Sunday, December 8, 2013

Today's Links

1---Current economic conditions, econbrowser

  While the expenditures-based measure (the one officially reported) registered real GDP growth of 3.6%, the income-based measure suggests growth was in fact only 1.4%....

There is nevertheless clearly still a lot of slack in the U.S. economy, with PCE inflation over the last year of only 0.7%.....(personal consumption expenditure)...

But there have been some other indicators that are unambiguously positive. The Institute for Supply Management released a value for their manufacturing PMI that was up to 57.3, an unusually high value for that indicator indicating widespread reports of improving business conditions....

The most recent data on new housing permits and unfilled orders for new durable goods also paint a picture of a recovery that continues to gain momentum...

On Thursday the BEA announced its revised estimate of U.S. real GDP. The initial estimate had been that the economy grew at a 2.8% annual rate in Q3, but that has now been revised up to 3.6%. Unfortunately, most of the gain came in the form of more inventory accumulation. Fourth-quarter production was higher than originally estimated, but final sales are now claimed to have grown at only a 1.9% annual rate, a little weaker than the original 2.0% estimate....

In principle, we should be able to arrive at the same magnitude by adding up the incomes earned by all Americans. In practice, when the BEA collects data from different sources, the estimates turn out to be different, and the difference between the expenditure-based estimate and the income-based estimate is simply described as a "statistical discrepancy." Since we don't have a good theory for what the statistical discrepancy represents, it's a good idea to look at both measures. While the expenditures-based measure (the one officially reported) registered real GDP growth of 3.6%, the income-based measure suggests growth was in fact only 1.4%....

2---Pension Theft: Class War Goes to the Next Stage, Dean Baker

This is not close to the typical pension in California or anywhere else. In the case of Detroit, the typical pension is a bit more than $18,000 a year. In Illinois it's around $33,000 a year. It's important to note that most Illinois workers do not get Social Security, so this is their whole retirement income.

The other item generally missing from the coverage is that these pensions are part of workers' pay. Controlling for education and experience, public-sector pay is somewhat lower than the pay of private-sector workers. The more generous pension and health care benefits that most public-sector workers enjoy are offsetting lower wages.

The pensions are not gifts bestowed by the government on workers; they are part of workers' pay. When the city of Detroit or state of Illinois cut workers' pensions, they are in effect saying that they are not going to pay workers for the work they did.

3---EXPORTING DEFLATION: Why Japan May Matter More Than Tapering, zero hedge

While the U.S. cuts back on stimulus, Japan is likely to move in the opposite direction, increasing its own stimulus very soon. That'll be on top of Japan's existing QE which is the equivalent of 3x that of the U.S. when compared to GDP. The reason for even more QE is that the grand experiment known as Abenomics, almost one year old, has been a failure. It hasn't lifted key components such as core inflation, wages or business spending.

Increased Japanese QE will mean a lower yen, potentially much lower. If right, that'll have significant consequences. Among other things, it'll increase the risks of exporting rivals fighting back by depreciating their own currencies and embracing a currency/trade war. Second, it's likely to raise the ire of exporting competitor, China, and raise already high tensions in the South China Sea. If more stimulus fails to lift the Japanese economy, Abe will be desperate to maintain his credibility and a fight with China could just suit his ends. Hence why Japan matters. Perhaps more than tapering.

To taper or not to taper?

It may be the time when the Fed stops with all the flirting and finally starts to cut bond purchases
To understand the potential consequences of tapering, let's do a quick recap of what QE is and what it's been trying to achieve. The Fed has put in place two key policies since the financial crisis:

  1. Lower short-term interest rates towards zero.
  2. Implement QE, involving the purchase of longer term bonds.

The Fed and other central banks have done this to achieve several ends:

  • Suppress bond yields and thereby interest rates (check).
  • Buying the bonds from banks and other institutions who can use that money to lend out and therefore stimulate the economy (hasn't happened).
  • The printed money also helping banks to repair their balance sheets, devastated by 2008 (check, at least in the U.S.)
  • Keeping short-term rates near zero means pitiful bank deposit rates and tempting depositors into higher yielding but higher risk investments (check).
  • Rising asset prices inducing the wealth effect, where people feel wealthier and start to spend again (minimal success, but let's wait and see).
  • Keeping interest rates below GDP rates, thereby reducing the developed world's large debt to GDP ratios (slow progress given sluggish GDP).
Increased Japanese QE coming soon

On December 16 last year, Shinzo Abe came to power and promised the most audacious economic reforms in Japan since the 1930s in order to arrest a 23-year deflationary slump. Almost a year on, the reforms now known as Abenomics can be judged a failure. This failure may soon result in policies which could have a greater impact on markets in 2014 than the much talked about taper.

Initially Abenomics involved a strategy with the so-called three arrows. The first arrow was a dramatic expansion in the central bank's balance sheet to lift inflation to a 2% target rate. The second arrow involved a temporary fiscal support program. While the third was structural reform to the economy.

The first arrow came with much fanfare and resulted in a large depreciation of the yen. Yen devaluation wasn't a stated aim but was certainly a target given a lower currency is needed to lift inflation. The big problem is that inflation has risen for the wrong reasons via higher import costs. Core inflation is flat as wages have barely moved....
More QE should result in more money heading offshore and a subsequent weakening of the yen.
Impact on the rest of the world
If a much lower yen is on the cards, it'll have the following consequences:
  • Japan will export even more deflation to the world when it least needs it. By this I mean that a lower yen allows Japanese exporters to price their products more competitively vis-vis other exporters. This would raise already heightened global deflationary risks.
  • It'll put other exporting powerhouses, such as Germany, China and South Korea, in a less competitive position, increasing the odds of a backlash via currency war. The yen at 115 or 120/dollar would change the ballgame and increase the risks of this occurring.
  • Any currency war risks a trade war. Historically, trade wars reduce global trade, sometimes significantly.
  • Putting China in a weakened exporting position will possibly increase tensions in the South China Sea. Tensions are already high and a lower yen won't help the cause.
  • You don't have to have a wild imagination to see that if Japan's experiment doesn't help lift inflation and the economy, a desperate, nationalist Prime Minister may just be more inclined to take the fight up to China.

4---Japan’s biggest export? Deflation, marketwatch
Commentary: BOJ exports its problems, global balances shift

Japan might be a hobbled economy but it is still the third largest in the world, accounting for almost one tenth of world GDP. So when the Bank of Japan prints as much yen as this, it provokes a worldwide adjustment in relative prices. Electronics producers in South Korea, Taiwan and, to an increasing degree, China, automatically face a price disadvantage versus their Japanese competitors, for example. It also means that Japanese consumers have a diminished capacity to purchase good made elsewhere. ...

The upshot is that the Fed and the BOJ’s printing presses will keep the euro stronger than it needs to be, further strangling European producers, while the rest of the world freeloads on the ECB’s paralysis.

5---Ghost of 1929 crash reappears, marketwatch

The Bernanke-led Fed’s enthusiasm for avoiding the mistakes that worsened the Great Depression—- a mistimed tightening of monetary conditions — has led him to repeat the mistakes that caused it in the first place: Namely, continuing to lower interest rates via Treasury bond purchases well into an economic expansion and bull market justified by low-to-no inflation

6---Low wages are stalling America’s economy, Rex Nutting

Opinion: Stagnant wages hold back consumption and investment

American workers should get a raise. They deserve a raise, and the economy needs it, too.
Low wages are holding us back. Since the official end of the recession more than four years ago, the average wage has barely kept up with inflation, even though workers are more productive and are creating more profits for the owners they work for.

ALSO SEE: Why Diana Furchtgott-Roth thinks the inequality problem is overblown.

Since June 2009, real average weekly earnings have increased 0.3% per year , even as productivity has increased 1.5% per year. Most of the income gains have gone to the highest paid workers, including the bosses. Real median weekly wages have actually declined 0.8% per year since 2009.

Slow income growth means consumer spending has also grown slowly. Most households are still trying to avoid taking on too much debt (like they did in the 2000s), so they don’t have the purchasing power to buy the additional goods and services that the economy could be producing.

If those additional goods and services can’t be sold, then businesses won’t hire the workers who would produce them, nor will they invest in the buildings or equipment that would be needed.

The U.S. economy relies on consumer spending to drive growth, but consumption is stuck in second gear. With consumer spending growing at less than 2%, it is no surprise that gross domestic product is also stuck in the 2% range.

Stagnant wage growth isn’t a new trend — it began in the late 1970s — but the Great Recession and its slow aftermath have amplified it. While corporate profits are near a record high as a share of national income, the workers’ share has dropped to the lowest level in nearly 60 years.

After adjusting for inflation, median wages are no higher than they were in 1979.

The freeze in workers’ earnings since the 1970s has been caused by many factors, including technological change, increased competition from workers in countries that pay lower wages, and reduced bargaining power due to the decline of unions and the ascension of corporate power. And more recently, wages have been depressed by the high unemployment rate. Read more about the 40-year slump.
The problem of stagnant wages isn’t just about the very bottom of the ladder, however. It’s not just about wages at McDonald’s /quotes/zigman/233369/delayed/quotes/nls/mcd MCD +1.44%  and Wal-Mart /quotes/zigman/245476/delayed/quotes/nls/wmt WMT +0.63%  . Slow wage growth is the rule for the bottom 75%. It’s not that the working poor are falling further behind the middle class; it’s that everybody else is falling behind the top 5% or 10%. ...

Corporations are also sitting on a pile of cash. They’ve increased dividend payments modestly, but are still retaining about half the profits they earn. They aren’t plowing the cash back into the business; net investment has fallen to the lowest levels since the Great Depression of the 1930s...
The only way to make the economic pie bigger is to give workers a larger and fairer share, in line with what they earned in the golden days of the American economy of the ‘50s, ‘60s and ‘70s.

Workers, unfortunately, don’t have the economic or political power to get it. And so we are stuck in a slow-growing and increasingly inequitable world

7---Deflation is Crushing QE right now, Forbes

the Japanese yen has reached four month lows versus the U.S. dollar. Japan is printing an enormous amount of money in a bid to end its 20-year affair with deflation. It wants inflation at all costs and the yen is collateral damage. Lowering the yen increases the competitiveness of Japanese exporters, resulting in more cars, robots and flat-panel TVs being shipped abroad. And that means Japan is exporting deflation, and resultant lower prices in these goods, to the rest of the world. Key competitors in China and South Korea are starting to fight back but are being hampered by their strong currencies versus the yen....

Disinflation reigns
I’ve spoken of deflation so far, but it’s really disinflation (falling inflation) that’s occurring. A host of recent data suggests that this remains the primary threat to global economies, including:
1) The U.S. inflation rate fell to 1% annualised in October, the lowest figure in almost 50 years, excluding the 2008 financial crisis. Inflation in America peaked in 2011 and remains way below the Fed’s 2% target rate. The chart below is courtesy of Business Insider.
2) U.S. bank loan growth is showing a similar slowdown. Stimulus isn’t resulting in increased lending and therefore isn’t filtering through to the real economy. There’s just not enough end-demand for loans as businesses and consumers remain cautious about taking on debt....

Why Japan’s largely to blame
Japan is back on the radar of investors given a breakout in its stock market and the yen reaching a four-month low. There’s a larger story brewing though. And that’s growing evidence that the grand experiment of Abenomics has been a complete and utter failure.
Recent third quarter GDP of 1.9% was half the level of the second quarter. More importantly, personal incomes have barely budged while the cost of living has soared, thanks to the falling yen. This week’s trade figures showed imports surging 26% year-on-year (YoY) in October, versus 19% expected, due to soaring fuel imports. This overshadowed exports rising 19% YoY, more than analyst forecasts. Consequently, Japan’s trade balance (difference between exports and imports) fell to the third lowest level on record.

8---PCE drops below 1 percent for year, No inflation, no growth, DOA economy, Bloomberg

In a separate government report yesterday, the price index tied to consumer spending, a measure of inflation tracked by Fed policy makers, increased 0.7 percent in October from a year earlier. It was the least since October 2009. The central bank’s goal is to keep prices increasing at around 2 percent.
Core prices, which exclude the volatile food and fuel categories, rose 0.1 percent from September and were up 1.1 percent from October 2012, the data showed

9---QE Fail, PCE in doldrums, doug short

The latest Headline PCE price index year-over-year (YoY) rate of 0.74% is a decline from last month’s adjusted 0.95% (previously 0.92%). The Core PCE index of 1.11% is fractionally lower than last month’s adjusted 1.22% (previously 1.19%).
As I pointed out last month, the general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has consistently moved in the wrong direction since early 2012 and, after flatling since May, it has now slipped lower....
Click to View
Become Inspired to Give. Watch Now.
The adjacent thumbnail gives us a close-up of the trend in Core PCE since January 2012. 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 12 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.
First, part of the reason the unemployed declined is due to 377,000 Federal workers no longer counted as unemployed due to being temporarily laid off.   ...
The most frightening statistic of the household survey is the labor participation rate.  The labor participation rate increased by 0.2 percentage points to 63%....
 if we take October and November together we get a 93,000 gain in employed persons, which is probably the truth of the real gain in employed as the shutdown clearly threw a monkey wrench into the monthly figures.  The cause of the massive increase is not new entrants to the ranks of the employed as those figures dropped by -58,000 for the month. ...
Those unemployed stands at 10,907,000, a -365,000 drop from last month and a main reason why the unemployment rate declined by 0.3 percentage points in a month
not in labor force

The most frightening statistic of the household survey is the labor participation rate.  The labor participation rate increased by 0.2 percentage points to 63%.  While this is an improvement from last month's record low, the labor participation rate is still down 0.6 percentage points from a year ago.  This implies that those who were dropped from the labor force are staying out of the labor force in large numbers.  For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age.  In other words, the dramatic increase of those not in the labor force cannot be everyone retiring who is age 55 and over.

labor participation rate

The civilian labor force, which consists of the employed and the officially unemployed, dramatically increased by 455 thousand in a month...
Generally speaking the employment to population ratio has been hovering around 1983 record lows for years now and in 1983 there were more families with a stay at home mom, with wages high enough for only one adult to work and support a family.   The low ratio implies there are many people who could be part of the labor force are not anymore, as shown in the graph below.

civilian pop to employment ratio

There are millions of people who need full-time jobs with benefits who can't get decent career oriented positions.  Those forced into part time work is now 7,719,000...

The long term unemployed, or those unemployed for 27 weeks and over, didn't really budge and stands at 4,066,000 people.   The long term unemployed are the crisis of our time and extended unemployment benefits are out to run out if not renewed for 2014.  If we see the long term unemployed actually get jobs, that is when we know the labor market is returning to health.

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