Overall, the global economic reports remain in the red, but the shockingly bad reports are fading.

TO BE NOTED: From News N Economics:

"World Economic Reports (May 14-21): still bad, but flood of shocking reports ebbs

Thursday, May 21, 2009

This week was a little light on global data. Given that the trade data is looking "better" in some areas (which really means not falling as quickly in some cases, see this post and this post), it is likely that Q1 will be the worse quarter for many Asian economies who rely heavily on exports for growth. It's bad, though, with Japan, Taiwan, and Singapore all falling 9% or more over the year! Inflation is slowing substantially in some areas, negative in others. And finally, it looks like US capital markets got a small bump in March, as foreigners returned to risk. Overall, the global economic reports remain in the red, but the shockingly bad reports are fading.

GDP in Asia: waiting to exhale

The chart illustrate annual GDP growth through Q1 2009 for Hong Kong, Japan, Taiwan, Indonesia, and Singapore. Looks bad, but Indonesia is showing some resilience, although GDP is now growing at its slowest pace since January 2004.

More scary inflation charts: Disinflationary pressures strong - deflation in some

The chart illustrates annual inflation across key economies through April 2009. The UK is an interesting case: the British pound has been taking a beating and pressuring prices, and the consumer price index is holding on (can't say the same for the retail price index) better than in other economies (US inflation now negative for two consecutive months). Today, though, S&P downgraded the UK outlook to negative, and the sterling took a hit; wonder what that will do to prices?

Amid a calm developing in capital markets, foreign investors returning to U.S.-denominated risk

The chart illustrates the 12-month rolling sum of net capital inflows through March 2009, as reported by the Treasury International Capital data (TIC). Good thing for the Treasury, which is planning on running $trillion deficits in coming years, that foreigners might buy their notes. In March, foreigners showed a slight shift toward risk, with net long-term flows growing for the first time over the year since the end of 2008 (second time over the month).

Auf Wiedersehen, Rebecca Wilder"

The chart illustrates price-rent ratios for some of the most notorious housing bubbles - Ireland, Spain, the UK, and the US - indexed to 1997

TO BE NOTED: From News N Economics:

"Housing bubbles around the world: looks pretty bad

Saturday, May 16, 2009

Housing bubbles around the world (click to enlarge):

The chart illustrates price-rent ratios for some of the most notorious housing bubbles - Ireland, Spain, the UK, and the US - indexed to 1997. The price-rent ratio can be compared to a price-earnings, or even better a price-dividend, ratio in finance. It measures the relative value of the asset: the price of the asset (purchase price of a home) divided by its flow of fundamental value (the value of having a roof over your head). As the price-rent ratio grows, the market value moves away from its fundamental value.

The bubbles have been extreme, and there is probably still some downward price momentum left in the pipeline for many of these markets. Ireland's housing market, while having experienced the biggest relative bubble, has seen its price-rent ratio rise since Q3 2008. Crashing economic fundamentals have driven down rents (the denominator), and likewise the relative value of owning a home.

I included the German price-rent ratio to show that housing bubbles are not uniformly the root cause of economic decline. The German housing market saw a bump early during the reunification years; but currently, it's falling exports brought on by anemic global demand (US demand to be sure) that caused the German economy to contract by 3.8% in Q1 2009. And for those of you who think in annualized terms (the European Commission releases the quarter on quarter growth rates), that's a 14.3% decline. Ouch!

Rebecca Wilder"

This week, the hard economic data reminds us that the global recession is ongoing

TO BE NOTED: From News N Economics:

"World Economic Reports (May 8-15): still heading down, but "not as fast" story gaining traction

Friday, May 15, 2009

This week, the hard economic data reminds us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation gets a small energy bump but still down; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several the "green shoot" survey reports (see last week's World Economic Reports).

Industrial Production: Still heading down, but at a slower rate

The chart illustrates the industrial production index for Germany and the UK (seasonally adjusted), and the growth rate for Malaysia and India (to adjust for seasonal variations) through March 2009. The rate of decline is slowing in Germany - actually, Germany's index went unchanged over the month - and the UK, improving over the year in Malaysia, but still heading down in India. A stabilization in the industrial sector may be afoot: the cliff diving is likely complete.

Exports: Same as industrial production...stabilization?

The chart illustrates annual export growth through March for Canada, Germany, Malaysia, and the US, and through April for China. Although China, Malaysia, and Canada turned down on an annual basis, the precipitous decline seems to have passed. We look for a trend to show stabilization.

Retail Sales: Struggling
The chart illustrates annual retail sales growth through April for China and the US, and through March for Singapore. Retail sales are struggling to make way. We wait to see if the various stimulus packages will get consumers back to the stores and auto dealerships; but let's not hold our breath quite yet.

Inflation: Energy and food prices create some volatility

The chart illustrates annual inflation through April 2009. Clearly, the momentum is down on a sharp drawback in aggregate demand. However, the recent bump in energy and food is creating some volatility (some upward momentum against the downward pressure). Norway is experiencing stronger-than-expected inflation, as the economy fairs better than others; but don't worry, inflation will probably fall, too.

The headline of the day: Eurozone economy took a dive in Q1

The chart compares Eurozone GDP to US GDP: ironic that the US is the epicenter of the global economic crisis,; was able to pass on the pain simply through trade flows; and now foreign economies take a sharper U-turn.

Overall, the global economic decline appears to be slowing; however, the recovery is still tentative.

Rebecca Wilder"

The Fed was "talked" into extending the term-length of eligible TALF loans in order accommodate the CMBS market

TO BE NOTED: From News N Economics:

"The Fed adds CMBS to TALF

Friday, May 1, 2009

This was expected. From what I hear, the CMBS market has been going haywire lately - investors trying to get ahead of the Fed's announcement:

The Federal Reserve Board on Friday announced that, starting in June, commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF).

The CMBS market came to a standstill in mid-2008. The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties. CMBS accounted for almost half of new commercial mortgage originations in 2007.
...

The Board also authorized TALF loans with maturities of five years. Currently, all TALF loans have maturities of three years. TALF loans with five-year maturities will be available for the June funding to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration.

The Fed was "talked" into extending the term-length of eligible TALF loans in order accommodate the CMBS market. The duration of commercial real estate loans are typical longer other types of loans.

It should be noted that by extending the term of TALF loans, the Fed's exit strategy just got a little more hazy. If inflation pressures start to turn around, which is not expected for at least a year or two out, the Fed will not be able to unwind the longer-term TALF funds. For this reason, I expect that the Fed will move a little more slowly and cautiously with the TALF prgram than it has with its other liquidity programs (like the MBS program, TAF, TSLF, etc).

Rebecca Wilder"

survey results suggest that further tightening is becoming less widespread

TO BE NOTED: From News N Economics:

"The worst of the credit crisis is likely behind us, say key central banks

Friday, May 1, 2009

Together, global senior loan officer surveys tell the following story: the worst of the credit crunch, at least in commercial banking, is likely behind us. Key central banks - the Bank of Canada (BoC), the Bank of England (BoE), and the European Central Bank (ECB) - report that Q1 2009 credit conditions in their respective banking sectors are generally tightening; however signs of stabilization are emerging: fewer banks are reporting to have tightened. The Bank of Japan (BoJ) reports that credit standards are generally easing somewhat; however, the demand for lending is likely the limiting factor for credit flow in Japan.

The ECB: showing signs of stabilization for household and firm lending

From the ECB's survey report:

The results of the April 2009 bank lending survey show that in the first quarter of 2009 the net percentage of banks reporting a tightening of credit standards on loans and credit lines to enterprises was 43%, which – while still reflecting a pronounced further net tightening – was 21 percentage points lower than in the fourth quarter of 2008. This could point to some stabilisation of the current tightening cycle. For the second quarter of 2009, the banks expect a further reduction of the overall net tightening to 28%.

The BoC: Lending standards still tight, but less widespread

From the BoC's survey report:

Although overall lending conditions continued to tighten, the tightening was somewhat less widespread than in the preceding quarter.

The BoE: Seeing some light, overall standards on corporate lending actually eased...

From the BoE's survey report:

In the three months to mid-March, a net balance of lenders reported that they had reduced the availability of credit to households. Contrary to expectations expressed in the 2008 Q4 survey, a small net balance of lenders reported increased lending to the corporate sector over the past three months. As in previous surveys, concerns about the economic outlook, reduced appetite for risk and falling collateral values had borne down on credit availability.

And the BoJ: Easing somewhat across most loan types

The BoJ's survey report indicates that in the first quarter of 2009 net, lending standards to large firms tightened somewhat, while those to medium-sized firms eased somewhat. Small firm and household lending standards eased somewhat. However, the outlook for small firm and household loans suggests that less easing is on the horizon. Note: the BoJ information can be found in question 7. of the survey.

In Japan, the primary problem in the bank lending space - the limiting factor according to the survey - is not the standards, but the weakening demand for loans (see question 1 of the survey and my previous post).

Overall, banking standards remain tight and are tightening in net across key economies; however, the survey results suggest that further tightening is becoming less widespread. I imagine that the worst of the global credit crunch is now behind us. The Fed's senior loan officer survey report for Q1 2009 will release soon; and I expect it to tell a similar story.

Rebecca Wilder"

however, the economic decline is ongoing

TO BE NOTED: From News N Economics:

"World economic reports (April 23-30): the good, the bad, and the ugly

Thursday, April 30, 2009

The 2009 global economy is still contracting quickly, as shown by key Q1 GDP reports. However, there are some glimmers of hope that are emerging, like industrial production in Japan got a bump in March and German and U.S. survey reports show some signs of relief. However, the light at the end of the tunnel is still very dim - even the positive indicators remain very much in negative territory.

The good: Japan's Industrial Production rose 1.6% in March

The chart illustrates the preliminary figures for Japanese Industrial Production through March 2009. The 1.5% bump is certainly a relief; however, production levels remain down over 35% since last year. Baby steps, I suppose.

More good: Survey reports in Germany and the U.S. rebound

The chart illustrates the Germany Ifo business climate survey and the Conference Board's consumer confidence survey through April. The German Ifo survey rose to its highest level in 5 months. However, businesses contend that inventory liquidation is imminent, and therefore, new production is not. Likewise, the U.S. consumer confidence surve surged in April, consistent with yesterday's reported 2.2% gain in consumer spending. However, it is prudent to note that this survey is still very low, and so too is consumer demand.

The bad: Annual export growth remains on red alert

The chart illustrates annual export growth through March for Switzerland and Thailand, and through February for the Philippines. The noteworthy observation here is: that annual export growth slowed in Switzerland and the Philippines, which is luke warm news at best, given that their growth rates are double digit negative.

The ugly: GDP falling precipitously in Q1 2009

The chart illustrates GDP growth in Q1 2009 (on a year over year basis, which means Q1 2008 to Q1 2009, not quarter over quarter, or Q4 2008 to Q1 2009...easier to compare) in South Korea, the U.S., and the U.K. The figure speaks for itself: the economic contraction worsened in Q1 2009. Each economy is setting records, especially in Korea.

Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.

Rebecca Wilder"

as prices fall workers are willing to accept lower wages. This is the infamous wage-price spiral

TO BE NOTED: From News N Economics:

"Got wages?

Wednesday, April 29, 2009

The common theme among the following articles is: wage cuts.

Tentative Nod to a Pay Cut at The Times:

The Newspaper Guild, the union that represents newsroom and certain other employees of The New York Times, tentatively agreed Tuesday to a 5 percent salary cut that had been proposed by management. The pay cut, which has already been imposed on nonunion employees of the newspaper, will go to a full vote of the union membership next week. The pay reduction, which began for nonunion workers on April 1, would end on Dec. 31, 2009, the union said.

More Job Reductions Planned at Sotheby’s:

Salaries will be reduced for top employees, too, and the company plans unpaid furloughs as well as a reduction in pension contributions for those working in the United States.

NC governor cuts pay of state employees, teachers:

North Carolina Gov. Beverly Perdue on Tuesday ordered a pay cut for all state workers in May and June equal to a half-percent of their annual salary as worsening tax collections force her to find about $1 billion more in savings before the end of the budget year in June. (Note: many states are cutting pay to accommodate record revenue loss)

Hundreds of Danvers employees accept salary freeze:

The employees make up seven of the town's 12 labor unions. Their agreement to forgo an approximate 3 percent raise in the coming fiscal year means no layoffs in their respective collective bargaining units as Town Manager Wayne Marquis scrambles to close a $900,000 budget shortfall.

And in Singapore, Layoffs remain companies' cut of last resort:

This time around, even before the National Wages Council (NWC) released revised guidelines in January, many employers had already moved to reduce their wage bills, and staved off (or maybe delayed) the need to wield the jobs guillotine.

The unemployment rate was 8.5% in March, up 3.4% since just last year (when the U.S. was already in a recession). Workers are desperate and willing to accept the salary freezes and/or wage cuts. As costs (wages) come down, firms are better able to reduce final goods prices in order to sell their product as demand for their product falls. But then, as prices fall workers are willing to accept lower wages. This is the infamous wage-price spiral.

Anecdotal evidence suggests that wages and salaries are either falling or frozen - at least mine was in 2009 - but certainly not rising. Although the chart above shows that average hourly earnings are not falling yet, the annual rate of growth is certainly slowing. Wages: just another signal that prices are going down.

Rebecca Wilder"

driven down saving yields

From News N Economics:

"Fed measures killed the yield on household saving

Saturday, April 25, 2009

A reader of this blog expressed concern about the effects of the Fed's massive expansionary efforts on the value of household saving. Specifically, the Fed slashed its fed funds target 510 bps from 5.25% in September 2007 to 0%-0.25% in December 2008, which has likewise driven down saving yields. Tom Petruno at the LA Times wrote a piece to this effect:

Who's really bailing out the banks?

Taxpayers, for sure. But the largely unsung victims of the financial system rescue are loyal bank depositors -- especially older people who have relied on interest income from savings certificates to live.

To save the banks from soaring loan losses, the Federal Reserve did what it always does when the industry gets into trouble: Policymakers hacked their benchmark short-term interest rate, which in turn pulled down all other short-term rates, including on savings vehicles.

But this time the Fed went to rock-bottom on rates. In December, the central bank declared that it would allow its benchmark rate to fall as low as zero.

Savers still are paying the price for that gift to the banks. Average rates on certificates of deposit nationwide have continued to slide this year, according to rate tracker Informa Research Services in Calabasas.

The average yield on a six-month CD fell to 1.27% this week, down from 1.86% on Jan. 1 and 2.24% a year ago. Anyone who has a CD maturing soon should be prepared for serious sticker shock.

Banks have been able to continue whittling down savings yields because the industry overall is flush with cash -- not just from the Fed's efforts to pump unprecedented sums into the financial system, but also because the events of the last year have left many people too afraid to keep their money in anything but a federally insured bank account. At least you know your principal is guaranteed.

Even as short-term interest rates have dived since the financial crisis exploded in September, the total sum in CDs under $100,000, as well as savings deposits and checking accounts, has soared by $507 billion, to $6.07 trillion, according to data compiled by the Fed.

RW: In spite of the rock bottom rates on saving accounts, CDs, and money market mutual funds, households continue to flock to the safety of these insured funds. And in response to increasing demand for saving instruments - the personal saving rate rose from 0.3% in February 2008 to 4.2% one year later - banks will draw down yields further.

Buy what Tom doesn't' say is that rock-bottom rates are here to stay. According to the FOMC statement:

"economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

And how long is that? Well, recently the Bank of Canada, whose interest rate policy tends to move in sync with the Fed's, released its monetary policy statmement. The BoC cut its overnight rate target to 0.25%; but more importantly, it made a definitive statement of how long might be an extended period:

"Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

It looks like saving rates will be low for a while, folks. The massive economic contraction is dragging down prices, and the IMF is forecasting U.S. deflation throughout 2010 (see Table A5 in the World Economic Update). Using the BoC's statement as a proxy for extended period, the near-zero federal funds target will hold saving yields low until June 2010, fourteen more months from now.

Disclaimer: To me, deflation remains to be a mechanism to clear markets rather than a macroeconomic hindrance. And furthermore, the IMF's outlook is very gloomy. Clearly, with 0% growth in 2010 for both the U.S. and the sum of advanced economies, the IMF expects an onslaught of defaults that are already in the pipeline, defaults that are not currently priced into market activity. We will see, though. The World Bank is projecting 2% U.S. growth in 2010.

Rebecca Wilder"

Me:

Don said...

"It looks like saving rates will be low for a while, folks."

I hate to be the person always sounding paradoxical, but the response from people that we want is to for them to find the low rates unacceptable and to start to go looking for riskier and higher yielding investments. That's how you conquer the fear and aversion to risk.

The added risk is, in fact, investment in forward looking projects that are unusually scary in a downturn. Presumably, that's the rationale for government investing during a downturn. Those of us who like private investment better than government would prefer individuals to start accepting more risk in investment.

Since many businesses don't make it, investing under our system is always risky. That's why we need risk. I'm not an investor, but I'd look into corporate bonds.

Don the libertarian Democrat

April 25, 2009 11:54 AM"

asset purchase programs (MBS and Treasuries) more like insurance against rising real rates than true stimulus in the housing market

TO BE NOTED: From News N Economics:

"Asset purchase programs Update

Thursday, April 23, 2009

The Fed has been busy these last few weeks, acquiring its promised agency MBS in large quantities and jumpstarting its Treasury purchase program. By my calculations, total government asset accumulation totals $572 billion to date.

• The Fed purchased $381 billion in agency MBS at roughly $30 billion a week (since the announcement to purchase an extra $750 billion in agency-backed MBS on March 18). At this rate, the Fed will buy the announced $1.25 trillion by December 2009.
• The Fed acquired $65.2 billion in Treasuries bonds and notes, and $1.5 billion in TIPS since March. The Fed is buying the full length of the yield curve, maturity dates from 2009-2039. Interestingly, the Fed purchased TIPS last week. To me, further acquisition of TIPS would signal the Fed’s upward inflation bias – pulling out later than earlier.
• The Treasury continues its smaller but still active MBS purchase program, holding $124.3 billion as of March 2009. The Treasury’s flow of MBS is reported only monthly and at a lag, so it may be holding more.

The Fed and Treasury efforts are translating into lower mortgage rates; the 30-yr conventional mortgage rate fell 0.43% to 4.82% since February. However, the downward momentum was discrete, occurring fully in the wake of the Fed’s announcement to buy Treasuries. Furthermore, prices fell 0.1% in March, offsetting some of the downward momentum on real mortgage rates. Price declines are likely to catch up and even surpass nominal mortgage declines, leaving real mortgage rates unchanged, perhaps even up.

In reality, the deflationary (disinflationary) scenario that is typical of a recession of this magnitude makes the > $1.55 trillion Fed and Treasury asset purchase programs (MBS and Treasuries) more like insurance against rising real rates than true stimulus in the housing market, and fiscal measures are key. It seems that the fiscal stimulus will provide a floor under the economy, so that with stable real mortgage rates and record price declines, home sales have a real chance of bottoming in a few months, if they have not already.

Rebecca Wilder"

Policy, Policy, Policy. That is what this cycle is all about.

TO BE NOTED: From News N Economics:

"World economic reports (April 16-23): expected to slide through 2009

Thursday, April 23, 2009

Today's weekly reports are slightly more positive than last week. However, I avoided the trade reports all together, which undoubtedly would have dragged down the sentiment. Although there are a growing number of positive reports out there, global economies are still very much in the red zone, -1.3% in 2009 according to the IMF.

China's retail sales rebound in March

China's retail sales grew 14.7% in March 2009. Much of the draw on retail sales, measured in current prices, has been driven down by the slowing - now negative - rate of inflation (see next chart); however, weak demand surely played its part as well. The March rebound is one of the numerous pointing to a bottom in the Chinese recession.

Inflation continues to fall; some areas go negative

Inflation around the world is low and going negative in some areas (China). This is primarily an energy story, since core inflation, growth in all prices except food and energy, in Canada and the Eurozone are still rising at a 2% and 1.5%, respectively. However, prices move at a lag, and eventually weak demand will drag down core inflation as well.

According to some measures, home value in the UK and US are stabilizing

In April, UK home values grew for the third consecutive month, slowing the annual rate of decline to -7.3%. In another report across the Atlantic, February US home values grew for the second consecutive month, slowing the annual decline to -6.5%. Amazingly, this gain in US home prices was not widely reported in the media. I'll take this as good news, but this is just two data points; and there are lots of reasons to think that home values will fall further (like the inventory of existing homes is still very elevated).

The FHFA index (this week's report) shows price movements on homes tied to conforming loans guaranteed by Fannie Mae and Freddie Mac. Therefore, it is missing much of the market tied to non-conforming loans; the S&P Case-Shiller index is thought to capture better the housing market as a whole since it includes homes tied to non-conforming loans. See this WSJ article for a broad description of the two indices. I imagine the true price is somewhere in betweeen the two.

The Bank of Canada reaches its "effective" lower bound

The Bank of Canada lowered its policy rate (the overnight rate) to just 0.25%, joining the near-zero lower bound club. The policy announcement reported that "the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual." The Wall Street Journal discusses the Bank of Canada's unprecedented statement that "the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

Policy, Policy, Policy. That is what this cycle is all about. From China to the U.S., and everywhere in between, central banks are pushing hard and governments are spending. However, in spite of the positive policy shifts, the IMF released this week its World Economic Outlook, where world growth, measured using purchasing-power parity (PPP) weights, is expected to contract 1.3% in 2009. If I had to choose, I'd go with the World Bank's forecast, which is -0.6% in 2009 on a PPP basis.

Rebecca Wilder

Posted by Rebecca Wilder

Consumers are proving to be much more resilient than previously expected

TO BE NOTED: From News N Economics:

"Adding to Altig's consumer spending dispute

Saturday, April 18, 2009

David Altig, senior vice president and research director at the Atlanta Fed, argues (hat tip, Mark Thoma) that a piece written in Economix on Tuesday (NY Times economics blog) is not, as David calls it, "that tight". Specifically, the sole purpose of the article was to highlight that the sustained retrenchment in consumer spending is a "historical oddity". And as David argues, it is not an oddity at all.

I agree with David: this Economix piece has its flaws and is definitely outdated (see last paragraph). In contrast, I don't agree with David's measure of cumulative PCE loss, which understates the impact of the shocks to consumer spending in the current cycle. Each indicator has its own cycle within the overall economic cycle; and the best measure of cumulative PCE loss is using the peak to trough of PCE, rather than the economic peak (the NBER dated peak, which David uses) to the PCE trough.

The chart illustrates the cumulative PCE loss using monthly data, as measured by the economic peak to PCE trough (blue) and by the peak and trough of PCE itself (red) over the last eight cycles (including this one). Normally, the different measures present almost identical results. With the exception of the current cycle, the biggest difference occurred in the 73-75 recession, a -0.2% differential.

However, this time it matters by a -0.6% differential. The cumulative PCE loss using the peak to trough PCE measure is -2.5% compared to that using the economic peak to PCE trough measure, -1.9%. PCE was rising through May 2008, five months after the peak of economic activity as defined by the NBER.

The PCE peak to trough paints a darker picture; one that puts this cycle on par with one of the bigger recessions, 1973-1975 (Note: I disagree with David's calculation of the 73-75 PCE loss; it appears to be too little).

One last thing: the Economix article is behind the times, even in the comment that the "sustained" consumer spending decline is an oddity. Consumers are proving to be much more resilient than previously expected. Currently, this PCE cycle is unlikely to set any records, not even that of the first time that PCE contracted for three consecutive quarters since 1947. By my estimates, March real PCE (to be released on April 30) needs to fall by more than $74.6 billion in order to post a third consecutive quarterly decline; that is unlikely.

Rebecca Wilder

Posted by Rebecca Wilder

There is no spinning the message, though, no strong trends of recovery have emerged.

TO BE NOTED: From News N Economics:

"World economic reports (April 8-15): some hope, but still shockingly bad

Every Wednesday or Thursday, I present the latest week's global economic reports to get a feel for world economic trends. This week's reports bring news of continued economic decline in key economies, i.e., Germany, and perhaps slight glimmers of hope for others, Malaysia. There is no spinning the message, though, no strong trends of recovery have emerged. Some highlights are:

• Annual import demand slumps. China's February report on annual import growth has not been totally rescinded.
• Inflation trends continue downward, except in Norway, whose annual inflation rate remains unchanged.
• Industrial production is a serious impediment to growth and jobs. Germany's industrial sector maintains its rapid decline, driven by stalled global trade.

Import slump is growing.

The chart illustrates import growth over the year through February 2009 for Germany, the U.S., and Canada and through March 2009 for China. Germany, the U.S., and Canada all marked new lows in import growth, falling in the range of 30% over the year (all levels are measured in $US). China's imports could not mimic the huge rebound that occurred in February, although the annual decline did not worsen too much, -25.1%. If the Chinese economy heats up a bit on massive stimulus, this would be good news for the rest of Asia, especially Japan.

Slack import demand signals anemic aggregate demand, which is dragging down prices around the world, especially those on energy and food.

The chart illustrates inflation in February and March of 2009 across France, Norway, Germany, and Sweden. Slack aggregate demand is dragging down inflation rates (disinflation). At least in the U.S., inflation is still an energy story; but eventually, the huge economic slack will drag down core prices, too.

Just out: the Bureau of Labor Statistics released its report on U.S. consumer price, which is still a mostly-energy story:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955. On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in March after rising 0.4 percent in February.

Industrial production in Malaysia improves slightly over the year, while that in Germany falls to new lows.

The chart illustrates annual industrial production growth in Malaysia, India, and Germany through February 2009. Germany's export sector is suffering and pulling industrial production down with it. No wonder Berlin-based DIW economic think tank forecasts that the German economy will contract by a massive 4.9% in 2009.

Unfortunately, the worst is yet to come. Unemployment continues its relentless surge.

The chart illustrates the unemployment rates in March of 2007, 2008, and 2009 across South Korea, Canada, Switzerland, and Australia. Clearly, the labor markets have taken a significant turn for the worse across the four economies. Although some seem to be falling faster (Switzerland, Canada, and Australia) than others (South Korea), there is likely more job loss in the pipeline.

Rebecca Wilder"

This week, economic reports around the world tell the story of an ongoing economic contraction

TO BE NOTED: From News N Economics:

"Economic reports around the world (April 1-7): still scary

Wednesday, April 8, 2009

This week, economic reports around the world tell the story of an ongoing economic contraction. Overall this week's reports suggest that there is still a lot for global policymakers to worry about.

EXPORT GROWTH IS STILL IN THE RED ZONE

The chart below illustrates monthly exports through March for South Korea and Taiwan, and through February for Malaysia and Indonesia (export numbers are not seasonally factored and listed in $US). Over the year the annual growth rates show ongoing weakness.

INFLATION FALLS - STILL MOSTLY ON ENERGY AND COMMODITIES....

The chart below illustrates annual inflation rates through March for Thailand, South Korea, Switzerland, and Taiwan. Serious weakness in global demand has dragged down energy and commodity prices, taking inflation to deflation in some cases. However, eventually this will pass through to core prices (prices ex energy and food) at a lag, and core inflation (which is still very positive in the US) will fall, too. Switzerland is now negative, -0.4%, and Taiwan and Thailand have experienced deflation for two and three consecutive months, respectively.


UNEMPLOYMENT IS WEAK IN THE EUROZONE AND THE US

The chart below illustrates the annual change in the unemployment rate for the Eurozone through February and the US through March. Both registered 8.5% unemployment rates in each respective month, or a serious deterioration in labor market conditions over the year.

The labor market is generally lagged to overall economic conditions - it takes a while for firms to internalize the economic situation, firing late and hiring late. So these economies may be recovering well-before the unemployment rate starts to decline (jobless recovery).

BUT IT DOES LOOK LIKE THE ECB IS WAY LATE

The chart below illustrates the policy rates for the European Central Bank (ECB) and the Bank of Japan (BoJ). The ECB cut by 25 bps to 1.25%, and the Bank of Japan left its rate unchanged at 0.1%. Given the previous chart, which illustrates the sharp decline in labor market conditions across the Eurozone, it seems that the ECB started to ease too late. Perhaps it is because wages are a little stickier in Europe.


ANOTHER OMINOUS SIGN OF WEAKNESS IN CONSUMER SPENDING

The chart below illustrates annual retail sales growth through February for Germany and Hong Kong. Hong Kong sales are clearly tumbling, falling 13.9% over the year. German retail sales growth, however, are quite volatile; it's 5.3% decline does not show any weakness beyond normal activity since early 2007. Interesting.

THE LANDSLIDE IN UK INDUSTRIAL PRODUCTION CONTINUES

The chart below illustrates UK industrial production in levels and its growth over the year. Nosedive. According to jka online blog, the sector breakdown was:

Consumer non durables, (-5%), textiles (-5.4%) and food and drink (-4%) were relatively lightly hit. Fuel products, the only sector showing growth up by just 1%.

Auf Wiedersehen, Rebecca Wilder"

Delinquency rates are surging, up 7.88% in the fourth quarter of 2008 (Q4 2008) according to the Mortgage Bankers Association (MBA)

TO BE NOTED: From News N Economics:

"Troubling statistics regarding federal mortgage relief programs

Saturday, April 4, 2009

Delinquency rates are surging, up 7.88% in the fourth quarter of 2008 (Q4 2008) according to the Mortgage Bankers Association (MBA). Both the quarterly change and the share of delinquencies are the highest since the series was first measured in 1972. Furthermore, troubling statistics at the Office of Thrift Supervision show that government interventions through Q4 2008 have failed to halt mortgage default rates.
The chart illustrates delinquency rates (percentage of delinquent loans out of loans outstanding) by loan type: subprime, prime, and total loans = subprime+prime+FHA+VA. Delinquency rates are making records across all loan types, with prime delinquencies hitting 5.1% in Q4 2008. The delinquency data include loans that are at least one payment overdue and not yet in the foreclosure process; clearly some of these loans will enter the foreclosure process soon.

Foreclosures in 2008 were up 225% since 2006, and according to the delinquency rates, that number is set to worsen in 2009.

The chart to the left illustrates the annual change in delinquency rates across all loan types for each quarter of 2008. Every loan type saw a significant increase in the pace of delinquencies in Q4 2008.

For prime lending, which accounts for 77% of total loan issuance (source: MBA), the annual surge in Q4 2008 was the greatest on record. And since the labor market has only worsened since Q4, 2.1 million jobs lost Jan-March 2009 versus 1.7 million jobs lost Oct-Dec 2008, the Q1 2009 prime delinquency rate has likely risen.

In response to the sharp increase in delinquencies and foreclosures, the government put in place several (seriously, I have lost count) programs to backstop mortgage defaults. However, a recent study at the Office of Thrift Supervision indicates that government mortgage relief programs have so far failed to halt mortgage defaults. From the LA Times:

In the last three months of 2008, most troubled borrowers were being offered not true modifications but breathers on payments followed by a resumption of the original mortgage terms, or even higher payments.

Moreover, many of the mortgages that were modified were falling back into default, according to the report, which also found that serious delinquencies continued to spiral to record levels in the fourth quarter.

We will see if the Obama Making Home Affordable Plan indeed provides aid to 7M-9M homeowners and prevents at least most of them from entering the foreclosure process. There are reasons to think that it will work, and reasons to think that it will not.

Rebecca Wilder"

According to McKinsey, the top fifth of the income distribution accounted for nearly half the debt growth.

TO BE NOTED: From News N Economics:

"McKinsey on the delevering household

Friday, April 3, 2009

McKinsey Global Institute wrote a really nice piece on the recent accrual of consumer debt, and how the consumer delivering process might play out during the recovery (download it here). The main point of the piece is: that in lowering the consumer burden – debt to income ratios – it matters very much how income behaves during the economic recovery.

• If income remains unchanged, to reduce debt-to-income by 1% requires almost 1% more of personal saving, or a >$100 billion draw on spending (consumption).
• But if income is rising, then household debt-to-income can fall with less give on consumption because consumers save less (see exhibit 12 in the paper).

McKinsey paints a really nice picture of the boom in household spending during the 2000-2007 period, fueled by home equity extraction (due to strong appreciation in home values), falling saving rates, and asset appreciation. Consumer spending was big – 77.3% of total economic growth from 2000-2007.

All charts are directly from the McKinsey report.

Households fueled spending habits through home equity extraction, amassing a lot of consumer debt along the way.

And who accrued the bulk of the debt? According to McKinsey, the top fifth of the income distribution accounted for nearly half the debt growth.

There is also a really nice discussion of wealth effects that I’ll leave for you to read.

Rebecca Wilder"

I think that the Fed is very capable of taking back the added liquidity

TO BE NOTED: From News N Economics:

"Some random thoughts on inflation (deflation)

Wednesday, April 1, 2009

I was in Mexico for one week and the only news-related materials I had were two March issues of the Economist; and fortunately, this is poolside reading for me. Anyway, the March 19th edition had a nice article about quantitative easing and the associated inflation angst and featured this chart to the left. The article inspired me to think a little more about why the Fed is taking such extreme balance sheet risk: inflation.

Recently, the Federal Open Market Committee shocked markets by announcing its intent to buy Treasuries in excess of the nominal 0.25% federal funds target, and to increase the MBS and agency coupon purchases by $850 billion. In spite of a 0.2% annual inflation rate in February, recent Fed policies like these have sparked fears of inflation, even hyperinflation. From the Economist:

On March 18th America’s inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said “inflation could persist for a time” at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed’s announcement that it plans to purchase $300 billion in Treasury bonds and an additional $850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. The Fed is doing what it is doing - quantitative easing - in an attempt to restore functionality to credit markets and to accommodate a low and falling money multiplier in order to secure price stability. Banks are hoarding funds (excess reserve balances one year ago were $1.8 billion and $771.2 billion now), which has been exacerbated by the Fed's paying interest on reserves, but nevertheless, reserves are surging. The result has been a collapse in the money multiplier, which disrupts the process by which the Fed's monetary policy measures (adding base to the system) are turned into money.

The chart above shows that the money multiplier has stabilized, but rests at very low levels. This is the bear faced by the Fed, and the primary reason for its extreme measures of late.

But contemporaneously, inflation expectations have taken a likewise turn for the worse. As falling inflation expectations become embedded into current behaviors (buying decisions or interest rate setting), the macroeconomy suffers. When oil was peaking in July of last year, the Fed watched inflation expectations closely for signs of pressure. And now, the Fed is watching those same expectations on the way down.

The chart illustrates market inflation expectations for each year over the next 10 years, as measured by the nominal 10-yr Treasury minus its inflation protected counterpart (TIPS). Admittedly, inflation expectations have improved significantly from their 0.04% low in November 2008 to 1.34% at the end of March. However, the market still expects just 1.34% annual inflation over the next 10 years, which is far below the Fed's new quasi inflation target of 1.7%-2.0%, and obviously a big concern.

This is why the Fed and central banks around the world are building up their balance sheets: inflation (deflation) risk. In the U.S. and according to the Taylor Rule, a nominal interest rate target based on current inflation, inflation expectations, and the output gap, the Fed should cut the federal funds target, the Fed's short-term interest rate to induce monetary stimulus, to -8%. Since that is impossible (a zero lower bound), the Fed is doing everything it can to support price stability.

I think that the Fed is very capable of taking back the added liquidity; and furthermore, I presume that the paying interest on reserve balances is part of the Fed's exit strategy. However, we will know in a year or two if the Fed gets it right. But know this: a $2 trillion balance sheet is just the beginning.

Rebecca Wilder"

There is backward-looking regulation; there is forward-looking regulation; and then there's just stupid regulation.

From News N Economics:

"Congress is being stupid again

Friday, March 20, 2009

There is backward-looking regulation; there is forward-looking regulation; and then there's just stupid regulation. From the NY Times:
The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger.

Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step.
...
The legislation would apply to bonuses paid to executives at companies holding at least $5 billion in bailout money and would essentially wipe out the phenomenal paydays that have been a tradition on Wall Street, at least until the firms reduce the amount they owe taxpayers to less than $5 billion.
At this point, I wonder what the Congressional members are trying to accomplish? To get re-elected? It certainly seems so. I can only imagine that this silly back and forth about bonuses is going to throw a wedge into other government plans to actually fix the banking system. This is so counterproductive; it's not going to pass; it can't.

Take a close look at both the firms that would be subject to the tax and those that wouldn't:

This data can be found on the Treasury's website, however, the NY Times lists total TARP appropriations, and the WSJ lists the initial recipients of TARP capital injections. All of the companies below the bold black line will not face the 90% tax on bonus payments.

Notice that the table (above) lists TARP monies received by banks, insurers, auto companies, and non-banking financial firms. And look at the list on the margin. Below the $5 billion mark are several sketchy deals, including the sum $5.5 billion aid to Chrysler and Chrysler Financial, the $2.3 billion to CIT Group, who only recently became a bank-holding company (i.e., regulated) in order to get TARP funds and was the centerfold for the securitization industry. Fannie Mae is paying bonuses, but are they on Congress' radar?

Congress is playing with fire here. The government Financial Stability Plan cannot work if the private sector is worried about the political ramifications of participating, or worse, that the government will amend the terms of any agreement six months later - and the private sector must be involved to make the deal big enough. For example, the WSJ argues that TALF is off to a slow start - the first round of TALF loan requests was $4.7 billion - in part because of the rage over the AIG bonus:

One reason for the slow start: the outcry over bonuses paid by American International Group Inc., the troubled insurer that received federal bailout money. Some investors are concerned that they too could be exposed to a political storm should they make too much money from the taxpayer-funded program.
Even if this is just for show, which I imagine that it is, it is highly counterproductive.

Rebecca Wilder

Posted by Rebecca Wilder

Me:

Don said...

Excellent post. Oddly, I see the job of elected representatives as calming anger and working towards solutions. This was simply an organized contest of expressing anger and shock. I love how these hearings are always way behind the curve and oblivious to the real problems staring them in the face. Far easier to express emotions than analyze and argue for solutions. This retroactive plan is beyond belief.

Don the libertarian Democrat

March 20, 2009 10:54 AM