Prospects for the Economy and Monetary Policy
William Dudley, president and CEO, NY Fed | Feb 28
…we need to keep a close watch on how households and businesses respond to commodity price pressures. The key issue here is whether the rise in commodity prices will unduly push up inflation expectations. Although there have been commodity price cycles in the past, commodity prices have not consistently increased relative to other prices, and indeed have declined in relative terms over the very long term. Historically, if commodity prices rose sharply in a given year, it has been reasonable to expect that these prices would stabilize or fall within a year or two. This property has been important because it has meant that measures of current “core” inflation, rather than current headline inflation, have been more reliable in predicting future headline inflation rates.
In contrast, over the past decade, commodity prices generally have been on an upward trend….
Nevertheless, there are important mitigating factors that suggest that it would be unwise for the Federal Reserve to over-react to recent commodity price pressures. First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary. In particular, much of the most recent rise in food prices is due to a sharp drop in production caused by poor weather rather than a surge in consumption. More typical weather and higher prices should generate a rise in production that should push prices somewhat lower. This is certainly what is anticipated by market participants. Second, even if commodity price pressures were to prove persistent, the U.S. situation differs markedly from that of many other countries. Relative to most other major economies, the U.S. inflation rate is lower and the amount of slack much greater.
Moreover, for the United States, commodities represent a relatively small share of the consumption basket. This small share helps to explain why the pass-through of commodity prices into core measures of inflation has been very low in the United States for several decades.
Spending & Income Rise In February
Personal income and spending rose again in January, the U.S. Bureau of Economic Analysis reports. The news offers fresh ammunition for arguing that the trend remains encouraging for two key pillars of the economy. But there’s some fine print to consider. It remains to be seen how (or if?) the Middle East turmoil, and the associated rise in energy prices, will alter consumer behavior. As such, the February numbers may already be dated. Meanwhile, the jump in income last month was primarily due to a new cut in payroll taxes that began last month. Nothing wrong with that, of course, but it’s not the same thing as saying that companies were handing out big raises last month.
Can The Crowd Exploit The Rebalancing Bonus?
James Surowiecki’s The Wisdom of Crowds
Book Bits For Saturday: 2.26.2011
● ANTs: Using Alternative and Non-Traditional Investments to Allocate Your Assets in an Uncertain World
By Dr. Bob Froehlich
Excerpt via publisher, John Wiley
There is clearly overwhelming evidence that a large percentage of a portfolio’s performance is determined by the percentage of money that an investor places in stocks, bonds, and alternative and non-traditional assets. Then to a much lesser extent, the performance of a portfolio is affected by the individual’s investment selection within those asset classes. The purpose of this book is to help you decide how much of that important 90 percent portion of your portfolio should be allocated to alternative and nontraditional asset classes.
When most individual investors thought of asset allocation, they simply thought of the big three: stocks, bonds, and cash. The reason was that most individual investors really only had these choices available to them. Not so anymore. Individual investors now have the opportunity to invest just like the big institutional investors by having exposure to alternative and non-traditional asset classes as well.
Analyzing The United States Government… As A Business
If the federal government was a corporation–a very big corporation–how would it stack up? Mary Meeker takes a stab at an answer. Befitting the size of her target, the analysis is hefty in its own right, weighing in at 266 pages. “This report looks at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook,” writes Meeker, a partner at KPCB and former financial analyst at Morgan Stanley, in the newly released “USA Inc.” The report examines the government’s income statement and balance sheet and concludes: “By the standards of any public corporation, USA Inc.’s financials are discouraging.” If you need additional details, this PDF file won’t disappoint. If you prefer a bound copy of the dark details, you can find it here
Q4 GDP Revised Down As Oil Threat Bubbles
Last year’s fourth-quarter rise in GDP wasn’t as strong as initially estimate, the U.S. Bureau of Economic Analysis reports. That’s discouraging for all the usual reasons, along with the fact that the economy needs all the momentum it can muster if there’s an oil-shock coming, courtesy of the turmoil in the Mideast.
Strategic Briefing | 2.25.2011 | Oil & The Economic Outlook
Rising Oil Prices Pose New Threat to U.S. Economy
New York Times/Feb 24
In the last week, oil prices have risen more than 10 percent and even breached $100 a barrel. A sustained $10 increase in oil prices would shave about two-tenths of a percentage point off economic growth, according to Dean Maki, chief United States economist at Barclays Capital. The Federal Reserve had forecast last week that the United States economy would grow by 3.4 to 3.9 percent in 2011, up from 2.9 percent last year.
Calibrating the Macro Effects of Higher Oil Prices: Results from the MA Model
Macroadvisers/Feb 24
Assuming no change in long-term inflation expectations, no monetary policy response, and no financial-market spillovers, the partial effects of the rise in oil prices can be estimated by scaling up or down the following simulation result generated from our model. An increase in oil prices of $10/bbl for one year starting in the first quarter of 2011 would:
•Reduce GDP growth by about 0.3 percentage point over the first half of the year and by 0.2 percentage point over the entire year.
•Headline PCE inflation would be about 0.1 percentage point higher over the year, and the unemployment rate about 0.1 percentage point higher.
Mixed Messages In January Durable Goods Report
January may have been harsh on the labor market and other sectors of the economy, but there’s no sign of a winter chill in today’s durable goods report for last month. New orders for manufactured durable goods surged 2.7% on a seasonally adjusted basis in January, the highest monthly gain since last September. But the robust advance in the top-line number for new orders comes with some messy details.
Jobless Claims Fall As Oil Prices Rise
Today’s weekly update on new jobless claims offers a fresh reason for hope, but the crowd isn’t likely to take the bait. The back and forth in this series in recent months has given rise to false hopes several times in the last few months that job growth is poised for better days. Is it different this time? Last week’s tally of new filings for unemployment benefits dipped to 391,000 on a seasonally adjusted basis, the Labor Department reports. That’s the lowest since the summer of 2008. But just when things are starting to perk up (maybe) for the labor market, it’s all a moot point suddenly, thanks to the upheaval in Libya and the resulting spike in oil prices.
Rebalancing & Fundamental Indexing
The original “fundamental indexing” ETF—RAFI US 1000 ETF (PRF)—recently celebrated its fifth birthday, and there was reason to celebrate. The fund, which was launched in December 2005, posted a tidy premium in its first five years vs. its competitors: the likes of the S&P 500 and Russell 1000. Fundamental indexing, as practiced by Rob Arnott’s benchmarking designs at Research Affiliates, seems to be working.