MacroScope

Losing the gold medal in football – and economics

Noe Torres and Jean Luis Arce contributed to this post. Blog updated Sept 5 to add Q2 GDP data for Brazil and Mexico.

Three weeks ago, Mexico beat Brazil on Saturday to win its first-ever men’s football Olympic gold medal. What does that have to do with economics? Maybe nothing. But as The Economist notes, Mexico’s victory might just prove “just a warm-up for more good results to come” — on the economic field.

Mexico’s economy grew 4.1 percent in the second quarter from the year-earlier period. Even considering a mild slowdown from the previous quarter due to weaker U.S. demand, this growth pace far outshines Brazil’s lackluster performance since mid-2011.

Global manufacturers such as tire maker Pirelli and Volkswagen’s luxury car maker Audi have recently looked to Mexico as an alternative to China. Bucking a global trend of manufacturing weakness, Mexico’s industrial output jumped 1.3 percent in June from May, exceeding forecasts of most economists surveyed by Reuters.

Brazil, host of the 2016 Olympic Games, has been spinning its wheels as local manufacturers struggle with clogged roads and ports, exorbitant taxes and an overvalued exchange rate. Even with record low interest rates, Brazil’s economy expanded just 0.5 percent in the second quarter from the same period a year earlier, below the median forecast in a Reuters poll with analysts.

Inequality and the crisis: the other missing link of macroeconomics?

Ever since an epic financial crisis hit the United States in 2008, mainstream economists, most of whom utterly failed to foresee the oncoming train wreck, have been scrambling to introduce a financial sector dimension to their models. It was a conventional approach that detached the study of financial stability from macroeconomic variables, the narrative goes, that prevented the experts from seeing the build-up of an unsustainable housing bubble that, when it crashed, took down the economy down with it.

Research by James Galbraith, professor of public policy at the University of Texas at Austin, suggests finance is only one blind spot for the economics profession. Another key and increasingly relevant factor in the public debate that has been largely ignored is the issue of inequality. The first chapter of Galbraith’s latest book, “Inequality and Instability,” begins like this:

In the late 1990s, standard measures of income inequality in the United States – and especially of the income shares held by the very top echelon – rose to levels not seen since 1929. It is not strange that this should give rise (and not for the first time) to the suspicion that there might be a link, under capitalism, between radical inequality and financial crisis.

Off the rails? Goldman lowers Q2 GDP ‘tracking’ estimate to 1.1 pct

Another round of bad news on the economy has prompted Goldman Sachs to shave another tenth of a percentage point off their already bleak second quarter U.S. GDP forecast.

The July Philadelphia Fed business activity index improved less than expected and remained “significantly negative,” pointing to a third month of contraction. Following news that June existing home sales were much weaker than forecast, Goldman Sachs economists lowered their Q2 GDP tracking estimate to 1.1 percent from 1.2 percent.

The 5.4 percent month-on-month decline in existing home sales in June, reported by the National Association of Realtors, was much weaker than the consensus expectation, the economists noted. The 4.37 million annualized rate of sales was also lower than expected despite upward revisions to the May sales figures.

Who expects euro bonds? Look outside the euro zone

It’s already been established that economists’ predictions about the euro zone’s future hinge largely on where their employer is based. Euro zone optimists tend to work for euro zone banks and research houses, and euro zone sceptics for companies based outside the currency union.

It somewhat undermined the idea their analyses are based purely on hard-headed economics, and less on national factors.

There was an echo of that in this week’s of economists and fixed income strategists, who were asked whether they expect euro zone leaders will agree to the issuance of a common euro zone bond, as backed by new French President Francois Hollande.

Euro zone survival is in the eye of the beholder

Despite all their years of experience and complex mathematical models, for economists the question of the euro zone’s survival really has them at the mercy of national bias… at least in terms of where their employer is based.

One of the key points from the latest Reuters poll was that a majority of economists from banks and research houses around the world – 37 out of 59 – expect the euro zone to survive in its current form for the next 12 months.

But behind that headline figure, the answers were skewed heavily by region.

Only 5 out of 24 economists from organisations based inside the euro zone thought it would fail to survive in its present 17-nation form over the next 12 months.

Modest U.S. growth prospects riddled with risks: bank economists

Despite all the flashing yellow signs in the global economy, banking sector forecasters are sticking – if a bit uneasily – to their modestly optimistic outlook. Still, a group of economists from the American Bankers Association, a banking lobby that presented its latest economic projections to Federal Reserve officials this week, highlighted plenty of risks. Chief among them were financial contagion from Europe and sharp fiscal adjustments in the United States.

They see U.S. gross domestic product expanding at a pretty subdued 2.2 percent this year, and then slowing to 2 percent in 2013. The forecast assumes that Europe will come to some sort of resolution that puts a floor under its troubled debt markets. Even so, the ABA committee saw a 55 percent chance that one or more countries would exit the euro, with Greece topping the list.

At a press conference on Friday presenting the group ‘s findings, George Mokrzan, chair of the committee and economist at Huntington Bancorporation in Columbus, Ohio, said one worrisome factor for the U.S. economy  was the lack of income growth for most American workers. He said this could crimp consumer spending, which accounts for the vast bulk of U.S. economic activity.

from Edward Hadas:

For growth, focus first on jobs

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Blame small government for U.S. GDP downer

Weak U.S. economic growth in the first quarter was driven in part by a pullback in business investment — but a sharp decline in government spending also played a role. Gross domestic product grew 2.2 percent, well short of the Reuters consensus forecast of 2.5 percent. Business spending fell 2.1 percent while government expenditures saw a 3 percent drop linked to lower defense spending. Consumer spending proved a bright spot in the report, climbing 2.9 percent. Still, there is concern that this too could fade because an unusually warm winter may have brought some spending forward.

Jay Feldman at Credit Suisse breaks down the numbers:

The big downside surprise from our vantage point was in federal government spending, which contracted 5.6% in the quarter (we expected an increase given the firmer readings in monthly Treasury data). Most of the shortfall was concentrated in defense (-8.1%). Combined with the ongoing contraction in state and local government output (-1.2%), the government sector overall shaved 0.6 percentage point from top line GDP.

Yet this pales in comparison to what might happen if Congress fails to break a budget logjam by the end of this year. If left unaddressed, the resulting spending cuts and expiring tax breaks — the dreaded fiscal cliff — could easily tip the world’s largest economy back into recession.

Roubini takes on the ECB

It was fun to watch. Nouriel Roubini, NYU economist and crisis personality, was one of just five carefully selected individuals at a large gathering in the International Monetary Fund HQ1 building’s towering atrium who actually got to ask questions of the policymakers on stage.

Roubini was characteristically biting in his critique of conventional orthodoxy, singling out the European Central Bank for not having done enough to stem the euro zone’s two-year financial crisis. He challenged the notion that the ECB is powerless to boost growth further, suggesting — to the clear discomfort of some policymakers in the room — that measures to weaken the currency could provide a badly-needed boost to exports:

I saw that on the panel there are four central bankers and the panel is about fiscal policy and sovereign debt. So the natural question is then to think maybe about what could be the contribution of central banks in resolving sovereign debt issues. Now, one simple answer would be to just monetize very large budget deficits and I understand why a central bank would say that’s a no-no.

Never mind the pain, feel the austerity

Austerity in the euro zone seems to be working — at least as far as the headline,  dry, soulless numbers of  budget balancing are concerned. Bailed out  Greece and Ireland have reported substantial improvements in last year’s profligacy performance.  Spain, while going in the wrong direction, at least has the satisfaction of being told it is not telling fibs.

We will get to the smoke and mirrors in a bit.

First Greece, the euro zone’s poster child for budget ill-discipline. The 2011 budget deficit to GDP ratio  – basically the annual overspend — came in at 9.1 percent. This may seem like a lot given the EU target is 3 percent, but it was down from 10.3 percent  a year earlier and from 15.6 percent the year before that. Furthermore, if you take out all the debt repayments costs that Athens has to make , you end up with only 2.4 percent (although in truth that is like pretending you don’t have a mortgage).

In Ireland, the craic was all about trouncing expectations. The deficit to GDP ratio for 2011 came in at 9.4 percent, which compared with an original 10.6 percent target and even a revised target just last December of 10.  1 percent. Everything is on track, Dublin reckons, to meet this year’s 8.6 percent.