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April 30, 2012
Is Personal Income Growth (Finally) Stabilizing?
For the second month in a row, personal disposable income (DPI) grew at a faster rate, advancing 0.4% in March—the best pace so far this year, according to today's update from the U.S. Bureau of Economic Analysis. It’s also the first month since December that DPI growth exceeded the increase in personal consumption expenditures, which gained 0.3% last month.
The improvement comes after months of sluggish growth in DPI, a downshift that has weighed on the year-over-year rate for this series and thereby darkened expectations for the broader economy. But with today’s update, it’s tempting to consider the possibility that income growth has found a floor. If so, the stability will help alleviate fears that a new recession is lurking.
Technically, DPI’s annual percentage change last month fell for the sixth straight month (2.77% in March vs. 2.83% in February). But rounding those changes to one decimal point reveals the first time that DPI’s annual pace has dropped since last August. The bigger test will come in a month, when we'll learn if today's DPI news was a fluke or not.
Meantime, some analysts are already changing their views. "This [income and spending] report sets up fairly well for the second quarter," predicts Peter Newland, a U.S. economist at Barclays Capital Inc. "What was encouraging was that the income numbers improved. Our expectation is that job growth does increase gradually."
"The trend is good from the perspective that incomes are outpacing spending, so we don't see consumers dipping into savings as much," advises Kathy Lien of GFT Forex. "Of course, markets like increased spending, but in this situation it's a healthy trend in terms of reducing household debt levels."
With all of the major economic reports for March published, it’s clear that the U.S. economy avoided a recession in the first quarter. But it's also true that growth turned wobbly—job growth slowed sharply last month, for instance. Does that spell trouble for April and the months ahead?
The week before us will deliver the first round of statistical clues, starting with tomorrow’s update on the ISM Manufacturing Index for April. Briefing.com reports that the consensus forecast calls for a slight retreat vs. March, but at a reading that's still comfortably in the growth camp. The big news is scheduled for Friday: the payrolls report for April. The consensus view sees a modest improvement over March's disappointing pace. That's better than another decline, of course, but if private-sector job growth is now running at well under 200,000 a month, as per the forecast for April, the crowd's capacity for digesting disappointment will remain low.
Why is economic growth running at a slower pace these days? The warm winter theory remains a popular explanation. “Companies that did not fire as many workers as usual do not have to hire as many workers as we go into the spring season,” BNP Paribas economist Yelena Shulyatyeva tells Marketwatch. “A good example is in construction. Builders did not have to stop working because of the record warm weather.”
Posted by jp at 9:59 AM | Comments (0)
Strategic Briefing | 4.30.12 | U.S. Recession Risk
Sluggish U.S. growth continues
James Hamilton (Econobrowser) | April 27
The slow pace of GDP growth continues to disappoint, particularly for the 12.7 million Americans actively looking for jobs and still unable to find them. On the other hand, the U.S. is unquestionably better off than would be the case had the September prediction of the Economic Cycle Research Institute that the U.S. was about to enter another recession proved to be accurate. The latest GDP report brings our Econbrowser Recession Indicator Index down to 4.0%. For purposes of calculating this number, we allow one quarter for data revision and trend recognition, so the latest value, although it uses today's released GDP numbers, is actually an assessment of where the economy was as of the end of the last quarter of 2011. The index would have to rise above 67% before our algorithm would declare that the U.S. had entered a new recession.
May 2012 Economic Forecast: Continued Expansion Predicted
Global Economic Intersection | April 30
The Econintersect May 2012 economic index shows underlying economic fundamentals continue to show economic expansion – and the dip in the rate of growth rebounded somewhat in this forecast.... Recession markers of real GDP, real income, employment, industrial production, and wholesale-retail sales growth remain well away from recession territory.
Chicago Fed: Economic Activity Decreased in March
Doug Short (dshort.com) | April 26
With the exception of the 1973-75 recession, the -0.7 level has coincided fairly closely with recession boundaries. The 1973-75 event was perhaps an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. Otherwise a cross below the -0.7 level has synchronized within a month or two of a recession start. A cross above the level has lagged recession ends by 2-4 months.
Growth outlook undeterred by March payroll report
Mike Dueker's Business Cycle Index (Russell Investments) | April 13
The Business Cycle Index (BCI) and forecasts of it were little changed following the March 2012 nonfarm payroll employment report, even though it is an important component of the BCI and the 120,000 gain in employment was well below consensus forecasts of a little more than 200,000 jobs. The reason is that the BCI model's forecast of March payroll employment from the previous month was only 137,000 jobs, so there was little impetus to revise the BCI model outlook. Current reading and trend: The BCI is now expected to remain over 1.0 standard deviations above zero until June 2014, which represents a decent run of solid economic conditions. Financial market indicators in the construction of the BCI are at values that neither add nor subtract significantly to/from the business cycle outlook.
ECRI Weekly Leading Indicator: The Growth Index Slips Again
Doug Short (dshort.com) | April 27
Triggered by another ECRI commentary, Why Our Recession Call Stands, I'm now focusing initially on the year-over-year growth of the WLI rather than ECRI's previously favored, and rather arcane, method of calculating the WLI growth series from the underlying WLI (see the endnote below). Specifically the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began....the WLI YoY is currently at a lower level than at the starting month for five of the seven recessions during the published series. Of course, the same can be said for its interim YoY trough in 2010. In any case, the behavior of this indicator over the next quarter or so will be especially interesting to watch.
Posted by jp at 5:47 AM | Comments (0)
April 28, 2012
Book Bits | 4.28.2012
● End This Depression Now!
By Paul Krugman
Adapted excerpt via The New York Times
When the financial crisis struck in 2008, many economists took comfort in at least one aspect of the situation: the best possible person, Ben Bernanke, was in place as chairman of the Federal Reserve. Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different. Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.
● The Little Book of Emerging Markets: How To Make Money in the Worlds Fastest Growing Markets
By Mark Mobius
Summary via publisher, Wiley
The world's economies are in a state of flux. The traditional dominance of the G7 countries is being challenged by emerging market nations like Brazil and India, and while investment opportunities in these countries abound, the risks can be extremely high. In this Little Book, Mark Mobius, an internationally-renowned expert on emerging market funds, explains the ins and outs of emerging market investment, providing practical guidance on picking industries and companies likely to win, and explaining why policies and regulations matter as much as balance sheets, how to recognize global contenders, techniques for managing risk, and how to get out at the right time.
● Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society
By Jim Manzi
Review via The New Republic
Did Obama's Stimulus increase employment, or would employment have risen even without it? Will the Affordable Care Act increase health insurance coverage without causing medical costs to skyrocket? Would national testing of children improve education or worsen it? Most urgent questions of public policy turn on empirical imponderables, and so policymakers fall back on ideological predispositions or muddle through. Is there a better way? Maybe government could do a better job at finding the facts. Jim Manzi proposes that policymakers rely on better empirical research. The gold standard for empirical research is the randomized field trial (RFT). Suppose that a pharmaceutical company claims that a new drug will cure baldness. The best way to test this claim is to randomly select two groups of bald men, and give the drug to members of one group and a placebo to members of another group. If the men in the first group sprout hair, while those in the second do not, we obtain strong evidence that the drug functions as advertised.
● Gold Bubble: Profiting From Gold's Impending Collapse
By Yoni Jacobs
Interview with author via Yahoo/The Daily Ticker
For the past decade, gold has been an incredible investment, rising from under $300 per ounce to as high as $1,900 per ounce before retreating to around $1,650 in recent trading. For the bulls, gold's recent drop is nothing more than a temporary setback on its inexorable march toward $2,000 and beyond. The case for gold rests primarily on factors familiar to anyone who's even remotely familiar with the metal: easy money from central banks around the world and rising demand from emerging economies, notably China and India. But all good things must come to an end and Yoni Jacobs, chief investment strategist at Chart Prophet, believes gold's best days are behind it. In fact, Yoni believes there's a bubble in precious metals that's about to collapse as detailed in his book, Gold Bubble: Profiting from Gold's Impending Collapse.
● Earth Wars: The Battle for Global Resources
By Geoff Hiscock
Summary via publisher, Wiley
The global competition for scarce natural resources that pits the West against the super-hot economies of China and India, plus a clutch of other contenders including Russia, Brazil, and Indonesia, has become one of the biggest issues facing the world today. Whether it is the rare metal lithium found in salt pans in the Andes, gas from the Caspian Sea, oil off the coast of Brazil, coal from Africa's Zambezi River, or uranium from Kazakhstan, China and India are desperate to ensure the security of their future energy supplies. The same goes for food and water, as contamination and over-use take their toll, the need to provide continued access for the next generation and beyond has increased exponentially. In Earth Wars: The Battle for Global Resources, international business journalist Geoff Hiscock explores the problems, potential solutions, and inevitable tensions in this ongoing scramble for finite natural resources.
● What Money Can't Buy: The Moral Limits of Markets
By Michael Sandel
Review via The Daily Beast/Newsweek
The book takes on what Sandel calls the “imperialism” of economic ideas. He thinks we’re in thrall to markets and use them to answer questions that markets aren’t meant to answer. “We are in the grip of a way of looking at the world and social life and even personal relations that is dominated by economic ways of thinking. That’s an impoverished way of looking at the world,” he says. One would expect Wall Street to figure prominently in this book, but What Money Can’t Buy says almost nothing about it. Instead, he challenges all of us to look at how we’ve allowed markets to pervade our public life. He argues that the spread of market philosophy has created what he calls “a consumerist idea of freedom,” in which we think our highest freedom is what we consume. Our obsession with consumption limits our freedom to engage in a full civic life.
● The Great Divergence: America's Growing Inequality Crisis and What We Can Do about It
By Timothy Noah
Interview with author via NPR
Thirty years ago, CEOs of America's largest businesses earned an estimated 42 times as much as their average employee. These days, that number has jumped to more than 200 times as much, by many counts. Since the economic crisis of 2008, there has been much more focus on income inequality, not just from economists and social scientists, but also from politicians and from protesters who occupied Wall Street. While there's no argument about what happened, there's plenty of debate about why and what — if anything — should be done to correct it. In a new book, The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It, journalist Timothy Noah traces the causes of the growth in inequality and prescribes some solutions that may or may not prove politically palatable.
● Compassion, Inc.: How Corporate America Blurs the Line between What We Buy, Who We Are, and Those We Help
By Mara Einstein
Summary via publisher, University of California Press
Pink ribbons, red dresses, and greenwashing—American corporations are scrambling to tug at consumer heartstrings through cause-related marketing, corporate social responsibility, and ethical branding, tactics that can increase sales by as much as 74%. Harmless? Marketing insider Mara Einstein demonstrates in this penetrating analysis why the answer is a resounding “No!” In Compassion, Inc. she outlines how cause-related marketing desensitizes the public by putting a pleasant face on complex problems. She takes us through the unseen ways in which large sums of consumer dollars go into corporate coffers rather than helping the less fortunate. She also discusses companies that truly do make the world a better place, and those that just pretend to.
Posted by jp at 5:47 AM | Comments (0)
April 27, 2012
US Economic Growth Slows In Q1, But Annual Pace Quickens
U.S. economic growth slowed in the first quarter, the Bureau of Economic Analysis reports. Q1 GDP grew at an annual 2.2% rate in the first three months of 2012, considerably slower than the 3.0% increase in last year’s fourth quarter. The downshift will surely feed worries that the economy is struggling, particularly after the sharp drop in March durable goods orders and the modest upturn in recent weeks in new jobless claims. But today's GDP report isn’t a smoking gun for arguing that a recession is imminent. Measured on a year-over-year basis, GDP growth accelerated, which suggests that the economy still has enough forward momentum to steer clear of a new downturn for the immediate future.
Let's review the numbers by starting with the traditional measure of GDP: real (inflation-adjusted) quarterly changes. As the chart below shows, there's been an obvious slowing of growth. As today's government release explains, "the deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in [personal consumption expenditures] and in exports." As a result, the pace of growth slowed for the first time in a year.
But it's a different story when we look at the year-over-year percentage change in real GDP. As the second chart indicates, GDP's annual pace increased moderately to 2.1% in this year's Q1 vs. 1.6% in last year's Q4.
That's encouraging in the sense that it suggests that a new recession isn't brewing, or so this data series implies. New recessions tend to be preceded/accompanied by slowing annual rates of GDP, which is clearly not the case in the latest numbers.
Nonetheless, this bit of good news comes with the usual caveats, starting with the possibility that today's Q1 GDP number will be revised downward. Even if the Q1 data holds, that's no assurance that Q2 is immune to trouble. But for the moment, it's fair to say that today's GDP update is a mixed bag for looking ahead.
"The U.S. economic expansion continues at a modest to moderate rate, with little momentum but should pick up somewhat later this year as business investment gets back on track," advises Sal Guatieri, chief U.S. economist at BMO Capital Markets.
“Consumers are remarkably stable and steady,” notes Julia Coronado, chief economist for North America at BNP Paribas. “We’ll need to see final demand continue to improve. We’re still in muddling-along territory.”
Joel Naroff, chief economist at Naroff Economic Advisors, thinks that the economy will stay out of the cyclical ditch for the rest of the year. According to the L.A. Times, he expects 3% growth for 2012 overall. If so, that would be a substantial improvement over last year's sluggish 1.7% increase.
"There's nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing but nothing more," opines Steven Baffico, chief executive at Four Wood Capital Partners.
Posted by jp at 9:53 AM | Comments (0)
Three Regional Fed Surveys Report Slower Growth In April
April's economic activity appears mixed, according to business surveys published by four regional Fed banks. Although all four updates reflect continued growth, three of the four indicate a slower pace of expansion in April vs. March. Only the central Atlantic region via the Richmond Fed indicated faster growth for the month. Here are excerpts from each report:
Empire State Manufacturing Survey (New York):
The Empire State Manufacturing Survey’s headline index fell significantly in April, though it still indicated a modest increase in activity. The general business conditions index dropped fourteen points to 6.6, suggesting that while growth continued, the pace slowed over the month. The new orders index was little changed at 6.5, indicating a modest increase in orders, and the shipments index fell twelve points to 6.4, indicating a slower pace of growth for shipments. The unfilled orders index fell six points to -7.2, and the delivery time index dropped three points to 4.8. The inventories index was little changed at 1.2, suggesting that inventory levels held steady.
Philadelphia Fed Survey
Manufacturing firms responding to the April Business Outlook Survey indicated that regional manufacturing activity expanded modestly this month. The survey’s broad indicators for general activity, new orders, and shipments all remained positive but fell slightly from their readings last month. The indicator for current employment, however, showed a notable improvement. Price pressures were only slightly more widespread this month. The survey’s broad indicators of future activity remained at relatively high readings, and firms were more optimistic about their plans for hiring over the next six months.
Kansas City Fed Manufacturing Index
The Federal Reserve Bank of Kansas City released the April Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that growth in Tenth District manufacturing eased further in April, but activity remained expansionary and well above year-ago levels. Factories in our region report continued growth, especially in employment, but at somewhat slower rates than in previous months, when unseasonably warm weather may have helped boost activity said Wilkerson. Expectations for the rest of the year notched down a bit as well, but remained positive.
Richmond Fed Manufacturing Survey
Manufacturing activity in the central Atlantic region advanced somewhat faster in April following slightly slower growth in March, according to the Richmond Fed’s latest survey. A significant increase in the shipments component pushed the overall index higher, while employment grew at a rate above March’s pace and growth in new orders held nearly steady. Most other indicators also suggested solid activity. District contacts reported capacity utilization grew more quickly, while backlogs grew more slowly. In addition, manufacturers reported that delivery times lessened, while inventories grew at a somewhat higher rate.
Posted by jp at 5:01 AM | Comments (0)
April 26, 2012
Has The Labor Market Hit A Wall... Again?
Weekly claims for new unemployment benefits are in a holding pattern these days. But holding for what?
For the third straight week, new claims hovered at just under 390,000 on a seasonally adjusted basis last week, the Labor Department reports. That's the highest since January and it's a sign that recent revival in the labor market has slowed. That was certainly the case with the March payrolls report, which reflected a sharp slowdown in jobs creation. The modest rise in jobless claims in recent weeks implies that there may be more to the new sluggishness in the labor market than one drab month for payrolls.
But if the recent rise in jobless claims is worrisome—and it is—there's still room for debate about what it means on a broader scale for the weeks and months ahead. Even with last week's seasonally adjusted 388,000 tally, new claims are still near the lowest levels in nearly four years. As the chart above reminds, weekly filings have been falling fairly persistently for most of the past year. A few weeks of modestly elevated numbers doesn't erase this progress, but the question is turning to whether the progress has hit a wall?
“It’s just so hard for companies to be confident and start hiring,” Yelena Shulyatyeva, an economist at BNP Paribas in New York, tells Bloomberg. “We believe that March is probably not the end of the modest readings on payrolls.”
It's surely troubling that the year-over-year momentum has faded recently. The annual percentage change for the raw, unadjusted jobless claims numbers has moved dangerously close to zero in the last two weeks. That's a signal that something has changed, if only on the margins. Two weeks falls well short of definitive proof that the game is over, but a few more numbers like this and it'll be time for a sober reassessment of the labor market's prospects for continued growth.
Meantime, there's a growing collection of troubling signs elsewhere on the macro landscape, starting with today's update of the Chicago Fed National Activity Index: "All four broad categories of indicators that make up the index deteriorated from February, with the production and income and personal consumption and housing categories both making a negative contribution to the index in March," advises the accompanying press release.
The retreat only feeds the anxiety after yesterday's weak durable goods report. The ongoing deceleration in personal disposable income growth and the recent stagnation in industrial production aren't cheering anyone either.
On the bright side, consumers continue to spend at a brisk pace, based on the March report for retail sales. But Joe Sixpack may not be reading the economic reports as closely as yours truly. Eventually, however, the word will drip out.
What's beyond debate is that a strong labor market is the critical factor, particularly now. It's premature to assume the worst, but unless there's convincing evidence to the contrary soon it's going to be increasingly difficult to think optimistically. Once again, for the third year in a row, spring has left us betwixt and between.
"This was a disappointing number and offers more evidence that the labor market continues to lose traction," notes Joe Manimbo, an analyst at Western Union Business Solutions via Reuters.
The priority now is looking for economic news that refutes the recent gloom surrounding the latest batch of numbers. The next opportunity for at least partial statistical redemption arrives tomorrow, with the government's first guess at first-quarter GDP. Alas, the consensus forecast sees only a 2.5% gain for the U.S. economy in the opening three months of 2012, according to Briefing.com, or down from 3.0% in last year's Q4.
Posted by jp at 9:39 AM | Comments (2)
Parsing The Finer Points Of "Reckless" Behavior For Monetary Policy
The word "reckless" is defined as acts that are irresponsible, wild, thoughtless, and the byproduct of someone who is utterly unconcerned about the consequences of some action. And for the record, Fed chairman Ben Bernanke wants you to know that he will tolerate none of those personal failings as a steward of the nation's monetary policy.
When asked yesterday, at the Fed's news conference, about whether he would lead the central bank to use all of its monetary levers to revive the economy, including raising the inflation target, the chairman dismissed the idea:
I guess the — the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate?
The view of the committee is that that would be very reckless. We have — we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.
His answer is said to be a response to Paul Krugman's new critique of Bernanke. Krugman's complaint is that the Fed isn't doing enough to address the economic weakness, the high unemployment rate in particular. Given Bernanke's previous views about Japan's economic malaise, the chairman's latest commentary sounds misplaced, Krugman advises:
In a hard-hitting 2000 paper titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Bernanke declared that “far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He proceeded to lay out a number of actions the Bank of Japan could take. And he called on Japanese policy makers to act like F.D.R. and do whatever it took: “Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.”
The problem, as Krugman sees it, is that "Chairman Bernanke’s Fed has been much more passive than Professor Bernanke’s writings would have led us to expect." He's not alone in wondering why the Fed head changed his mind. David Beckworth writes that "many observers have been baffled by the transformation of Ben Bernanke the academic who argued the Bank of Japan in the 1990s was not trying hard enough to restore aggregate demand to Ben Bernanke the central banker who now seems to be making the same mistakes for which he criticized the Japanese."
Bernanke's defense is that "we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target."
Marcus Nunes asserts that Bernanke's "sole concern" all along has been one of preventing deflation, and so there's really nothing surprising by the chairman's reluctance to embrace the medicine that he recommended for Japan all those years ago.
But if there's a method to Bernanke's monetary madness, there are also risks. Scott Sumner sums up the potential pitfall for Bernanke in claiming that keeping the U.S. out of the deflation ditch is the main priority:
I think what Bernanke meant to say was that the Fed should not raise its long run inflation goal when unemployment is high. And that’s certainly a defensible proposition. But he didn’t express this view clearly, and hence got hammered by people like Paul Krugman and Brad DeLong. And I can’t blame them, because the Fed is acting as if they don’t care at all about the unemployed. It’s acting like the ECB. Inflation has averaged much less than 2% since mid-2008, which would be an excessively tight policy even if the Fed didn’t care at all about the suffering of the unemployed.
My hunch is that Bernanke does care about the unemployed, and wishes the Fed had done more. My hunch is that he doesn’t have the Fed with him, but feels forced to defend Fed policy for political reasons. This is very awkward, and he occasionally stumbles. (It’s also a very poor reflection on Obama’s leadership, as he appointed 80% of the Board of Governors, including Bernanke.)
Defining "reckless," it seems, may not be so simple after all.
Posted by jp at 6:14 AM | Comments (0)
April 25, 2012
March Durable Goods Orders Drop Sharply
The margin of safety for durable goods orders is wearing thin. This series isn't forecasting a recession, at least not yet, but it's now the closest to crossing the line since the U.S. slipped into macro darkness in 2008.
The Census Bureau reports that new orders for manufactured durable goods dropped 4.2% in March on a seasonally adjusted basis. That's the steepest monthly decline since the Great Recession was slicing into business activity in 2009. Business investment (new orders for nondefense capital goods ex-aircraft) fared better, dropping only 0.8% in March. But it's hard to ignore the overall trend of late, which looks increasingly bearish on a monthly basis.
Monthly numbers for new durable goods orders are a volatile lot, of course, and so it's crucial to cut through the short-term noise in search of the bigger picture for this series, which is widely considered one of several leading indicators of future economic activity. Unfortunately, there's not much cheer to report here either: New orders for both durable goods and business investment rose a slim 2.7% and 3.9%, respectively, on a year-over-year basis. Those are the lowest annual growth rates since 2009.
It's troubling that the year-over-year percentage change for both series now appears to be stuck in a persistent deceleration phase. The growth rate didn't sink this low, or slow this quickly, in the previous two spring soft patches of 2010 and 2011. Is this a sign that the economy is destined for a deeper slowdown this time? Short of a miraculous rebound in the next update on durable goods and other indicators, it's hard to look at the latest numbers as anything other than a considerably dark warning sign.
Even worse, the downshift in new orders on an annual basis joins a similar trend in disposable personal income, which has been in deceleration mode for months. Adding to the gloom is the dramatic slump in job growth in March.
"This adds to the evidence that momentum in the economy sort of fell flat in March," Ellen Zentner, a senior economist at Nomura Securities, tells Reuters in reference to today's durable goods report.
The question is whether the fall was temporary? Judging by the rise in the Conference Board's leading index for March, there's a case for optimism. Or does the durable goods news trump that view?
We'll know the answer soon enough as new data from other corners of the economy roll in for March. Next up is tomorrow's weekly update on jobless claims. Recent numbers have looked a bit weak, as I discussed last week. Suffice to say, the crowd's not likely to be forgiving if tomorrow's update brings decisively bad news. For the moment, however, the outlook is relatively sunny. The consensus forecast anticipates that new jobless claims dropped by a healthy 13,000, according to Briefing.com.
We'll also learn tomorrow how the overall economy fared last month by way of the Chicago Fed National Activity Index. The update for February looked encouraging. A repeat performance for March would go a long way in boosting sentiment. Today's durable goods news, however, suggests that we may be headed for a run of negative surprises.
Posted by jp at 9:46 AM | Comments (0)
Strategic Briefing | 4.25.12 | A New Recession For Britain
UK slides back into recession
Reuters | April 25
Britain's economy is in its second recession since the financial crisis, data showed on Wednesday, heaping pressure on Prime Minister David Cameron's coalition government as it battles a series of political embarrassments. The unexpected contraction in the first three months of 2012 - a 0.2 percent dip in gross domestic product - confounded forecasts for 0.1 percent growth.
Britain falls back into recession in first quarter
MarketWatch | April 25
The results deal a blow to the British government and Chancellor of the Exchequer George Osborne, who have insisted that austerity measures will set the stage for growth.
UK back in recession
The Independent | April 25
The decline in gross domestic product (GDP) was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth, the Office for National Statistics (ONS) said.
U.K. Returns to Recession in First Quarter on Building Slump
Bloomberg | April 25
The fall in GDP from the fourth quarter was due to a 3 percent drop in construction, the most since the first quarter of 2009, and a 0.4 decline in industrial production. Manufacturing contracted 0.1 percent. Services, the largest part of the economy, expanded by 0.1 percent, boosted by transport, storage and communication. Rising energy prices, government spending cuts and anemic wage growth are squeezing consumers, creating a drag on the recovery. Pay growth slowed to 1.1 percent in the three months through February, less than a third of the inflation rate.
UK economy in double-dip recession
BBC News | April 25
The BBC's chief political correspondent, Norman Smith, said the Treasury was again blaming the difficulties facing the UK economy on the eurozone, with sources saying the eurozone is predicted to enter recession and therefore "it would be hard for the UK to avoid one". Some 40% of the UK's exports go to the eurozone.
Did the euro crisis cause the double dip recession?
The Guardian | April 25
I've been speaking to Tim Leunig, chief economist at the liberal thinktank Centre Forum. He told me it's very difficult to tell from these figures the causes of the double dip. He said: "There's very little you can say about that either way unless the ONS say that exports have collapsed. The construction industry is not a eurozone issue. If the eurozone had done better other sectors might have grown. If it's construction it's not really the austerity measures either – it's not teachers losing jobs."
U.K. Economy Unexpectedly Slips Into Recession In Q1
RTT News | April 25
IHS Global Insight's Chief UK Economist Howard Archer said he strongly suspects that sometime down the line that the GDP data will be revised up to show modest growth in the first quarter, but by then the recession headlines will have been written.... In contrast to the official GDP data, the British Chambers of Commerce's Quarterly Economic survey suggested that the economy has returned to positive growth in the first quarter of 2012. Recently the International Monetary Fund lifted its 2012 growth forecast for the U.K. to 0.8 percent, which is same as the government estimate. Chancellor George Osborne, in his budget speech, said the Office for Budget Responsibility revised up its growth forecast for the economy this year from 0.7 percent.
Source: BBC News
Posted by jp at 5:46 AM | Comments (0)
April 24, 2012
What Happened To Peak Oil?
Fears that the world is running short of oil aren't going away, but judging by the latest figures on global oil production there's no sign that the peak oil factor is an imminent threat. Global output rose to a new all-time high last December, according to data from the U.S. Energy Information Administration (EIA): 75.384 million barrels per day, or just ahead of the previous peak of 75.170 million barrels a day in January 2011.
A new high may ease anxiety over oil supplies for the moment, but it's sure to be a temporary respite. All the challenges that have weighed on the outlook for raising production over the past decade are still with us. Discoveries of big, easily recoverable supplies are dwindling. Yes, U.S. consumption of oil has reportedly fallen 10% since 2005, but world demand keeps rising, mostly because of increasing growth from China, India, and other emerging markets that are rapidly industrializing and using ever larger quantities of fossil fuels.
Yet the peak oil theorists, if not wrong in the long term, seem to have been premature in warning that the summit for production was upon us. In 2009, for instance, one forecast for global oil production via The Oil Drum warned that output was set to fall by more than two million barrels a year. A decade ago, geologist Ken Deffeyes’ widely read book Hubbert's Peak: The Impending World Oil Shortage
Deffeyes is hardly alone in warning that the end is near for raising global oil production, as a sampling of the many book titles in recent years on the peak oil subject remind: The Party's Over
There is a peak out there somewhere, of course. Production for every commodity with a finite supply inevitably reaches a crest. The question, of course, is when? Estimating the date of the apex is problematic for several reasons. Technology, for instance, can change the analysis. If you can make cars more energy efficient, that's the equivalent of finding more oil, all else equal. That leaves us with the troublesome task of predicting what technology will bring in terms of energy savings in the years ahead.
Meanwhile, new and unexpected supply sources are increasingly rare, but they do pop up from time to time, such as the huge discovery in Brazil a few years ago. New finds require new estimates for the peak. Once again, technology must be factored into the analysis. History suggests that a given field's recoverable supply rises with improved technology through time.
Let's not forget that there's always doubt about the data, which further complicates the forecast of the peak. To cite just one example that illustrates the problem: Iran, one of the largest sources of crude oil on the planet. Anyone want to bet a year’s salary that the official numbers from Tehran have been accurate over the last 20 years?
In fact, all analytical roads lead back to the Middle East, starting with Saudi Arabia, which holds the title of the world’s large supplier of easily recoverable crude oil and the repository for most of the world’s spare production capacity. The kingdom, in other words, is the world’s great swing producer, allowing the country to effectively raise output relatively quickly. The late Matthew Simmons, a widely quoted oil analyst in his day, warned in his 2005 book Twilight in the Desert
As always, there’s the enduring question: Will it last? Can the world continue to increase oil production? Yes, according to the BP Energy Outlook 2030 published earlier this year. Good thing too, since total global consumption of crude is expected to rise in the decades ahead as well. How will the oil industry satisfy this thirst? “Rising supply to meet expected demand growth should come primarily from OPEC, where output is projected to rise by nearly 12 [million barrels per day]. The largest increments of new OPEC supply will come from [natural gas liquids] as well as conventional crude in Iraq and Saudi Arabia.”
EIA also expects global production to continue rising as far as the eye can see, for both OPEC and non-OPEC sources.
None of this deters the peak oil crowd. “Peak oil is a fact, not a theory,” asserts PeakOil.com
From US conventional oil production peaking in 1970 to global conventional oil production peaking in 2006 the figures are indisputable. Even institutions such as the International Energy Agency (IEA) and publications like The Economist that are not known for alarmism have admitted that oil production from conventional sources has peaked. So why are there still commentators out there that refuse to believe peak oil?
Rising production numbers are probably part of the answer.
Posted by jp at 10:15 AM | Comments (1)
April 23, 2012
Next Month In Boston: ETFs & Risk Management
I’ll be moderating the 2pm panel at IMN’s 3rd Annual World Series of ETFs & Investment Management conference on May 7 at the Seaport World Trade Center in Boston. The topic under discussion: using ETFs for managing downside risk.
The panelists:
Jerry A. Miccolis, chief Investment officer, Brinton Eaton Wealth Advisors, and co-author of Asset Allocation For Dummies
Howard Present, president and CEO, F-Squared Investments LLC
Mitchell D. Eichen, CEO, The MDE Group Inc.
Posted by jp at 5:16 PM | Comments (0)
Presidential Politics & The Business Cycle
War and the business cycle are the two primary factors influencing presidential elections. There are other forces, of course, but it's hard to win if one or both of these big-picture variables are working against you.
War is the more complicated political variable. It may help or hinder, depending on the conflict and the candidate. Franklin Roosevelt was never in serious danger of losing re-election during World War Two. Lyndon Johnson's political fate, on the other hand, was all but doomed by the Vietnam War.
The business cycle, by comparison, is much closer to throwing off political effects in a binary process. When the economy's growing, that's a big plus for your re-election prospects; recessions, on the other hand, almost always mean trouble for an incumbent seeking a second term. A smooth talker may be able to spin a troublesome war to his advantage in the public square of debate, but that's a much tougher challenge with a contracting economy.
There's always a danger of generalizing relationships, of course, but as Ray Fair, a Yale economics professor, notes in a newly updated edition of Predicting Presidential Elections and Other Things
As for the current incumbent, "the improving economy is swinging the pendulum in President Barack Obama's favor in the 14 states where the presidential election will likely be decided," the Associated Press reports.
But economic analysis that's filtered through a political lens is vulnerable to, well, politics. Economist Larry Kudlow, who makes no secret of his preferences for White House occupants whose political party begins with "R", opines that there's been little if any improvement on the macro front in terms of the President's odds for victory in November. "The unemployment rate may have come down to 8.3%," Kudlow allows. "But the problem for several years is that discouraged workers have been dropping out of the labor force. So real-world unemployment is considerably higher than the official stats." He continues:
And if all this weren't bad enough for the president, recent economic numbers are going in the wrong direction: Initial jobless claims have increased about 6%. Existing homes sales and housing starts have fallen the last two months. Manufacturing, which has been a very positive story (assisted by rock-bottom natural-gas prices from the shale revolution), actually fell last month. And while retail sales continue to be a bright spot, incomes after inflation — including high gas and food prices — may not be keeping up.
Another economist at the opposite end of the political spectrum argues that Obama's record on jobs isn't as dismal as the Republicans would have you believe. "Yes, Mr. Obama’s jobs record has been disappointing — but it has been unambiguously better than Mr. Bush’s over the comparable period of his administration," Paul Krugman writes.
This is especially true if you focus on private-sector jobs. Overall employment in the Obama years has been held back by mass layoffs of schoolteachers and other state and local government employees. But private-sector employment has recovered almost all the ground lost in the administration’s early months. That compares favorably with the Bush era: as of March 2004, private employment was still 2.4 million below its level when Mr. Bush took office.
If we consider Obama's political fortunes as directly tied to the presence or absence of a recession proper, then there's reason to think that the president's re-election prospects are still favorable, if only slightly. Economists and policy wonks can surely make a strong case that the economy is suffering, but it's debatable how much any of this is destined to throw the election to Mitt Romney, given what we know about the economy at the moment. Although no one thinks the recovery in the last several years has been adequate, what's relevant for November 6 is what happens between now and then. The operative question: Will the economy sink into a new recession? If it does, will it deteriorate soon enough, deep enough, to capsize Obama's job at 1600 Pennsylvania Avenue?
No one really knows the answer, although with the latest numbers in hand it's clear that the economy will have to suffer an unusually steep and dramatic decline in the next several months to cast a much darker pall over Obama's re-election odds. For instance, consider recent U.S. economic history based on the coincident and leading indicators published by the Philadelphia Fed. This particular set of indicators is compiled based on aggregating state data, in contrast with other methodologies that use national numbers. The message in the Philly Fed's leading index for the U.S. is that the economy overall will continue to expand. The Conference Board's leading indicator also anticipates continued growth.
If expecting the expansion to roll on is overly optimistic and there's a recession approaching, we should expect to see the leading indices tumble sharply in the next several months. Some analysts are warning of no less, in part based on the slowdown in job growth and industrial production in March.
But a slowdown in the rate of growth isn't a recession. With only six full months left before the election, the President can take some comfort from the fact that the overall economy is still growing, according to the broad sweep of economic data available. The American economy isn't likely to suffer another 2008-style sudden lurch downward without a dramatic shock, such as a new war with Iran that sends oil prices sharply and suddenly higher, or a new and dangerous phase in the euro crisis.
As for the U.S. economy, there's still a fair amount of forward momentum to keep a recession at bay for the foreseeable future. Some economists think otherwise, but that's a speculative view. If you're looking for a high-confidence prediction on the major turning points in the business cycle, there's a strong case for arguing that the best we can do is identifying new recessions early on in the process. In other words, once a recession has started, it'll be relatively conspicuous in the data. By that standard, it's highly unlikely that the National Bureau of Economic Research will eventually designate March 2012 as the start of a new recession. As for April, there's limited data to say much of anything at this point; beyond that, well, good luck.
Still, the recovery is starting to look vulnerable, relative to the three months through February. Is that a sign of deeper trouble? Maybe, but if it is we'll soon see confirmation in the numbers. For now, however, there's only guesses, and the bias for growth, although modest, continues to have the upper hand.
Posted by jp at 5:50 AM | Comments (0)
April 21, 2012
Book Bits | 4.21.2012
● Land of Promise: An Economic History of the United States
By Michael Lind
Review via History Book Club
This election year offers Americans an unusually clear choice between competing visions of the republic: On the one hand a minimalist government presiding over a lightly-taxed populace left free to succeed (or not) on their own devices; or a more actively engaged government intervening in economic development and social policy to pursue what it perceives as the general welfare. Michal Lind’s splendid new economic history of the United States shows that these two competing visions are almost as old as the republic itself. This is a book that would be welcome anytime, but that is especially timely in the run-up to the 2012 elections. Anyone even slightly acquainted with American history will recognize these as the Jeffersonian and Hamiltonian strains of American public policy. Yet history is full of ironies: Jefferson remains one of the great heroes of the Democratic Party, but the real Jeffersonians of our time are the Tea Party Republicans, while Democrats tend to be Hamiltonian in outlook. The strands of history make a tangled skein. Michael Lind untangles those strands for us in this lucid, fascinating, highly readable book. He presents American economic history as a succession of “republics,” each characterized by its own economic forces and policies, each destabilized by the forces that would create its successor.
● The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns (Wiley Finance)
By Timothy McIntosh
Summary via publisher, Wiley
Presenting a revolutionary new investment philosophy that redefines how we view sector investing, The Sector Strategist challenges long held ideas about how this unique area of finance operates. Misconceptions, such as the belief that international stocks provide diversification, are preventing investors from making the most of the opportunities for financial growth that sectors provide, and the book presents practical, applicable evidence that a better, more profitable option is available. Additionally, the book hopes to give readers an opportunity to improve returns and protect retirement assets by providing a wide range of techniques and tools designed to optimize wealth that the author has developed over the last decade.
● From Bear to Bull with ETFs
By David Kotok
Q&A with author via IndexUniverse
IndexUniverse: You recently wrote a book on sector investing with ETFs. Why are sectors a useful way to approach the market?
Kotok: The benchmark for the U.S. stock market is the S&P 500 Index. It is composed of sectors and they are key to gaining performance. The ETF choices among the sectors facilitate this process. Choosing a sector to overweight or underweight requires macro inputs and a rationale for the decision. This is coupled with selection of broader characteristics such as growth vs. value or large-cap vs. small-cap. In some cases, you can combine them.
IndexUniverse: Which two U.S. sectors look the most attractive to you right now and how are you investing in them with ETFs?
Kotok: We like the health care sector. The broad-based ETF is XLV [the Select Sector SPDRs – Healthcare (NYSEArca: XLV)], and we hold it.
● The Great Recession: Market Failure or Policy Failure?
By Robert Hetzel
Review via John Taylor's Economics One blog
The debate about the causes of the financial crisis and the great recession will continue for many years, and the facts and analysis that Robert Hetzel put forth in his new book The Great Recession: Market Failure or Policy Failure? should now be part of that debate. As I said in my comments for Cambridge University Press, “Hetzel applies his experience as a central banker and his expertise as a monetary economist to make a compelling case for rules rather than discretion, showing that 'monetary disorder' rather than a fundamental 'market disorder' is the cause of poor macroeconomic performance. At the same time, he acknowledges and discusses disagreements among those who argue for rules rather than discretion.”
● Risk Intelligence: How to Live with Uncertainty
By Dylan Evans
Review via Publishers Weekly
A lecturer in behavioral science at University College Cork School of Medicine in Ireland, Evans (Placebo: The Belief Effect) defines risk intelligence as “the ability to estimate probabilities accurately,” such as the probability of a car crash or the truth of a rumor. Evans explores everything from climate change predictions to Homeland Security’s color-coded system that supposedly rated the risk of terrorist attacks. Evans outlines why many are so bad at estimating probabilities—with sometimes devastating consequences, such as in the financial crisis and 9/11—and how one can become better at it, since it’s a vital skill for gaining success in life. With an arsenal of studies and statistics, he covers fascinating topics, including battlefield strategies, overconfidence, lies, and the tendency to follow the crowd, despite obvious evidence they are wrong.
● The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America
By Sen. Tom Coburn with John Hart
Adapted excerpt via The Washington Examiner
I am known as a senator in Washington, but I will always be a medical doctor first. And if America were one of my patients, I would tell her she had a 100 percent chance of experiencing a major cardiac event -- a potentially fatal heart attack or stroke -- if she failed to take immediate steps to get healthy. In many respects, our recent recession may have been mere chest pains compared with what is coming. To many Americans, the cures are blindingly obvious: spend less, borrow less, keep taxes low and reform entitlement programs in a way that protects the poor. One reason I released my "Back in Black" deficit reduction plan, which includes $9 trillion in savings, was to show that these changes are possible. The real problem in Washington is not gridlock or money in politics, nor is it a lack of ethics reform or solutions. It is careerism -- the philosophy of governing to win the next election above all else. For the career politician, the moment to do what is right is never today. It is always a mirage just beyond the horizon of the next election.
● The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years
By Lawrence White
Summary via publisher, Cambridge University Press
The Clash of Economic Ideas interweaves the economic history of the last hundred years with the history of economic doctrines to understand how contrasting economic ideas have originated and developed over time to take their present forms. It traces the connections running from historical events to debates among economists, and from the ideas of academic writers to major experiments in economic policy. The treatment offers fresh perspectives on laissez faire, socialism and fascism; the Roaring Twenties, business cycle theories and the Great Depression; Institutionalism and the New Deal; the Keynesian Revolution; and war, nationalization and central planning. After 1945, the work explores the postwar revival of invisible-hand ideas; economic development and growth, with special attention to contrasting policies and thought in Germany and India; the gold standard, the interwar gold-exchange standard, the postwar Bretton Woods system and the Great Inflation; public goods and public choice; free trade versus protectionism; and finally fiscal policy and public debt.
● America's First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837
By Alasdair Roberts
Summary via publisher, Cornell University Press
For a while, it seemed impossible to lose money on real estate. But then the bubble burst. The financial sector was paralyzed and the economy contracted. State and federal governments struggled to pay their domestic and foreign creditors. Washington was incapable of decisive action. The country seethed with political and social unrest. In America's First Great Depression, Alasdair Roberts describes how the United States dealt with the economic and political crisis that followed the Panic of 1837. As Roberts shows, the two decades that preceded the Panic had marked a democratic surge in the United States. However, the nation's commitment to democracy was tested severely during this crisis. Foreign lenders questioned whether American politicians could make the unpopular decisions needed on spending and taxing. State and local officials struggled to put down riots and rebellion. A few wondered whether this was the end of America's democratic experiment.
● Eco-Tyranny: How the Left's Green Agenda will Dismantle America
By Brian Sussman
Summary via publisher, WND Books
Exorbitant energy prices, rolling blackouts, acute food shortages, critical water deficiencies, and private property rights usurped: this is America’s future as envisioned by the environmental movement’s well-honed green agenda. In order to de-develop the United States, the Left is using phony environmental crises to demonize capitalism and liberty, and purposefully withhold America’s vast natural resources-and the Obama Administration is piloting the plan.Eco-Tyranny , by best-selling author Brian Sussman, presents a rational strategy to responsibly harvest our nation’s vast resources in order to fulfill the future needs of a rapidly growing population.
● Harvest the Wind: America's Journey to Jobs, Energy Independence, and Climate Stability
By Philip Warburg
Review via Kirkus Reviews
Warburg believes that that collaboration between the government and the private sector can make wind power a major source of energy for the generation of power in the United States. An attorney specializing in environmental law who served as president of the Conservation Law Foundation from 2003 to 2009, the author has been a committed environmentalist for more than 40 years. Warburg makes the case that with this “inexhaustible domestic energy resource,” America can finally demonstrate a willingness to lead the international fight for climate stability. He reports on recent travels through the U.S. and in Denmark. where he met with “farmers, ranchers, shop owners, truckers, crane operators and more,” whose lives have been improved by the new technology. He also visited large and small-scale wind farms, on land and offshore. While Warburg admits that wind power still presents serious problems for the environment—the turbines are responsible for the death of thousands of birds, the noise they produce can disturb neighboring residential communities, etc.—he is optimistic that these will be resolved and that the benefits of the new technology exceed the costs.
Posted by jp at 5:40 AM | Comments (0)
April 20, 2012
Strategic Briefing | 4.20.12 | Conference Board's Leading Indicator Rises In March
US Leading Economic Indicator Increases
Conference Board | Apr 19
The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.3 percent in March to 95.7 (2004 = 100), following a 0.7 percent increase in February, and a 0.2 percent increase in January. Says Ataman Ozyildirim, economist at The Conference Board: “The LEI increased for the sixth consecutive month, pointing to a more positive outlook despite subdued consumer expectations and weakness in manufacturing new orders. Moreover, the six-month growth rate of the LEI continues to improve. The CEI, a measure of current economic conditions, has also increased in five of the last six months, with broad based gains in all components.”
U.S. Leading Indicator Gain Moderates
Tom Moeller (Haver Analytics) | Apr 19
The Leading Economic Indicator index from the Conference Board rose 0.3% last month after an unrevised 0.7% gain during February. A 0.2% increase had been expected. Last month a robust 70% of the series' components rose. That compares favorably to last September's low of 25%. A steeper interest rate yield curve, more building permits and higher stock prices had the largest effects raising the overall leading index. The separate Leading Credit Index slipped for the third straight month and indicated tighter conditions versus the easy state of last summer and fall.
Index of Leading Economic Indicators in the U.S. Climbed 0.3%
Bloomberg | Apr 19
The index of U.S. leading indicators rose for a sixth month in March, indicating the world’s largest economy will maintain its expansion.... “The momentum is holding up,” Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York, said before the report. “Job creation and income growth are positives for economic growth.”
U.S. Leading Economic Index Rises For Sixth Straight Month In March
RTT News | Apr 19
Pointing to a more positive outlook, the Conference Board's leading economic index for the U.S. increased for the sixth consecutive month in March, according to a report released on Thursday.
U.S. growth seen improving as leading index rises
MarketWatch | Apr 19
Among the 10 indicators that make up the LEI, seven made positive contributions in March: the interest rate spread, building permits, stock prices, a credit index, jobless claims, manufacturers’ new orders for consumer goods and materials, and manufacturers’ new orders for nondefense capital goods excluding aircraft. Negative contributions came from weekly manufacturing hours, consumer expectations and the ISM new orders index. “The rise in financial indicators, for example, equity prices and the credit spread, suggest that the financial half of the economy has made its repairs and is moving forward,” Wells Fargo analysts wrote in a research note.
United States: Conference Board Leading Indicators
Adam Goldin (Economy.com) | Apr 19
The Conference Board index of leading indicators rose 0.3% in March after increasing 0.7% in February. This marks the sixth consecutive monthly gain. The results were slightly above consensus expectations and indicate that growth will continue through the first half of 2012. The interest rate spread and building permits were the largest contributors to the gain, while the main drag came from the average workweek, which had risen or remained unchanged the previous six months. The coincident index rose for the fourth consecutive month, increasing 0.2% in March.
Leading Indicators: Signs of Continued Moderate Growth
John E. Silvia (Wells Fargo) | Apr 19
The March index of leading economic indicators pointed to a continued moderate pace of economic growth.... The index improved 0.3 percent, led by gains in financial indicators, while consumer numbers were weak. The rise in financial indicators, for example, equity prices and the credit spread, suggest that the financial half of the economy has made its repairs and is moving forward. There were also positive contributions from building permits and new orders. On the downside, the labor market—average weekly manufacturing hours—and consumer expectations reduced the gain in the leading index
Posted by jp at 6:21 AM | Comments (0)
April 19, 2012
Is The Recent Rise In Jobless Claims Warning Of Another Spring Slowdown?
A week ago I wondered if the rise in jobless claims in the first week of the month was due to a seasonal factors, and the inquiry still stands. But as you’ll see, today’s update raises more questions than it answers, although the short list of potential culprits starts with the seasonal influence of Easter. As for the straight numbers, new filings for unemployment benefits last week fell slightly by 2,000 to a seasonally adjusted 386,000. Historical context is always crucial for evaluating the number du jour, and more so than usual with today’s news.
The latest drop doesn't mean much, however, given the revision to the previous report. With the fresh data in hand, it's clear that there's been a modest change in the trend--a change that may or may not be temporary. As the chart below reminds, jobless climbs jumped by an unusually large amount—unusual, that is, relative to history over the last 11 months. The revised data released today shows that new claims rose during the week through April 7—Easter week—by a seasonally adjusted 26,000. We haven’t seen a weekly increase of that magnitude since April 2011. That’s not an encouraging comparison. The surge in jobless claims a year ago foreshadowed a rough patch for the economy. The turbulence passed, but the question now is whether we’re headed for a new bout of trouble?
The optimistic view is that the jump in jobless claims is temporary, due to seasonal factors related to Easter. Maybe, although there’s reason for doubting that explanation when we look at the raw numbers on a year-over-year basis. As the second chart below shows, unadjusted claims fell a mere 3.7% vs. the same time a year ago. That’s a clear reversal of fortunes relative to the roughly 9%-16% decline range that’s prevailed for months.
Is this a warning of things to come? Possibly, although it’s still too early to say much of anything without more data. Jobless claims, to roll out the familiar caveat, are notoriously volatile in the short run. Meantime, if you look at the first chart above that tracks the seasonally adjusted weekly numbers, you’ll see that even with the rise in claims the absolute level of seasonally adjusted numbers is still quite low--near a four-year trough, in fact.
If there’s a genuine problem brewing here, which would cast a shadow over the outlook for the broader economy, we’ll know fairly soon. The worst case scenario would be a continued rise in the weekly seasonally adjusted numbers along with a confirming jump in the unadjusted year-over-year percentage change.
For now, there are only questions about what next week’s update will reveal. Economist Carl Riccadonna at Deutsche Bank is thinking positively: he tells AP that "what we're seeing in the numbers is not unusual at this time of year" and so more encouraging news is coming. But in the same article, Jennifer Lee of BMO Capital Markets advises that it's realistic to interpret the recent data on jobless claims as a sign that "job growth is slowing. Still growing, mind you, but at a slower pace."
"Bottom line," says Peter Boockvar of Miller Tabak via RTT News, "the last two weeks reflect a reversal of the slow but steady drop in the amount of those filing for unemployment insurance that we've been seeing since November." That's not enough to make convincing forecasts, but the change definitely frames how the crowd will be thinking in the near term. "It's only two weeks," Boockvar continues, "so way too early to declare a fresh deterioration, but it definitely bears watching because if the pace of firing's start to pick up again, it certainly says something about what the pace of hiring's will be."
Posted by jp at 9:44 AM | Comments (0)
Expecting Good News
When we last checked in on the "new abnormal"—an unusually tight connection between the market's expectations for inflation and growth—the relationship was alive and kicking. A month later, nothing has changed, or so it appears. Taken at face value, that's encouraging. Implied inflation (defined as the yield spread on the 10-year Treasury less its inflation-indexed counterpart) and the S&P 500 stock market index (a proxy for growth expectations) are still joined at the hip. In recent years, a fall in the inflation outlook has preceded macro weakness. But there's no sign of that anxiety. For what it's worth, the crowd isn't in pricing new troubles, at least nothing that's radically different from the usual afflictions of recent months.
A sign of worry would be a sharp and sustained fall in inflation expectations. That's atypical for peering ahead for evaluating growth within the long sweep of economic history, but it's been the norm in recent years. Why? The economist David Glasner explains here for why "rising inflation expectations work their magic." One day that will change, but not yet.
Meanwhile, the fact that inflation expectations are holding their ground, and the stock market is inclined to confirm the buoyancy, suggests that the recent turbulence in several economic reports—weakness in housing starts and higher jobless claims, for instance—isn't truly indicative of the broader trend.
Of course, expectations and hard numbers don't always line up. The next installment on testing if the two sides are in agreement, or not, arrives later today with the news on last week's new filings for jobless benefits.
Posted by jp at 6:16 AM | Comments (0)
April 18, 2012
Strategic Briefing | 4.18.12 | Is Euro Risk On The Rise Again?
Debate Grows as Europe Fears Return of a Crisis
New York Times | April 17
The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth. Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.
IMF Raises Global Forecast for First Time Since Early 2011
Bloomberg | April 17
The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.” The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said today in its World Economic Outlook. It sees growth of 4.1 percent in 2013, up from 4.0 percent. It raised its forecasts for the U.S. to gains of 2.1 percent this year and 2.4 percent in 2013. The report reflects the IMF’s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country’s default, has stabilized since last year. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent in the IMF’s previous forecast. China is projected to grow 8.2 percent and Japan 2 percent this year.
Soros warns euro crisis could destroy the EU
Reuters | April 16
Billionaire George Soros warned on Monday that the euro crisis is growing deeper, tearing at the fabric of European Union cohesion, because policymakers are prescribing the wrong remedies. "I'm afraid that the euro crisis is getting worse. It's not over yet, and it is going in the wrong direction," Soros said in discussion with Denmark's economics minister hosted by the daily newspaper Politiken.
Too early to sound the alarm
Manfred J. M. Neumann, Deutsche Bundesbank (Vox) | April 17
Debt finance of public consumption has clearly gone too far in several countries, reaching the borderline of sustainability. Have austerity measures now gone too far as well? This column argues it seems too early to sound the alarm. First, the global economy is likely to grow by 3.3 % this year, and second, reversing the fiscal stance or exiting the euro are worse options than austerity.
Paulson goes short on German Bunds
Financial Times | April 17
John Paulson, the billionaire hedge fund manager who foresaw the collapse of the US housing market, is shorting German government bonds in a wager that the eurozone debt crisis will significantly deepen in the coming months. Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely, said a person familiar with Mr Paulson’s strategy.
Germany sells two-year bonds at record-low yield
Reuters | April 18
Germany sold new two-year debt at a record low cost on Wednesday as investors nervous over Spain bought 4.2 billion euros of the low-risk bonds at auction.
The ECB’s Lethal Inhibition
Barry Eichengreen, University of California at Berkeley (Project Syndicate) | April 12
Last December, with Europe’s financial system on the brink of disaster, the European Central Bank stunned the markets with an unprecedented intervention, offering banks across the eurozone essentially unlimited liquidity against any and all collateral for an exceptional period of three years. The ECB’s surprise liquidity operation put the continent’s crisis on hold. But now, just fourth months later, matters are again coming to a head. The big southern European countries, Spain and Italy, battered by austerity, are spiraling into recession. The deterioration of economic conditions is casting doubt on their governments’ budgetary arithmetic, undermining political support for structural reform, and reopening seemingly closed questions about the stability of banking systems. Once again, the eurozone appears to be on the verge of unraveling. So, will it be once more into the breach for the ECB?
Italy Puts Back Balanced Budget Goal by a Year
CNBC | April 18
Italy will delay by a year its plan to balance the budget in 2013 due to a weakening economic outlook, according to a draft document due to be approved by the cabinet of Prime Minister Mario Monti on Wednesday.... Italy's budget deficit is already one of the lowest in the euro zone as a proportion of output and many economists say its chronically weak growth is more of a concern than fiscal slippage.
Spain Slides Further into Crisis
Spiegel Online | April 16
The situation on the financial markets is getting tougher for Spain. The interest rates the country must pay on longer-term, 10-year bonds rose on Monday to over 6 percent for the first time this year. The government in Madrid is also warning that Spain has fallen back into recession.
Posted by jp at 5:48 AM | Comments (0)
April 17, 2012
Industrial Production In March Is Flat... Again
The view that the economy's recent strength was boosted by a warm winter looks a bit more convincing after reviewing this morning's March report on industrial production. After strong gains in December and January, March delivered the second straight month of no change in the Fed's industrial production index.
The annual trend in industrial production is still comfortably positive, with March activity higher by 3.8% vs. the year-earlier level. That's a sign that the economy's still growing, although the annual pace is down more than slightly from February's 4.6% rate. Is that merely a technical adjustment that reflects the warm winter factor, which is now fading as we move into spring? Or is there something deeper going on that threatens to bite the cycle down the road?
In the wake of two back-to-back months of flat-lining in the monthly data, the modest retreat in the annual rate looks a bit troubling. But it's hard to say if there's something more than short-term noise here and so it's premature to assume that there's something darker in the works. Indeed, even a 3.8% annual rise in industrial production, assuming we hug this rate for the foreseeable future, is a healthy pace.
Still, it's hard to forget that job growth slowed sharply last month. Is industrial production confirming that the economy's pace is facing new headwinds? The next major clue arrives on Thursday, with the arrival of fresh jobless claims data. But expectations are muted for thinking there's a dramatic improvement heading our way. The consensus forecast for new claims sees a slight drop in the next update from the previous week, according to Briefing.com. If so, that would be welcome, but hardly a game changer one way or another.
Meantime, we're left to ponder the deeper meaning of the weakness in the latest industrial production figures. "It's evidence of some slowing in the manufacturing sector, which I'm not entirely surprised because of what's happening in Europe and the end of the tax depreciation on equipment allowance," advises Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, via Reuters. "My expectation going forward is that manufacturing will chug along at a moderate pace from business investment and consumer spending. But you will see exports dry up a bit."
That doesn't sound like the end of the world (or the demise of the recovery). But with two straight months of zilch staring us in the face, the margin for negative surprises is getting uncomfortably thin.
Posted by jp at 10:20 AM | Comments (0)
Housing Starts Retreat As New Housing Permits Rise Sharply
New construction on residential housing slowed sharply last month, the Census Bureau reports, while newly issued permits in March rose to the highest level since September 2008. In other words, there’s mixed news on the housing front, although the ongoing climb in new permits suggests that construction activity will soon be turning higher.
The retreat for housing starts surprised many economists, but it’s important to put the latest numbers in context. It’s fair to say that the modest recovery in housing remains intact. Although housing starts last month totaled 654,000 (seasonally adjusted annual rate), or down from February’s 694,000, the year-over-year change is still comfortably in positive territory (10%-plus as of last month), as it has been since last September. The fact that new permits are growing at a much faster rate implies that housing construction will continue to expand, if only modestly. In turn, that's a hint that construction payrolls, and all the related spending that flows from housing activity, will improve, if only slightly.
It’s clear that even a slow-growing housing market is a big plus because it no longer a drag on the broader economy. Residential real estate was at the epicenter of the financial crisis and the recession, and so it’s no trivial matter to see this sector moving to a net positive.
Nonetheless, it's premature to expect strong, sustained growth anytime soon. “Housing continues to bump along the bottom,” notes Jacob Oubina, a senior U.S. economist at RBC Capital Markets. “The best we can hope from housing over the next couple years is that it won’t subtract from growth. The numbers in the past few months were decidedly impacted by a much milder winter, so a significant portion of construction was pulled forward.”
That sounds about right, and today’s numbers appear to be following this script. The headwind of reducing the foreclosures and working off the excess inventory is still with us, and will be for some time—probably another couple of years at a minimum. But progress, albeit uneven and vulnerable progress, can't be dismissed as the path of least resistance. If you're looking for a potent catalyst to shake the economy out of its doldrums, however, you'll have to look elsewhere. Housing is beginning to walk, which is a major step up from lying face down in the macro ditch. But it's going to be a while before there's any running here.
Posted by jp at 9:36 AM | Comments (0)
Research Review | 4.17.2012 | Asset Allocation
Tactical Asset Allocation Using Relative Strength
John Lewis (Dorsey Wright Money Management) | March 2012
Relative strength strategies have a long history of delivering market-beating returns. A great deal of research in this area has been devoted to models using common stocks. While some studies show that RS works well using asset class data, the body of research is not as large. Our research shows that relative strength is a very valuable factor for selecting asset classes. When looking at the relative performance of various asset classes over an intermediate-term time horizon it is certainly possible to achieve returns better than standard, broad-based benchmarks. Achieving these returns often requires patience because relative strength strategies can get out of synch with the market. However, the adaptive nature of relative strength allows the process to adapt to the changing leadership over time.
Value and Momentum Tactical Asset Allocation
Wesley R. Gray (Empiritrage, LLC), et al. | March 2012
We present a concise quantitative method for combining value and momentum strategies in a tactical asset allocation framework by directly comparing the attractiveness of valuations across a broad range of asset classes. Our broad and diverse publicly traded asset classes include public equity, investment grade and high yield bonds, cash, Treasury Inflation Protected Securities (TIPS), commodity and real estate. We refine the basic yield approach to valuation by standardizing the value signal using the Z-score. By tactically adjusting the weight of each asset class based on its perceived value and momentum signals, our model shows significant improvement in overall portfolio performance.
Diversification of Equity with VIX Futures: Personal Views and Skewness Preference
Carol Alexander and Dimitris Korovilas (University of Reading) | March 2012
A comprehensive description of the trading and statistical characteristics of VIX futures and their exchange-traded notes motivates our study of their benefits to equity investors seeking to diversify their exposure. We analyze when diversification into VIX futures is ex-ante optimal for standard mean-variance investors, then extend this to include (a) skewness preference, and (b) a moderation of personal forecasts by equilibrium returns, as in the Black-Litterman framework. An empirical study shows that skewness preference increases the frequency of diversification, but out-of-sample the optimally-diversified portfolios rarely out-perform equity alone, even according to a generalized Sharpe ratio that incorporates skewness preference, except during an extreme crisis period or when the investor has personal access to accurate forecasts of VIX futures returns.
Strategic Performance Allocation in Institutional Asset Management Firms: Behold the Power of Stars and Dominant Clients
Ranadeb Chaudhuri (Oakland University), et al. | March 2012
We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers, the money management firms’ high-value products. The extent of strategic performance allocation varies with the product’s client power. We identify the channel through which strategic performance allocation takes place by studying four sources of variation of its extent under the cross-subsidization hypothesis (whereas such variation is not predicted by managerial talent allocation hypothesis) and find that its extent is related strongly to all four: availability of IPO opportunities, illiquidity of the products’ investment styles, cross-trading status of the firm, and custodian status of the firm. We also assess the implications of strategic performance transfer away from the products that cross-subsidize this performance.
Heuristic Portfolio Trading Rules with Capital Gain Taxes
Michael Gallmeyer (University of Virginia) and Marcel Marekwicaz (Copenhagen Business School) | February 2012
This paper studies the out-of-sample performance of portfolio trading strategies when an investor faces capital gain taxation and proportional transaction costs. Under no capital gain taxation and no transaction costs, we show that, consistent with past literature such as DeMiguel, Garlappi, and Uppal (2009b), a simple 1/N [equal weight] trading strategy is not dominated out-of-sample by a variety of optimizing trading strategies. A notable exception of a strategy that does outperform 1/N in our analysis is the parametric portfolios of Brandt, Santa-Clara, and Valkanov (2009). With dividend and realization-based capital gain taxes, the welfare costs of the taxes are large with the cost being as large as 30% of wealth in some cases. Overlaying simple tax trading heuristics on these trading strategies improves out-of-sample performance. In particular, the 1/N trading strategy's welfare gains improve when a variety of tax trading heuristics are also imposed. For medium to large transaction costs, no trading strategy can outperform a 1/N trading strategy augmented with a tax heuristic, not even the most tax- and transaction cost e cient buy-and-hold strategy. Our results thus show that optimal trading strategies trade risk and return considerations off against tax considerations and neither solely focus on any of the two.
Implementing Black-Litterman Using an Equivalent Formula and Equity Analyst Target Prices
Zhi Da (University of Notre Dame), et al. | December 2011
In a seminal paper, Black and Litterman (1992, BL hereafter), propose a novel way to incorporate investors' views into asset allocation decisions within the standard mean-variance optimization framework of Markowitz (1952). In this paper, we derive a simpler formulation of the BL Model that is easier to interpret and allows for correlation between the uncertainty about the investor's views and the asset returns.... We show that the optimal portfolio outperforms the market and this result is robust across di erent time periods and parameter choices.
Posted by jp at 5:46 AM | Comments (0)
April 16, 2012
Another Strong Month For Retail Sales In March
If you’re not impressed by the ongoing strength in retail sales, you should be. Or maybe you're just perplexed. In any case, consumption rose a strong 0.8% in March on a seasonally adjusted basis, the Census Bureau reports. Although that’s down a bit from February’s 1.0% jump, there’s nary a sign in the latest numbers that the consumer is stressed or poised to give up shopping any time soon.
In fact, retail sales for the first three months of this year have delivered a strong run, given what we know about the continued deceleration in disposable personal income (DPI). Either DPI is misleading us about the future or consumption is. Only time will tell, although based on today’s news it’s clear that consumption has yet to give way this year to the darker side of expectations.
Is the story materially different if we ignore the short-term data? Nope, not at all. Looking at retail sales on a year-over-year basis also shows that consumption’s pace is holding steady at roughly 6.5% a year. That's down a bit from the highest levels in recent years, but no one will confuse it with sluggish growth. If the business cycle is poised to bite, the message has yet to reach Joe Sixpack.
Is this an artifact of higher gasoline prices? There's no smoking gun here either. Retail sales less spending at gasoline stations rose about 0.7% last month, or up slightly from February’s pace. Meanwhile, retail sales-ex gasoline continued to rise at a bit more than 6% on an annual basis through March, which is in line with the trend for much of the past year.
In short, retail sales continue to chug along at a robust pace, even after ignoring the volatile auto sector.
“There is no sign that higher fuel prices have damaged consumer sentiment and spending,” Jeremy Lawson, a senior U.S. economist at BNP Paribas, tells Bloomberg. “This is enough to generate solid economic growth. We’ve seen the job market improve and that’s boosting consumption.”
Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, finds nothing in today’s numbers to suggest otherwise. "It's a clear sign that U.S. consumer spending remains strong,” he notes via Reuters. “On balance I think it's the latest sign here that the U.S. economy is outpacing a lot of its major counterparts in recovery.”
If you're inclined to argue differently, you won't find any statistical support in today's retail sales update.
Posted by jp at 9:29 AM | Comments (0)
The High Cost Of Searching For Investing Talent
The evidence in favor of indexing is convincing, perhaps overwhelming. But finance is conspicuously light on definitive laws and so it's not surprising that research on active management continues to offer encouragement for those who think they can beat the odds and generate alpha through time. But there are two ways to read these pro-active management studies. One interpretation (probably the more popular view) is using these papers to rationalize alpha's charms as widely available for those who are committed to working harder. The alternative view, which animates my thinking, is to see these studies as evidence that chasing alpha demands a lot of extra time and effort for an uncertain payoff that's probably out of reach for most of us in the long run.
Consider the so-called active share research from professors K. J. Martijn Cremers and Antti Petajisto ("How Active Is Your Fund Manager? A New Measure That Predicts Performance"). It's surely one of the more convincing studies in recent years in terms of offering a methodology for trying to predict alpha for mutual funds and other portfolios. Not surprisingly, the paper has inspired a wave of favorable reviews for embracing active management. In an article I wrote last year for Financial Advisor, I summarized the research:
The paper can be thought of as a refinement of tracking error, which has been used for years for evaluating investment strategies. Tracking error calculates how closely a portfolio follows its benchmark (or not) by measuring the volatility (standard deviation) of the difference between the returns of a fund and its benchmark. But tracking error does a poor job of distinguishing between the two main types of active management: individual security selection and factor timing, such as industry-rotation or market-timing strategies.
A superior metric for judging active management's results is comparing a portfolio's holdings to an appropriate benchmark, according to Cremers and Petajisto. Their active share measure quantifies the divergence in a fund's securities versus an appropriate index. The readings range from 0% (no deviation in holdings and weightings versus an index) to an active share rating of 100% (zero overlap with the index). The closer to 100, the stronger the degree of active management and (the authors emphasize) the higher the odds of delivering alpha.
It's an idea that's been informally discussed for years in active management circles. If there's any chance of beating an index, the portfolio must differ from the benchmark in a meaningful way. That alone is no silver bullet, although the reasoning is bound up with the recognition that a manager who's willing to make more than trivial bets harbors above-average confidence in those choices. Think Warren Buffett or George Soros, for instance. No wonder that concentrated-portfolio strategies-holding only the "best picks"-resonate strongly within the active management community.
The problem is that the practical hurdles of applying active share analysis are more than trivial. For one thing, most of the funds with the most encouraging active share scores are relatively small portfolios. That's hardly a shock. As portfolios grow larger, the gravitational pull of the market becomes stronger and so the closet-indexing risk rises with assets under management. The message is that there's limited capacity for the funds with the best prospects. That's also a warning that if too many investors pile in, the expected alpha is likely to fade if not evaporate entirely.
Meanwhile, there are practical challenges for deploying active share analysis on a routine basis. On that point, I'll quote myself once more via Financial Advisor:
Even if you think active share can help you pick managers, there's the problem of crunching the numbers on a timely basis. The formula outlined by Cremers and Petajisto is simple enough to calculate in Excel. The stumbling block is the obligatory dose of fresh data on a fund's holdings. In fact, you'll need recent data on lots of funds. A sensible use of active share rankings as a screening tool inspires sifting through a broad list of portfolios within a strategy. Imagine that you're searching for strong managers in the small-cap domestic-equity blend mutual fund category. According to Morningstar Principia, nearly 200 actively managed products are available. Assuming there are 50 to 100 holdings per fund, an intensive round of statistical analysis awaits.
Even if you overcome this hurdle, don't get too comfortable. There will be ongoing maintenance. If active share shines brightest in smaller funds, you should plan on bailing out of products that grow too large. In turn, you must redeploy the proceeds into smaller portfolios that rank high on alpha-generating prospects. In other words, you'll need to run active share evaluations regularly.
Another pro-active management study that's receiving attention is a Barclays paper from last month—"The Science and Art of Manager Selection." Paul Sullivan of The New York Times discussed the paper recently, reporting that the Barclays research "aims to lay out the risks of trying to read past performance into future returns when selecting active managers." The Barclays authors advise that "for those for whom active management may be suitable, this paper explains how we go about identifying, analyzing, selecting and monitoring investment management organizations."
Unfortunately, the process outlined by Barclays is nothing if not complicated. No one will confuse the due diligence laid out in this paper as streamlined. Between reviewing historical records on funds, running performance attribution analyses, focusing on "return gap analysis," etc., the road to success sounds like a full-time career. For most folks, that's asking too much.
Even for professionals, the question is one of deciding if the time is better spent developing robust expectations about return and risk for the major asset classes. Keep in mind that even if you dedicate yourself to identifying superior active managers, you'll still need to do all the asset allocation analysis that drives the lion's share of results for indexing strategies. That alone is a time-consuming challenge if you're looking for robust estimates.
The truth is that most investors don't have the time or expertise to do both. The primary allure of indexing in the context of a multi-asset class portfolio is that it focuses on exploiting the main drivers of risk and return: beta. If we can develop some productive intuition about expected risk premiums for the various betas, we'll have a solid foundation for achieving investment success. It's not easy, but this necessary task is sure to be a lot more difficult if you add active management analysis to this strategic chore.
The truth is that relatively few investors are able to pull off this dual task, and for a simple reason: alpha sums to zero. There's only so much market-beating performance to go around, and most of it goes to a handful of really smart investors. Meanwhile, the positive alpha is financed exclusively by investors who suffer negative alpha. Beta, of course, generally ends up in the middle; if you factor in trading costs, beta tends to deliver above-average results, as I noted here. Some things never change, no matter how many research papers suggest otherwise.
Posted by jp at 6:23 AM | Comments (1)
April 14, 2012
Book Bits | 4.14.2012
● Breakout Nations: In Pursuit of the Next Economic Miracles
By Ruchir Sharma
Review via Kirkus Reviews
The head of Morgan Stanley’s emerging markets division conducts a brisk worldwide tour in search of new markets ready for takeoff. No first-book jitters for Sharma, longtime columnist for the likes of Newsweek and the Wall Street Journal. His smooth, almost chummy style suits him ideally for guiding civilians through the sometimes-arcane thicket of the dismal science, looking for those emerging markets likely to disappoint or exceed expectations in the coming years. Sharma insists on the importance of on-the-ground observations, and he’s recently visited all the countries discussed here. While recognizing that factors explaining growth change continually, he divulges some helpful, broad rules of the road. We learn, for example, why a particular nation’s form of government counts less than the economic understanding and vision of its leaders, why the size and growth of a nation’s second city is important and why the list of top-ten billionaires matters.
● The Reckoning: Debt, Democracy, and the Future of American Power
By Michael Moran
Excerpt via The Huffington Post
Americans must learn not to take their unmatched economic advantages for granted, lest they disappear. These advantages come in several forms, starting with the American currency. Because most of the world's trade is denominated in US dollars, the price Americans pay for most commodities (oil, for instance, or food) is just a bit lower than elsewhere, even if they may be subject to a little more volatility as part of the deal. Similarly, because the US Federal Reserve controls the number of dollars in circulation, America can sustain policies -- like the near-zero federal funds rate that has prevailed since the financial crash -- that would have global bond markets baying for the blood of any other nation. These low rates effectively lower the ultimate return-on-investment foreign creditors will receive for purchasing American debt through the sale of US Treasury bonds and other government securities. With US national debt heading into record territory versus annual GDP growth, the ability to keep interest rates artificially low is no small advantage. But these perks of global dominance will erode along with America's hegemony, and erratic policy measures in Washington will speed the arrival of that day. Already global markets are chirping, and China, Russia, and other economic rivals have demanded that the dollar be supplanted as the global reserve currency by something else. This will not happen quickly unless American politicians, by strangling growth with budget cuts in the midst of a downturn, stupidly force the issue.
● Is China Buying the World?
By Peter Nolan
Review via Publishers Weekly
In this informed review of international business patterns, Nolan (Integrating China: Towards the Coordinated Market Economy), a professor of Chinese economy at the University of Cambridge, answers the title’s rhetorical question in the negative. As Nolan notes, the ascendancy of multinational corporations stemming from the liberalization of international trade since the 1970s has made allegiance to “home” countries a polite fiction in the global market. While multinationals seek access to the markets of developing nations, Nolan clarifies that foreign direct investment in other regions exceeds that in China. Although China’s immense foreign-exchange reserves, the largest of any nation, fuels apprehension in the West, this issue should be seen in context—the holdings of Western asset fund managers overshadow them. Unfortunately, Nolan slights some important considerations: for example, he acknowledges Beijing’s historic determination to build “a group of globally competitive giant firms to match those from the high-income countries,” but leaves largely unexplored the implications of the advantages these companies can derive from the state’s “majority equity share” and “high investment rate.”
● The Decline and Fall of Europe
By Francesco M. Bongiovanni
Summary via publisher, Palgrave Macmillan
Is Europe Doomed? What if it fell apart? What if the Eurozone crisis was just the beginning of what's in store for Europe? What if there were other destructive forces besides economic ones that threatened to blow the entire edifice into pieces? InThe Decline and Fall of Europe, Dr. Francesco M. Bongiovanni offers a unique panoramic view of the intractable challenges Europe faces today, starting from the birth of "Project Europe" with its unique political and economic model, charting the progress and shortcomings of the Union, addressing how the continent has descended into geopolitical irrelevance, how Europeans espoused what became the unsustainable "civilization of entitlements", the challenges of enlargement and the question of Turkey's accession, how decades of mismanagement of immigration planted the seeds of social instability, how growth has become a forgotten word in most of Europe, and how the Euro, intended to be the glue holding the Union together is threatening to bring it down instead. The conclusion that increasing impoverishment and instability await Europeans seems inescapable. The book offers a timely, multi-dimensional and irreverent portrait of a decaying Europe, reviewing in detail the causes and consequences of a decline which is going to affect Europeans as well as the entire world.
● Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans
By Shlomo Benartzi
Lecture by author via Allianz Global Investors
In November 2011, Professor Shlomo Benartzi, of the UCLA Anderson School of Management and Chief Behavioral Economist of the Allianz Global Investors Center for Behavioral Finance, spoke at the TED@AllianzGI conference. His topic was how behavioral finance, a combination of psychology and economics, can help people avoid making “money mistakes” associated with retirement planning. One of the most effective behavioral finance tools is Save More Tomorrow™, a savings enhancement program that helps people overcome behavioral challenges so they can save adequately for retirement. The program shows that behavioral finance not only works but is also extremely powerful. Professor Benartzi chose the program’s name as the title of his new book, Save More Tomorrow: practical behavioral finance solutions to improve 401(k) plans, which presents this and other behavioral finance tools that address a wide range of retirement planning mistakes.
● An Economist Gets Lunch: New Rules for Everyday Foodies
By Tyler Cowen
Summary via publisher, Penguin
Tyler Cowen discusses everything from slow food to fast food, from agriculture to gourmet culture, from modernist cuisine to how to pick the best street vendor. He shows why airplane food is bad but airport food is good; why restaurants full of happy, attractive people serve mediocre meals; and why American food has improved as Americans drink more wine. And most important of all, he shows how to get good, cheap eats just about anywhere. Just as The Great Stagnation was Cowen's response to all the fashionable thinking about the economic crisis, An Economist Gets Lunch is his response to all the fashionable thinking about food. Provocative, incisive, and as enjoyable as a juicy, grass-fed burger, it will influence what you'll choose to eat today and how we're going to feed the world tomorrow.
Posted by jp at 5:03 AM | Comments (0)
April 13, 2012
Financial Advice Can Be Dangerous Too
It's widely recognized that actively managed investing strategies generally face an uphill battle vs. indexing. The evidence at this late date, after countless studies of real world track records, is persausive if not overwhelming. And the empirical clues keep adding up, as The Wall Street Journal reminds. What's true for individual asset classes tends to apply with multi-asset class strategies too. That alone is enough consider indexing in a strategic context, but there are other incentives. Looking for financial guidance from certain professionals can also eat away at your wealth, warns a study that analyzed recommendations by advisors
"The Market for Financial Advice: An Audit Study," a new working paper from the National Bureau of Economic Research, finds that there's considerable risk in assuming that you'll always find good advice for managing your portfolio from among so-called financial professionals. The paper starts out with a simple question: "Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients?" In search of an answer,
We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial interests of the advisers (e.g., returns-chasing portfolio) or run counter to their interests (e.g., a portfolio with company stock or very low-fee index funds). We document that advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.
Perhaps the main lesson here is that you must do your homework when picking a financial advisor. Barriers to entry are laughably low for getting the regulatory green light for feeding investors portfolio advice. The hurdles to, say, selling residential real estate are higher compared with doling out opinions on asset allocation for fees and/or commissions.
Money, of course, changes everything, and it compels some advisors to dispense poor investment recommendations. As Financial Advisor magazine summarizes the NBER paper's findings, "Financial advisors often work against the interests of their clients if it means the advisor can earn more in fees."
Not exactly a shocking disclosure, but a relevant one now and forever. One of the problems of evaluating advice, even for sophisticated investors, is that portfolio benchmarks should be customized to match each client's objectives, risk tolerance, net worth, and so on. Alas, that's a tough assignment under the best of circumstances. As the NBER study suggests, it's also a task that's all too often ignored in the financial industry. All the more reason to start with the default portfolio that's optimal for the average investor with an infinite time horizon: a passively allocated portfolio of all the major asset classes.
This default mix of assets is an obvious place to start for several reasons. Why? The long answer is found in decades of research
The main question, of course, is how to customize this asset allocation benchmark for your investment needs? That's a good question for your advisor to ponder. His answer may tell you a lot about whether it's even worth asking him a second question.
Posted by jp at 8:30 AM | Comments (0)
April 12, 2012
Are Seasonal Factors Behind Last Week's Jump In Jobless Claims?
Last week’s sharp increase in new jobless claims implies that the labor market’s recovery momentum is fading. Initial filings for unemployment benefits jumped a hefty 13,000 to a seasonally adjusted 380,000 for the week through April 7, the Labor Department reports. That’s discouraging for several reasons. First, it’s the biggest weekly increase in over three months. Second, new claims are now at the highest since late-January. Third, the upward deviation from the trend—defined as difference in the latest weekly claims number vs. its four-week moving average—is the most in nearly a year.
Let’s just say that the latest news on claims isn’t good. And if we consider the report in context with the dramatic slowdown in jobs growth last month, the cyclical clouds look even darker. But before we go off the deep end, it's time once again for some perspective. And once we consider a broader context, it’s obvious that it's too soon to admit defeat for anticipating the economy to continue growing.
For starters, the standard caveat applies: weekly jobless claims numbers are a volatile lot and so you can’t tell much, if anything, about a single report. One method for smoothing the volatility in search of deeper meaning is by watching the four-week average, and on that score not much has changed. The four-week average rose a bit last week, but otherwise it’s near a four-year low. The trend, as the chart below reminds, continues to look healthy.
Another way to strip out the short term noise (along with the seasonal adjustments that can cloud the big-picture analysis) is to focus on the year-over-year trend in the raw claims numbers. Here too the news remains encouraging. In fact, the trend appears to be improving. As you can see in the second chart, unadjusted weekly claims fell last week by nearly 14.8% vs. a year ago. That’s the biggest decline in three months and it suggests that the recent retreat in new filings for unemployment benefits still has momentum.
Nonetheless, it’s hard to forget that the payrolls report for March delivered a negative surprise last week in the form of a dramatically lower number of new jobs. Today’s jobless claims update will only stimulate the crowd’s anxiety level.
“On the back of last week’s employment report, this does suggest momentum in labor market is slowing a bit,” Sean Incremona, a senior economist with 4Cast Inc., tells Bloomberg. But then he hedges a bit by advising that “I wouldn’t, though, read one claims report and one payrolls report as suggesting that the trend of improvement has stalled.”
Eric Green, chief economist at TD Securities, isn't rushing to judgment either. "It's very difficult to know the extent to which that's driven by seasonal effects from Easter or not," he notes via Reuters. "This is not a game changer, this does not confirm the weakness in the report we saw last Friday. We suspect that much of the increase was due to seasonal issues and we would therefore expect it to drift lower."
Blaming the seasonal factor certainly looks valid when you consider the unadjusted annual decline shown in the second chart above. Of course, it'll take time to confirm, or deny, the theory. Tune in a week from today for the next jobless claims update. Meantime, perhaps the update on retail sales for March, scheduled for release on Monday, April 16, will tell us more.
Based on early reports from retailers directly, March spending patterns continue to look encouraging... maybe. "There's a growing belief we reached bottom a while ago," says Joel Bines, managing director of the retail practice of AlixPartners, a consulting firm. "Rather than confidence that things have turned the corner, it's confidence that things are unlikely to get worse from here."
Posted by jp at 9:39 AM | Comments (0)
Is Commercial Loan Growth A Positive Sign For The Economy?
Lending activity is generally considered a lagging indicator of the business cycle, and rightly so. A look at a long-term chart of business loans, for instance, shows that this series has been known to rise well after the start of a new recession. But is the value of this indicator more timely in the current climate, in which the pain of the credit crunch is seared into the collective memory?
The financial sector is still skittish after suffering heavily in the Great Recession. Indeed, no corner of the economy took a heavier blow than finance. The slump of 2007-2009, after all, was partly triggered by an unusually deep financial crisis. It's only natural that banks, even after nearly three years of modest economic growth, are still cautious. If so, what does that say about the continuing rise in business loans generally?
The latest numbers on commercial and industrial loans, as compiled by the Federal Reserve, show that lending is still rising. The actual dollar amounts can be misleading, however, if we're trying to gauge the broad moves in the economy. A slightly better approach is to look at rolling 12-month percentage changes. History shows that when a new recession strikes, the annual pace of business lending, if it isn't already falling, peaks relatively early once the economy begins to shrink. The lone exception to this rule for the past nine recessions is the 1981-1982 slump.
Economist John Silvia of Wells Fargo tells us in Dynamic Economic Decision Making 
Popular wisdom holds that the economy needs banks to lend before the economy gets going. In reality, businesses are cautious about borrowing at the start of the recovery and will invest their own cash first and then borrow at the bank. Meanwhile, the bank is also cautious since it probably has some bad loans it wants to work off from the last recession. As a result, bank lending is a lagging, not leading, indicator of the recovery.
Business lending these days continue to climb at a robust rate over year-earlier levels (see chart below). Through February, commercial and industrial loans rose 12.2% vs. the same month from 2011, according to Fed data. That's up from January's 11.0% pace and by far the highest rate of increase since the Great Recession ended in mid-2009.
The weekly reports through the end of March show more of the same. Commercial and industrial lending totaled $1.39 trillion (seasonally adjusted annual rate) as of March 28, 2012—up 11.6% vs. the last week of March in 2011.
Bank loans are just one statistic, of course, and traditionally these numbers are considered of limited use as an early signal of economic trouble. When the economy faced new headwinds last spring, and during the spring of 2010 too, business lending didn't flinch from its revival. Maybe that was a sign of confidence that the economic recovery would survive, as it has so far.
Meantime, it's worth remembering that the economic turmoil in recent years has been accompanied by the deepest financial-sector crisis since the Great Depression. It's reasonable to wonder if banks are more sensitive to recession risk these days. If so, is commercial lending activity more likely to dry up earlier than usual if loan officers think the economy's set to falter? In that case, can we take comfort from the fact that banks continue to extend credit to the business community?
The answers are unavoidably speculative. What we do know is that bank lending continues to expand. That alone is no guarantee that the economy will dodge a bullet. On the other hand, any decline in lending activity would be seen as ominous in the current climate. For the moment, however, the lending skies still look sunny.
Posted by jp at 8:12 AM | Comments (0)
April 11, 2012
Research Review | 4.11.12 | Equity Risk Premium
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2012 Edition
Aswath Damodaran (NYU Stern School of Business) | March 2012
Equity risk premiums are a central component of every risk and return model in finance and are a key input into estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating equity risk premiums, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. We also look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.
The Equity Risk Premium in 2012
John R. Graham (Duke and NBER) and Campbell R. Harvey (Duke and NBER) | March 2012
We analyze the history of the equity risk premium from surveys of U.S. Chief Financial Officers (CFOs) conducted every quarter from June 2000 to March 2012. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. While the risk premium sharply increased during the financial crisis peaking in February 2009, the premium steadily fell until the second quarter 2010. The current surveys show that the premium has increased to near to the levels during the financial crisis. The survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. We find that dispersion of beliefs is above average as well as individual uncertainty. We find little relation between our survey-based risk premium and a measure of the implied cost of capital that relies on individual firms’ forecasted future cash flows. We also present evidence on the determinants of the long-run risk premium. Our analysis suggests the level of the risk premium closely tracks both market volatility (reflected in the VIX index) as well as credit spreads. However, the most recent data show a puzzling divergence between VIX and our measure of the risk premium. Our analysis suggests that market volatility is inexplicably low.
Rethinking the Equity Risk Premium
P. Brett Hammond, Jr., et al. (CFA Institute) | 2011
In 2001, a small group of academics and practitioners met to discuss the equity risk premium (ERP). Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.
Shares and shibboleths: How much should people get paid for investing in the stockmarket?
The Economist | March 2012
The big question, however, is how large that extra return should be. Here it is important to distinguish between the extra return investors actually achieved for holding equities (what could be called the ex post number) and the return they expected to achieve when they bought them (the ex ante figure). Academics started to focus on this problem in the mid-1980s when a paper by Rajnish Mehra and Edward Prescott indicated that the ex post return of American equity investors had been remarkably high, at around seven percentage points a year. It seems unlikely that investors expected to do so well.
Risk, Uncertainty, and Expected Returns
Turan G. Bali (Georgetown University) and Hao Zhou (Federal Reserve) | March 2012
A consumption-based asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premiums. The empirical results from the size, book-to-market, and industry portfolios as well as individual stocks indicate that the conditional covariances of equity portfolios (individual stocks) with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant premium relative to portfolios that are uncorrelated or lowly correlated with VRP. The insignificant alpha estimates indicate that the conditional asset pricing model proposed in the paper also explains the industry, size, and value premiums.
Time-Variation in the International Diversification Benefits
Wan-Jiun Paul Chiou (Shippensburg University) and Kuntara Pukthuanthong (San Diego State University) | March 2012
Does the economic value of internationally diversified portfolios shrink over time in an increasingly integrated global market? How do the dynamics of global economy and financial markets affect the benefits of international diversification? What is a proper measure of diversification benefits? In contrast to previous research, this paper specifically models the investment constraints associated with liquidity and portfolio feasibility. We find that, although the world market is more integrated, the time-varying benefits of global diversification remain positive. The addition of weighting bounds decreases a portion of diversification benefits, but this addition also decreases the uncertainty of gains and asset allocation and induces diversity in the diversified portfolio. Correlation is not associated with the potential diversification benefits but adjusted R-squared from a multifactor model is. Inflation risk, default risk premium, liquidity and size of equity market are associated with the diversification benefits.
Posted by jp at 6:55 AM | Comments (0)
April 10, 2012
Asset Allocation Can't Save Us, But It's Still Crucial For Portfolio Results
Is asset allocation unimportant after all in the grand scheme of managing wealth? Yes, according to a new study the Center for Retirement Research at Boston College. "The focus on asset allocation is misplaced," advises "How Important Is Asset Allocation To Financial Security In Retirement?" On first glance this finding sounds like a knock-out blow to all the studies through the years that tell us that asset allocation is a critical variable for portfolio management. Should we now abandon the idea? In a word, no.
The paper appears to offer radical advice by way of a shocking disclosure. In fact, the study's not telling us anything that wasn't already obvious. The authors demonstrate that a number of tools and techniques beyond asset allocation are of greater influence on the outcome of financial planning decisions over long periods of time—particularly for investors with relatively small portfolios. The message is that investing results alone may not suffice for most folks in the all-important task of saving for retirement. How you manage assets is important, but that can can pale next to how much you earn over the course of a lifetime, and how much you save along the way.
This isn't terribly surprising, and it certainly doesn't change what we know about asset allocation and its relationship with risk and return over the long haul. Nonetheless, you still can't get blood out of a stone and asset allocation won't help all that much if your portfolio is small relative to what's needed to engineer a secure retirement. As the authors explain,
Strikingly, the typical 401(k)/IRA balance of households approaching retirement is less than $100,000, which suggests that the net benefits of portfolio reallocation have to be modest for the typical household. Although it is possible that higher income households have more to gain.
A simple Excel exercise aimed at determining the required saving rates for individuals with different starting ages, ending ages, and asset returns showed that the difference between earning a real return of 2 percent instead of 6 percent could be offset by working five years longer. This finding suggests a minor role for asset allocation in creating a secure retirement.
The paper concludes: "Given the relative unimportance of asset allocations, financial advisers will be of greater help to their clients if they focus on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage."
Agreed. But this is hardly a smoking gun that invalidates asset allocation. True, designing and managing the portfolio mix through time can't overcome the headwinds of, say, not saving enough assets to properly fund retirement. Asset allocation won't make you any taller or smarter either. But within the realm of the portfolio, asset allocation and rebalancing remain the primary factors driving the risk/return profile. That hasn't changed, nor will it. The fundamental laws of finance are written in stone.
Meantime, there is a risk of trying to be too clever with asset allocation. It's hard to beat a broadly diversified, unmanaged multi-asset class portfolio in the long run without taking big risks--risks that may or may not pay off. For instance, the Global Market Index—a passive, unmanaged mix of the major asset classes weighted by market values—outperformed nearly 90% of 1,200-plus multi-asset class mutual funds for the 10 years through the end of 2011.
But if we're talking about the broader array of influences on an individual's wealth, it's necessary to look beyond money management. To note the obvious, or what should be obvious: your career is likely to have a bigger impact on your retirement than your decision on how much to hold in stocks vs. bonds vs. REITs vs.commodities. Even the greatest portfolio strategy in the world won't do much to help you reach financial goals if your investment assets are minimal, or if you lose your high-paying job and have to settle for flipping hamburgers. At the opposite extreme, it's no great revelation to discover that a CEO with a multi-million-dollar salary can ignore asset allocation—and investing in general—and still do quite well for himself.
None of this alters the reality that asset allocation and rebalancing are the key variables that govern results through time for most portfolios. That may not be terribly relevant for your financial health in general. But if we're talking about managing portfolios, asset allocation is still on the short list of key factors.
Posted by jp at 7:57 AM | Comments (0)
April 9, 2012
A Bit Of Humility Is Still Required For Predicting The Business Cycle
Was Friday's disappointing news on job growth the death knell for the recent run of economic growth? Some analysts think that the macro jig is up and that the sharp slowdown in the expansion of payrolls for March represents the point of no return. The truth is that no one knows for sure if last month's downshift was a sign of things to come or just a temporary weak patch in an otherwise reviving labor market. In contrast to the far more widely followed establishment profile, the so-called household survey of the labor market in March certainly paints a more encouraging picture, as Scott Grannis explains. In any case, for now it's a mystery that can only be solved with more data. That doesn't mean we should ignore the potential for trouble--the latest establishment survey numbers are certainly disturbing at a time when growth overall remains fragile. The risk for a slowdown or worse suddenly looks higher. But it's premature to argue with a high degree of confidence that a new recession is unavoidable.
Consider, for instance, how the annual growth rate for private-sector nonfarm payrolls compares with initial jobless claims. Even after the weak jobs report for March, the year-over-year increase for payrolls is a respectable 1.93%, or near the highest levels reported since the last recession was officially declared over in mid-2009. If there's a new recession knocking on our door, payrolls growth will deteriorate rapidly and dramatically in the months ahead.
That may be coming, but it's not obvious from looking at the trend in initial jobless claims. One of the stylized facts about recessions is that new filings for unemployment benefits rise persistently just ahead of, or in the early stages of recessions. But there's no sign of that warning--not even close. Initial claims have been falling fairly consistently for nearly a year. The trend, if history's a guide, signals that the labor market will continue growing.
It could all fall apart suddenly, of course. But while we're waiting for fresh data, there are several economic data points to consider that don't make it easy to forecast a new recession. For instance, average weekly hours worked among production and nonsupervisory employees has been rising steadily. Looking beyond the labor market, industrial production's year-over-year growth rate looks robust and stable. A broader measure of U.S. economic activity shows no clear signs of trouble either, as per the Chicago Fed National Activity Index. Meantime, one measure of financial stress continues to recede, based on the St. Louis Financial Stress Index. And in contrast to March's slowdown in employment growth, manufacturing activity perked up a bit last month. The services sector continued growing last month too, albeit at a moderately lesser pace.
Still, this is no time for complacency. One warning sign that's been a regular on these pages for months is the decelerating growth in disposable personal income. Other risk factors include high energy prices and the ongoing euro crisis.
Overall, you can make a good case for worrying about the economy, but that's been true all along. But it's too early for a high-confidence forecast that a recession is upon us. Predicting major turning points in the business cycle remains a speculative affair if the expected change isn't conspicuous in the data. For all the progress in macroeconomics in reading and analyzing big-picture trends, the best you can expect is that we'll have a defacto confirmation of the onset of the next recession in the early stages of that event—not before it's started.
For instance, in late-March 2008 I went on record in arguing that a new recession was unavoidable. There were several factors that convinced me that the cycle had irrevocably turned for the worse, although lots of analysts disagreed at the time. The official confirmation arrived months later, in December 2008, when NBER announced that a new recession began roiling the economy as of January 2008 (the cyclical peak was December 2007). By that standard, my March 2008 recession call was late, which is to say well after the recession had already begun. A number of economists were warning of a downturn even earlier. But in March 2008, and for several months thereafter, anticipating a recession was still a minority view.
The point is that at some point it becomes a virtual certainty that another contraction is inevitable and so we should focus on making that call as early as possible. The numbers will tell us when that point of no return has arrived. For the moment, though, we're not there yet. We may be in a recession, but that's still a speculative call without sufficient statistical confirmation.
On that note, the week ahead won't change much. Thursday brings another weekly update on jobless claims, but one number for this volatile series doesn't usually tell us much. The March report on consumer inflation arrives on Friday, but that's of minimal value for assessing the broad economic trend.
In short, it's going to take time—another month or two at a minimum—to decide if the economy's set to tumble. Meanwhile, let's keep in mind what's obvious. The economy wasn't in recession in February, and probably didn't succumb in March, based on the preliminary data in hand so far. Confidence levels fall sharply for making claims about the cycle for April and beyond. It's still impossible to see around corners no matter how hard you look in the rear-view mirror. We should be looking, of course, but it's important to recognize what mere mortals are capable of in the dark art of forecasting the business cycle.
Posted by jp at 8:09 AM | Comments (0)
April 7, 2012
Book Bits | 4.7.2012
● White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You
By Simon Johnson and James Kwak
Blog post by co-author (Johnson) via Economix (NY Times)
Debt has surged, relative to G.D.P., six times in American history, during the War of Independence, the War of 1812, the Civil War, World War I, World War II and since 2000. In the first five instances, debt rose as the government scrambled to raise resources to pay for a war effort. After each of those wars, debt was steadily reduced relative to the size of the economy – over decades, not over months or even years. The debt surge since 2000 is different – a point that James Kwak and I explain in detail in our book, published this week. To be sure, we have the two expensive wars, in Iraq and Afghanistan. But much more of the increase in the deficit was because of tax cuts under George W. Bush, Medicare Part D (which expanded coverage for prescription medicines) and – most of all – the financial crisis that brought down the economy and sharply reduced tax revenue starting in September 2008. Our modern debt surge is much more about declining federal government revenue than it is about runaway spending. If you believe strongly that our fiscal issues are primarily about “runaway spending,” please read our book. The smart approach is to begin the long and not-so-nice work of controlling deficits while allowing the economy to grow.
● Time to Start Thinking: America in the Age of Descent
By Edward Luce
Interview with author via WNYC (The Brian Lehrer Show)
In Time to Start Thinking: America in the Age of Descent, Edward Luce argues that America is sliding into an economic and geopolitical free fall. Luce is Financial Time's chief U.S. columnist and former speechwriter for Larry Summers, who served as Treasury Secretary during the Clinton administration.
● The New Depression: The Breakdown of the Paper Money Economy
By Richard Duncan
Summary via publisher, Wiley
When the United States stopped backing dollars with gold in 1968, the nature of money changed. All previous constraints on money and credit creation were removed and a new economic paradigm took shape. Economic growth ceased to be driven by capital accumulation and investment as it had been since before the Industrial Revolution. Instead, credit creation and consumption began to drive the economic dynamic. In The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan introduces an analytical framework, The Quantity Theory of Credit, that explains all aspects of the calamity now unfolding: its causes, the rationale for the government's policy response to the crisis, what is likely to happen next, and how those developments will affect asset prices and investment portfolios.
● Before the Lights Go Out: Conquering the Energy Crisis Before It Conquers Us
By Maggie Koerth-Baker
Q&A with author via Grist
Q. You write early on, “This isn’t a book about quick fixes,” argue there’s “no killer app” for renewable energy, and suggest that any sane path forward is going to involve a complex mix of new policies, technologies and systems. (I kept thinking of Clay Shirky’s line about the future of the media business: “Nothing will work, but everything might.”) How do we get there from here, when “here” is where so many Americans still think politicians can lower the price of gas — or that lower gas prices are a good thing?
A. That is a difficult question. And I don’t think there is a clear answer. But in the course of doing this research, I have come to the conclusion that part of the answer must involve some method of putting a price on carbon — precisely because that carbon is valuable. We’ve become dependent on fossil fuels for a reason — not because of any evil plot, but because these fuels are just that much more powerful than anything that came before them. The power of coal, the portability of liquid gasoline: There is amazing value there. At the same time, we’re also talking about fuels we have limited supplies of. And those fuels, when we use them, also cost us money in the form of health-care costs and climate change adaptation costs.
● Saving Europe: How National Politics Nearly Destroyed the Euro
By Carlo Bastasin
Summary via publisher, Brookings Institution Press
Three times in the few years since the global financial crisis erupted, the euro has come close to extinction, endangering both the world economy and history's most ambitious project in shared sovereignty. Yet each time, the case for a common currency proved to be more compelling than its weaknesses, and the euro survived. Saving Europe reveals how the nexus of international economics and national politics pushed monetary union to the brink of a breakup, how that disastrous development was avoided, and why the long-term viability of a common currency challenges politics as we know it.
● Handbook of Research on Stock Market Globalization
Edited by Geoffrey Poitras
Summary via publisher, Edward Elgar Publishing
The stock market globalization process has produced historic changes in the structure of stock markets, the effects of which are evident throughout the world. Despite these transformations, there are relatively few sources examining the connections between the globalization process currently under way and previous periods of stock market globalization. This seminal volume fills that gap. The chapters in the first section examine previous globalization periods through the lens of the corporate economy, valuing equities and managed funds. Further chapters address current issues such as the social closure of the exchange, demutualization and mergers and acquisitions as well as cross-listing and liquidity. The final chapters consider the regulatory challenges posed by stock market globalization. These include the pressures on regulators from rent-seeking stock market participants, the demise of exchange trading floors and Latin America’s stock market.
● Redesigning the Stock Market: A Fractal Approach
By Pravir Malik
Summary via publisher, Sage
Redesigning the Stock Market: A Fractal Approach aims to alter the core of the global business machinery by integrating more long-sighted heuristics into trading mechanisms. These trading mechanisms encompass both the macro-environment related to the stock market and the micro-act of stock trading. The book covers the following key areas:
* Discussion on a fractal basis for analysis of the macro financial environment and the stock market.
* History of stock market crashes and lessons we can derive from them.
* External changes that affect the stock market.
* Suggestions for redesigning the stock market to minimize future financial crises and ensure business and societal sustainability.
Posted by jp at 5:37 AM | Comments (0) | TrackBack
April 6, 2012
Job Growth Slows Sharply In March
Here we go again? Another spring is here and suddenly the economic data is looking weak again. Private-sector nonfarm payrolls rose in March by a slim 121,000 on a seasonally adjusted basis. That's roughly half as strong as we've been seeing in recent months. In February, for instance, private job growth was a much stronger 233,000. It's safe to say that today's number is a big disappointment and far below what most economists were expecting. Today's jobs report also raises new concerns that the economy is weaker than it appeared in recent months, giving new strength to the arguments that the warm winter has been artificially juicing the numbers.
The unemployment rate still managed to slip a bit to 8.2% last month from February's 8.3%. But this is meaningless in context with the latest evidence of weak job growth. In any case, it's suddenly a whole new ballgame for analyzing the economic outlook… again.
One reading of today's report is that economic momentum generally is slowing. Indeed, the main reason for the weak jobs report is due to a reversal of fortunes in the services sector, which dominates the labor market in providing jobs. Consider that in February, services jobs rose by a seasonally adjusted 204,000, or roughly in line with the previous two months. But growth in services jobs slowed to a net rise of just 90,000 in March.
If the economy is destined for another slowdown or worse, it's hardly a total surprise, given the ongoing downshift in the annual growth rate of personal income. Yesterday I wondered if ADP's estimate of job growth would suffice to overcome this headwind and the question certainly resonates on a deeper level after today's news.
Even so, it's premature to say that economic expansion has run its course. The risk may be higher today, but a stronger argument for what happens next requires more data. Monthly payrolls numbers can and do bounce around a lot, even in far more robust periods of economic growth. March's payrolls update might reflect a temporary bit of statistical noise. One reason for favoring this view is yesterday's weekly update of initial jobless claims, which continue to trend lower. The ongoing fall in new filings for jobless benefits doesn't jibe with today's payrolls report, but it'll take time to figure out which series is the superior barometer for what's coming. For the moment, the weekly claims numbers deserve the benefit of the doubt. Why? The claims data is dispensed more frequently, and when you see a trend based on higher quantities of data, well, that’s a stronger signal. Today's payrolls data, by contrast, is the outlier, at least for now.
Keep in mind too that last year's spring slowdown was preceded by a substantial rise in initial jobless claims in April 2011. History may be about to repeat, but so far there's no sign of trouble in the claims data. Let's see what next Thursday's update tells us.
Meantime, no one can dismiss today's payrolls report. The real question is whether we'll see confirmation in the days and weeks ahead for thinking that another spring slowdown is upon us.
“It is obviously disappointing,” says Cliff Waldman, a senior economist at the Manufacturers Alliance for Productivity and Innovation. “This provides some pretty good evidence that part of the strength of the prior two months was probably seasonal.”
Tony Crescenzi, a strategist at Pimco and author of Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy
Posted by jp at 9:33 AM | Comments (0)
April 5, 2012
New Jobless Claims Fall Again Last Week
Initial jobless claims fell again last week, touching a new four-year low and signaling that the labor market will continue growing in the foreseeable future. For the week through March 31, new filings for unemployment benefits dropped 6,000 to a seasonally adjusted 357,000.
Last week’s decline was no quirk, considering that the four-week moving average of new claims also dipped to a new four-year low. There’s no seasonal issue clouding the trend either. Unadjusted claims are 12% below last year’s level, which is to say that the annual decline remains in the 10%-15% range of decrease that’s prevailed for the past 12 months.
The persistence of the decline is notable and therefore encouraging. Indeed, falling jobless claims remains on the short list for thinking optimistically about the economy for the near term. A falling rate of new filings tells us that the higher pace of job creation in recent months has legs. Yesterday’s employment report from ADP said as much and tomorrow’s payrolls update for March from the government is likely to bring a fresh dose of confirmation. But as I wrote earlier today, I’m still anxious about the decelerating growth rate in personal disposable income. An expanding labor market should eventually stabilize if not reverse the slowdown in income, but the clock is ticking. If income is stagnant—and it is after adjusting for inflation—there’s likely to be trouble down the line, short of a new borrowing binge by consumers. Anything’s possible, of course, but after getting burned by the Great Recession one should be skeptical that consumption growth can be sustained without a commensurate rise in personal income. In that case, job growth may be vulnerable later this year.
But such worries aren’t likely to be an immediate problem when the economy is generating a decent run of jobs. And if tomorrow’s payrolls update surprises on the upside, it’ll be a bit easier to think that income growth will soon rise once more.
Today’s data certainly inspires modest confidence for expecting that somehow it’ll all work out. “The labor market is going to continue to gradually heal, though we have a long ways to go,” Ryan Sweet, a senior economist at Moody’s Analytics, tells Bloomberg. “The economy is pulling up pretty well given the headwinds we’re seeing from Europe.”
If the optimism is misplaced, we'll soon see signs of it in initial claims numbers. But so far, the trend remains our friend. But let's not minimize the stakes at this juncture: job growth has to stay robust if not accelerate higher, otherwise all bets are off. The past two springs have hit speed bumps that threatened to derail the economy. At the moment, that risk is minimal; good thing too, since a third tumble could push the business cycle over the edge this time.
Posted by jp at 9:30 AM | Comments (0)
Will Job Growth Suffice?
Private-sector payrolls rose by 209,000 last month on a seasonally adjusted basis, according to yesterday's ADP Employment Report. That’s pretty good, but is it good enough? The question resonates because while job growth has clearly perked up recently, at least compared with the modest pace for last year's seven months through November, the faster rate of jobs creation hasn't curtailed the slow deterioration in the year-over-year change in disposable personal income, at least not so far. Maybe that critical bit of progress is coming; if so, good news on this front is contingent on keeping payrolls rising at a healthy clip. Unfortunately, ADP's estimate of March payrolls was a slight downshift from February. Granted, the change was slight—a net gain of 209,000 vs. 230,000 in February. That didn't stop analysts from dispensing upbeat comments.
"My conclusion is the employment growth trend that we've seen over the last year remains in place and we probably will see a decent employment number on Friday when the Department of Labor reports non-farm payrolls," says Fred Dickson, chief market strategist at D.A. Davidson & Co.
That's more or less the view of Joel Prakken, chairman of Macroeconomic Advisers, which creates the ADP report each month. “Labor market conditions continue to improve at a moderate pace," Prakken said in a press release. "Employment grew in all the major sectors of the economy tracked in The Report, and across payrolls of all sizes."
But with Joe Sixpack's disposable personal income growing at ever-slower rates, it's reasonable to wonder what's in store for the economy in the months ahead without a substantially higher round of job creation? Optimists like to emphasize that consumer spending is rebounding, which is no small feat for an economy that relies heavily—roughly 70% of GDP—on personal consumption expenditures. The latest update on personal income and spending certainly shows that February was a good month for consumption. Income growth, however, continues to slow, despite the improvement in jobs creation. On a year-over-year basis, disposable personal income's growth is near its slowest pace on record—2.6%. The only time it was lower on a sustained basis was during the depths of the Great Recession.
How does the slowdown in income growth square with the relatively strong pace of spending? Economist Tim Duy considers one explanation:
The acceleration in auto sales is clearly supporting this trend since the middle of last year. Apparently, what's good for Detroit is still good for America. The importance of autos in sustaining spending begs the question of what will occur when pent up demand is satisfied? Obviously, auto sales will stop contributing positively to growth as sales level off at some point in what I would expect to be the not to distant future. This is especially the case considering the anemic pace of personal income growth.
Hopefully, income growth will accelerate as the labor market improves. Otherwise, households will need to take on additional debt or running down saving rates to hold the current trend in place.
That doesn't sound like a recipe for sustainable growth, but the analysis brings us back to evaluating the outlook for the labor market. To be fair, the outlook is still open for debate. One reason for remaining optimistic comes from looking at the average weekly hours worked for production and nonsupervisory employees. As the second chart below shows, weekly hours worked have climbed sharply in recent months. That’s a clue that the private sector will continue to mint jobs at a respectable pace in the near-term future.
That sets us up for the next data point: initial jobless claims (scheduled for release later today), which will help us decide if the labor market can maintain its higher growth rate of recent months. It was last year's drop in new claims that offered an early signal of the labor market's latest acceleration. Weekly claims are likely to offer more clues about where we're headed for what amounts to the main support system for the economic recovery: jobs. The good news is that the consensus forecast sees another decline for new claims, according to Briefing.com.
Meanwhile, tomorrow brings word of the government's March payrolls reports. Unfortunately, the outlook echoes ADP's update: a modestly slower rate of private-sector job growth for March. That wouldn't be enough to derail the case for expecting economic growth, but it wouldn't be enough to overcome worries about sluggish income growth either.
Posted by jp at 7:31 AM | Comments (0)
April 4, 2012
Untangling Inflation Worries
Inflation may be mild and falling, but that doesn't stop anyone from worrying. A new survey by MFS Investment Management, for instance, reports that investors are more concerned about inflation over the next 12 months compared with their financial advisors. Sixty percent of investors surveyed say they're worried about rising inflation over the next 12 months, according to the MFS Investing Sentiment Survey.
Conversely, only 41% of financial advisors think that rising inflation is a concern for investors in the year ahead.
The disconnect arises amid a backdrop of mild and falling inflation lately. Annual consumer price inflation was 2.9% in February, the Bureau of Labor Statistics reports, down from the low-3% range last year. Ignoring the brief deflation spell during the Great Recession, official measures of inflation are currently near their lowest levels in half a century, and it may be headed lower still, considering the recent decline in the annual pace. But that doesn't mean it "feels" like inflation is low.
Rising energy prices—gasoline in particular—surely stoke inflation worries even as broad measures of prices remain near historically low levels. The average price for a gallon of gasoline in the U.S. is just under $4, or approaching the all-time high set back in 2008, according to the Energy Information Administration. It's no surprise that higher fuel costs take a toll on consumer sentiment. "Consumer purchasing power, at least for the next few months, is going to remain pressured by rising gasoline prices," Sam Bullard, a senior economist at Well Fargo Securities, told Reuters recently.
But there's a risk of letting commodities prices—energy prices in particular—dictate your worldview on the inflation outlook. Previous surges in energy prices have accompanied concerns that inflation was poised to spiral upward, but the fears were premature. The lesson is that commodities prices are volatile, but they tend to be a wash eventually. Perhaps it's different this time and energy prices will remain permanently elevated. Even that wouldn't spell disaster for inflation if prices stabilized at higher levels. But economic logic can be in short supply at a time when the crowd is forking over more money at the pump. Nonetheless, it's important to keep in mind that a fair amount of the current rise in energy prices is linked to the Iranian crisis. When and if that crisis blows over, oil prices could drop sharply.
Meanwhile, with energy prices on the march, inflation anxiety is climbing again. Do those fears amount to another case of overreaction? For some perspective, consider that the Cleveland Fed's 10-year estimate of inflation was 1.38% last month, the lowest in a generation. Good news? Inflation hawks might think so, but there may be complicating factors, particularly if inflation expectations continue falling in the current economic climate. The new abnormal, as I like to call it, is still in force, courtesy of the blowback from the Great Recession--a blowback that continues to define the relationship between inflation expectations and growth. The two halves of this coin remain tightly bound these days. That's abnormal, and not widely understood, but for the moment it's an abnormal relationship that rolls on.
Exhibit A is the tight positive correlation between the stock market and inflation expectations, as defined in the yield spread for the nominal less inflation-indexed 10-year Treasuries. The message here is that a sustained drop in inflation levels at this stage may be a sign of new economic troubles. In other words, be careful what you wish for, at least in the short run.
Nonetheless, populist commentary resonates. Columnist Amity Shlaes, for instance, recently argued that inflation threatens to "capsize" the U.S. But that view looks misguided, or at least premature as long as the new abnormal prevails.
One day inflation will be a clear and present danger for the economy. When that day comes, will the inflation threat suddenly spin out of control? Not necessarily. If Milton Friedman was correct, inflation as a long-term proposition remains under the control of the central bank's monetary policy. We can debate if the Fed will do the right thing and manage the transition prudently. It's certainly made mistakes in the past--letting inflation out of the bag in the 1970s, to cite the obvious example. But there's no reason to think that we're doomed to repeat yesteryear's mistakes. Assuming, of course, that we can read history accurately and draw the right lessons.
Posted by jp at 6:34 AM | Comments (0)
April 3, 2012
The Beta Investment Report | High Yield Bond ETFs | 4.3.12
Here’s the latest installment of our ongoing review of ETFs that can be used to replicate the Global Market Index (GMI), a passive, unmanaged benchmark that’s comprised of the major asset classes. In the previous edition, we looked at broadly defined, investment-grade U.S. bond funds. Today's focus is on high yield ETFs.
In particular, we're looking at three junk bond products targeting the U.S. fixed-income market. A new ETF was recently launched that caught our eye: SPDR Barclays Capital Short Term High Yield Bond (SJNK). This fund, which targets the shorter maturity spectrum of junk bonds, started trading last month and so it's still on our wait-and-see list.
Meanwhile, our formal short list is comprised of three high yield ETFs. These are the funds that meet certain criteria, including an expense ratio no higher than 0.5%, a passive index-replication investment strategy, and a track record of at least three years. The three ETFs that pass our test are generally comparable, although our first choice is SPDR Barclays Capital High Yield Bond (JNK). Its moderately lower expense ratio is an attraction, an edge that seems to be helping it outperform for the trailing three-year period vs. the other two funds.
Then again, we don't expect radically different results from these funds over the medium- and long-run horizons. As such, all three are more or less interchangeable for use in replicating GMI and other multi-asset class strategies. Indeed, performance correlations over the last three years between these three products is roughly 0.95, according to Morningstar Principia. (A correlation of 1.0 indicates perfect positive correlation; zero reflects no correlation.) That's a sign that these ETFs share similar if not quite identical risk profiles. No doubt there'll be short-term differences, perhaps surprisingly so at times, given the different benchmarks and replication procedures. But in the context of GMI, the expected differences are unlikely to be game changers one way or the other. That said, if we must pick just one from the list, JNK is the current preference for capturing a broad definition of the high yield beta via an ETF.
Posted by jp at 12:43 PM | Comments (0)
Strategic Briefing | 4.3.12 | Warm Weather & The Economy
The winter of our content? How much did weather skew U.S. data?
Irwin Kellner (MarketWatch) | Apr 3
All eyes will turn to the March employment data, to be released this Friday, to see if this improvement was real or merely a statistical illusion. The weather is usually more benign at this time of year, so any distortions from seasonal adjustments tend to be minimal. Nonfarm payrolls grew an average of 245,000 between December and February after expanding by an average of only 157,000 in the three prior months. That’s quite a jump. If March’s employment stats are as good or better than the previous three months, it could be sign that the winter’s improvement was real. But if March disappoints, it would mean that the strength over the winter was nothing but a chimera.
Video: How a warm winter impacts the economy
The Globe and Mail | Apr 2
What sort of impact has this wacky weather had on agriculture and energy commodities? What about the general encomy? BNN finds out with Matt Rogers, president at Commodity Weather Group, and John Lonski, chief economist at Moodys.
Americans Went on a February Shopping Spree
U.S. News & World Report via Chicago Tribune | Apr 2
Warmer winter, newfound confidence, and pent-up demand sent consumers to the malls even as real income lagged Americans have a little more money to spend, and they're spending all of that and then some. In February, consumer spending increased by more than three times as much as personal income, growing by $86.0 billion, according to figures released today by the Commerce Department. That's an 0.8 percent increase over January, the largest bump in seven months. Personal income also rose, but not as dramatically, at 0.2 percent, or $28.2 billion, and disposable personal income also rose by 0.2 percent.
Obama Adviser Says Jobs Gains Broad-Based Not Weather Driven
Bloomberg | Mar 27
President Barack Obama’s top economist says that U.S. job gains are broad-based and that growth in January and February was not simply the result of inaccurate statistical adjustments or “unseasonably warm weather.” Alan Krueger, chairman of the White House Council of Economic Advisers, also said small businesses are finding it easier to obtain credit, aiding the recovery. Some have suggested that an unusually warm winter helped propel job gains and the drop in unemployment claims in the first two months of the year, Krueger said in excerpts of remarks prepared for National Association for Business Economists Conference today in Washington. “But the evidence suggests that the recent job gains have been more robust than merely a result of favorable weather,” he said “Although there is a long way to go before the labor market is operating normally, the accumulating evidence should lend confidence to the view that we are on a better path.”
Scientists cite global warming for more heat waves, heavier rainfall
The Seattle Times | Apr 2
On Wednesday, the U.N. Intergovernmental Panel on Climate Change (IPCC) released a 594-page study suggesting that when it comes to weather observations since 1950, there has been a "change in some extremes," which stem in part from global warming.... "The IPCC report is yet another reminder of the pressing need to tackle climate risk in both the near and long term," said Mark Way, head of Swiss Re's sustainable-development activities in the Americas. "Last year in the United States, even with the absence of major hurricane impacts, the insurance industry paid out approximately $35 billion in losses due to weather-related events. Severe weather will continue to impact the economy, and society in general, until we take the necessary measures to increase our resilience." Although extreme weather in developed countries exacts a higher human toll than in industrialized nations, the high economic cost associated with recent U.S. disasters is shifting more of the financial burden on taxpayers.
One Of The Biggest Myths About The Strong Economy Has Now Been Debunked
Joe Weisenthal (BusinessInsider) | Apr 2
Construction was supposed to be one sector that would OBVIOUSLY benefit from the warm weather, and yet it hasn't. For the last two months, constructions pending has been negative. Further confirming this number is the fact that construction employment actually fell in the last month.
Warm weather, shrinking labor market lower unemployment
Yale Daily News | Apr 2
For Ivan Sachs, owner of Connecticut-based Cherry Hill Construction Co., this year's relatively warm winter has helped jump start his 55-year-old, family-run construction and demolition business for the 2012 season. "There was no real, lasting frost this year, so we were able to start post-winter work a bit early," Sachs said. "Normally we start at the end of March or the first week of April, but this year we began almost a month earlier."
Warm weather, improved economy bringing out homebuyers and sellers this spring
The Star-Ledger | Apr 1
In the real estate business, there is a budding sense of optimism these days. A warmer winter, a stronger sense of job security and a general feeling that home prices have stopped dropping are fueling a new outlook. "This is extraordinary," said Jeffrey Otteau, president of the Otteau Valuation Group in East Brunswick. The market is "exploding off the charts, and I’m convinced this is just the early stages of what is yet to come.
The local economy will benefit from a warm spring
Madison Daily Leader | Apr 2
The remarkably warm winter and spring in our area is certainly welcome. There's nothing wrong with less shoveling, easier driving and an earlier start to spring and summer recreation. But we see some economic benefits that the warm temperatures will bring. We recognize some of these benefits come at the expense of others, but the net gain is positive.
Posted by jp at 5:42 AM | Comments (0)
April 2, 2012
Manufacturing Activity Picks Up In March
The first major economic report for March suggests that the economy continued to expand last month thanks to manufacturing activity growing at a slightly faster rate. The ISM factory index rose to 53.4, up from 52.4 in February. A reading above 50 indicates a growing manufacturing sector.
The ISM report is good news in the wake of last week’s update on personal income and spending for February. Although consumption growth was strong in February, personal income growth continues to decelerate. If the deterioration rolls on, the trend may derail the economic recovery down the line. The fact that manufacturing continues to revive, however, suggests that there’s still enough forward momentum in the economy to counteract any weakness in other areas.
“The manufacturing sector is in pretty good shape and it’s been increasing at a pretty solid pace,” says Stephen Stanley, chief economist at Pierpont Securities. “Inventories are pretty lean and companies are playing it pretty close to the vest. I don’t see much evidence of underlying weakness.”
John Ryding and Conrad DeQuadros of RDQ Economics advise that the moderately stronger ISM numbers for March "augur well for the payroll and industrial production data for the month," via Barron's.
Let's hope so. Robust Jobs growth is critical for keeping the slowdown in personal income growth from becoming a bigger threat. Today's ISM update is a small down payment for thinking positively. Economists overall, however, may need more convincing. The consensus forecast (according to Briefing.com) for March private nonfarm payrolls sees a gain of 215,000. That's pretty good, relative to recent history, although if this guess is accurate it represents a slight drop from February's 233,000 increase.
Expecting the softer side of growth for March looks reasonable based on the business surveys for activity last month by way of the regional Fed banks, as compiled by economist Ed Yardeni. A sign of new headwinds in the weeks and months ahead? Maybe, although the ISM number du jour suggests otherwise.
The ISM manufacturing index has been in the low 50s since last August and "it's still right in the middle of that range, suggesting that manufacturing is still chugging along here in the U.S. even though manufacturing is in a recession in Europe and just barely growing in China," opines Chris Low, chief economist at FTN Financial, via Reuters. "Most of the [ISM subcategory] indices are little changed. The really important ones are new orders, production, the backlog. The production index rose three points. It is the highest since December so that's good."
Posted by jp at 11:37 AM | Comments (0)
Major Asset Classes | March 2012 | Performance Review
March was a mixed bag of performance for the major asset classes. REITs (MSCI REIT) were the big winner last month, posting a strong 5.2% gain, in sharp contrast with a 4.1% loss for a broad definition of commodities (DJ-UBS Commodity). Returns within the global equity space varied quite a bit too, with U.S. stocks (Russell 3000) advancing 3.1% as foreign markets in developed nations (MSCI EAFE) suffered a slight loss of 0.5% as emerging markets (MSCI EM) fell 3.3% in March (in US $ terms).
The mixed-bag metaphor also applies within bond markets. Both foreign corporates (Citi Non-$ Corp) and emerging market bonds (Citi ESBI-Capped) were higher by 0.3% (in US $ terms) last month, but red ink wasn't hard to find elsewhere in fixed income. Inflation-linked Treasuries were especially hard hit, falling 1.1% on the month.
Meanwhile, the Global Market Index, our passively weighted mix of all the major asset classes, inched higher in March by 0.3%. That's the third monthly increase this year, albeit the smallest advance so far in 2012. Nonetheless, GMI is ahead for this year's first quarter by 7.2%.
Posted by jp at 5:40 AM | Comments (0)