Give me the Bad News

This post is going to make a new economic forecast look a bit less hopeful. If you're looking for better news, I recommend that the reader link over The Good News Economist instead.

Yesterday, the National Association of Business Economists (NABE) released it's May economic outlook. The outlook predicts that the recession will end this year and that 2010 will see 2.7 percent growth (Q4 to Q4). Now NABE is not a group of bulls, they call the growth beginning this year a "subpar 1.2 percent rate in the second half."

The group gives a fair estimate. It just buries some of the information. When talking about 2010, the release says that growth "is slated for a return to near its historical trend." That's true growth in the high 2 to low 3 percent range has not been uncommon in the US of late. The problem is that we still had a recession, so while growth is back on trend the level of GDP remains off trend.

Taking a look at the rates predicted by NABE, one can produce the chart below (if you also pull in the BEA's GDP data).

I do assume that the 2.7 percent annualized rate is constant across quarters. This is not entirely realistic but if the 2.7 holds then shifting the quarter growth will likely only make the recovery happen more slowly. In either case until the third quarter of 2010, GDP is lower than it was when the recession began and by the end of 2010 growth since the beginning of the recession (according to NBER in December of 2007), is only .0456 percent.

A Picture is Worth a Third of your Housing Wealth

Thanks to Vincent Reinhart and Nick Schulz, we have a new spiral figure of the US home prices up at The American's Enterprise blog.

The new spiral shows that US home prices in 20 major urban areas are down 31.4 percent from their peak in May of 2006. This rapid decline follows the bubble in housing prices that drove the 20-city index to increase 74 percent between January 2000 and December 2005, data for available five year changes are below.



While, it may not make sense for home prices to remain flat over time, in fact longer time series show real growth, there may still be room for prices to continue falling. The supply of new homes is falling, which may help to stabilize the price over time.

Households seek less debt

A letter out of the Federal Reserve Bank of San Fransisco shows that American households are a lot like their banks, neither wants to be carrying much debt right now. The Federal Reserve Bank looked at the ratio of household debt to personal disposable income and found that since the recession began there has been a slight decline. From an all time high of 133 percent in 2007, the ratio now stands at 130 percent.

According the the report, "going forward it seems probable that many US households will reduce their debt." The report even finds that the US could face a situation similar to Japan in the 1990's and push the debt ratio below 100 percent. This all makes sense given that the most prominent avenue to wealth creation in the US his home ownership, which has seen rapid declines in value over the last year. As the New York Times reported in March, household wealth dropped about 9 percent in 2008. Yet house prices have fallen faster, almost 19 percent year over year in 2008 and 30 percent from their 2006 peak.

An honest deleveraging will require casting off much more debt. Of course, given that much of this is mortgage debt there is likely to be a long adjustment

Investment Plummets says EU Release

A new release out of the European Union's Eurostat program today, provides a glimpse at how the global recession has impacted financial flows. A release today tells that foreign direct investment in the 27 EU member countries fell 60 percent last year. Investment from the US to the EU fell particularly hard to 45 bn euro in 2008 from 194 bn euro in 2007, down 76.8 percent. At the same time those 27 countries invested 30 percent in the rest of the world.

Of course this data represents corresponds to the freezing of credit markets last fall. Yet it may also indicate changes in long-term investment expectations. Foreign direct investment (FDI) is seperate from pure financial flows that includes a wider array of short-term investments in stocks, currency, etc. FDI focuses on "obtaining a lasting interest by the investor in one economy in an enterprise resident in another economy." The Eurostat release lists purchases that buy more than 10 percent of a firm's stock in this way. Think of Inbev's purchase of Anheuser-Busch.

These declines come just as President Obama seeks to change profit repatriation laws to reap more tax revenue. Criticism of the plan exists both at home and in EU countries like Ireland, which has been a beneficiary of American subsidiary profits to tax. If investment falls, the impact of such taxes changes may be less than everyone expects.

Treasury Doubles Down on Risk

Treasury Secretary Timothy Geithner is now finishing a speech to the Community Bankers of America. Full text here. He's just announced, to large applause, that the Treasury Department finds itself addicted to private lending.

Treasury plans to used the "proceeds of repayments we expect to receive from some of the largest banks" to allow banks with total assets of less than $500 million to re-apply to the Capital Purchase Program (CPP). The CPP, which is the bulk of the TARP funding, will now be going to small public and private corporations and mutual intuitions, among other types. This applies both to banks that have applied previously and new applicants. Treasury will also extend the deadline for small banks to form holding companies and re-apply to CPP for the next six months.

This move puts the returns gained from CPP back up for market risk. In addition is does so just as markets appear to be recovering and we should be encouraging private capital not flooding another round of government investment.

In his remarks Geithner stressed that these community banks, such as Farmers National which has $400 million ins assets and received $7.5 million from CPP were healthy before they received CPP. Treasury's lending too such can make a "viable bank stronger and ensure that it could lend more aggressively."

Yet we know that smaller institutions were low on the totem pole of CPP from the start. The largest amount of funds went to small number of institutions in a short time, as I've posted previously. CPP began about crisis management and that lending strategy made sense. Yet CPP is beginning to look more like industrial policy. In fact if Bank of America, the firm which according to the Fed's stress test needs to raise the most capital of the 19 banks tested has already found $7.4 billion of its required $34 billion in private capital, "viable" banks should be encouraged and able to raise private capital. In fact the stress test made such encouragement. Yet in his comments to small banks, Geithner make no calls for them to raise private capital.

"a" Gifts: Thoughts on the 2009 Trustees Report

Today, the Social Security Trustees released their annual report for 2009. It's an annual event that Meagan McArdle of The Atlantic referred to as "every journalist's favorite annual kabuki ritual."

 For those looking for the headline news, the Trustees have given the program a more bleak forecast than last year. The program is no expected to begin running deficits one year earlier, in 2017 and the Trust Fund will be exhausted four years earlier in 2034.

For those who don't want the wonkish titular explanation, please leave this post now and go read LOLFed (seriously, it's great). For the few of you left, a few thoughts.

1. Social Security "current law" crisis deniers are not putting their money on the table to support their assertions. Unlike the US general budget, the Trust Fund is accounted for seperately and only used for Social Security. In addition to taking in payroll taxes, and some intra-government transfers, the Trust Fund also accepts gifts. This year, even as Social Security turned 70, few gave. In fact the amount is a generic footnote in a table "a. $-.5 to $.5 million." Ouch. Especially since I think such gift programs could be successful at gauging public demand for government services if they were available more broadly in this line item fashion.

2.  There's no COLA, and no need for a COLA. Get over the COLA

When it comes to pop, we all know there are healthier beverage options but flavored sugar water is always tempting and ultimately unsatisfying. It's the same with COLAs (Cost-of-Living Adjustments). There be no COLAs until at least 2013 since inflation is expected to remain low.  When I say 'expected' I mean by government agencies like CBO who believe that the Fed can quickly unwind toxic, uh "legacy assets." For an alternative inflation outlook see Alan Meltzer.

Yet the National Committee to Preserve Social Security and Medicare (NCPSSM) says we need to ensure that everyone gets a COLA. I agree with NCPSSM that retirees do have a consumption basket skewed toward higher health spending. I'd also like to know that those same seniors draw on Social Security and the other program NCPSSM wants to protect. Currently, these programs serve most retirees well. 

Unemployment Rises to 8.9 percent

The Bureau of Labor Statistics released the unemployment rate for April today. It's estimated at 8.9 percent of the labor force, an increase from 8.5 percent in March. This is moth a slower job loss than last month and not much of a surprise. I wanted to point out two quick things.

1. The "rosey" assumptions in the Obama FY2010 Budget look more unrealistic with time. Below I've charted the US unemployment rate so far this year along with projections needed to match the average unemployment rates predicted in the budget (8.1 percent) and by CBO (8.3) back in January.

The figure assumes that unemployment declines at a constant rate each month to reach the average. Already unemployment would have to decline by .2 percentage points a month to 7.3 percent by year's end to meet the budget's annual average. Yet the administration projects an average of 7.9 percent unemployment in 2010. So it's going to take some wild gyrations in unemployment to get these results. I've dismissed these assumptions before but the numbers, for unemployment at least, continue to underscore just how off they were.

2. I'm glad to see that BLS gave attention to something I've blogged about previously, the growth of discouraged workers. The chart below from BLS show that discouraged and marginally attached workers have grown during this recession.

Do you Own the Shirt on your Back?

According to a report out of the UK, it looks like much of what Americans "own" is actually borrowed. The chart below is taken from the UK's Financial Services Authority Turner Report. Of course, the important follow-up question to ask is: "What sort of activities is all this debt financing?" If the answer is education or job training we may be able to get a good return. Yet the more likely result, that we are borrowing to finance present consumption means that there may not be the future resources to repay all this debt.

Markets but not Capitalists

A new Rasmussen poll out yesterday shows that only 35 percent of American voters find free market economies and capitalist economies to be the same thing. Rasmussen says that:

This helps explain earlier data showing that 77% prefer a free market economy over a government managed economy while just 53% prefer capitalism over socialism.

Yet the more important question is why are the two seen as so different. Assuming that their are no sample errors unique to either poll (I'd be shocked if their were), people are exhibiting different reactions to terms often thought of as synonymous. The result of the most recent free market study was supported by a March survey by the Pew Research Center that found that 70 percent of of American believe that they were better off "in a free market economy even though there may be severe ups and downs from time to time." (HT: AEI President Arthur Brooks. Note that Brooks' article "The Real Culture War is Over Capitalism uses both "capitalism" and "free markets" to talk about is values).

A few points may make the difference:
1. Capitalist can refer to a person. In fact, a kind of person whom a Google search is likely to caricature like JP Morgan: fat, bearded, and wearing a suit that would surely have been devoured by moths decades ago.

2. Free markets are almost always the purview of international trade. Domestic "free" markets are typically pretty settled. Only in rare cases, say the need to contain invasive creatures are products not allowed across local, state, or provincial lines. It's the national borders where goods are stopped. Maybe trade gets more positive association than the actual method of production.

3. People really have no idea what a capitalist system is.

Learning Large Numbers

The slew of numbers coming out of Federal programs, from the $1.25 trillion that the Federal Reserve will spend on asset purchases to the Obama administrations $3.5 trillion budget, have many struggling to figure out how to comprehend these numbers.

NPR took an academic approach. Video bloggers have taken to using piles of pennies to represent the budget The online project, Econ4U, who recently took out large ads in DC Metro stations, did stand-up interviews asking "How Many Millions Are in a Trillion?" Only 21 percent of respondents got the question right.*

The concern is great and if the goal is simply to inform people it's doing a good job. Yet any hopes that people might apply, or that that matter retain, their knowledge suffers from the same problems that "awareness" movements always have: how to turn knowledge into action. Given the struggles people have to exercise or eat right despite an array of knowledge on health, convincing them to act on difficult to conceive deficits with abstract comparisons may not be an effective pressure on policy.

*The correct answer is a million million.