Saturday, August 27, 2005

A time for listening

I took an unplanned and unexpected four days off this week from blogging. Some of it was due to approaching deadlines: an article due at the end of this month and the fall semester starting in less than two weeks. Some of it was due to a slow news weeks. Upon reflection, however, much of it was due to the shocking murder of Brother Roger Schutz in Taizé, France.

For those of you who do not know who he was, Brother Roger was the founder of an ecumenical Christian monastery during WWII cum refuge for Jews escaping Naziism. Over time the monastery grew in size as more brothers joined, and in the 1950s young people from all over Europe and gradually the world began to gather. Brother Roger didn't gather these people; he never advertised or recruited. They came of their own accord, drawn through word of mouth. At times more than 5000 people are worshipping at Taizé and sharing in the lives of the brothers.

Brother Roger was the moving force behind the now world-known Taizé liturgy or worship style, focused upon meditative song and silence. As The Economist observed in its obituary this week, "Listening, rather than preaching, was the essence of Taizé." Blogs are all about talking, and I have talked a great deal over these many months and even years. As I come off a year's sabbatical and the fall semester begins, I will be talking a good deal more. And yet Taizé shows us that we must spend our time listening as well.

So until September 8 -- the beginning of the fall semester at my college -- I am going to be listening rather than talking. I hope to meet you again then.

Monday, August 22, 2005

Rallying point

Feeling snippy today.

I read that former Senator George Allen (R-VA), yet another of the Republican hopefuls of 2008, said on This Week yesterday that, as AP paraphrases,
a constitution guaranteeing basic freedoms would provide a rallying point for Iraqis.

"I think this is a very crucial time for the future of Iraq," Allen said on "This Week" on ABC. "The terrorists don't have anything to win the hearts and minds of the people of Iraq. All they care to do is disrupt."
Unfortunately, the reality is far from George's fantasy world.
Shiite and Kurdish militias, often operating as part of Iraqi government security forces, have carried out a wave of abductions, assassinations and other acts of intimidation, consolidating their control over territory across northern and southern Iraq and deepening the country's divide along ethnic and sectarian lines, according to political leaders, families of the victims, human rights activists and Iraqi officials.

While Iraqi representatives wrangle over the drafting of a constitution in Baghdad, the militias, and the Shiite and Kurdish parties that control them, are creating their own institutions of authority, unaccountable to elected governments, the activists and officials said.
As many of you know, I'm a political scientist specializing in international political economy but with a background in international relations. Folks in my field like to talk about "sovereignty". In my book, consolidating control over territory and establishing institutions of authority is about sovereignty, not chaos; rule, not "disruption".

And yet on second thought, maybe ol' George is right -- perhaps the new Iraqi constitution (as I type, T minus 6 hours and counting [Baghdad is currently 8 hours ahead of EDT] to the revised deadline) will provide a "rallying point for Iraqis". After all, the Weimar Constitution did wonders for rallying Germany.

Friday, August 19, 2005

Another inflation post

So why is general inflation so low when energy prices are so high? I suggested in passing on Tuesday that
there aint nothin' gonna stop us 'Mericans from buyin' our gas. Those skyrocketing gas prices might stop us from buying everything else, however.
It seems that Wal-Mart has the same inkling as well as a couple of corporate economists.
"Unlike the past when oil had a huge inflationary impact, this time its inflationary impact is very small and it may have a somewhat deflationary impact," [Nariman Behravesh, chief global economist at Global Insight] said.
Consider the below chart of annual CPI and PPI inflation rates on consumer goods since 1997 (the East Asian financial crisis). Until 2003, wholesale and retail inflation on such products was roughly the same and moved in tandem. Throughout 2003, however, producer inflation far outstripped consumer inflation as the CPI on commodities flirted with deflation. Over the last 18 months, CPI and PPI have again moved together, but PPI continues to exceed CPI, especially during disinflationary periods. The conclusion? Since early 2003 price pressures on producers of finished goods has been much higher than on their consumers.

Moreover, from January 2003 to June 2005, real wages and salaries (SA, deflated by the PCE price index) have risen 7.9% and real disposable personal income is up 7.8% while real consumption has risen 9.4% and real consumer goods (incl. autos) imports (SA, again using the PCE deflator) are up a whopping 16.1%. Debt and dissaving -- not income -- has kept US consumption high over the past years, while cheap goods imports and the overall 'Wal-Mart effect' have helped keep core inflation well in check.

I wonder, in fact, if contined Fed tightening combined with a drop in oil prices -- say to the low $50s/barrel -- might shake what little general inflation exists right now completely out of the economy.

Wednesday, August 17, 2005

Mr. Housing Bubble

According to Richard DeKaser, chief economist of National City Corp., housing markets in 53 US cities are currently "extremely overvalued" -- defined as
prices are 30% above where he estimates they should be based on historic price data, area income, mortgage rates and population density — a proxy for land scarcity.
The failure of US incomes to rise much at all in the face of this housing boom is a big culprit.
in 85% of the cities surveyed, home-price gains outpaced income gains during the past year. In Bakersfield, Calif., prices rose 33% while incomes increased 3%. In 29% of areas, prices outpaced income growth by at least 10 percentage points.

Just 2% of markets were in bubbly territory at the start of 2004, vs. 31% in the first quarter of 2005.
Low interest rates aren't getting people into these homes, either. Massive and risky debt is.
Nearly four out of 10 (38.1%) home buyers who bought houses in the first half of 2005 put down less than 5% of the purchase price, up from 30.6% in 2000, according to a study released Tuesday by SMR Research, a Hackettstown, N.J., firm that tracks mortgage debt. Nearly half (49.9%) of buyers put down less than 10%, up from 44.8% in 2000.

Another potential red flag is the growing use of so-called piggyback loans.

Traditionally, home buyers who did not come up with a 20% down payment had to pay an added cost each month for private mortgage insurance. But recently, more strapped borrowers are taking out two loans - one for 80% of the purchase price and a second, or piggyback, loan in the form of a line of credit or home equity loan. So far this year, nearly half (48.2%) of buyers used piggybacks, up sharply from 19.9% in 2001.
USA Today was nice enough to publish DeKaser's list of metro areas, and no surprises here. Of the 20 most overvalued cities, sixteen are in California including Riverside, Sacramento, San Diego and Los Angeles.

Folks might want to up the size of those piggyback loans another $20 so they can buy an appropriate t-shirt to wear around the house:

Tuesday, August 16, 2005

Inflation? It's all about oil

In July 2005, crude oil (WTI) spot prices jumped 4.7%, average gasoline prices rose 6.1%, and petroleum import prices rose 6.6%. No wonder, then, that the the CPI for petroleum-based energy rose 6.1% on the month -- the only thing keeping consumer inflation above the zero line.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The July level of 195.4 (1982-84=100) was 3.2 percent higher than in July 2004. . . .

Energy costs advanced sharply, increasing 3.8 percent in July after falling 0.5 percent in June. Within energy, the index for petroleum-based energy rose 6.1 percent in July, accounting for over one-half of the increase in the overall CPI.
Let's face it -- there aint nothin' gonna stop us 'Mericans from buyin' our gas. Those skyrocketing gas prices might stop us from buying everything else, however.

Core annual consumer inflation in July was 2.1%, and the three-month annualized seasonally-adjusted figure was just 1.6% -- slightly higher than June's 1.2% but both well below the recent pace. Thus the annual core inflation rate of 2.1% is the lowest since October 2004. If we look at all items less energy (i.e. including food) we're now at the lowest CPI inflation rate since August 2004.

One item in the July report jumped out at me -- apparel deflation. Since 1999 deflation is this sector has been standard, reaching quite dramatic levels in 2002 (-2.6%) and 2003 (-2.5%). Since July 1998 apparel prices are -11.5% in nominal terms and -31% in real terms. After having recovered some price stability earlier this year, apparel prices (SA) were -0.7% in June and another -0.9% in July -- or -3.3% and -3.8% NSA. Those big price drops probably have something to do with the apparel glut on the US market. Apparel prices fell 3.3% in June while apparel imports rose 21.1% in volume terms. Sure, the end of the Multifiber Agreement is good for all producers, not just China. And say, about that bridge you were interested in . . .

While it would take a lot more analysis than I'm willing to do, there seems to be reason to believe that US consumers are becoming unable to absorb all the production being dumped on US markets, whether domestic- or foreign-made. After growing a big 6.0% in 2004Q4, industrial production of consumer goods in the US grew 1.7% in 2005Q1 and 1.5% in Q2, with another monthly drop (-0.5%) in July. US consumption growth has been outpacing income growth for years now, and with real interest rates finally rising into positive territory (especially mortgage rates), the days of borrow-and-spend are on the wane. I think we'll plug away for the rest of 2005, but check the roost for chickens in early 2006.

Monday, August 15, 2005

Follow the bouncing ball

Today, let's follow the bouncing ball:

Exhibit 1: foreigners liked US corporate debt in June. They really liked it.
International investors bought a net $71.2 billion Treasury notes, corporate bonds and other securities, compared with $55.8 billion in the previous month. The report reinforced speculation rising interest rates in the U.S. compared with Europe and Japan are increasing demand for dollar-denominated assets.

``This is a large enough number to be a positive surprise,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York. ``We're not only adequately financing our trade deficit, but even a bit more than that. It certainly helps us understand better why the dollar continued on firm footing in June.''
Of the net $79.1bn in domestic securities purchased by foreigners in June, 66% were corporate bonds while just 18% were US treasuries (and 0.1% were equities!).

Exhibit 2: nominal interest rates on US corporate debt in June were low. Extremely low. The average yield on Aaa rated corporate bonds was 4.96%, the lowest level since 1966. On Baa bonds the yield was 5.86%, the second-lowest level since 1967.

Exhibit 3: interest rates are falling or are stable nearly everywhere except the United States. So the best buy continues to be the US despite our low returns. As Bloomberg notes,
The yield difference between U.S. 10-year Treasuries and German bunds with similar maturities is 99 basis points, or 0.99 percentage point. The gap, or spread, reached a five-year high of 104 basis points on July 29.
Exhibit 4: In turn, the dollar is rising. The real broad dollar in June was up nearly 4% over December 2004. Per the real major currencies index, the dollar was up 7.4%. The greenback was even stronger in July and is rising further on the news mentioned in Exhibit 1.


Conclusion 1: The Fed doesn't need to raise rates much further to keep foreigners interested in US debt or keep the dollar up. In fact, higher interest rates are likely to only strengthen the dollar.

Conclusion 2: With a strong dollar and relatively low real interest rates, the US will keep importing like a mad man. What, me save? Popular convention wisdom these days seems to be relying on an end to housing price inflation to produce a renewed interest in personal savings. Yet the US personal savings rate has been plummeting since the mid-1980s. It is going to take the equivalent of moving heaven and earth to get Americans to start saving more than 1-2% of their income.

Conclusion 3: Global imbalances will only grow more and more acute over the rest of 2005.

Conclusion 4:
In 2005Q1 the US current account deficit as a percentage of GDP was -6.4%. CA balance of -7% of GDP, here we come!

Friday, August 12, 2005

Cutting consumption is the only way

Brad (aka Bob) was right. Calculated Risk was right. Hell, even I was right after further consideration.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total June exports of $106.8 billion and imports of $165.6 billion resulted in a goods and services deficit of $58.8 billion, $3.4 billion more than the $55.4 billion in May, revised. June exports were virtually unchanged from May, and June imports were $3.4 billion more than May imports of $162.2 billion.
A trade deficit of $58.8bn racks up the country's third biggest monthly trade deficit of all time, and only $0.16bn short of the #2 slot. The twelve largest monthly deficits have occurred over the last twelve months. No surprise then that the 2005 deficit is currently running 17.9% larger than the 2004 pace, on track for an annual trade deficit of $730bn pushing -6.0% of GDP.

The good news of early 2005 has clearly dissipated like the morning mist. After growing robustly in March and April, US exports have been stagnant in May and June. Imports, on the other hand, continue to soar. June goods imports in particular were up 2.4% in a single month!

As with May, oil has wrought much of the June trade deficit. US petroleum import prices jumped a whopping 7.9% in June, and in tow came a record $19.9bn petroleum import bill. Oil prices contributed about $1.6bn to the month's deficit all on their own. Petroleum imports prices in July were another 6.6% higher than in June, so get ready to test the all-time trade deficit record of $60.1bn next month.

It's not all about oil, of course. Non-petroleum goods imports are up 11.6% on the year while services imports are up 11.4%; the total non-petroleum import bill is up an overall 11.5%. The good news is that US export growth is faster, up 11.7% this year. The bad news is that total non-petroleum imports are 37% larger than total exports, the upshot being that with non-petroleum imports growing 11.5%, total exports would have to grow at a nearly 16% pace just to keep the trade deficit stable. And that's assuming falling oil prices (due to ever-rising petroleum import levels).

There is no way in hell that nominal US exports are going to grow at a 16% annual rate. It hasn't happened since 1988, and it occurred back then thanks to a huge export boom in agricultural products and steep export price inflation. It also happened in 1973-74 and 1978-80 for the very same reasons. This will not happen today. No way. Impossible.

So what is the solution to this conundrum? The same answer I've been giving ever since I began the Globblog. The US must consume less. Much less. There is no other way out.

Thursday, August 11, 2005

Buy, buy, buy!

Despite the fact that the personal savings rate in June 2005 hit 0.0%, Americans have decided to buy yet more things in July.
U.S. retail sales surged 1.8 percent last month as buyer incentives led to the biggest gain in auto sales since just after the Sept. 11, 2001, attacks, when carmakers flying the flag put in place zero percent financing deals, a government report showed on Thursday.

July's retail-sales jump followed a similarly healthy 1.7 percent rise in June, the Commerce Department said. However, the increase fell short of Wall Street forecasts for a 2.2 percent gain.

Auto sales shot up 6.7 percent, their sharpest rise since October 2001, as Ford and DaimlerChrysler joined General Motors in extending employee discounts to all consumers.
Of course, this big increase is fueled mainly by auto sales which are purchased mainly on credit. The methodology of the Commerce Department tallies the full purchase price in its computation of personal consumption expenditures on the month (even though these cars will be paid off over years), and thus we are almost certain to see a negative personal savings rate for July. You heard it here first.

The retail and food services sector has recovered nicely from its brief hiccup in May. Since then, total sales are up an annualized 21% -- twice the pace of the last twelve months (all data is nominal and seasonally-adjusted). This is all about cars, however. Total retail and food service sales excluding motor vehicles and parts dealers is up only 7.0% annualized since May and up 8.1% since July 2004. Over the last six months, non-auto related sales are up 7.5% annualized. I think you all can see the declining trend here.

Especially interesting is sales by housing related sectors. Furniture and home furnishing stores saw sales change -1.3% for the month; building materials, garden equipment and supply dealers had sales -0.4%. Over the last three months, furniture and home furnishings sales are up 2.7% annualized while building materials et al. is up an annualized 0.8%.

Are those rising interest rates finally pulling the plug on housing?

Wednesday, August 10, 2005

$2.37 and counting

After driving some 1300 miles across the midwest over the past two days, the big spike in gas prices has hit my wallet a little harder than most. Yet even though crude oil on the NYMEX is over $64/barrel, one is constantly met by the rejoinder that "things were worse in 1981" when the real price of oil was near $90/barrel in current dollars.

So are gas prices really much ado about nothing? In March 1981 the US national average for a gallon of gasoline topped out at $1.38. Using the CPI as a deflator, that comes out to $1.56/gal. in constant 1982-84 dollars. The current national average is $2.37/gal. That's around $1.20/gal. in 1982-84 dollars (hard to say precisely since we don't have the July or August CPI data yet). Per the CPI, gasoline in current terms will have to reach ~$3/gal. to be an all-time record.

If you prefer the PCE price index, however, we're not nearly that far away from 1981. In constant 2000 dollars, the 1981 price was $2.47/gal. while current prices are around $2.10/gal. In current terms, gasoline will only have to reach ~$2.75/gal. to be a record.

So while crude oil prices are currently around 70% of their real record high, gasoline prices are around 80% of the real record per the CPI and 85% per the PCE index. Things were worse in 1981 -- and today's price of gasoline is worse than crude oil.

Saturday, August 06, 2005

Red Sox

Another fun fact on the non-existent US personal savings rate:
In fact, the government's calculation may even overstate how much of a typical paycheck is going into savings.

Any money directed into 401(k) plans is considered to be part of take-home pay in the government calcuation. But that 401(k) money isn't available to spend.

Take a person who contributes 10 percent of income to a 401(k). If the government counts him or her as having a zero savings rate, he or she is actually spending about 10 percent more than the actual take-home pay, liquidating assets or taking on debt to support spending.
On a more important note, however, watch for me in the center field seats today on Channel 29 in the Twin Cities or on NESN in New England -- my first Red Sox game!

Friday, August 05, 2005

Good labor stats, seasonally adjusted for your comfort

The BLS reports today that the job picture in the US is looking pretty good. After a very disappointing May and June, July turns in a better-than-expected number.
Nonfarm employment grew by 207,000 in July, and the unemployment rate was unchanged at 5.0 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the month, payroll employment rose in many service-providing industries.
Note that the Bloomberg consensus forecast was just 175,000 jobs. With July plus a 20,000 job upwards revision to the weak June numbers, The Capital Spectator says we're "cookin' with gas" now.

I can't help but think that Barry Ritholtz is basically right, however, when I look at the seasonally unadjusted numbers. Barry is always going on about the funny number crunching done by the BLS among others, and the July figures seem out of sorts to me.

Case in point: the SA jobs number for July was +207,000 while the NSA number was -1,201,000. That in and of itself is not what caused my eyebrows to rise. What did is the fact that the NSA figure for July 2005 (-1,201,000) showed greater job loss than in July 2004 (-1,143,000), and yet the SA figure for July 2005 (+207,000) is two-and-a-half times larger than the SA number for July 2004 (+83,000). This is quite unlike January and April of both years, in which the SA and NSA figures are very similar (SA: 1/2004, +117; 1/2005, +124. NSA: 1/2004, -2661; 1/2005, -2692 . . . SA: 4/2004, +337; 4/2005, +292. NSA 4/2004, +1131; 4/2005, +1181). So why are the SA July figures so dramatically different from 2004 to 2005 when the NSA figures are pretty similar -- and especially since the NSA figures for 2005 are worse than 2004?

My second concern: if we're now "cookin' with gas", why is the NSA job total for January through July 2005 (+344,000) actually lower than in 2004 (+358,000)?

Thursday, August 04, 2005

Wotcher, cheap money!

Something we (that's the royal "we", FYI) here at the Globblog have been expecting for some time has now come to fruition.
The Bank of England's Monetary Policy Committee today voted to reduce the Bank's repo rate by 0.25 percentage points to 4.5%.

In the first half of the year, output growth in the United Kingdom was subdued. Household spending and business investment growth have slowed. Although there are some signs of a pickup in consumer spending, downside risks remain in the near term.
Among eleven leading central banks (per Reuters), the Bank of England now joins Sweden's Riksbank as rate cutters among the top 11, while the Bank of Japan, European Central Bank, Bank of Canada, Swiss National Bank and the Danish National Bank are all in long-term holding patterns. Only the Fed, the Reserve Bank of Australia, the Reserve Bank of New Zealand and Norges Bank (Norway) have upped rates this year. Among those rate raisers, and the Australians declined on further increases yesterday and the Kiwis anticipate their own holding pattern for the rest of this year.

So while the Fed is determined to keep upping the ante (as soon as next week, in fact), much of the rest of the world is just as determined to sit out the hand.

Wednesday, August 03, 2005

Can you eat your house?

As I mentioned yesterday, the US personal savings rate has reached the Rubicon. In June 2005 we as a country officially saved 0.0% of our disposable (i.e. after-tax) personal income.

The Great Vanishing American Savings Rate has been a long time coming, but the pace has really picked up over the last two years. Since June 2003, real DPI has risen 6.04% while real personal consumption expenditures have gone up 8.27%. So no surprise, really, that our personal savings rate has tanked from a very meager 2.0% down to nothing at all.

All this spells potential danger for the US economy, of which 70.1% (during Q2) is consumer spending -- not far from the all-time high of 70.5% in 2003Q1. No longer can US consumer spending grow faster than US income growth. Or can it?

Freddie Mac tells the story (via CNN/Money):
In the quarter ended June 30, 74 percent of Freddie Mac-owned loans that were refinanced resulted in principal amounts larger by at least 5 percent.

Only 9 percent of refinancings resulted in lower loan amounts.

In other words, nearly three-quarters of homeowners refinancing a $100,000 loan wound up with a loan principal of at least $105,000, usually more...the difference between the size of the old loan and the new loan is being taken out in cash.

In 2003, that was the case only 33 percent of the time. Back then refinancing was rate driven, according to Bob Moultin of Americana Mortgage Group. Homeowners reworked mortgages to take advantage of lower interest rates so they could reduce their monthly bills.

Now they refinance to put cash in their pockets or to pay for big purchases.
Now those in the know tell us that most of this money is being spent on home improvement, thus keeping the loan-to-equity value ratio after refinancing to around 70%. Yet whether it's spending on the house or on a vacation to Disneyworld, the US economy is going to be counting more and more on precisely this kind of equity withdrawl to boost consumer spending.

And thus the American economy becomes ever more dependent on not simply construction, but on the rising value of all homes. As the ultra-easy money vanishes from the mortgage market (1-year ARMs up to 4.46% now from 4.24% just four weeks ago, and the spread between them and the 30-yr. FRM is down to around 130 basis points), values are going to have to rise steadily to entice those who refinanced in 2003-04 to jump into the refi market yet again. Rates on 15-yr. FRMs are up 22 basis points from four weeks ago, and rates on 30-yr. FRMs are up 24 basis points. Even rates on 5-1 hybrid ARMs are up 21 points (with new data out tomorrow).

And the news on refinancing volume isn't good. As rates rise, refi activity expectedly dries up. The Mortgage Bankers Association Refi Index is -24% from just seven weeks ago.

Maybe making new houses and home improvements out of gingerbread is a good strategy going into the future. At least we'll be able to eat them then, because we might very well have to. There won't be any income sources left to buy food.

Tuesday, August 02, 2005

Reaching the Rubicon

Some said it couldn't be done. But we're Americans. "Can't" isn't in our vocabulary.

So we did it. In June 2005 the US personal savings rate officially hit 0.0%. Personal savings recorded were a barely measurable $1.9bn at annualized rates -- or around $160 million for the month.

Over the last year, disposable personal income is up 5.3% while personal consumption expenditures are up 6.7%. And this trend has been going on for years. In June 2004 we were saving around 1.5% of our income. Last month it dissipated like the morning fog into nothingness.

Monday, August 01, 2005

Not all forms of construction are created equal

The Commerce Department tells us today that
builders have been paring spending each month after the value of all construction projects surged to an all-time high of $1.13 trillion, on an annualized basis, in February.

Spending on all construction projects dipped by 0.3 percent in June from the previous month.
This overall figure masks important differences within the construction industry. On the one hand, public nonresidential construction (22% of total) continues a healthy growth pace -- up an annualized 11.7% rate (SA) since February -- while private nonresidential construction (22% of total) is at least relatively steady. On the other hand, private residential construction (55% of total) is clearly on the skids -- on a SA annualized -26.9% -20.1% plunge from February through June.

Yes, manufacturing activity in the US is up of late. Yet this economy is so profoundly dependent on construction that the demise of the housing sector will prove the recent upswing in production to in fact be overproduction. Where is the income to buy all this new production? The jobs to generate the income? The export markets?

Recall that the US personal savings rate in Q2 was a stunning 0.2%. While in Australia, the household savings rate has been negative since mid-2002, this is to some extent a statistical artifact thanks to the Australian Bureau of Statistics practice of making deductions for housing stock depreciation. The US won't have this artificial "luxury" of year-upon-year negative savings.

UPDATE: Vincet is keeping me on my toes.
I heard that residential construction is down due to issues with the volatile home improvement component. I'm told new home constuction is up 0.2%. Also as you know housing starts is not showing any signs of slowdown.
Over the course of four months in which this figure had consistently fallen, it seems hard to believe it is due simply statistical noise. I realize that the chief economist of RBS Greenwich Capital claims the big jump in home improvements in February is causing mischief in the numbers, but the annualized figure is down an even steeper -22.9% since March and since December, -6.6% annualized.

Y-o-y, private residential construction is up 9.1%, but in March it was +13.1% and in April, +16.7%. The slowdown appears real, and actual decline could occur as early as the end of 2005.