Thursday, February 3, 2011

Today's links

1--Beware the Hiccups of Consumer Spending, Kelly Evans, Wall Street Journal

Excerpt: U.S. consumers are proving a fickle bunch. One minute they're joining in the economic recovery, the next they're pulling back.

Friday's gross-domestic-product data should at first glance offer an encouraging read on consumer spending. Personal consumption expenditures, the largest single component of GDP, are expected to rise at about a 4% annualized rate in the fourth quarter, the fastest since the real estate-fueled boom year of 2006. GDP itself is seen expanding at about a 3.5% pace, adjusted for inflation and seasonality.

That would be just the latest hopeful sign from U.S. households. The Conference Board already has reported its consumer-confidence gauge jumped to an eight-month high in January. The University of Michigan/Reuters sentiment survey out Friday also is expected to show improvement. It is tempting, then, to think consumer spending finally has turned a corner.

Not so fast. This recovery has been unusually choppy and surprisingly weak. Paul Dales of Capital Economics says it typically takes about three quarters after a recession ends for GDP to return to prerecession levels. This time around, assuming that milestone is finally hit with Friday's release, it will have taken six.

That's partly due to the hot-and-cold spending behavior of U.S. consumers in the aftermath of their credit binge. There are occasional bright spots, stoked in no small part by fiscal and monetary stimulus. But the strength hasn't proved lasting. Even the expected fourth-quarter bounce would leave consumer spending up only about 1.7% in 2010, after declining the prior two years. That's a far cry from the 5.7% rebound seen in 1983, after the last deep downturn.

2---China's Housing Market Nears U.S., Japan Bubble Levels, Bloomberg

Excerpt: China’s property market may be heading into a bubble as the economy’s reliance on real estate reaches a level close to the housing peaks in the U.S. and Japan, according to Citigroup Inc.

The CHART OF THE DAY shows investment in residential property accounted for 6.1 percent of China’s gross domestic product last year, the same level as the record in the U.S. in 2005 that was followed by the subprime crisis, said Shen Minggao, Citigroup’s China research head. It’s also about 2 percentage points away from Japan’s 1970s housing boom, he said.
“China’s property market is entering into a bubble stage,” Shen said in a phone interview. “It’s evident that property prices are no longer sustainable once the residential investments achieve above 8 percent of nominal GDP, and China may not be an exception....

China’s property prices rose for 19th month in December, climbing 6.4 percent from a year earlier. The government last week increased the minimum down-payment for second-home purchases, told local governments to set price targets on new properties, and introduced taxes for homes in Shanghai and Chongqing. The measures followed two interest rate increases in the past four months and a ban on third mortgages.

3---Mid-East contagion fears for Saudi oil fields, Ambrose-Evans Pritchard, Telegraph

Excerpt: Risk analysts and intelligence agencies fear that Egypt's uprising may set off escalating protests in the tense Shia region of Saudi Arabia, home to the world's richest oilfields.

Goldman Sachs said the Mid-East holds 61pc of the world's proven oil reserves – and 36pc of current supply – which may compel global leaders to make "concentrated efforts" to stabilise the region. The bank said high levels of affluence should shield Saudi Arabia and the Gulf's oil-rich states from "political contagion".

However, a third of Saudi Arabia's 25m residents are ill-assimilated foreigners and the country faces a "youth bulge", with unemployment at 42pc among those aged 20 to 24.

Nima Khorrami Assl, a Gulf expert at the Transnational Crisis Project, said Shi'ites have been "stigmatised as a result of excessive paranoia since Iran's Islamic Revolution" and face systemic barriers in education and jobs. "Should the Gulf states do nothing or attempt to preserve the status quo, social unrest becomes inevitable. The current situation is inherently unstable," he told Foreign Policy Journal....

The outbreak of Arab populism vindicates claims by US neo-conservatives that the region is ripe for change, but this is not what Washington had in mind. "US interests are the first casualty," said Mr Itani.

Fairly or unfairly, America is tarred with the Mubarak brush. Cairo may switch allegiance to the rising powers of Turkey, India, and above all, China.

4--Functions of the Fed and the Current Economic Situation, Dennis P. Lockhart, FRB of Atlanta

Excerpt: On the national level, the pace of economic growth is picking up, and I believe much of the strength in the fourth quarter of last year has carried over into 2011. The moderate pace of economic expansion seems to have momentum, and I believe it should prove sustainable as the year progresses.

Confidence appears to be growing. According to the Conference Board, consumer confidence rose sharply in January. Business confidence is also building. Business leaders remain cautious regarding investment and hiring, but in my contacts with businesspeople across a range of industries I hear more optimism than I heard even a few weeks ago. I believe that as businesses become more assured that growth will continue and their revenues will grow, they will increase investment and hiring.

There are risk factors that I think bear careful watching. The sovereign debt problems in Europe could become more severe and spill over to negatively affect our economy through a number of channels. The weakness of the U.S. housing sector—particularly house prices—could reemerge as a major drag on consumer spending over and above the direct effect of slow construction activity. States and municipalities remain under intense fiscal pressure, and many will have to continue to reduce expenditures to avoid default on their debt obligations or downgrades of their debt ratings. These factors are risks to the improving outlook.

5--Bloomberg on the Icelandic Miracle, Paul Krugman, New York Times

Excerpt: Iceland Proves Ireland Did `Wrong Things’ Sacrificing Taxpayers:

Today, Iceland is recovering. The three new banks had combined profit of $309 million in the first nine months of 2010. GDP grew for the first time in two years in the third quarter, by 1.2 percent, inflation is down to 1.8 percent and the cost of insuring government debt has tumbled 80 percent. Stores in Reykjavik were filled with Christmas shoppers in early December, and bank branches were crowded with customers.

To be fair, real GDP is still about 14 percent down from its 2007 peak, so Iceland hardly got off unscathed. But the human and social damage appears to have been much lighter than many expected.

6--Germany Rules Out Bond Buybacks by Bailout Fund, Bloomberg

Excerpt: Germany ruled out allowing the European Union bailout facility to fund bond buybacks from debt- strapped governments as euro-area officials struggle to narrow differences on a strategy to end the region’s financial crisis.

A German government official briefing reporters before a Feb. 4 EU summit said the 440 billion-euro ($607 billion) European Financial Stability Facility lacks the legal authority to purchase the outstanding debt to ease finances of countries including Greece. European officials have said such measures are being considered as part of a revamped crisis strategy. ....

Germany, the biggest of the 17 euro nations, is making its assent to the expanded rescue effort conditional on tougher controls of countries’ finances, say four officials involved in the talks who declined to be named because the deliberations aren’t public. Existing budget rules have gone unenforced since the euro’s debut in 1999.

7--The Coming Collapse of Commercial Real Estate is Already Here, via

Excerpt: The U.S. consumer may be on the mend as we head further into 2011, but the same story of resurgence does not apply to many of the U.S. big-box retailers.
From Wal-Mart to Sears to Target to Best Buy, if you look at what is happening in the retail space, "it looks pretty scary," says retail expert Howard Davidowitz.

Wal-Mart -- the world’s largest retailer – has seen six consecutive quarters of negative same-store sales and is now looking to put the majority of its investment capital towards emerging markets.

In the case of Target and Best Buy, they both recently missed major key earnings expectations. Making matters worse, Best Buy “tanked” even without the competition from the now defunct Circuit City, Davidowitz points out.

Companies like Apple, Amazon, Netflix are doing gangbuster business while the aforementioned struggle to keep pace....

A coming collapse in commercial real estate has been looming for the last couple years, but Davidowitz thinks it has already begun. “I think there has [already] been a partial collapse in the commercial real estate business,” he says pointing to the rising number of community bank failures. “I think retail real estate developers better start rethinking the use of their space

8--An improving economic outlook, Econbrowser

Excerpt: Looking a little better each day.

Let's start with Tuesday's manufacturing ISM survey of plant managers. A value above 50 signifies that more responders reported improving conditions than reported deterioration. The January reading of 60.8 is the highest we've seen since 2004, and is the sort of number we might see if real GDP were growing at a 6% annual rate.

On Monday the BEA released December details for income and consumption. Personal consumption expenditures have been growing strongly quarter-to-quarter and month-to-month within each quarter.

Earlier in the decade consumption spending was sustained by home equity withdrawals and very low saving rates. Trying to work out from under those debt burdens has been a key factor holding us back over the last three years. My hope had been that, with disposable personal income back to growing on track, we could see parallel growth in consumption spending while maintaining a decent saving rate.

Consumer spending now seems to be growing a little faster than income, and I'd be more convinced we're on a sustainable path if the key driver of growth was coming from investment and net exports....

Motor vehicles and parts alone contributed 0.9 percentage points to the fourth-quarter real GDP annual growth rate of 3.2%, perhaps a little surprising since the gains in the number of light vehicles sold is more modest....But the gasoline price spike of the summer of 2008 is now almost 3 years behind us. And I'm guessing that by now there may be some shock potential of ongoing geopolitical turmoil in the Middle East.

9--The Great British austerity experiment, Dean Baker, Guardian

Excerpt: Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom. The reason was the new coalition government's commitment to prosperity through austerity. As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That's bad news for the citizens of the United Kingdom. They will be forced to suffer through years of unnecessarily high unemployment. They will also have to endure cutbacks in support for important public services like healthcare and education....

The British economy looks like it is doing its part. The fourth-quarter GDP report showing that the economy went into reverse and shrank at a 2.0% annual rate is exactly the sort of warning that many of us here were expecting. Weather-related factors may have slowed growth some, but you would have to do some serious violence to the data to paint a positive picture. Of course, the austerity in the UK is just beginning. There will likely be much worse pain to come, with a real possibility that the country will experience a double-dip recession, or at least a prolonged period of stagnation....

The same story applies to consumers. This sort of drop in interest rates is not about to kick off a consumption binge. Consumers remain heavily indebted as a result of the collapse of the housing bubble. Lower interest rates will change this picture little....

This means that the predictable result of austerity is slower growth and higher unemployment. The UK has volunteered to be our guinea pig and test this proposition. For now, it looks like things are going just as standard economic theory predicts: the economy is slowing and unemployment is likely to rise.

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