Monday, December 26, 2005

Pump up the volume

Back in early 2004 the Bank of England was in the middle of a robust interest-rate hiking campaign. It opened the year at 3.75% and by August 2004 was up to 4.75%. Consumer inflation was never a real problem, with British CPI running in a 1.0-1.5% range at the time. It was really about housing prices, and the central bank's dramatic action took the air out of the UK housing bubble for sure. Annual housing inflation across the UK (per Nationwide) hit its most recent peak of 20.3% in July 2004 and has been tumbling ever since, hitting a low of just 1.8% in Septemer with a slight bounce since then, settling at latest measure at 2.4% in November. In the sixteen months since July 2004, five have seen SA monthly price declines. As a consequence, RPI inflation (which includes housing) has plunged from 3.5% in late 2004 to 2.4% in November 2005.

The UK bond market has decided that the BoE has had enough. The Bank cut interest rates by 25 basis points in August 2005 and the widespread belief seems to be that another cut in the works.
U.K. government bonds had their biggest weekly advance in six months after comments from Bank of England policy makers spurred speculation interest rates in Britain will be lowered further.

The rally in bonds sent two-year yields to their lowest since mid-October as the minutes of the bank's last rate-setting committee meeting showed Stephen Nickell voted for an interest rate cut, while the rest voted to keep rates on hold. BOE Chief Economist Charles Bean said in an interview on Dec. 18 the bank won't necessarily ``sit here until the spring doing nothing.''

``Bean was the first source of joy for the bond bulls, followed by the Bank of England minutes, which followed on to the GDP figures,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, Scotland. ``We had a triple whammy of good news.''
Time to pump up the volume?

I suspect this is a lesson for future Fed behavior as well. With US core inflation remaining quite low and stable, with housing prices still out of control and consumer spending spilling red ink everywhere, and with global production showing signs of beginning to outstrip consumption again, the Fed is storing up ammunition in these latest rate hikes as much as it is fruitlessly trying to reign in American consumption. If the ECB is going to cut back on supplying liquidity to the global economy, the BoE and later on the Fed are most likely to stop in to stem the stem of the tide.

Thursday, December 22, 2005

A little note on US personal savings

The good news is that it appears to be that Joe and Jane Consumer's descent into the nether-regions of debt-for-consumption has moderated. The bad news is that the new equilibrium is still negative.
Personal outlays -- PCE, personal interest payments, and personal current transfer payments increased $25.9 billion in November, compared with an increase of $14.0 billion in October. PCE increased $25.3 billion, compared with an increase of $13.4 billion.

Personal saving -- DPI less personal outlays -- was a negative $19.1 billion in November, compared with a negative $18.3 billion in October. Personal saving as a percentage of disposable personal income was a negative 0.2 percent in both November and October. Negative personal saving reflects personal outlays that exceed disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.
While US households are no longer in the debt-fest days of the summer when they went into yet another car-buying frenzy, November's negative personal savings rate makes it a solid half year -- six months in a row and seven of the last eight months -- of dissaving. Call it a "consumer binge" if you like.

This consumer binge is not only dependent on debt. It is also dependent on exceptionally low inflation. Overall annual PCE inflation in November ran at just 2.7%. Core annual PCE inflation (minus food and energy) is a meager 1.8%. After peaking at 2.0% in the summer, core PCE inflation is now trending downwards again. Durable goods deflation is persistent -- as it has been since 1995 -- but has significantly picked up pace over the last six months, with help from deflation in imported consumer durables (running at a -0.2% pace y-o-y).

Try as it might, the Fed just can't get Americans to stop buying. We're now on track for an annual 2005 personal savings rate of -0.4%, the lowest rate since 1933 -- the depth of the Great Depression. Remember that.

Friday, December 16, 2005

The magic of dark matter

To the surprise of many, the US current account deficit actually shrank (marginally) in the third quarter of 2005.
The Commerce Department reported that the deficit in the U.S. current account totaled $195.8 billion in the third quarter. That was down 1 percent from the deficit in the April-June quarter of $197.8 billion, which had been a 0.4 percent improvement from the record deficit of $198.7 billion set in the first three months of the year.

The third quarter figure was below the $205 billion imbalance that had been forecast.
How this happened is of course the big question. The deficit on goods and services grew from -$186.9bn in 2005:II to -$197.9bn in 2005:III -- nearly 6% growth. The surplus on services grew from +$13.3bn to +$15.1bn, but this relatively small $1.8bn improvement was clearly not enough to outweigh the much bigger $11bn deterioration from the goods trade.

The balance on income improved markedly, from -$1.5bn to +$0.5bn, but this is clearly small potatoes, too. The real shift came in the grab bag "private remittances and other transfers", part of unilateral current transfers, which went from -$15.3bn to just -$5.6bn in a single quarter.

Ah, dark matter.
Analysts said payments by foreign insurance firms to settle damage claims stemming from hurricanes Katrina and Rita accounted for most of the improvement.
This is hardly a new phenomenon. In 2004:III the US current account deficit remained steady thanks almost solely to the $4.6bn improvement in "other transfers" associated with Hurricane Ivan. In 2001:III the current account deficit turned around $5.6bn thanks in large part to a $13.0bn turnaround in "other transfers" in the wake of 9/11.

Why talk about Euro-Disney when a major disaster hitting highly insured Americans seem to always do the trick?

Wednesday, December 14, 2005

Wow. That's a big one.

The word is out from the Commerce Department: October's seasonally adjusted US trade deficit in goods and services tallies up to a gargantuan $68.9bn. You don't need me to tell you it's a record. Or that it's a full $2.9bn larger than the old deficit record set way back in September. Or that the 2005 trade deficit is on track for 19% annual growth over 2004 and 45% growth over 2003 (that, too, is pretty damned big).

You might not know, however, that the seasonally unadjusted trade balance for October calculated on a C.I.F. basis was $82.5bn, an enormous $19.1bn larger than the deficit of October 2004, which back in the halcyon days of 2004 was itself a record.

How did we do it, you ask? A big big rise in goods imports combined with stagnant services exports. US services exports have been advancing in a step pattern for some time now. They hit a plateau and stay there for months at a time, then there is a little leap up to another plateau at which they stay for a while, and so on and so on. The last step up for services exports was September 2005, and before that, March 2005, and before that, November 2004. So the current plateau will probably be around for a few more months.

The more worrisome result from the October data is the strong growth in goods imports. Over the last three months, the seasonally adjusted annualized US goods import bill is $1.74 trillion (an annualized $1.62 trillion over the first six months of the year). Thus we're on an import binge of late, there is no doubt about it.

And it's not simply an oil binge. Petroleum-related goods imports are indeed up markedly over the past three months, averaging $24.2bn per month (while just $18.4bn per month over the first six months of 2005). At the same time, non-petroleum goods imports are averaging $120.4bn over the last three months, up from a first-half-of-2005 tally of $116.4bn. In sum, 59% of the growth in the annualized Aug-Oct 2005 goods import bill over the annualized Jan-June bill is due to oil, but 41% of it is due to growth in things other than oil.

And what might be said "things other"? Cars and consumer goods. Automotive imports so far this year are up 4.3% in nominal terms, and consumer goods imports are up 10.4%. No wonder the US personal savings rate has been negative over the last five months (June-Oct) and six of the last seven. The hard times upon which General Motors, Ford and Delphi have fallen won't be helping matters, either.

The dollar took a mini-tumble today once word of this monster got out. What is so interesting, however, is how the Fed's interest rate strategy is not only not having any effect on US consumption (neither of imports nor domestic products), but having in fact a positive effect on it by supporting a strong dollar which can command imports. Per the Fed's data, the real broad dollar was up 4.4% y-o-y in November and the real major currencies dollar was up 9.7% y-o-y.

As long as the Fed tightens, foreign states and capital are willing to loan us the money to consume, putting us deeper in debt but keeping the whole wheel turning. When the Fed stops tightening (in relative terms as well as absolute -- note the ECB raised rates earlier this month for the first time in 2.5 years), the incentives for foreign capital to buy the dollar weaken notably. Then do we return to the days of 2003 when just four fingers (the Bank of Japan, the People's Bank of China, the Central Bank of China and the Bank of Korea) were all that held the water behind the dike?

Friday, December 09, 2005

Global imbalances on a snowy day

It's a big snow day here in the Northeast. The kids are home and I'm on duty to make sure nobody kills each other.

But you don't want to know about domestic life at the Glut house. You want to know what's next for the global economy. On that very topic, I am currently digesting a very interesting (and mercifully short!) paper by Ricardo Hausmann and Federico Sturzenegger on the US current account deficit titled "U.S. and global imbalances: Can dark matter prevent a big bang?".

Their argument is especially interesting to me not so much because they poo-poo folks like Brad Setser and Maurice Obstfeld (with whom I largely agree) on global imbalances. I am more interested in their possible contribution to an explanation of how world cities -- London and New York especially, but many others besides -- manage, promote and sustain dramatic and increasingly unequal exchange between themselves and the rest of the world.

So that's what I'm thinking about on this snowy day somewhere in America. If you've read the piece, I'm keen to hear what you think. I'll be pondering it today while I dig out the car and shovel my walk.

Monday, December 05, 2005

Don't look at the RMB, sell us airplanes instead!

Do you remember these words spoken in November 2004 by People's Bank of China Deputy Governor Li Ruogu?
The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only three per cent that of US labour. They should give up textiles, shoe-making and even agriculture probably. . . . They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.”
Well, it looks like one shouldn't take such talk too seriously. At least the part about buying from the United States. Because China has no intention of "balancing" trade with the US.
China ordered 150 Airbus single-aisle A320 airliners Monday, more than twice as many plane orders than the company's U.S.-based rival Boeing Co. snagged from China last month.

The European aircraft manufacturer said the deal was worth nearly $10 billion and was ''the largest single order that Airbus has ever received since it entered the Chinese market two decades ago.'' . . .

The order upstages China's purchase last month of 70 Boeing jets during a visit to Beijing by President Bush. At list prices that deal was worth about $4 billion, although buyers typically get discounts on big orders.

Until now, Chicago-based Boeing has won about 60 percent of new plane orders from China, with Airbus taking about one-third.
So what again is the US going to sell to the world so as to begin tackling its $700bn annual trade deficit?

Saturday, December 03, 2005

When global capital markets prevent balancing

Well, this ought to help the $80bn goods trade deficit the US is going to rack up with Japan this year.
The amazing shrinking yen continued its slide this week, crashing to a seven-year low point against the euro, sterling, Australian dollar and South Korean won and to a 30-month low against the US dollar. . . .

The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities – negating the value of these latter flows in currency terms. . . .

Japanese ministers suggested the government was comfortable with yen weakness.
Yeah, no kidding.

In 2004 the US ran a $75.6bn goods trade deficit with Japan. That figure will be well over $80bn by the end of 2005. No surprise considering the yen is some 13% weaker in nominal terms now than this time last year (closer to 10% weaker in real terms). So far the US is exporting only 1.3% more goods to Japan this year over last year's pace, while importing 7.0% more.

The US services surplus is indeed growing this year, up a big 18% over 2004. Last year the US ran a $15.6bn services surplus with Japan. 18% larger is less than $3bn more, however, thus still not enough to keep the overall trade balance with Japan from deteriorating.

Global capital markets are determined to prevent any balancing mechanism from operating until it's too late to avoid the hard landing scenario everyone fears. So where are the signs of a new Plaza Accord in the offing? I'm not holding my breath.

Friday, December 02, 2005

The magic of negative savings

Dear Uncle Alan seems concerned that the US federal government spends dramatically more than it receives in income. Too bad he's not terribly interested in American households doing the same thing.

To demonstrate how dependent the contemporary US economy -- and by extension of America's role as the buyer of first resort (remember that we're screaming towards a $725bn trade deficit this year), the global economy -- is on the indefatigable yet income-short American consumer, consider what third quarter GDP growth would have been without it.

In 2005:III, we recall, real GDP growth was a pretty impressive 4.3%, the highest in six quarters. Nominal GDP (SA) stood at $12,601bn, up from $12,378bn in 2005:II -- thus a nominal annualized growth rate of 7.2%. However, nominal US personal saving (SA) was $133bn in the red in the third quarter. If Americans consumed with a 0% savings rate in 2005:III rather than the actual -1.5% rate, nominal GDP would have been only $12,468bn -- or a nominal annualized growth rate of 2.9%. Not quite so impressive.

But what is all this in real terms, you ask? Good question. In 2005:II, real GDP in constant 2000 dollars stood at $11,089.2bn. Using the PCE price indices from the BEA, we find that with a savings rate of 0% in 2005:III, real GDP for the third quarter would have been $11,087.2bn. It doesn't take a math genius to see that real GDP for 2005:III with a 0% savings rate would have been lower than in 2005:II -- and have generated a 0.0% real growth rate.

In short, without negative savings and all other things being equal, the US economy would be at a standstill. Now that would have been one hell of a headline.