MacroScope

Beige, black and blue

It would have been worse without Canadians, big families and stately homes.

U.S. growth slowed in most parts of the country in June and into mid-July, the Federal Reserve said in its Beige Book survey of economic conditions across the country.

That’s bad news because most economists thought a slowdown in the first half of the year was a temporary soft patch. Weak momentum going into to the second half may point to lingering malaise.

However, there were a few bright spots in the gloom.

In general, consumer spending picked up as lower gas prices gave people more money to spend and made travel less expensive. Retail sales were booming in New York because Canadians, flush with a strong currency, were flocking to one specific large mall in the western part of the state.

A hotel in Baltimore reported occupancies had been pushed up by big events and an increase in family reunions. However, gains in tourism on the East Coast probably came at the expense of a loss of visitors to the oil-spill tarnished Gulf Coast, the Fed said.

The housing market remained weak across the nation, and home prices continued to slide, the report said. Still, fancy homes were going like hot cakes in some places. Washington area-houses in the mid to upper price range were selling quickly, with the hottest items in th $800,000 to $1.25 million range. In Colorado, sales of high end homes in some mountain resorts were strong.

Taylor rules were made to be broken

When calibrating monetary policy, central bank officials often turn to the Taylor rule, a useful construct for thinking about the relationship between unemployment and inflation pioneered by John Taylor, former Treasury official and Stanford economics professor. So as the U.S. economy appears to falter and investors begin to speculate on the prospect of another round of monetary stimulus from the Federal Reserve, it’s worth checking in with Taylor’s model.

Economists at Goldman Sachs sought to do just that in a recent research note, and they found something interesting: if one accounts for the effects of unconventional easing through bond purchases as estimated by Fed Chairman Ben Bernanke, then policy is currently as accommodative as it needs to be.

To call for additional easing, these Taylor rules would need 1. much smaller estimates of the effectiveness of asset purchases than cited by Bernanke and/or 2. significant further deterioration in the Fed’s economic outlook.

from The Great Debate:

A great divide holds back the relevance of economists

By Mark Thoma
The opinions expressed are his own.

Reuters invited leading economists to reply to Mark Thoma’s Op-Ed on the “great divide” in economics and will be publishing the responses. Here are responses from Ashwin ParameswaranJames HamiltonDean Baker, Lawrence Summers, and a recap of Paul Krugman’s.

How much confidence would you have in the medical profession if the teaching faculty in medical schools had very little experience actually treating patients, and very little connection to – even a lack of respect for – the practitioners in the field? Would your confidence be improved if medical research had little to do with the questions that are important to the doctors trying to serve patients?

Unfortunately, that's a pretty good description of how economics has been practiced. The questions academic economists are trying to answer have little connection to the problems faced by business economists trying to help their firms make good, profitable decisions (and vice-versa). And though academics pay some attention to government policy, particularly Federal Reserve policy, addressing the problems faced by government economists trying to help policymakers make the best possible choices is not the main focus of this research.

A very British excuse

This time it was the royal wedding. When the economy shrank unexpectedly late last year, it was the bad weather. If Britain’s economy again struggles to generate growth in the current quarter, perhaps it will be blamed on the new series of ‘The Apprentice’.

"Thanks for nothing!"

Britain’s economy grew 0.2 percent quarter-on-quarter between March and June, exactly in-line with the Reuters poll consensus. Perhaps the most interesting part of the GDP release statement was the Office for National Statistics’ claim that without special factors, including the royal wedding, growth could have hit 0.7 percent.

That would have taken the GDP index at market prices back above 100 points – its 2006 base level – for the first time since the recession, but as it happened, it fell just short, at 99.8.

Fed’s Plosser on default risk, inflation, and more

The following are highlights from a Reuters interview with Philadelphia Federal Reserve Bank President Charles Plosser on Wednesday.

FED AS LENDER OF LAST RESORT IF DEFAULT OCCURS:

“Clearly if something were to happen and financial markets were to seize up, and there were liquidity problems or financial market disruptions, I think the Fed would feel like it had the responsibility to go in and keep markets functioning, as a lender of last resort.”

“We have to be very careful that we don’t become, that we don’t conduct fiscal policy in this context. That we don’t substitute for the inability of the Treasury to borrow in some circumstances. That would be a bad policy decision from my perspective.”

Debt ceiling scuffle already hurting economy

When U.S. President Barack Obama warns about the possible damage to economic growth from a failure to lift the debt ceiling, he usually speaks about it in the future tense. So does Federal Reserve Chairman Ben Bernanke who, when asked about the issue in congressional testimony last week, said “it certainly could slow the economy.”

But as economists at Goldman Sachs see it, that process may already be under way, for the following reasons:

1. Consumer confidence has deteriorated more rapidly in recent weeks than economic variables would suggest.

Give me liberty and give me cash!

Come back Mr Fukuyama, all is forgiven.

In his 1992 book “The End of History and the Last Man”, American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.

The iPod – the iCon of Chinese capitalism

Walking past Apple’s sleek shop along London’s Regent Street on Sunday, my wife asked me what I wanted for Father’s Day.

“An iPad?” I ventured, half-jokingly.

“Are you sure you want one? Don’t you care how they’re made?” came her disapproving reply.

She was, of course, referring to the rash of suicides among Chinese workers at Foxconn, the Taiwanese manufacturer of Apple’s much desired iPads and iPhones.

The wavering faith of capitalism’s high priests

Yet another guardian of market orthodoxy has uttered what was once an unspeakable heresy.

This week, the European Bank for Reconstruction and Development‘s (EBRD) acknowledged that its old approach of encouraging growth in client economies by reducing the role of the state and fostering private ownership was “simplistic”.

“The problem with this view is that markets cannot function properly unless there are well-run, effective public institutions in place,” the London-based development bank said in its annual transition report.

What emerging animal are you?

Ever since Goldman Sach’s Jim O’Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the “s” – BRICS or BRICKS?

Completely new lists have also been compiled — HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters’ Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).

Fun though some of this is — and no one can argue that BRICs has not had an impact — there is a danger that the acronym could become more relevant  than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.