Opinion

The Great Debate

Deflation pressure not just from housing

It will take more than a recovery in housing to reignite inflation in the U.S. economy, a state of play that argues for the continued threat of deflation and a Federal Reserve that is pinned to the mat, unable, even if willing, to raise interest rates.

The strong disinflationary forces in the United States are deeper and wider than a simple, if bloody, aftermath of a housing bubble.

Many took encouragement from a report by Reis Inc that apartment rents in the United States rose in the first quarter for the first time in a year and a half even as the apartment vacancy rate stayed at an all-time high of 8 percent. Besides indicating a possible recovery in jobs and household formation, which tracks jobs, there is a hope that stabilization in housing values and rents would remove a powerful disinflationary force.

However, the downward trend in core inflation, while influenced by weakness from housing, is far broader.

“A close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures,” Federal Reserve staffers Bart Hobijn, Stefano Eusepi and Andrea Tambalotti wrote in the Federal Reserve Bank of San Francisco Economic Letter.

Nice job, pity about falling wages

It was the strongest U.S. employment report in three years and yet just beneath the surface was plenty of evidence that inflation pressure from the labor market is more of a fond hope than a real threat.

Nonagricultural payrolls rose in March by 162,000, the most in exactly three years and for only the third time since the recession began later that year. Of course, the United States probably needs about 200,000 new jobs a month just to bring unemployment down by a point in a year’s time. No sooner do jobs become available than sidelined would-be workers start seeking employment again. That kept the unemployment rate at 9.7 percent, while the key broader measure of the unemployed, the underemployed, the discouraged and the marginally attached — those game for work but unable to find it, get to it or find child-care while they go — hit a whopping 16.9 percent.

And that, ladies and gentlemen, is why, in an economic recovery with a growing job market, average hourly earnings actually fell by two cents an hour, or 0.1 percent from the month before.

The Age of Frugality takes a holiday

That whole Age of Frugality thing didn’t last long, did it?

U.S. real personal consumption grew in February at a respectable 0.3 percent clip, the fifth straight such monthly rise, a fact widely greeted as news that the recovery is on course. The fly in this tasty soup, however, is income, which in real terms didn’t increase at all, not even by one tenth of a percent.

American’s did this neat trick — spending more while earning the same — the old fashioned way: they cut back on luxuries … like saving.

Savings as a percentage of disposable personal income fell to 3.1 percent from 3.4 percent the month before and down from a recent peak of 6.4 percent in May 2009. In fact, the last time the savings rate was lower was October 2008 when a market maelstrom was convincing so many people, apparently falsely, that something rather dangerous and important was wrong with the economy. In real terms, consumption is only very slightly below where it peaked in 2007.

from James Saft:

Learning from Ken Feinberg

Sometimes it's what doesn't happen that is most illuminating.

When Pay Czar Kenneth Feinberg first slashed executive compensation at U.S. firms that benefited most from a government bailout the cry was that this would hurt these weakened firms when they could least afford it, as the best and brightest would leave for better money elsewhere, where the free market still ruled.

Well, the door didn't hit them on their way out, but mostly because they stayed rooted to their desk chairs.
Feinberg evaluated the compensation of 104 top executives at affected companies in 2009, reducing pay for most to levels far below financial industry norms and their own former earnings.

Yet here we are in 2010 and about 85 percent are still working for the same firms, still toiling for the kinds of wages that may well make them wish they'd gone into the law rather than finance. Remember all those articles in glossy magazines about how impossible it is to make it in New York City on $500,000 a year?

China tightening could undo risk markets

saft2.jpgThe key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.

After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.

“We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool,” Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.

Can recovery and credit crunch coexist?

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

New studies from the Federal Reserve and European Central Bank show that, whatever else, a recovery in the economy is not being supported by a resumption in bank lending, raising concerns about how exactly growth will become self-sustaining when official stimulus ebbs.

The ECB last week released its loan survey showing banks tightened credit yet again for businesses and consumers, though at a less severe rate than in the previous quarter. Much was made of the fact that banks said they expected to ease terms to businesses, but not individuals, slightly in the last three months of the year.

Days later the Fed was out with its own survey, and again the news is getting worse more slowly, which must mean it is time to pop open the tap water. Banks are tightening terms and conditions to large firms, though fewer are doing so than before. Of course we should be thankful for small mercies, but the fact remains that this is a relative rather than an absolute survey, which means that even if fewer are being tougher the vast majority are being just as tight with money as they were three months ago when things were very tight indeed.

The death of the “punchbowl” metaphor

jamessaft1.jpg (James Saft is a Reuters columnist. The opinions expressed are his own)

Don’t expect the year-long rally in risky assets to be undermined any time soon by the Federal Reserve becoming concerned about inflation.

The old metaphor — that the Fed’s job is to take away the punchbowl just when the party starts getting good — just doesn’t apply in the current circumstances. That’s not to say inflation isn’t a threat in the medium term — it is virtually a promise.

But punchbowl thinking dates from a time when firstly the Fed was presumed to have a degree of control over events we now know is not true and secondly to an era when asset prices were the caboose rather than the engine of the economic train.

Time for a shareholder revolt

jamessaft1(James Saft is a Reuters columnist. The opinions expressed are his own)

There are encouraging signs that shareholders are becoming more assertive in defending their interests.

The Financial Times reported on Monday that some of Britain’s largest institutional shareholders – including Standard Life, Legal & General and M&G – are working on a plan to bypass investment banks by creating a club to underwrite new issues of equity by small and medium-sized British companies, a move that could save hugely on fees.

What, you may wonder, took them so long?

Second only to taxpayers, investors have been the great patsies of the financial crisis, paying massive costs to a financial services industry which has, to put it mildly, not served them well.

An unhealthy privilege

jamessaft1–James Saft is a Reuters columnist. The opinions expressed are his own.–

When the U.S. dollar ultimately loses its status as the world’s premier reserve currency it will be painful for all involved, almost certainly disorganized, and very possibly a very good thing.

World Bank President Robert Zoellick outlined the risks to the dollar’s status in a speech in Washington on Monday.

Sit back and enjoy the Kabuki trade show

jamessaft1.jpg–James Saft is a Reuters columnist. The opinions expressed are his own.–

Financial markets have plenty to be worried about but their latest concern — a trade war between the United States and China — should not be on the list.

Aligned self interest and a knowledge on both sides of the causes of the Great Depression should limit matters to a kind of trade war Kabuki, a highly stylized piece of theatre in which the United States shakes its fist and China responds in kind but no blows land.

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