Monday, March 12, 2012

Today's links

1--U.S. Unemployment Up in February, Gallup

Excerpt: Underemployment is 19.1%, up from 18.7% in January... U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December.

The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011.

In addition to the 9.1% of U.S. workers who are unemployed, 10.0% are working part time but want full-time work. This percentage is similar to the 10.1% in January, but is higher than the 9.6% of February 2011.

As a result, Gallup's U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.

Regardless of what the government reports, Gallup's unemployment and underemployment measures show a substantial deterioration since mid-January. In this context, the increase in unemployment as measured by Gallup may, at least partly, reflect growth in the workforce, as more Americans who had given up looking for work become slightly more optimistic and start looking for work again. So while there may be positive signs, the reality Gallup finds is that more Americans are looking for work now than were doing so just six weeks ago.

2--Signs Point to Economy’s Rise, but Experts See a False Dawn, NY Times

Excerpt: There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.

Most worrying is the prospect that Congress will drop aid for the long-term jobless and allow payroll taxes to rise to 6.2 percent from the current level of 4.2 percent, amounting to a $1,000 tax increase on the average wage earner. Macroeconomic Advisers, a prominent forecaster, estimates that the expiration of the two provisions could cost the economy 400,000 jobs and cut growth by half a percentage point next year.

3--U.S. Trade Deficit Surged to 3-Year High in January, NY Times

Excerpt: He said much of the increase was tied to higher oil prices, which drove oil imports up 3.3 percent. The wider deficit, he said, was likely to slow growth in the January-March quarter to an annual rate of 1 percent.

Economic growth should improve later in the year, he said, because a surge in hiring could increase consumer spending.

A separate Commerce Department report showed that wholesale companies kept building their stockpiles in January. Sales, however, dipped for the first time since May.

Business restocking was a major driver of economic growth at the end of last year. Economists say the restocking is most likely to slow in the first quarter, weakening growth.

A wider trade deficit weighs on growth because it means Americans are spending more on foreign-made goods than overseas consumers are spending on American-made goods.

Economists predict the trade deficit this year will widen from last year’s $560 billion imbalance. A major reason is that they expect companies to sell fewer goods in Europe, which represents about 20 percent of America’s export market.

4--NYT Gets Carried Away With February Job Numbers, CEPR

Excerpt: The February jobs report was reasonably good. It wasn't great; we created an average of 250,000 jobs a month for four years at the end of the 90s. Coming off a severe downturn we should be seeing jobs growth of 400,000 a month, as we did following the 81-82 recession and the 74-75 recesssion, but 227,000 jobs is definitely an improvement over what we had been seeing.

But the NYT got a bit carried away. It told readers:

"Household survey respondents indicated that 879,000 more people were working in February than in January. Though it is not unusual for the two surveys to differ, it is unusual for the growth in the household survey to be so much greater."

No, that isn't quite right. The survey showed a rise in employment of 428,000 jobs. That's good, but not 879,000.

5--TrimTabs’ Says Payrolls Grew So-So 149,000 in February, while BLS Reports Robust 227,000 New Jobs, zero hedge

Excerpt: The BLS’ February seasonal adjustment is the second largest of the year totaling +1.53 million jobs while the January seasonal adjustment is the largest of the year totaling +2.16 million jobs. To put these huge seasonal adjustments into perspective, labor turnover during any given month is about 4 million people hired or fired. The size of the seasonal adjustments in January and February relative to the number of people hired or fired is a whopping 53% and 39%, respectively.

Looking forward, withholding tax data during the month of March will be much cleaner providing better view of growth in wages and salaries and employment because the volatility from the 2% payroll tax change in January and February 2011 will disappear from the data. Similarly, the BLS seasonal adjustments decline significantly in March and April reducing this source of error to their survey based results.

TrimTabs’ believes the anemic wage and salary and job growth results in February support the view that the economy remains stuck in slow growth mode due to numerous economic headwinds confronting the economy. Those headwinds are sluggish real wage and salary growth barely higher than inflation, elevated unemployment, waning government support, reduced and expiring tax incentives, contracting state and local governments, elevated fuel prices, and a sluggish housing market.

6--(From the archives) CNN Poll: Support for Afghanistan war at all time low, CNN

Excerpt: As the war in Afghanistan passes the ten-year mark, a new national survey indicates that support for the conflict has dropped to an all time low as a growing number of Americans express concern that the situation in the central Asian country has turned into another Vietnam.

According to a CNN/ORC International Poll released Friday, only 34% of the public says they support the war in Afghanistan, one point less than the previous low of 35%, with 63% opposed to the conflict.

But that opposition is not a reflection of the original decision to get involved in Afghanistan a decade ago," says CNN Polling Director Keating Holland. "It's what Afghanistan has turned into in the subsequent decade that has soured Americans on the war effort there."

The survey indicates that 57% say it was not a mistake to send military forces to Afghanistan in October 2001, several weeks after the September 11th terrorist attacks.

But according to the poll, 58% now say that the war in Afghanistan has turned into a situation like the U.S. faced in Vietnam, six points higher than the number who felt that way a year ago.

7--Jobs Data Improve, but Growth Picture Darkens, WSJ

Excerpt: Just hours after another strong employment report, rain is hitting the parade. The latest U.S. trade data, released alongside the jobs numbers, are triggering a raft of downgrades to first-quarter growth estimates. That could be a sign of trouble ahead later in the year.

Economists at Goldman Sachs and Macroeconomic Advisers lowered their tracking estimates for first-quarter GDP growth to 1.8% from 2%, partly due to expectations for lower net exports during the period (due to a jump in imports).

J.P. Morgan Chase economists lowered their overall projection for first-quarter GDP to 1.5% from 2%. They also cite downside risk to their current estimate that growth would accelerate to 2.5% in the second quarter, partly because the first-quarter data suggest higher business inventories heading into the second quarter. With growth estimates for 3% in the third quarter and 2% in the fourth quarter, they put full 2012 growth at just 2.2%.

“The contrast between the solid employment and the weak GDP data is striking,” J.P. Morgan chief economist Michael Feroli writes in a note to clients. The explanation: weak productivity. Nonfarm business output growth is near the pace of GDP growth (1.5%), while a measure of private hours worked follows a 3.5% growth pace, he says. “Not only would the -2.0% implied productivity growth be very weak, but it would come on the heels of a year in which productivity advanced only 0.3%. The implication for corporate profits is concerning.”

This helps explain the Federal Reserve’s concerns. The Fed’s latest forecast (in late January) put 2012 GDP growth between 2.2% and 2.7%, a little better than the second half of 2011. But it has indicated some doubts about the unemployment rate dropping so much in recent months with the GDP growth we’ve seen.

 “The decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its long-term trend,” Fed Chairman Ben Bernanke said in his latest testimony. “Continued improvement in the job market is likely to require stronger growth in the final demand and production.”

The Fed wasn’t expected to take any action at its meeting next week anyway. J.P. Morgan’s Feroli says the latest employment data still mean “the bar for action at the April meeting may have been nudged up a bit.”

“While the growth and productivity slowdown is certainly a concern, Fed policymakers probably take some modest degree of comfort in seeing a rise in the employment-to-population ratio, a trend decline in unemployment, and reasonably steady job growth,” he says.

8--U.S. Fourth-Quarter Federal Reserve Flow of Funds (Text), Bloomberg

Excerpt: Following is the text from the Federal Reserve’s flow of funds report.

Debt of the domestic nonfinancial sectors expanded at a seasonally adjusted annual rate of 5 percent in the fourth quarter of 2011, about ½ percentage point more than the pace registered in the third quarter.

Household debt increased at an annual rate of ¼ percent in the fourth quarter, the first increase since the second quarter of 2008. Consumer credit rose at an annual rate of 7 percent in the fourth quarter, the fifth consecutive quarterly increase. Home mortgage debt declined 1½ percent in the fourth quarter, the smallest decline since the end of 2009.

Nonfinancial business debt rose at an annual rate of 4½ percent in the fourth quarter, 1 percentage point higher than its third- quarter pace. Corporate bonds outstanding and business loans increased while commercial mortgage debt continued to decline.

State and local government debt declined at an annual rate of 1 percent in the fourth quarter. For 2011 as a whole, state and local debt declined almost 2 percent, its first annual decrease since 1996. Federal government debt rose at an annual rate of 13 percent in the fourth quarter. For all of 2011, federal debt rose 11½ percent, the smallest annual increase since 2007.

At the end of 2011, the level of domestic nonfinancial debt outstanding was $38.3 trillion, of which household debt was $13.2 trillion, nonfinancial business debt was $11.6 trillion, and total government debt was $13.5 trillion.

Household net worth--the difference between the value of assets and liabilities--was $58.5 trillion at the end of 2011, about $1.2 trillion more than at the end of the third quarter. For 2011 as a whole, household net worth fell close to ¾ percent, the first annual decrease since 2008.

9--No Return to Normal, The Burning Platform

Excerpt: Some economists see evidence that the pace of growth is increasing. The Bureau of Economic Analysis, an arm of the federal government, said on Wednesday that the economy grew at an annual rate of 3 percent in the last three months of 2011, somewhat higher than its initial estimate of 2.8 percent. The unemployment rate has declined to 8.3 percent in January from 9.1 percent last July.

10--Germany wants new debate on EU constitution, Reuters

Excerpt: Germany wants to reignite a debate over creating an EU constitution to strengthen the bloc's ability to fight off financial troubles and counter-balance the rising influence of emerging economies, Germany's foreign minister said on Friday.

..."We have to open a new chapter in European politics," Westerwelle told reporters on the sidelines of a meeting of EU foreign ministers in Copenhagen. "We need more efficient decision structures."

..."I think we have to reopen the debate about a European constitution again," he said. "We have a good treaty, but we need a constitution ... There are new centers of power in the world."...

German Finance Minister Wolfgang Schaeuble had said in November that his country wanted to see changes to the EU's Lisbon Treaty by the end of 2012 in order to lay the foundation for a common fiscal policy in the bloc.

Germany argued that change was needed to enshrine tougher fiscal discipline and safeguard the bloc from further financial troubles.

For example, it wanted an amendment to incorporate tighter regional oversight of government spending and allow the European Court of Justice to strike down a member's laws if they violated fiscal discipline.

11--Will home prices fall 20% more?, MSN Money

Excerpt: a combination of factors is set to push national home prices down an additional 10% or so before a hard bottom is found. And if Europe's debt mess and fiscal bickering in Washington result in another recession, the drop could be double that.

Here's why.

Next leg down has already started

The problem with much of the recent enthusiasm is that it's been based on rising home-sales data, which when put in percentage terms by headline writers, makes the gains seem dramatic. Take last month's report on existing-home sales. On a month-over-month basis, sales were up 4.3%; great news!

.But at 4.6 million units annually, the sales rate is pitiful compared with the 7.3 million sales peak hit in 2005....Even narrowing the inventory to just homes that are vacant with a "for sale" sign in the yard, there are still around 3 million excess residential housing units on the market. That means that even if builders stop all activity and no new homes come to market, it would take nearly eight months to clear them out.

No wonder prices are weakening again. According to Standard & Poor's Case-Shiller Home Price Index, prices have fallen eight months in a row and have reached new post-bubble lows, with prices returning to levels not seen since late 2002. In other words, although the recession officially ended in 2009, the housing market continues to weaken

12--US trade gap widens sharply in January, AFP

Excerpt: The US trade deficit rose sharply in January, forging the biggest gap since October 2008 as imports surged on the back of high oil prices, official data showed Friday.

The trade gap grew to $52.6 billion, after an upwardly revised $50.4 billion in December, the Commerce Department reported.

The US gap in goods and services has been widening in recent months, a period of rising oil prices.

Underscoring the trend was the three-month average ending in January, which rose to $50.2 billion, from $47.0 billion in the October-December period.

The January trade deficit was much bigger than the $48.2 billion gap expected by most analysts.

In January, exports rose 1.4 percent to $180.8 billion, outpaced by $233.4 billion in imports, a jump of 2.1 percent from December.

The growth in imports was massive. According to the Commerce Department, the United States had not imported so many goods, $196.1 billion, since July 2008. The $37.3 billion in services imports was an all-time record, it said.

The US trade balance with the rest of the world has been hit by high oil prices. The world's biggest oil-consuming country saw its petroleum trade deficit jump 9.0 percent in January from December, while the price of imported crude remained above $100 a barrel for the fourth consecutive month.

13--Consumers Shape Up Their Finances, WSJ

Excerpt: U.S. households' net worth—the value of homes, stocks and other investments minus debts and other liabilities—rose $1.2 trillion to $58.5 trillion from October through December, the first improvement in two quarters. The increase came as the Dow Jones Industrial Average rallied nearly 12%. A measure of households' disposable personal income jumped, helping Americans keep a lid on debt, which fell to 113% of disposable income from 118% at the end of 2010....

Such progress could easily be erased. A jump in energy prices or a decline in the stock market could snuff out consumers' willingness to borrow and spend. Prices for most households' critical asset—their home—are just starting to show signs of reaching a bottom. And recent borrowing has been driven by student loans, which some analysts worry could lead to trouble if the job market for young adults doesn't improve.

"Borrowers cannot default on this type of debt, meaning that they will be burdened for years to come," wrote Paul Edelstein, U.S. economist at IHS Global Insight.

The Fed report showed companies remained cautious about spending in the fourth quarter.

Nonfinancial companies held $2.23 trillion in cash and other liquid assets at the end of December, the Fed reported, up from $2.12 trillion in the third quarter. Cash represented the largest share of corporate assets since the 1950s.

Steven Sintros, chief financial officer of Wilmington, Mass.-based uniform-rental company UniFirst Corp., said the firm has amassed cash in recent years to make acquisitions when the economic outlook becomes clearer.

14--Biderman Market Theory’s Two Bullish Distinctions, Trim Tabs

Excerpt: 80% of the largest US stocks are owned by institutions and therefore flows in and out of institutions can move stock prices. Cash is also bullish for stocks.

Cash flow is bullish despite constant selling by players. Mutual funds, pension and hedge funds are all being forced to sell US equities to meet redemptions. So how can money flows be bullish if retail is selling? Simple, the cash coming from public company float shrink, about $1.9 billion each and every day, is more than all of the share sales by the public.

When public companies reduce the total number of shares outstanding by 1.3%, that means that institutional owners of stock have more money and less shares to chose from. More money chasing fewer shares should translate into higher aggregate stock prices, everything else being equal.

Everybody watching this already knows that we think that the Fed has been juicing asset prices as the main vehicle for getting the US out of recession. So we have a stock market that is up by more than $9 trillion since March 2009 and is now only about 15% below the $22 trillion all time high set in October 2007.

Yet, despite the surging stock market the US economy is not growing very fast despite the hopes and wishes of most stock market players. Wage and salary growth has slowed from about 4.5% before inflation year over year during the height of QE2 during first half of last year to a meager 3.2% nominal growth year over year since the start of this year.

15--Hollande Repeats Call to Renegotiate EU Treaty; Rival Doubts Credibility, Bloomberg

Excerpt: Francois Hollande, the Socialist candidate in France’s presidential election, repeated his promise to renegotiate Europe’s latest fiscal treaty, saying it puts undue emphasis on austerity and offers little about the need for growth measures.

“Discipline is necessary on a European level; each state needs to make an effort to improve its accounts,” Hollande said on France 3 television today. “But it will be impossible to meet these goals if there isn’t growth and jobs and activity.”

European Union leaders signed a German-inspired deficit- control treaty on March 2 that puts a tighter curbs on spending and mandates automatic corrections of deficits that stray from targets. It is due to take effect on Jan. 1, 2013, and must be ratified by at least 12 of the 17 euro-area countries. All 17 countries in the euro area, including France, and eight EU members outside the currency bloc signed the treaty.

“If tomorrow I’m president, I’ll say there are parts of this treaty we can accept, but we won’t accept sanctions that are against countries’ interests and, second, we’ll add growth, activity, big industrial projects, Eurobonds to pull the economy ahead.”...

Hollande’s comments came the same day that Der Spiegel reported that German Chancellor Angela Merkel, U.K. Prime Minister David Cameron, Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti had all agreed not to host the Socialist candidate before this year’s presidential election because they are angry about his plan to renegotiate the new budget pact.

16--The Inequality Trap, Kemal Derviş, Project Syndicate

Excerpt: The recent work by Rajan, Stiglitz, Kumhof and Ranciere, and others explains the apparent paradox: those at the very top financed the demand of everyone else, which enabled both high employment levels and large current-account deficits. When the crash came in 2008, massive fiscal and monetary expansion prevented US consumption from collapsing. But did it cure the underlying problem?

Although the dynamics leading to increased income concentration have not changed, it is no longer easy to borrow, and in that sense another boom-and-bust cycle is unlikely. But that raises another difficulty. When asked why they do not invest more, most firms cite insufficient demand. But how can domestic demand be strong if income continues to flow to the top?

Consumption demand for luxury goods is unlikely to solve the problem. Moreover, interest rates cannot become negative in nominal terms, and rising public debt may increasingly disable fiscal policy.

So, if the dynamics fueling income concentration cannot be reversed, the super-rich save a large fraction of their income, luxury goods cannot fuel sufficient demand, lower-income groups can no longer borrow, fiscal and monetary policies have reached their limits, and unemployment cannot be exported, an economy may become stuck.

The early 2012 upturn in US economic activity still owes a lot to extraordinarily expansionary monetary policy and unsustainable fiscal deficits. If income concentration could be reduced as the budget deficit was reduced, demand could be financed by sustainable, broad-based private incomes. Public debt could be reduced without fear of recession, because private demand would be stronger. Investment would increase as demand prospects improved.

This line of reasoning is particularly relevant to the US, given the extent of income concentration and the fiscal challenges that lie ahead. But the broad trend toward larger income shares at the top is global, and the difficulties that it may create for macroeconomic policy should no longer be ignored.

17---America's Debt-Service Economy, WSJ

Excerpt: Americans still aren't close to ridding themselves of the debt burden they took on during the bubble years. At the moment, that might not matter.

With increases in credit-card debt and student and car loans outstripping a decline in mortgage-debt outstanding, U.S. household debt edged up to $13.22 trillion in the fourth quarter, the Federal Reserve said in its quarterly flow of funds report Thursday. That marked the first such increase since the third quarter of 2008.

The catch: After-tax income grew faster than debt. So the household debt-to-income ratio fell to 112.8%, from 113.4% in the third quarter. That is well off the peak of 130% reached in 2007, but historically, still looks awfully steep. In the 1990s, the debt-to-income ratio averaged 85%.

When it comes to spending, however, consumers aren't affected so much by the level of debt as by how much of their pay is eaten by debt payments. Just think back to the money people spent when they enjoyed the false comfort of teaser mortgage rates.

On debt-payment levels, consumers have it pretty easy now. As of the third quarter, the debt-service ratio—debt payments as a percent of households' after-tax income—was at a 17-year low of 11.09%. With incomes rising, it was probably lower still in the fourth quarter.

If anything will give consumers pause, it is probably how little they have rather than how much they owe. The Fed report showed the value of household financial assets, adjusted for inflation, was at 2005 levels. The value of real-estate holdings—where most middle-class wealth is tied up—was at 2001 levels.

That leaves many families 10 years closer to retirement, with nothing to show for it.

18--There's a long, winding road to central bank exits, Australian

Excerpt: With rates close to zero, the US, UK, Japanese and European central banks have pumped cash into the financial system. But each has chosen a different method - and will face different challenges when they try to shrink again.

The growth in balance sheets has been startling: The combined assets of the four central banks will top $US9 trillion ($8.5 trillion) by the end of March, compared with $US3.5 trillion five years ago, Deutsche Bank says.

The European Central Bank's €3 trillion ($3.72 trillion) balance sheet is the biggest relative to the economy, at 32 per cent of nominal eurozone GDP, followed by the Bank of Japan with 30 per cent, the Bank of England with 21 per cent and the Federal Reserve with 19 per cent.

The BOE's balance sheet has expanded fastest in the crisis, more than tripling to £321 billion ($447.4bn).

But the change in composition and maturity profile of the balance sheets has been equally noteworthy.

In January 2007, the Fed held $US779bn of US Treasurys, of which 52 per cent matured in under a year and only 19 per cent in more than five years.

Now, it holds $US1.65 trillion of Treasurys, of which 57 per cent mature in more than five years.

Of the BOE's £255bn face value of gilts, 72 per cent mature in more than five years, with 26 per cent maturing in more than 20 years.

The ECB has focused on loans to banks. From €450bn of mostly one-week loans in January 2007, its exposure has risen to €1.1 trillion of mostly three-year loans.

So while it has bought €284bn of government and covered bonds, the overall maturity of its assets is weighted toward shorter-maturity bank loans.

But the ECB is taking higher credit risk than the BOE or Fed because of the loan collateral it is accepting, even after hefty haircuts.

The BOJ is both offering loans and buying Japanese government bonds and other assets under its latest ¥65 trillion ($757.3bn) program but has focused purchases on two-year bonds so far.

To tighten policy, central banks could raise rates, sell assets or mop up liquidity through market operations.

Because of the long-maturity bonds the Fed and BOE hold, even by 2015 they will still face a tricky task in selling assets without disrupting markets.

Because of the long-maturity bonds the Fed and BOE hold, even by 2015 they will still face a tricky task in selling assets without disrupting markets.

So they are more likely to raise rates first but might take years to run down their holdings.

The ECB is relying on a full recovery in private funding markets to exit from its loans — which is far from guaranteed.

Meanwhile, the BOJ has been stuck with ultra-loose policy for years.

The exit for all of them is likely to be a long and gradual process.

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