James Pethokoukis

This from IHS Global Insight:

Although there are increasing signs that the economy has bottomed out, IHS Global Insight’s summer forecast shows that a job recovery is still a ways off for most of the nation’s metropolitan areas. Of the 363 metros in the country, just one—McAllen, Texas—will add more than 1,000 jobs this year. While most areas will begin increasing employment again in 2010, it will be tepid, with only 118 metros crossing the 1,000-job mark next year. Solid gains will not return for the majority of the country until 2011.

The slow recovery means it will be well into next decade before most areas regain the jobs lost during this recession. Not surprisingly, auto-ravaged Detroit will see the largest employment decline (more than 15%) among major metro areas, and will need years, if not decades, to recover. The housing-bust metros of the Sunbelt (Phoenix, Arizona; Riverside, California; Tampa, Florida) will all suffer steep drops and not return to pre-recession levels until 2013 or later. At the other end of the spectrum, Texas metros and Washington, DC, have avoided the brunt of this downturn and, thus, will be among the first to recover.

It was a pretty upbeat Ben Bernanke that spoke over the weekend at the Fed conference. But a few cautionary statistics from Ed Yardeni:

(1) Commercial bank loans are down $293.1bn ytd through August 12.

(2) Commercial banks are still failing. Indeed, 77 lenders have been closed ytd, compared with 25 in all of 2008.

(3) The delinquency rate for mortgage loans on 1-to-4-unit residential properties rose to a seasonally adjusted rate of 9.24% of all loans outstanding as of the end of Q2-2009. The percentage of loans in the foreclosure process at the end of Q2 was 4.30%.

(4) The combined percentage of loans in foreclosure and at least one payment past due was 13.16% on a non-seasonally adjusted basis, the highest ever recorded in the delinquency survey conducted by the Mortgage Bankers Association.

(5) There was a major drop in foreclosures on subprime ARM loans during Q2, suggesting that the government’s mortgage mitigation programs are working. However, they are aimed mostly at distressed borrowers with resets rather than prime borrowers losing their jobs. Indeed, there were increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.

Geopolitical thinker and strategist Tom Barnett is disappointed with the resilience of the global economy and institutions:

As always, I am disappointed that roving gangs don’t roam my streets and we haven’t all been reduced to survivalism. Still waiting on the many wars as well. Not even getting a slew of new leftist governments.

As global recessions go, a complete disappointment for the professional hysterics. But I’m sure it’s a complete anomaly to be explained away. I look forward to the posts, and place my continuing faith in an electronic Pearl Harbor (over a decade now in the frantic predicting/making) that will bring the entire world to its knees overnight, ending life as we know it. Certainly, when it comes, it will render all our current problems completely meaningless in comparison, so I wonder why we’re even bothering to debate healthcare reform.

Me: And all that money I spent on a bug-out bag has been wasted! Wait, there is still Captain Tripps, I mean, the swine flu! And what about peak oil?

Is the light at the end of the tunnel an oncoming train? That’s the worry of many economists who fret that after a couple of quarters of moderate growth, the U.S. economy will either lapse into a state of torpor or relapse into recession. In a new Financial Times op-ed, Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade creates a strong risk of just such a “W-shaped” economic scenario.

If so, unemployment would remain really high. And, given that prospect, you just know incumbent Democrats facing re-election in 2010 would love to vote for Son of Stimulus. The big drawback: Doing so would risk the wrath of budget-conscious independents, as well as bond investors who share Warren Buffett’s stated concerns that all this red ink could sink the dollar.  Plus, a backup in interest rates would negate any positive effects from more stimulus.

But Olivier Blanchard, chief economist at the International Monetary Fund, may have cracked the code on to boost the economy and not spook bond investors and budget hawks. Blanchard’s grand bargain, one I have been suggesting for months, is for government to spend more money in the short term to boost growth while simultaneously taking strong action to reduce the long-term budget deficit. “The trade-off is fairly attractive,” Blanchard said in a report this week. “IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.”

Fiscal space is good! When you’re dealing with gobsmacking budget numbers, small cuts (or even just nicks in the rate of growth) can make a huge, real-world difference. As the Peterson Foundation figures it, Uncle Sam has run up some $55 trillion in long-term liabilities. Minor tweaks that make that number a bit more manageable in the future would create huge fiscal opportunities for more pro-growth measures today.

One example: the Dartmouth Institute for Health Policy and Clinical Practice calculates that if Medicare spending across America “grew at the San Francisco rate of 2.4 percent per year instead of the current national average (3.5 percent), Medicare would achieve a cumulative savings of $1.42 trillion between now and 2023.” That’s a nice chunk of change. Or, as an analysis I commissioned from the American Enterprise Institute revealed, extending the Social Security retirement age while at the same time indexing benefits to inflation rather than wages would turn a $5 trillion present value deficit into a $5 trillion surplus.

Can America afford to upgrade its rotting transportation infrastructure and electrical grid while also, say, lowering corporate and investment tax rates to a more internationally competitive level? Yes and yes. If entitlement liabilities are downscaled, the U.S economy can generate more than enough future economic growth and excess tax revenue tomorrow to “pay for” smart investments today. That would create jobs and strengthen America’s economic foundation -– and keep the bond vigilantes at bay.

My Reuters colleagues break the news that the White House is revising upward its ten-year budget forecast to $9 trillion from $7 trillion:

“The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year,” said the official, who is familiar with the plans.

“Our budget projections are now in line with the spring and summer projections that the Congressional Budget Office put out.”

The CBO said in June that deficits between 2010 and 2019 would total $9.1 trillion. The official said the 2010-2019 cumulative deficit projection replaces the administration’s previous estimate of $7.108 trillion.

Me: Expect the CBO to also crank up its forecast, which will be higher than the administration’s. Also, this is further evidence that the common wisdom that people don’t care about budget deficits (no matter what the polls say) is wrong. C’mon,  leaking such news on a late Friday afternoon?

Some thoughts on today’s NY Times story about the falling fortunes of the once super-rich:

1) Yay! It actually made the point that tax rates affect economic behavior:

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

2) Boo! It also seems to accept this explanation, by Piketty co-author Emmanuel Saez, as to why income inequality has risen in recent decades (via a Saez paper):

A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.

3) Boo! It underplays the role of globalization and technology in creating greater income inequality in favor of blaming asset bubbles and tax rates. Here is bit from a story I wrote about income inequality, quoting Saez:

At the top, what you primarily have is executives at large companies who are paid very large salaries with bonuses and stock options,” Saez says. “It has really become a truly global market for the talent of executives.” So it’s not so much that globalization has driven down wages because the average U.S. worker has to compete with a low-paid competitor in China or India. (About a quarter-million jobs are lost annually to offshoring, which works out to only 0.18 percent of the workforce.) Rather, globalization has increased the demand for top corporate managers, and it has made companies more valuable as it has spurred economic growth and higher stock market values. That has boosted executives’ income-from salaries, stock options, and capital gains.

Then there’s technology:

Rapid technological change, which itself is driving globalization, is also pushing wage inequality. “Inequality is related to technology, and … you really require more skills to operate in a challenging economy driven by technology,” says Daron Acemoglu, an economics professor at MIT. According to the liberal Economic Policy Institute, inflation-adjusted wages for male high school graduates have slipped 6 percent since 1980, while rising 20 percent for college graduates and 35 percent for those with an advanced degree. Technology places a premium not only on computer skills but on the managerial and organizational abilities needed to run a modern, networked company.

4) Boo. It failed to mention how globalization had made real-world income inquality virtually non-existent. Again, from me:

More and more research is revealing that the supposed rise in income inequality is a bit of a crock. One reason is the “China Effect.” A recent University of Chicago study found official income inequality statistics fail to take into account that lower-income Americans tend to consume more inexpensive Asian goods. As the study’s authors conclude, “This price effect offsets almost all the rise in inequality measured by official statistics.” And whatever slight rise in inequality that’s left over can easily be explained by technology and the expanded global market for CEO talent.

Things I am “wee weed up” (which I think means “agitated”) about: the long-term budget deficit, the Long Recession, the state of U.S. competitiveness, the cancellation of “The Sarah Connor Chronicles” (now and forever!),  breaking my Kindle by putting my elbow on the screen and then leaning my full 205 pounds on my elbow (I mean, Amazon never said “not” to do that),  Washington humidity, not being at Jackson Hole, health exchanges, the housing market, Rick Schroeder in “24″ in season six (currently watching on DVD via NetFlix), my six-day summer cold,  my commute which is even slower in the summer (something about “hot” rails, the Cubs falling out of the pennant race (now and forever, apparently) …

A good post on the healthcare debate from Alex Harris of the OpenMarket blog:

Any arguments about providing more entitlements somehow reducing the total amount of entitlements just don’t work. Insurance produces moral hazard. People overconsume goods they get for free on the margin. That’s Econ 101. The Democrats may have realized this and so proposed various cost-cutting measures, like panels to determine who gets care and who doesn’t.

A bunch of nutters on the right got all up in arms about the panels. Why? Because they would reduce benefits. Of course if you want government-run health care, you’ll have to ration. But, my god, isn’t this better than government-run health care that doesn’t ration?  … Instead, we basically face the choice between government-run health care that rations and government-run health care that doesn’t and so utterly destroys the nation’s economy. Which would we rather have? This is the choice that’s lost in the “death panels” rhetoric. …  Which should libertarians prefer: a limited new government package that provides minimal care (e.g. with high deductibles) or a big luxury package that provides everything? I would think we should prefer the minimal package (so long, of course, as private health care isn’t outlawed and so people can still get additional care elsewhere).

Me:  So that is the choice, I think. A minimalist government-run plan with high deductibles (and the option of getting extra care in the marketplace), or a private-insurance system that subsidizes the poor. Simple, yes?

The great Andy Busch of BMO Capital Markets draws up a scenario that could see Ben Bernanke get pushed toward the exits:

David Wessel in his book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic” said this, “But in what would prove a colossal mistake, they (Bernanke, Paulson, Geithner) hadn’t come prepared with a plan to prevent a bankruptcy if they couldn’t sell Lehman as they had managed to sell Bear Stearns.” This ability to see the danger and yet not being prepared to stop it is truly troubling.

However, this is not why Ben Bernanke may lose his job. It will be due to someone taking the fall for the crisis and for why the unemployment rate remains above 9.5%. This is Bernanke’s Mendoza Line. This is what Moody’s John Lonski and I agreed upon last night on the Kudlow Report: Bernanke can be the fall guy for a weak US economy.

Envision a political world for President Obama in which he’s not getting his major pieces of legislation through Congress. Imagine then, he’s also got an economy that is not rebounding enough to generate job gains and an economy that may be experiencing a strange form of commodity inflation leading to higher gasoline prices. Something has to change and that change could cost Bernanke his job.

If we’ve learned anything from last fall, we know that what was once deemed rock solid can crumble away amidst the pressure of an outside force.

David Rosenberg of Gluskin Sheff outlines the bear case on Ben Bernanke getting reappointed by Obama:

Bernanke was a giant cheerleader for the leverage-induced economy during his time as the chief economist at the White House and while he was aggressive (and likely broke every rule in the book of central banking) in getting the credit market and economy back on track, he failed at the outset to realize the severity of the credit collapse and treated it as a liquidity event only for months

The Fed’s economic forecast that was published just over a year ago for late 2008 and 2009 is an embarrassment, to say the least. Valuable time was lost under his watch and the question is (i) does the Administration look at his entire record as opposed to his period as a White Knight, and (ii) will Mr. B end up being a scapegoat once the economy relapses in the fourth quarter and the unemployment rate makes new post-WWII highs along the way. See the front page of the NYT for more — Bernanke, a Hero to his Own, Still Faces Fire in Washington. The search committee is already out, by the way, and the likes of Blinder, Yellen, Ferguson and Summers are on it.

Me: I notice that Intrade has Bernanke at 80 percent, but contract is pretty lightly traded. I just keep thinking about the House Government Oversight Committee meeting concerning BofA and Merill where members from both parties basically said Bernanke was lying about his role in the merger. That can’t be good.