MacroScope

Fiscal cliff could help U.S. avoid road to Japan – but probably won’t

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]

Our tracking data show overall growth in an unsatisfactory 2% real growth path with weaker industrial activity threatening to pull growth lower.

The rebalancing of production and consumption must accelerate in order for the economy to regain a dynamic growth path. Macro policy is uniquely able to incent the economy in this direction and monetary policy has been doing its part. […]

Roaring auto sector could charge up U.S. growth

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Economists love motor analogies, and for good reason: they are very useful in illustrating the ebb and flow of economies. In coming months, maybe even years, the help from the auto sector could become a lot more literal, argues Paul Dales, senior U.S. economist at Capital Economics in London. In particular, he expects rising sales following years of depressed consumer spending on vehicles in the wake of the Great Recession could add as much as 0.25 percentage point to U.S. gross domestic product growth per year over the next four years. Here’s why:

The rise in new vehicles sales in September, to 14.9 million from 14.5 million in August, was significant as the number of new vehicles being purchased is now higher than the number being scrapped. This comes after four years in which the total number of vehicles in operation has been declining.

That fall was because when the recession hit and credit seized up, both households and businesses had little choice but to run their existing vehicles for longer. It is possible that 10 million fewer new vehicles have been sold than would have been the case if there was no recession.

Fed’s Lockhart explains what he means by “substantial improvement” on jobs

Federal Reserve officials have linked their open-ended stimulus program to substantial improvement in the labor market. So now, it’s up to Fed watchers to hone in on a definition of substantial, no small task in a world of multiple and often conflicting indicators on the job market.

In a speech to the Chattanooga Rotary Club on Thursday, Dennis Lockhart offered some insights into how he’s thinking about the process:

For policy purposes, I think it’s appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of “substantial improvement” has been met. The official national unemployment rate published by the Bureau of Labor Statistics is the most prominent statistic in the mind of the general public. As a policymaker, I want to have confidence that a decline of this headline number is reinforced by other indicators and evidence of broad labor market improvement in its many dimensions. The challenge my FOMC colleagues and I will face is communicating in simple and trackable terms what this phrase “substantial improvement” means while respecting the complex reality of many moving parts. […]

Unsaving the U.S. economy

The U.S. savings rate sank last month to its lowest since November, official data showed this week, in a sour reminder of how the economy is still dangerously exposed to any financial downturn or other shocks like the fiscal cliff. Following are some facts about this usually overlooked indicator:

* The U.S. saving rate is basically the amount of dollars Americans are able to save from their wages after spending and paying taxes, as a percentage of income. In September the rate was at 3.3 percent, a drop from 3.7 percent the previous month and the lowest since 3.2 percent in November 2011.

* The 3.3 percent rate is much worse than the healthy 8.1 percent average of the 1950s and 60s, the Golden Age of the U.S. post-war economy. It is also below the 5.5 percent average of the 1990s.

Economists revise down third quarter U.S. GDP forecasts as business investment missing in action

Richard Leong contributed to this post

U.S.durable goods orders rebounded a solid 9.9 percent in September following the prior month’s plunge. However, a proxy for business investment was essentially stuck in neutral. This was sufficiently worrying to JP Morgan economists to force them to revise down their estimates for third quarter U.S. economic growth down to 1.6 percent from 1.8 percent. Barclays economists also marked down their Q3 GDP forecast by 0.2 percentage point, putting it at 1.8 percent. The Reuters consensus forecast for the number, due out on Friday, is 1.9 percent.

JP Morgan economist Mike Feroli:

Don’t let the headline fool you: the September durables report was a big disappointment. In particular, the weakness in the capital goods figures leaves intact our concerns regarding the capex outlook. In light of today’s report we are revising down our expectations for tomorrow’s 3Q GDP report from 1.8% to 1.6%. We continue to look for 2.0% growth in 4Q, though there is now some downside risk to our business investment projection for next quarter. […]

Core capital goods orders were flat last month and core capital goods shipments were down 0.3%. These figures may not look so bad until you consider two factors; first, both numbers had been weak over the prior few months and some rebound was expected, and second, both numbers tend to be strong in the third month of the quarter. Topping it all off, both numbers were revised down a decent amount in August. All of these factors get reflected in the three-month average annualized change, which shows shipments declining at a 4.9% pace and orders sinking at a 23.5% annual rate.

Housing neutral for Fed doves; Operation Twist running on empty

A slightly bigger than forecast 5.7 percent rise in sales of new homes in September reported by the National Association of Realtors on Wednesday lends credibility to September’s jump in housing starts, but appears neutral for Federal Reserve monetary policy discussions.

The jump in new home sales seems to have largely justified the 11 percent jump in September housing starts, says Decision Economics senior economist Pierre Ellis. The inventory of houses for sale at the end of September rose just 1.4 percent, from the end of August and the months’ supply fell to 4.5 months from 4.7 months, he added.

Thus, the increased production of houses seems not to have involved any “over-exuberant optimism” – and the impact if demand were suddenly to evaporate would be contained, he said. “Healthy skepticism seems to prevail in builderland,” Ellis observes.

Deciphering the Fed: Guideposts for progress on jobs

The Federal Reserve’s open-ended bond-buying stimulus announced last month was coupled with a promise to continue purchasing assets “if the outlook for the labor market does not improve substantially.” Central bank officials are expected to continue discussing what parameters they will take into account to define such progress, but are not expected to come to any hard and fast decisions just yet.

In a research note entitled “What the Fed didn’t say: Payrolls at 160K,” Torsten Slok, economist at Deutsche Bank, offers a few guideposts:

In terms of what the Fed will be looking at, we reckon that employment growth will be first among equals – in particular nonfarm payrolls. We estimate that the FOMC’s economic and policy projections are consistent with payrolls averaging gains of around 160,000 per month through mid-2015, when they have told us they expect the exit process to begin to get under way. There is a range of uncertainty around this estimate. But if the numbers are coming in well below that rate for a number of months (100k or less), look for the Committee to extend the mid-2015 date and possibly step up its QE purchases, and expect just the opposite if they are coming in well above that rate (200k or more).

Could renewed U.S. economic strength turn the fiscal cliff into a fiscal ramp?

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The term ‘fiscal cliff’ has now safely transitioned from economic jargon to popular cliché. But how worried should Americans be about the growth-stunting mélange of expiring tax cuts and spending reductions set to begin kicking in at the start of next year?

Economists widely believe that if Congress fails to come to some sort of agreement on the budget, the U.S. economy would plunge into a deep recession. RBS economist Michelle Girard, however, thinks a recent pick up in U.S. economic activity could offset some of the cliff-related weakness.

While uncertainty over the fiscal cliff dominates most conversations, the relative strength of the underlying U.S. economy should not be forgotten. The expansion is today on firmer footing today than at any point in the past three to four years. No major economic imbalance exists. Moreover, headwinds that have hindered the pace of recovery are fading.

Banks keeping most of QE3 benefits for themselves

Federal Reserve officials have been worried that their policy of ultra-low interest rates may be having less of an effect than usual because of a “broken transmission channel.” In plain English, this means the money hasn’t really been flowing smoothly from liquidity-flooded banks to would-be borrowers.

Economists at TD Securities argue banks have passed on less than half of their lower funding rates as reflected in yields on mortgage-backed securities onto consumers.

During the current iteration of monetary policy easing, pass-though peaked at 66% during the third week following the QE3 announcement, when MBS yields rebounded from their post-QE3 lows and 30-year mortgage rates fell to a record-low 3.36%. However, since the QE3 announcement, our calculations suggest that banks have passed through an average of just 40% of their lower funding rates (i.e. lower MBS yields) in the form of lower mortgage rates.

Ambling through the archives: Don’t blame the deficit, 1983 edition

The battle over the amount and nature of government spending is the focus of the current U.S.presidential campaign and is unlikely to go away even after the November election is well in the rear view mirror.

In such a setting, a paper presented by economist Albert M. Wojnilower at the October 1983 Bald Peak Conference sponsored by the Federal Reserve Bank of Boston, sounds as timely today as it did then. Wojnilower, then chief economist at First Boston, prepared his “Don’t Blame the Deficit” talk as a commentary on “Implications of the Government Deficit for U.S. Capital Formation,” a paper by Benjamin M. Friedman, a professor of political economy at Harvard.

Here is the jist of Wojnilower’s argument, made almost three decades ago when the Ronald Reagan presidency was almost three years old: If the United States is under-investing, the “villain” is not the Federal budget deficit, he said.