Saturday, April 28, 2012

Weekend links

Today's quote: "Of course there can be economists who are opposed to the idea that stimulus can work as an article of religious faith. Economic theory also predicts that for a large enough sum of money there will be economists who will say that the stimulus did not work regardless of what they actually believe to be true." Dean Baker, economist

1--How Richer States Finance Poorer Ones, NY Times

Excerpt: Third, and most important, we have found a number of camouflaged vehicles through which we can indirectly make sizable transfers of real wealth among the states, without exciting the citizenry by booking them as explicit transfers. Chief among these are Medicaid and Medicare, as Bruce Vladeck notes in his classic paper, “The Political Economy of Medicare.”

There is also vast military spending, along with sundry other federal programs directing federal money to the states. (see chart) Readers contemplating the table will discover in it a certain paradox — that those residents who most often denounce big government and call for sharp cuts in government spending often benefit themselves from such spending or live in regions that receive significant government support. This was also noted by the Tax Foundation. In presenting the data in the form of a geographic map, the foundation wryly observes: As you can see from the map, states that get the “worst deal” — that is, have the lowest ratio of federal spending to taxes paid — are generally high-income states either on the coasts or with robust urban areas (such as Illinois and Minnesota). Perhaps not coincidentally, these “donor” states also tend to vote for Democrat candidates in national elections. Similarly, many states that get the “best deal” are lower-income states in the Midwest and South with expansive rural areas that tend to vote Republican.

2--American Austerity, Paul Krugman, NY Times (Big job losses under Obama)

Excerpt: With all the focus on Europe’s sudden discovery that austerity doesn’t work, we shouldn’t lose sight of just how much de facto austerity we’ve done on this side of the Atlantic. Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy: (chart) That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

3--Stock market is in for a rude awakening, pragmatic capitalism

Excerpt: The overwhelming weight of the evidence over the past four to six weeks is that economic growth has peaked and is now slowing down. In that period we have seen either disappointing results or actual declines in the following important economic indicators: core durable goods orders, the Chicago Fed National Activities Index, initial weekly unemployment claims, new home sales, existing home sales, payroll employment, the NFIB Small Business Index, construction spending, the ISM Non-Manufacturing Index, personal income, the Kansas City Fed Index, the Philadelphia Fed Survey, industrial production, the Empire State manufacturing index and the NAHB Housing Market Index. These indicators cover most of the U.S. economy and generally provide a good idea of where activity is headed.

In this regard we point out that the Chicago Fed computes and puts out a little-followed monthly indicator called the Chicago Fed National Activity Index (CFNAI), a weighted average of 85 monthly economic indicators covering production, income, employment, hours worked, personal consumption, housing sales, orders and inventories. The CNFAI has declined for three consecutive months and entered negative territory in March. From what we see so far in the current numbers, another drop is likely in April as well. The significance of the above data is reinforced by ECRI Weekly Leading Indicator. On December 10th the ECRI dropped to 5.25% below a year earlier, a level that indicates a high probability of recession. In fact, since 1968 the ECRI leading indicator has declined to that level or below only six times, and each time a recession began either a few months before or a few months after. There has never been a false call, and this is the first negative call since January 2008. Since most serious investors follow the same economic releases that we do, they must be aware of the fragility of the current recovery, particularly given the household debt burdens and the problems in Europe and China as well as the so-called “fiscal cliff” awaiting the U.S.

That is why they slice and dice every single word in the FOMC monetary statements, minutes and speeches of Chairman Bernanke and every other Federal Reserve Board member, hoping to get a hint that QE3 is coming to the rescue soon. Yesterday was a good example where the FOMC and Bernanke basically said nothing new, yet were subject to all kinds of interpretation by the “experts” who do that sort of thing for a living. The market has been moving up on the liquidity provided by central banks around the world and is deathly afraid of going it alone. All in all, the economic recovery is not sustainable, and we doubt that the Fed can do anything more. Although QE1 helped prevent the economic and financial system from collapsing, each easing move after that has had less and less effect. We believe that the stock market is in for a rude awakening.

4--Economists React: GDP Is ‘Disappointing but Also Puzzling’, WSJ

 Excerpt: The GDP data at face value are disappointing but also puzzling. Private sector hours worked rose 3.7% in the first quarter — what were these workers producing? The unemployment rate fell from 8.5% in December to 8.2% in March — how can this be if the economy was only growing at around its potential rate? The positives in the report are the growth in consumer spending and the rise in residential investment, which gives the expansion in demand a better balance. However, the pace of inventory investment is likely to be a drag on second-quarter growth. We must remember that these data are revision prone and we also believe that the expenditure estimate of GDP has systematically understated the strength of the recovery.

 Our focus will remain on job creation, profits, and industrial production as giving the best guide to the pace of growth and the direction of the economy and we still look for growth of 3% this year. –RDQ Economics While the warm weather of the first quarter may have provided a boost to the overall [consumer spending], it is noteworthy that such reduced the demand for utilities. Services provided from housing and utilities served as a 0.23% drag on first-quarter GDP. The good news is that more seasonal weather in the second quarter should reverse the weather related drag on both fourth and first quarters.–Ray Stone, Stone & McCarthy... Private consumption rose at the fastest pace since late 2010, “financed” by a sizeable decline in the savings rate. More than a third of that pick-up was attributable to surging car sales. In addition residential investment jumped by almost 20%, the most since 2Q10, probably supported by the unusually mild winter weather. While we expected consumer spending and residential investment to be the main growth drivers at the beginning of the year, their contributions were even larger than we anticipated. –Harm Bandholz, Unicredit

5--Argentina's deputy economy minister is "fiery red Marxist", b92net Excerpt: (Mostly propaganda)

6-- Actual home purchases are not keeping up with pending home sales, sober look

Today we saw stronger than expected pending home sales in March from the National Association of Realtors. Bloomberg: The index of pending home purchases rose 4.1 percent to 101.4, the highest level since April 2010, after a 0.4 percent gain in February that was revised from a previously estimated 0.5 percent drop, the National Association of Realtors reported today in Washington. The median forecast of 43 economists surveyed by Bloomberg News called for a 1 percent rise in the measure, which tracks contracts on previously owned homes. This is great news for the housing market, but there is a problem.

Typically the pending home sales index leads existing home sales by a month or two. But recently the actual closings have not kept up with this index and the gap has gotten wider. Here are the two indices from 2002. (see charts) It shows that many pending transactions never make it to closing. The only explanation for this is the persistence of tight credit conditions in the housing market, with buyers unable to obtain adequate financing in order to close. This is in spite of record low mortgage rates. Within a month or two we should know if there have been improvements in the rate of closings. If so, we should see existing home sales pick up sharply. But given the recent history of the two indicators, this improvement is far from certain.

7--A Worrisome Rise in Jobless Claims, NY Times

Excerpt: The odds that the economy has fallen into a spring slowdown – for the third straight year – rose this morning. The number of people who filed new claims for jobless benefits held roughly steady last week, according to the seasonally adjusted numbers released by the Labor Department today. The report was bad news because it suggested that the rise in claims over previous weeks might not have been, as some optimists hoped, a statistical fluke caused by the timing of Easter. Last week, 388,000 people filed an initial claim for unemployment insurance (again, according to the seasonally adjusted numbers, which is why the timing of holidays matters). That number was largely unchanged from 389,000 the prior week and 388,000 the week before. Three weeks earlier, though, only 362,000 people filed initial claims, which seemed to be a sign that the labor market was continuing to improve. The weekly jobless-claims statistics are notoriously volatile. But three straight weeks of elevated claims suggests that job growth in April may have been as disappointingly modest as March’s job growth had been, following much better numbers in late 2011 and early this year.

As Annie Lowrey wrote in The Times last week: Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again, raising fears that the winter’s economic strength might dissipate in the spring. In recent weeks, European bond yields have started climbing. In the United States and elsewhere, high oil prices have sapped spending power. American employers remain skittish about hiring new workers, and new claims for unemployment insurance have risen. And stocks have declined…. A third straight year of economic disappointment could have major political implications, hurting President Obama’s re-election campaign and helping Mitt Romney, the likely Republican nominee, make the case against Mr. Obama.

8--Running on empty, macrobusiness Excerpt: .

The New York Fed: April’s Empire State Manufacturing Survey indicates that manufacturing activity in New York State improved modestly. Although the general business conditions index fell fourteen points, it remained positive at 6.6. The new orders and shipments indexes also remained positive, but showed only a small increase in orders and shipments. The prices paid index inched downward but remained high, and the prices received index climbed six points to 19.3. The index for number of employees rose to its highest level in nearly a year, indicating a significant increase in employment levels, while the average workweek index fell to a level that indicated only a small increase in hours worked. Future indexes remained quite positive, suggesting a strong and persistent degree of optimism about the six-month outlook....

As I said last month, the regional indexes hold a loose relationship with the all important national manufacturing measure, the April ISM. But with two months of slowing, it’s an increasing possibility that we’ll see a decent fall in the ISM on May 1st. The other news last night was that the weekly DOL report of unemployment claims rose on revised figures from last week: In the week ending April 21, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 1,000 from the previous week’s revised figure of 389,000. The 4-week moving average was 381,750, an increase of 6,250 from the previous week’s revised average of 375,500. That’s three straight weeks of rises and the highest 4 -week moving average this year. Bloomie reckons this trend is hitting confidence, the biggest fall in a year (though still well above the last few years): The Bloomberg Consumer Comfort Index declined to minus 35.8 from minus 31.4 the previous week. So, we may also be setting up for a consecutively weak BLS payroll number on May 4th. Still, from a week or so ago, March retail sales were still moving at a ripping 0.8% month on month and 6.5% year on year, though that may now be old news. More to the point, the rally in the Dow last night was driven by one data point above all others, pending home sales, which beat the street handsomely:...

We are much closer to a bottom in US house prices, but the experience of Japan suggests strongly that looking for a bottom in such markets is itself a mistake. Prices eventually flatten out sure, and stay flat. If the new normal means anything it is surely that asset prices will be determined by wider investment, real income and productivity gains, not leveraging up!

9--Argentina partially re-nationalizes YPF oil company, WSWS

Excerpt: Last week, Argentina’s president, Cristina Fernandez de Kirchner, announced that her government was expropriating 51 percent of the formerly state-owned oil company YPF from its Spanish owner Repsol. The announcement provoked denunciations and threats from Spanish and European governments and corporations, along with recriminations in the Western media. It also evoked praise from petty-bourgeois “left” elements in Latin America and elsewhere.... Indeed, the reassertion of state control over the company has overwhelming support in Argentina, with polls showing 80 percent of the population in favor of the move. Similar percentages opposed its privatization in the 1990s under the previous Peronist government of President Carlos Menem. The sell-off of the company along with a host of other state-owned enterprises was the centerpiece of a neo-liberal policy backed by the International Monetary Fund that led to a sharp increase in unemployment and poverty for the Argentine working class... Fernandez and her aides have blamed the crisis on Repsol’s “looting” of YPF, including paying out the vast bulk of the company’s profits in dividends to shareholders, failing to invest in production, and not increasing output to meet expanding demand

10--Death of a Fairy Tale, by Paul Krugman, Commentary, NY Times:

This was the month the confidence fairy died. For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets. Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen.

Why? Confidence! ... Or as I put it..., the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue. The good news is that many influential people are finally admitting that the confidence fairy was a myth. ... Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity Fran├žois Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. ...

The question now is what they’re going to do about it. And the answer, I fear, is: not much. For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs. Now, claims that only austerity can pacify bond markets have proved ... wrong... And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better. But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure...,

on the grounds that any relaxation of austerity would cause borrowing costs to soar. So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

 11--Argentina: The Rise of NeoCorporatism, economonitor 1

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