Stimulus Is Maligned, but Options Were Few
The New York Times | Feb 29
Britain — which has its own currency and enjoys low interest rates — offers perhaps the best parallel to the United States. In 2010 the coalition government of David Cameron came into office promising to undo the stimulus policies of its predecessor. It cut spending across the board, asking government departments to slash budgets by 25 to 40 percent. And it shot Britain’s incipient economic recovery in the foot. By the end of last year the British economy was still 4 percent smaller than it was before the recession started four years earlier. And it is expected to contract a little more this year. Even after budget cuts, the government’s debt is bigger, compared with the size of the economy, than when Mr. Cameron took office. By comparison, despite criticism of its size and composition by both the right and the left, the stimulus by the Obama administration did add to jobs and growth. The nonpartisan Congressional Budget Office estimates it will have contributed at least 1.6 million jobs and perhaps as many as 8.4 million by 2013.
Durable Goods Orders Dropped Sharply Last Month
New orders for durable goods tumbled in January, falling 4.0%, the U.S. Census Bureau reports. That’s the biggest monthly decline in three years and it’s sure to spark a new round of heated debate about what happens next for the economy. Nonetheless, it’s premature to use today’s numbers to argue that the economy’s destined for the skids. Indeed, the annual trend for new orders is still solidly in the black as is the year-over-year pace for business investment (non-defense capital goods ex-aircraft orders).
Four Regional Fed Banks Report Economic Growth In February
Early clues about February’s economic activity via several regional Federal Reserve banks suggest that growth prevails. Month to date, four regional banks have released manufacturing activity updates for February and in all four cases the numbers show improvement. That suggests that the rest of this week’s economic news on manufacturing will bring more statistical encouragement. Later today, the Richmond Fed will release its update of manufacturing activity and the January summary of durable goods orders for the U.S. arrives. Tomorrow we’ll learn the latest for the ISM-Chicago Business Barometer and on Thursday the ISM Manufacturing Index for February hits the streets, offering the first broad look at the U.S. activity for the month. Meantime, the four regional Fed surveys available at the moment suggest that February overall is shaping up to be another month for expansion. Here’s a brief look at each of the four regional Fed reports released so far based on the accompanying press releases:
In Search Of Smoking Guns
Lakshman Achuthan of the Economic Cycle Research Institute reaffirmed his recession forecast from last September, telling CNBC that “our call stands.” He emphasized that “when you look at the hard data that is used to officially date business cycle recessions, it has been getting worse, not better, despite what the consensus view of an improving economy has been.”
Book Bits For Saturday: 2.25.2012
● The Oil Curse: How Petroleum Wealth Shapes the Development of Nations
By Michael L. Ross
Summary via publisher, Princeton University Press
Countries that are rich in petroleum have less democracy, less economic stability, and more frequent civil wars than countries without oil. What explains this oil curse? And can it be fixed? In this groundbreaking analysis, Michael L. Ross looks at how developing nations are shaped by their mineral wealth–and how they can turn oil from a curse into a blessing. Ross traces the oil curse to the upheaval of the 1970s, when oil prices soared and governments across the developing world seized control of their countries’ oil industries. Before nationalization, the oil-rich countries looked much like the rest of the world; today, they are 50 percent more likely to be ruled by autocrats–and twice as likely to descend into civil war–than countries without oil. The Oil Curse shows why oil wealth typically creates less economic growth than it should; why it produces jobs for men but not women; and why it creates more problems in poor states than in rich ones. It also warns that the global thirst for petroleum is causing companies to drill in increasingly poor nations, which could further spread the oil curse.
Inflation Expectations & Stocks Still Moving In Lockstep
The new abnormal is alive and well, or so it appears. Exhibit A: the stock market and inflation expectations remain joined at the hip. As the crowd anticipates higher inflation, the stock market rallies, and vice versa. This won’t last forever, and earlier this month I wondered if the new abnormal was on its last legs. But for the moment, at least, reports of this relationship’s demise are premature.
More Awkward Questions For Advocates Of The Gold Standard
David Glasner has been reading a newly acquired copy of Ralph Hawtrey’s Trade Depression and the Way Out, 1933 edition, which inspires some tough questions for the hard money folks.
Jobless Claims Flat Last Week At 4-Year Low
Today’s initial jobless claims report is a yawn with last week’s new filings for unemployment benefits showing no change from the previous week’s total, which was revised upward slightly. But the latest numbers don’t provide any reason to question the persistence in the recent decline for this series. The unchanged 351,000 seasonally adjusted total for new claims last week is still the lowest since early 2008.
Volatility & Asset Allocation
Earlier this month I wrote about the upcoming launch of two foreign bond index funds from Vanguard—the firm’s first step into the market for international fixed-income products. Foreign bond funds are nothing new these days, although the proposed Vanguard funds are a bit out of the ordinary because the portfolios will hedge foreign exchange risk. Vanguard’s reasoning is that forex hedging dampens volatility, which is true. But as I noted, volatility per se isn’t a problem in the context of a broadly diversified multi-asset class strategy. In fact, volatility can be quite helpful in that case. Although I mentioned this point briefly, the issue deserves more attention vis-a-vis rebalancing.
Strategic Briefing | 2.22.12 | Eurozone Economics
European shares slip on euro zone recession worries
Reuters | Feb 22
The euro zone’s service sector shrank unexpectedly this month, reviving fears that the economy risks sinking into recession, a business survey showed. Markit’s Eurozone Services Purchasing Managers’ Index (PMI) fell to 49.4 from January’s 50.4, missing even the lowest forecast in a Reuters poll. Strategists said several issues remained unresolved after the Greek bailout deal. “There are still some big questions: does Greece have enough money even now after the second bailout? Can they generate the growth required?” asked Henk Potts, equity strategist at Barclays Wealth, though he noted other factors would limit the downside for equities. “In general terms, there has been a more positive feel to markets since the start of the year. The euro zone crisis has been helped by recent measures. The U.S. (economy) is gaining momentum.”