Monday, April 4, 2011

Today's links

1--That Big March Jobs Number, Dean Baker, CEPR

Excerpt: It seems that the current contingent of economics reporters are too young to remember a healthy economy. This is the only way to explain the extraordinary celebration of the gain of 216,000 jobs reported for March. While this news is certainly in the "could have been worse" category, this is hardly an impressive rate of job growth, especially for an economy recovering from a severe recession. Remember, job growth averaged 250,000 a month for the 4 years from 1996 to 2000, and that was starting from an unemployment rate that was already under 6 percent.

For those folks too young to remember how an economy is supposed to grow, I constructed a simple chart showing monthly job growth in the two years following the 74-75 recession, the 81-82 recession, and the 91-92 recession and compared them to the 216,000 job growth reported for March. (In making comparisons it is worth noting that the period following the 90-91 recession was known as the "jobless recovery.") The numbers shown are labor force adjusted which means that I multiplied the number of jobs created each month by the ratio of the March 2011 labor force to the labor force in the month given. (see chart)

2--William C. Dudley on the Road to Recovery: "The coast is not clear", NY Fed

Excerpt: So, why is the economy finally showing more signs of life? In my view, the improvement reflects three developments.

First, household and financial institution balance sheets continue to improve. On the household side, the 2008-09 rise in the saving rate appears to have stabilized in the 5 percent to 6 percent range. Meanwhile, the amount of money that households need to service their debt (for mortgages, cars, credit cards) has fallen sharply to levels that prevailed during the mid-1990s. Debt service has been pushed lower by a combination of debt repayment, refinancing at lower interest rates and debt write-offs. Financial institutions have strengthened their balance sheets by retaining earnings and by issuing equity. Bank lending standards, while still tight, have begun to ease somewhat. As a result, some measures of bank credit are beginning to expand again.

Second, monetary policy and fiscal policy have provided support to the recovery. On the monetary policy side, we at the Fed have maintained unusually low levels of short-term interest rates and engaged in large-scale asset purchases. These measures have fostered a sharp improvement in financial market conditions. On the fiscal side (that is, government spending and taxation), the economy has been supported by the shift in policy to help support growth. In particular, the temporary reduction in payroll taxes could have a strong impact on growth during the first part of this year.

Third—and very much linked to the topic of this meeting—is growth abroad. Much of the rest of the world—especially the emerging market economies—have been growing strongly. This growth has led to an increase in the demand for U.S.-made goods and services. Over the four quarters of 2010, real, or inflation-adjusted, exports rose 9.2 percent....

To sum up, economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed's dual mandate. In particular, the unemployment rate is much too high.

3--Could a default by Greece, end the EU?, Angry Bear

Excerpt: the European banking system is highly interconnected. For example, according to the German Bundesbank, Germany's bank exposure to Spain was roughly 136 bn euro in December 2010, where most of it is held in the form of Spanish bank paper, 56.4 bn euro, and Spanish enterprises, 58.3 bn euro; the rest is in sovereign debt. Furthermore, German banks are sitting atop 25 bn euro in (worthless) Greek paper, primarily in the form of sovereign debt. Euro area countries are exposed to other banks AND the sovereign; but more importantly, the ones that save (run current account surpluses) are the ones holding the worthless (in some cases) bank and government debt. (read more after the jump)

Bank risk is a big risk in Europe. Based on the consolidated banking data at the Bank for International Settlements (BIS), German banks hold 22% of the Greek external debt load i.e., bank debt + sovereign debt + corporate debt), while French banks hold 32% (see Tables below). Furthermore, German banks accumulated 20% of all Irish external debt, 14% of Italy's, and 21% of Spain's.

So the question is, not what will happen if Greece defaults, per se; but will a Greek default set off a chain reaction liquidity crunch that challenges asset valuations in the other Euro area banking systems (for bank paper and sovereign paper)? I suspect that it will, since the European banks are still building their capital buffers.

My point is, the Germans are partial to NOT letting Greece default. All fiscal austerity aside, the Germans have demonstrated that they'd rather write a check than take the writedowns, at this time. Therefore, from this perspective, I find it very unlikely that Greece defaults this year (or next, really).

4--Determinants of Business Investment Spending, Paul Krugman, New York Times

Excerpt:...what the old literature found was a very clear effect of demand growth on investment — the so-called “accelerator” — and not much else very clear. Here’s a useful example from the Boston Fed (pdf), in 1993, during an earlier slump in business investment.

And what that paper concluded applies perfectly to our current circumstances, too:

The disappointing volume of capital spending by businesses during the early 1990s appears to be a symptom of the slow rate of growth of economic activity in recent years rather than the consequence of exceptional impediments to investment spending.

It’s not the socialist atheist Islamic Kenyans; it’s the economy, stupid.

5--S&P 500 Posts Longest Winning Streak Since February on Faster Jobs Growth, Bloomberg

Excerpt: U.S. stocks rose, giving the Standard & Poor’s 500 Index its first back-to-back weekly gain since February, as reports showing faster-than-forecast growth in jobs and consumer spending bolstered economic optimism....

The S&P 500 added 1.4 percent to 1,332.41, the highest level since Feb. 18. The benchmark index had its biggest first- quarter rally in 13 years, climbing 5.4 percent. The Dow Jones Industrial Average increased 156.13 points, or 1.3 percent, to 12,376.72. Both gauges advanced for a second week.

“There’s economic momentum,” said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees $784 billion. “As long as the jobs creation stays on course, it reads confidence throughout the economic landscape. Corporate earnings should be solid. There are many pockets in the market that are still attractive.”

The S&P 500 has risen almost 6 percent in 2011, extending last year’s 13 percent rally, amid government stimulus measures and as corporate earnings beat analysts’ estimates for an eighth straight quarter. The index had fallen as much as 6.4 percent from this year’s high on Feb. 18 as concern grew about Japan’s nuclear crisis and uprisings throughout the Middle East and northern Africa....

M&A Deals

“Corporate confidence is rising,” said Prudential’s Krosby. “We expect to see companies deploying their cash with strategic acquisitions and continuing to sweeten their dividends and engaging in share buybacks.”

6--Hidden Bad Signs in a Good Jobs Report, Wall Street Journal

Excerpt: But the jobs report is a lagging indicator, and some of the issues that have led economists to scale back growth forecasts for this year aren’t yet reflected in this report. One potential area of difficulty is disruptions in manufacturing supply chains caused by the Japanese earthquake, the ripple effects of which might not be felt for weeks or months. Manufacturing added jobs in March, but there might be some difficulties ahead.

Meanwhile, prices of food and oil have been increasing, sparking worries about consumer spending. If more people have jobs, that mutes those fears a bit. But today’s report notes that wages were unchanged. If prices are going up but workers aren’t getting paid more, it spells good news for companies who can keep labor costs low, but suggests continued struggles for consumers.

The other overarching issue is the number of people who remain unemployed. Though the rate is dropping, there are still 13.5 million people who would like to work, but can’t get a job and that doesn’t include those who dropped out of the labor force. The broader U-6 unemployment rate that includes people marginally attached to the labor force continued to decline but still remains at 15.7%. So much slack in the job market means that employers don’t feel as much pressure to increase wages.

Finally, there are still some lagging sectors. Amid the broader jobs increases, construction continued to shed jobs, a reminder that the housing market continues to struggle. Meanwhile, local governments facing budget crunches are shedding jobs, 15,000 last month, and more cuts are on the table across the country.

7--Eight Years to Get Back to Full Employment?, Wall Street Journal

Excerpt: The payroll gains in March were good. But we’d need eight years of consistent monthly gains just like that — taking us to the year 2019 — to bring the economy back to full employment.

The labor market lost almost 8.8 million jobs from the peak for payrolls in January 2008 (138 million payroll jobs, when the unemployment rate was 5%) to the trough in February 2010 (129.2 million). Since then, the U.S. has added 1.5 million jobs.

If the March gain of 216,000 jobs were to continue, payrolls would return to their peak in 34 months — early 2014.

But the economy also needs to add at least 100,000 jobs a month just to keep pace with long-run growth in the labor force. That brings us to early 2019 under March’s pace for payroll gains.

The bottom line: the labor market needs to be producing far more jobs — 300,000 to 400,000 a month — to put the labor market on a trajectory that most Americans would find acceptable. Even adding 300,000 jobs a month would take almost five years to get back to full employment.

8--If Home Prices Counted in Inflation, Floyd Norris, New York Times

Excerpt: Until 1983, the Consumer Price Index included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of “owners’ equivalent rent,” which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, “measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.” The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.

Whatever the reasonableness of that approach, the practical effect of the change was to keep the housing bubble from affecting reported inflation rates in the years leading up to the peak in home prices. It is at least possible that the Federal Reserve would have acted differently had the change never been made....

In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.

The Fed did raise rates in 2004, although perhaps more slowly than seems appropriate in hindsight. The increases then stunned Wall Street, which might not have happened had investors been watching an inflation rate that included home prices.

In the last few months, the two markets have again diverged, but in the opposite way. From October 2010 through January, home prices as measured by an index kept by Federal Housing Finance Agency fell at an annual rate of 12.4 percent, while the government’s calculation of owners’ equivalent rent shows it rising at an annual rate of 1.5 percent. Home prices have not yet been reported for February, but the upward trend in rental prices continued.

Inflation rates may have been understated for years when home prices were rising much more rapidly than rental rates. At the time, the discrepancy might have seemed to be an indication of rising speculation and prompted Fed concern. Now, it is possible that inflation will be overstated precisely because speculative excesses are being purged from the housing market.

9--Digging out of a very deep hole, Pragmatic Capitalism

Excerpt: Not to rain on the parade today, but I think some perspective is necessary with regards to the state of the job’s market. In this morning’s note David Rosenberg puts the current situation in the proper context – yes, we are recovering, but this is still one disastrously large hole we are climbing out of (via Gluskin Sheff):

“…there is a very long row to hoe for the labour market – let’s not forget that it is still digging itself out of a very deep hole. For example, at 130.738 million, payrolls are actually lower now than they were in January 2000. Think about that for a second – because over this 11 year period of flat employment, the population has risen nearly 30 million. The level of payrolls is also much closer to the bottom than it is to the peak – in fact, here we are heading into year number three of the expansion and only 17% of the job losses have been recouped. (On average, 21 months after a recession ends, total NFP recover 207% of the jobs lost from the recession. There was one exception and that was the 2001 recession, where payrolls didn’t reach the bottom until 21 months after the recession ended in November 2001.

At this state of the cycle, what is “normal” is that we are at a new all-time high on employment! But payrolls are actually 7.25 million shy of where they were when the recession began, so the fact that they have rebounded 1.5 million from the lows is, in the overall scheme of things, really nothing to write home about. Here we are, just three months away from closing the books on the second year of the statistical stimulus-led recovery, and employment is still much closer to the trough than to the peak. If we can luck out and have the business cycle die and escape a recession at some point and continue along the path of 200K payrolls gains month in and month out, then we can look forward to the spring of 2014 before all the losses from the Great Recession are fully reversed.

In other words, let’s hold off on the cheerleading and take umbrage in the fact that the labour market, while on the mend, is still a very sick puppy.”

10--No sign of demand growth, Pragmatic Capitalism

Excerpt: Yes, there’s modest top line growth, but not a lot of evidence anything more than that is likely to happen any time soon, especially with global post earthquake issues, US fiscal cutbacks of at least $31 billion as a ‘down payment’ next week, Japan showing no inclination to rebuild without ‘paying for it’, UK austerity kicking in for real this month, continued tightening in the euro zone, and China still fighting inflation with spending and lending cuts.....(personal spending, personal income) ... no sign of accelerating demand. In fact the growth rates are less than they were when the output gap was a whole lot smaller in 06 and 07. (housing, weak) ...

Consumer buying plans don’t look inspiring either, which makes sense with rising food and fuel prices. With ‘normal’ credit conditions, govt deficits would be plenty high for us to be doing a lot better than this by now. So given today’s credit conditions, seems to me govt deficits are far too small to see much progress on the demand side, and tightening fiscal at this point only makes that more so.

11--Three Sites Where You Can Monitor U.S. Radiation Levels, Forbes

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