argentina’s threat is to create a panic, to telegraph the country’s own power. It shouldn’t. Default isn’t a bad word, and the stubborn refusal by the Argentines to pay up is empty drama that only ends up proving the country’s own weakness. Absolutely nothing is riding on an Argentina’s default. The entire conflict is composed of absurdities.

Injunction Math: Acceleration and the Incredible Shrinking Payment Percentage - If some or all of Argentina's Exchange Bond holders accelerate their bonds after last night's default, the amount Argentina owes NML et al. under the terms of Judge Griesa's injunction could plummet. Here is the relevant language: Such "Ratable Payment" that the Republic is ORDERED to make to NML shall be an amount equal to the "Payment Percentage" (as defined below) multiplied by the total amount currently due to NML in respect of the bonds at issue in these cases .. Such "Payment Percentage" shall be the fraction calculated by dividing the amount actually paid or which the Republic intends to pay under the terms of the Exchange Bonds by the total amount then due under the terms of the Exchange Bonds. Before acceleration, the total amount due from Argentina on the Exchange Bonds is the total unpaid coupon (little x). If Argentina pays the Exchange Bond holders their full coupon before acceleration, the Payment Percentage it owes NML et al. is x/x=1, or 100% of the $1.5 billion or so currently due NML. After acceleration, the total amount due from Argentina on the Exchange Bonds is full principal and accrued interest on whatever is accelerated, plus unpaid coupon on whatever is not accelerated (big X). If Argentina pays the Exchange Bond holders their total unpaid coupon after acceleration, the Payment Percentage it owes NML et al. is x/X, or a whole lot less than 100% of $1.5 billion.

Economists Call on Congress to Mitigate Fallout from Ruling on Argentine Debt - Over 100 economists, including Nobel laureate Robert Solow, Branko Milanovic and Dani Rodrik called on Congress today to take action to mitigate the harmful fallout from the recent ruling by Judge Griesa of the U.S. District Court for the Southern District of New York that requires Argentina to pay holdout creditors at the same time as the majority of creditors. The letter warns that “The District Court’s decision – and especially its injunction that is currently blocking Argentina from making payments to 93 percent of its foreign bondholders -- could cause unnecessary economic damage to the international financial system, as well as to U.S. economic interests, Argentina, and fifteen years of U.S. bi-partisan debt relief policy.”“It’s a widely shared opinion among economists that the court’s attempt to force Argentina into a default that nobody – not the debtor nor more than 90 percent of creditors – wants, is wrong and damaging,” said Mark Weisbrot, economist and Co-Director of the Center for Economic and Policy Research, who helped circulate the letter.The letter warns that Griesa’s decision could “torpedo an existing agreement with those bondholders who chose to negotiate.” It also cautions that, since sovereign governments do not have the option of declaring bankruptcy, “the court’s ruling would severely hamper the ability of creditors and debtors to conclude an orderly restructuring should a sovereign debt crisis occur. This could have a significant negative impact on the functioning of international financial markets, as the International Monetary Fund has repeatedly warned.“The court’s decision “creates a moral hazard,” the economists write, since investors will be allowed “to obtain full repayment, no matter how risky the initial investment.” The full letter appears below:

Of Course Argentina Defaulted -- Many are bewildered as to why Argentina wouldn't come to some agreement in the eleventh hour, given the seemingly manageable amounts of debt in play. But the truth is that Argentina acted sensibly, especially given the limited maneuvering room it had to work with.  For starters, the effects of default at home, at least in the short term, are minimal. Argentina hasn't had access to international capital markets for well over a decade. This has made foreign currency often hard to come by, has led to big disparities between the official exchange rate and the unofficial "blue" market rate, and has more generally limited productive investment throughout the economy. But banks, companies, and consumers are now accustomed to this reality. So while the default keeps Argentina from re-entering international credit markets, it doesn't change day-to-day life for most Argentines -- ATMs still work, stores are still open, and business continues as usual. In fact, rather than falling off an economic cliff, some experts see the default as a smart financial move. If Argentina paid the plaintiffs the more than $1 billion it owed, it would have opened itself up to the demands of other remaining outside creditors, which hold somewhere between $10 billion and $15 billion in debt. Further, some argue that the "rights upon future offers" (RUFO) clause in the restructured debt would enable those holders to ask for similar terms, reopening all of the $100 billion to new and better terms.

Forget Argentina: How Do You Collect from Russia? - Never let it be said that the wheels of international justice spin quickly, but, with the pace of a Siberian jail sentence, the Permanent Court of Arbitration finally handed down its merits award in the Yukos litigation.  (For those of you not in the know, Yukos was dismantled by the Russian government, nominally as seizure for back taxes -- some levied ex post -- purportedly as an attempt to stymie the political aspirations of its principal, Mikhail Khodorkovsky.)  The decision is a doozy: a unanimous and stinging denunciation of the Russian government in this series of transactions, with such zingers as "calculated expropriation" and accusations that the governmental scheme was "devious."  The award of a cool $50 billion was far less than the plaintiffs wanted but was a record-setter for the Court.  Russia, of course, is vowing "appeal" (not quite sure to where -- strongly worded letter?), but this really means the fight now enters the collection phase.  Maybe Russia has some frigates to grab? Here's a link to the ruling.

Russia’s economic crisis deepens - The outflow of funds from Russia has shown no signs of stopping as stocks and the ruble continue to be sold off in the wake of the shooting down of a Malaysia Airlines plane over Ukraine. The Russian economy is struggling because the European Union, which was cautious about enforcing strict economic sanctions against Russia, decided to take a hard-line stance. As a result, Russian stock prices and the ruble have been falling. Depending on the details of a new set of sanctions to be soon announced, the situation could possibly have negative effects on the Japanese economy.On Wednesday, the European Bank for Reconstruction and Development (EBRD), which has offered loans to and invested in Russia and east European countries, decided to freeze new investments in Russia. Though Russia holds a 4 percent stake in the EBRD and a certain degree of influence, the anti-Russia moves could not be stopped. According to the Central Bank of the Russian Federation, in a half-year period alone from January to June, about $74.6 billion (about ¥7.6 trillion) of funds flowed out of Russia. If the European Union imposes stricter sanctions, the outflow will surely be accelerated.

US sales to Russia have only risen since sanctions imposed - In the months since the United States imposed sanctions on Russian businesses and close associates of President Vladimir Putin's, an odd thing has happened: U.S. exports to Russia have risen. U.S. Census Bureau foreign trade data show that exports rose 17 percent from March through May _ the most recent months for which the data is available _ compared with the previous three months, before sanctions were imposed. The value of exports has risen in each consecutive month this year, an unusual trend in a trade relationship that historically fluctuates on a monthly basis. Russian markets account for less than 1 percent of U.S. exports, but what the U.S. sells to Russia is largely high-tech and expensive goods, including technology and equipment for the energy sector, which faces the threat of targeted sanctions. Robert Kahn, a senior fellow in international economics at the Council on Foreign Relations, said the rise in exports was evidence that Russian companies were stockpiling goods with the expectation that future sanctions would prevent U.S. companies from selling to their country. The first round of sanctions, placed by President Barack Obama on March 6, targeted primarily individuals close to Putin and those linked to the invasion and annexation of Crimea. The most recent round, imposed earlier this month because of alleged Russian assistance to separatist groups in eastern Ukraine, was broader, including Gazprombank, the financial wing of Russia's state-owned and largest natural gas company, along with energy companies Novatek and Rosneft. The Obama administration said Monday that new sanctions were likely to be announced this week.

Russian Oligarchs Wave Goodbye To Visa, Switch To Chinese Credit Card - So much for the "Russia is becoming increasingly isolated" meme that the West would like many to believe. As Russia continues to sign de-dollarization deals and trade agreements with its BRICS allies while pushing ahead with retaliatory actions against the US and Europe, it appears the 'sanctioned' friends of Putin are taking matters into their own hands. Billionaire oligarch Gennady Timchenko, among the first to be hit by travel bans and asset freezes by the US, has decided to tear up his Visa and Mastercard, shifting all his credit cards to China's UnionPay, noting that "in some ways it is more secure than Visa - at least the Americans can't reach it."

Russia And India Begin Negotations To Use National Currencies In Settlements, Bypassing Dollar -- Over the past 6 months, there has been much talk about the strategic proximity between Russia and China, made even more proximal following the "holy grail" gas deal announced in May which would not have happened on such an accelerated time frame had it not been for US escalation in Ukraine. And yet little has been said about that other just as crucial for the "new BRIC-centric world order" relationship, that between Russia and India. That is about to change when yesterday the Russian central bank announced that having been increasingly shunned by the west, Russia discussed cooperation with Reserve Bank of India Executive Director Shrikant Padmanabhan. The punchline: India agreed to create a task group to work out a mechanism for using national currencies in settlements. And so another major bilateral arrangement is set up that completely bypasses the dollar.

"US Will Feel Tangible Losses," Russia Prepares To Unleash Retaliatory Trade Wars -- "It's a troubling continuation/expansion of trade as a geopolitical tool," warns one Washington-based consulting firm as Russia prepares to unleash retaliatory actions to US and European sanctions. As Bloomberg reports, Russia said yesterday it may ban imports of chicken from the U.S. and fruit from Europe and is investigating McDonald's cheese for safety. In addition, a Russian lawmaker has drafted legislation that might result in U.S. accounting firms being barred from doing business in his country. All of this is odd given Jack "trust me" Lew's reassurance that Russian sanctions would have no impact on the US economy. Russia's response, US will feel 'tangible losses' from 'destructive, myopic' sanctions.

More Signs of Doubt in Europe About the Costs of Siding With Ukraine -- Yves Smith - This week, the US hopes to get the EU to agree to impose so-called tier three sanctions on Russia to punish them for their alleged role in the downing of MH17 and for supporting the rebels in Ukraine. That would include prohibiting investment in Russian equity and debt of Russian banks more than 90 days maturity by European citizens as well as barring EU banks from sourcing funding for them on a regulated market. The English language press gives the impression that all systems are go, but that depiction could be a PR push to give the sense of inevitability, or it could actually be accurate. Input from readers in Europe very much appreciated.What is striking is a spate of articles from not exactly expected sources on the potential costs to Europe of putting the screws on Russia. The Financial Times has displayed quite a lot of blood lust on the topic of Russia, so it was instructive to see Wolfgang Munchau, who is based in Germany, sound a cautionary note in one of his comments. Munchau points out that he’s surprised by the IMF’s latest forecasts, which simultaneously show Russian GDP for 2014 1.1% lower than previously estimated as a result of the sanctions implemented so far, while increasing Germany’s by 0.2%. Munchau thinks the two in combination are not credible: The Committee on eastern European Economic Relations, a German business lobby with political power similar to that of the National Rifle Association in the US, says existing sanctions threaten 25,000 German jobs. An estimated 350,000 German jobs directly depend on German-Russian trade; many would be at risk if sanctions were stepped up. Total German trade with Russia was close to €80bn in 2013….

EU’s Sanctions on Russia Will Fail to be a Knockout Blow - The main burden of the EU sanctions mooted by the commission would appear to fall on the UK. The core measure targets debt and equity capital raising by the Russian state banks and bans European intermediaries from offering associated underwriting and advisory services, and the bulk of such business is done in the City of London. Capital market funding is also a small portion of overall foreign funding of Russian banks (about 3.5 per cent as of March 2014), so an important detail about the EU sanctions package as regards both overall impact and burden sharing between the member states will be whether the prohibition on financing Russian banks will extend to ordinary lending. The international syndicated loan market for Russian borrowers is dominated by continental European banks. French banks have the largest exposure of $52.5bn.This analysis presupposes that the EU will never go for the “nuclear” sanctions option of banning gas imports from Russia, and that the EU and US together will not try to replicate against Russia the ban on oil exports imposed on Iran. The EU cannot for now substitute its present annual gas import volumes of 150bn cubic metres from Russia, and the loss of Russia’s present level of crude oil exports – 7m barrels a day, compared to Iran’s 2.5m b/d – would trigger a sharp rise in the oil price and a global economic slump. This would be the economic equivalent of the Cold War-era concept of nuclear deterrence based on mutually assured destruction. Short of the “MAD” options, the Russian economy will decline and Europe will suffer, but there will be no knockout blow and, as so often in Russia’s history, the Russian nation may be expected to rally around in the face of hardship caused by foreign foes.

Wolf Richter: Sanction Spiral Successful – German Exports to Russia Plunge -The sanction spiral concocted by the US and the EU in response to the ever more tragic fiasco in Ukraine is supposed to force, or at least encourage Russian President Vladimir Putin to abandon whatever schemes he may have concerning Ukraine. So the 28 EU members are trying to hash out new sanctions today, to be duct-taped to the existing spiral that ineffectually jabs at 87 Russian individuals and 20 Russian organizations. This time, the sanctions are supposed to have teeth. And a broad impact that would squeeze the Russian economy, much to the liking of the US government. Under discussion are, among other goodies, curtailing Russian banks’ access to EU capital markets and kicking the defense and energy sectors where European technologies play a big role. But there is fear that the sanctions could bite back. Trade between the US and Russia is minimal. So it’s easy for the US to talk. Not so between Europe and Russia, and particularly between Germany and Russia. France has a lot at stake too. And much of Europe depends on Russian natural gas. Elegant compromises are needed. The “emerging consensus” is that only future contracts would be hit. This would allow France to deliver the first of two helicopter-carrying assault and command ships sold to Russia via a €1.2 billion contract, signed with fanfare in 2011. France’s economy and budget are in trouble, and this contract is of utmost importance to France. That France would not cancel the contract, whatever the pressures might be, has been clear for months [read.... France Thumbs Nose at Obama Over Sanctions: Will Deliver Two Warships to Russia].

Is a Bloated Current Account Surplus the New German Disease? - Germany’s global image is better than ever. Industry is booming, unemployment is at a record low since reunification and, to boot, the country just took home its fourth World Cup title. But the International Monetary Fund highlighted an underlying German problem Tuesday in its “2014 Pilot External Sector Report.” With a diplomatic nod the fund noted that “Germany’s external position is substantially stronger than implied by medium-term fundamentals and desirable policy setting.” To translate, Germany ran up a current account surplus of almost $270 billion in 2013, which amounts to more than 7% of economic output. It was the world champion both in nominal terms and relative to its gross domestic product. China’s surplus, steadily criticized by the U.S., amounted to just $183 billion by comparison, equivalent to 2% of GDP. It’s not the first time that Germany’s extremely high current account surplus has drawn attention. The IMF has criticized Germany on this front before. So has the European Commission. The U.S. Treasury Department jumped into the act last year by blaming Germany for dragging down not only the euro zone but the rest of the world economy. . The ongoing criticism shows the international concern remains strong, and that Germany has done very little in response. Why? Simply because Germany doesn’t agree that its current account surplus is a problem. No one is willing to put the brakes on the country’s powerful export machine. And it’s not clear that policy makers could even if they wanted to. In an open economy, the Chinese can’t be prevented from buying a German-made machine any more than Americans could be kept from splurging on Porsches.

As the Wage-Profit Conflict Sets In, Troubles Deepen for Global Capital -- As the recession in Europe painfully proves all attempts at austerity to be dead-ends, the search for the miraculous “silver-bullet” continues. The European Central Bank (ECB) has initiated a negative “nominal” interest rate. That means the ECB, the first monetary authority to ever take such an action in a common currency zone, will be charging commercial banks for the funds they deposit (overnight) rather than paying them interest. The ECB is pursuing an inflation target of 2% with a dogmatic belief that “this is he rate at which agents [read this as financial speculators and the rentiers] will not be affected in their economic decisions.” To this end, it utilizes three sets of interest rates: (1) the marginal overnight borrowing rate of the banks from the ECB; (2) the basic rate for their re-financing operations; and (3) the rate that is applied to the banks’ deposits at the ECB. In order for the monetary interventions of the ECB to have any effect, the rates on these interests ought to be differentiated. Until very recently, the ECB rate on deposits was set to zero, and the rate on the re-financing operations was 0.25%. The decision of the ECB has now been to reduce the latter rate to 0.15% and the deposit to negative 0.10%. More growth certainly is needed. GDP growth for the zone as a whole was a fragile 0.9% (year-on-year) in the first quarter of 2014 and the IMF forecasts the eurozone’s full-year growth at 1.2%, compared with 2.8% for the United States and 2.9% for the UK. Meanwhile, the “developed world” is neither saving nor investing. As the two graphs below reveal, the developed economies of the globe seem to have shunned the accumulation of real capital, in favor of the debt-driven speculative games of the global casino.

Strange Things Are Happening In Hungary's Banking Sector - The Hungarian banking system has been a thorn in the Hungarian government’s side for quite some time. A large proportion of it is foreign-owned, which makes it more likely that there would be outflows of capital and restriction of essential lending activity in a crisis. And, of course, it’s more difficult to coerce foreign-owned banks into doing things that the government wants, such as cheap lending to favored borrowers and buying up government debt. Not only are many of its banks foreign-owned, they lend foreign currencies too. A high proportion of Hungarian mortgages are in euros or Swiss francs. Banks extended foreign-currency mortgages to Hungarian households at a time when the exchange rate to forints was favorable. But since then the international value of the forint has fallen, mainly due to a sustained period of monetary easing by the Hungarian central bank. This has improved economic conditions but left Hungarian households struggling to pay their foreign-currency mortgages. The Hungarian Curia (or Supreme Court) judged this to be “unfair”. Quite how a loss on a foreign currency mortgage arising from a falling exchange rate due to central bank policy can be described as “unfair” is perhaps difficult to understand. But anyway, the Curia says it is, and it is the highest judicial authority in Hungary.  And as a consequence, the losses will be forced on to the banks. Banks will be obliged to repay to borrowers any losses incurred as a consequence of adverse exchange rate movements in the calculation of interest and loan repayments.

IMF Chief: Jury’s Still Out On Whether Greece Debt Relief Needed - The head of the International Monetary Fund on Tuesday questioned whether Greece still needs debt relief, saying that a review of the country’s economy in the coming weeks would determine if Athens’ debt stock is sustainable without help from creditors. Top IMF officials have repeatedly said over the past two years that Greece’s debt levels were too high and could overwhelm the country’s fragile economy without some sort of debt relief. The fund pointed to a promise by Europe to help cut Greece’s debt stock to significantly below 110% of gross domestic product if the country met its bailout targets. But Tuesday, IMF Managing Director Christine Lagarde said it was too early to prejudge the fund’s latest analysis of the sustainability of Greece’s debt. “I would not pass judgment on whether or not debt relief is or is not needed or what form the European support will take,” Ms. Lagarde told journalists in a briefing. “I think the jury is out.” It’s unclear whether the IMF is softening its stance on Greece’s need for debt relief under pressure from Europe, which has been reticent to give the country more favorable bond terms, or is simply trying underscore that any debt relief decision will be based on an analytical process.

Euro area staring at deflation as it waits for TLTRO - The ECB remains behind the curve in routing out the Eurozone's persistent disinflationary trend. The area's CPI is now below 0.5% on a year-over-year basis. Yesterday we saw German CPI hit new lows (see chart) and Italy's inflation rate is now hovering just above zero.  Bloomberg: - Euro-area inflation unexpectedly slowed in July to the weakest in almost five years, underscoring the European Central Bank’s concerns that the economy is too feeble to drive price growth.  Inflation was 0.4 percent compared with 0.5 percent in June, the European Union’s statistics office in Luxembourg said today. That is the weakest since October 2009 and below a median forecast of 0.5 percent in a Bloomberg News survey of 42 economists.  The centerpiece of ECB's latest policy initiative, the TLTRO program, will take some time to fully ramp up. In the mean time the central bank is staring at rising risks of deflation, which may end up being extremely difficult to fight (as the BoJ painfully learned over the years). The Eurosystem's (ECB) balance sheet continues to shrink to pre-LTRO levels resulting in tighter monetary conditions.

IMF Says BOE May Need to Drain Reserves as it Lifts Rates -- In its annual health-check of the U.K. economy, the IMF said the BOE may need to suck cash from the banking system when it starts to raise interest rates to ensure the smooth functioning of money markets, which provide vital short-term financing that greases the wheels of the financial system. Managing bank reserves—cash held by banks on account at the central bank—will also be important to prevent unwanted volatility in interest rates, the IMF said. The amount of reserves has ballooned in the past five years as the BOE has pumped billions of pounds into the economy through a policy known as quantitative easing. The IMF’s advice highlights one of the potential pitfalls facing central banks as they begin the slow process of reversing the unprecedented stimulus policies put in place since a global financial crisis tipped the world into recession in 2009: Interest rates in financial markets and possibly the wider economy may not respond to changes in official rates as predictably as they once did. The BOE keeps short-term interest rates close to its benchmark Bank Rate by paying that interest at that rate—currently 0.5%–on reserves held in banks’ accounts at the central bank. By raising or lowering that rate, the BOE should technically be able to influence interest rates across the economy, such as on business overdrafts, car loans and mortgages. But the wrinkle is that not only banks with reserve accounts borrow and lend in short-term money markets. Funds and some corporations do too, some of which lend cash overnight and charge less than the Bank Rate. That has borne down on overnight rates. The BOE noted in a June report “a tendency for unsecured interest rates to trade slightly below Bank Rate” for much of 2013 and 2014. If that persists as the BOE begins to tighten, then market rates may not rise in line with its official rate. The IMF’s advice is to drain reserves if needed. Sucking money out of the system should help nudge up market rates, keeping them in line with the BOE benchmark as it starts to climb.

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