Commentaries

Reasons to be cheerful

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Doing more with less is a corporate mantra that some say bodes ill for job growth. Data last week showed that productivity at non-farm business jumped at an extraordinary 9.5 percent annual rate in the third quarter.

Yet the sharp gains in efficiency are helping drive corporate profits and that could be just what’s needed to convince employers that it’s safe to begin hiring again. (more…)

John Meriwether writes to investors (again)

This purports to come from the hedge fund investor John Meriwether but mysteriously carries a Nigerian postmark:

Dear friend,

Greeting,

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My name is John Meriwether and I am a very wealthy financier in Greenwich, Conneticut, the economic capital of US. I have been managing investment funds for welthy business associates, taking advantage of relative value arbitrage strategies. This is 100 per cent guaranteed safe way to make double digit investment returns every year and was revealed only to me by internationally renowned Nobel prize winning economists. My track record – with LTCM and JWM Partners – speaks for itself.

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To provide a Bank account where your commission would be transferred to after the successful transfer of this fund to your designate account overseas, please feel free to contact ,me via this email address johnmeriwether1000@yahoo.com

Playing politics with Social Security

By John M. Berry

The White House’s knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won’t get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending.

The problem wasn’t the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices.

Benefits were indexed in the 1970s precisely to stop politicians eager to curry political favor by providing large benefit increases on an ad hoc basis.

Shoveling out more checks to an important group of voters when the economy is as depressed as it is now would be a popular thing to do. Plenty of Democrats — as well as many of the Republicans who have been clamoring about soaring budget deficits — quickly endorsed the $250 payment even though prices weren’t just flat, they fell by 2 percent. (more…)

Kohn on V-shapes, housing, inflation and a whole lot more

Donald Kohn, the Fed’s number 2, has a lot to say about the economic outlook but not a whole lot new in terms of when the central bank will reverse course on its extraordinary easy monetary policy. Full speech at the National Association for Business Economics in St. Louis can be found here.

Some choice bits:

I don’t think a V-shaped recovery is the most likely outcome this time around.

I’m not sure the stock market and credit markets agree, but they might come around to his way of thinking eventually.

The demand for U.S. exports has been increasing lately after falling sharply in the first half of the year. However, with the firming of domestic demand, imports have also begun to increase, and, on net, the external sector appears to be a roughly neutral influence on overall economic activity at present.

There’s been lots of talk about a weak dollar feeding an export-led recovery, but it doesn’t look like it’s weak enough just yet.

And here’s my favorite on the recovery in the housing market. Emphasis mine.

Been down so long, it looks like up

The latest S&P Case-Shiller home price data is feeding into the feel-good vibe of the moment, of mergers the Dow approaching 10,000 and other green shoots. The composite index of home prices for 20 U.S. metropolitan regions rose 1.6 percent in July from June — a stronger gain than expected and the third consecutive monthly gain. As the release notes, there have now been “six months of improved readings,” and this is giving some early support to stocks and the dollar.

Yet the year-over-year rate remains well in negative territory: a 13.3 percent decline for the 20-city index and a 12.8 percent decline in the 10-city index. Yes, 17 of the 20 cities had monthly gains, but 14 are still showing annual declines in the double-digits.

David Blitzer of Standard & Poor’s says:

We do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures.

And Calculated Risk puts it in perspective:

The debate continues – is the price increase because of the seasonal mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, and the slowdown in the foreclosure process (with a huge shadow inventory), or have prices actually bottomed? I think we will see further house price declines in many areas.

As the Fed sleeps

It’s not even October and the Federal Reserve already appears to be going into policy hibernation.

Today’s statement appears intended to attract as little attention as possible. Even the more gradual tailing away of mortgage purchases by the Fed seems calculated to assist the Fed’s quiet retreat.

There will be no further efforts by the Fed to accelerate the pace of growth. Given the grim economic outlook this is a shame. Today’s Fed statement pointed to a pickup in growth, but the Fed’s own economic forecasts still scream out for stronger action.

Even through 2010 unemployment is expected to hover close to 10 percent. Core inflation meanwhile could go below 1 percent in 2011. This is the kind of outlook that would normally prompt the Fed to stamp on the accelerator.

Sadly, the Fed no longer has this option. Ben Bernanke is hemmed in on two fronts.

The first is a political constraint. The doubling of the Fed’s balance sheet during the crisis alarmed many in Congress. As the financial crisis has receded, there seemed less justification for such extraordinary action.

The Fed now badly needs to win back support in Congress. The stakes are high as lawmakers prepare to overhaul the regulatory framework. Not only does the central bank hope to win the new role as systemic regulator, they may need to fight hard to avoid encroachments on their independence by Congress.

A compelling case for carry in Treasuries

Under normal circumstances, U.S. Treasuries should probably be getting clobbered.

The worst of the credit crisis is over, the economy is expected to snap back in the second half of the year, and the appetite for riskier, higher-yielding assets should be siphoning off demand from boring, safe-haven assets like Treasuries.

But things haven’t been normal for a while.

Treasury yields are down substantially from three months ago. This week provided additional evidence that something is not quite right. The government dumped $70 billion of three-year, 10-year and 30-year Treasuries into the market, yet yields fell.

But when you consider how much banks and other investors who enjoy dabbling in leverage can make by deploying that oldie, yet goodie, “the carry trade,” the recent rally in Treasuries doesn’t seem so crazy.

The carry trade in its simplest form is a way for investors to make money by borrowing at short-term low rates and investing in securities that yield much more.

Right now, short-term funding costs are at rock bottom rates — the overnight federal funds rate is sitting around 0.15 percentage point and three-month London interbank offered rate at just 0.3 percentage point. The 10-year benchmark Treasury note yields 3.33 percent and the 30-year bond, 4.16 percent.

Barroso’s EU vision lacks levers for change

Could the European Union be among the big losers of the global financial crisis?

Despite signs that recession in Europe may be bottoming out, the 27-nation bloc risks emerging from the turmoil with its economic growth potential stunted, its public finances shackled by mountains of debt, and its international influence weakened.

That is the backdrop to Jose Manuel Barroso’s campaign for a second term as president of the executive European Commission.  In a manifesto sent to EU lawmakers last week, he warns that unless Europeans shape up to the challenge together, ”Europe will become irrelevant”.

The conservative former Portuguese prime minister is  seeking a confirmation vote in the European Parliament this month, so a degree of dramatisation is to be expected. But there is no hiding the setback the crisis has dealt to European integration. Barroso has rightly put economic recovery at the top of his agenda, but he lacks powerful levers to achieve his goals at a time when the knee-jerk response in Europe has often been to revert to national economic solutions.

The recent crisis showed that there remains a strong short-term temptation to roll back the single market when times are hard, he acknowledges in the 41-page document.

Barroso is too much of a politician to name names, but he was clearly referring to the way Britain pressured state-rescued banks to lend at home and France and Germany sought to protect domestic jobs when aiding car manufacturers. Those governments deny their moves are protectionist and cite their duty to spend taxpayers’ money in the national interest. But such measures pose a threat to the principles of free movement of capital and labour and fair competition.

Barroso vows to be “an implacable defender” of the EU’s single market and its competition and state aid rules — the foundation stone of European prosperity. But he does not say how he can force governments that have rescued stricken banks to restructure and dispose of them in ways that avoid distorting the level playing field for business.

Job declines slow, but unemployment rate jumps

The Labor Department’s August report on the jobs market has a bit of a good news/bad news slant to it. Job cuts slowed to “just” 216K, below expectations and better than last month’s 276K (up from the originally reproted 247K). But the unemployment rate, which is calculated through a distinct survey of households rather than businesses, jumped to 9.7% from 9.4% the previous month. You’ll remember that a slide back in July made some hopeful that maybe, just maybe, joblessness has stabilized.

Still, the market doesn’t seem to be too worried, at least for the moment as Treasury yields head north. The benchmark 10-Yr note has inched up about 2BPs to 3.39% since the report hit the wires.

The take away, however, continues to be that job losses are still outsized and likely will keep consumption and housing from recovering in a meaningful way.

ADP still showing steep job losses

The ADP national employment report showed job losses still huge in August, though better than July and the smallest decline it’s recorded since September 2008.

Though it came in worse than expected, markets aren’t doing a whole lot with the data, with Treasuries hovering around the unchanged mark and stocks down only slightly.

From the report:

Employment losses are clearly diminishing. Despite recent indications that overall economic activity is stabilizing, employment, which usually trails overall economic activity, is still likely to decline for at least several more months, albeit at a diminishing rate.

It’s starting to look like the markets are ignoring the data. Yesterday, it was ISM that got the cold shoulder, now jobs data. It could also be the time of year, which means just wait until after Labor Day for the fun to begin.