3.4% if you can keep it

The good surface news on the US economy just keeps on coming. Today the Commerce Department reports that second quarter real GDP growth was a robust 3.4% -- and if wasn't for the big, big drop in private inventory investment during 2005:II, the overall figure would have been even higher.

Here are a few tidbits that jumped out at me from this report.

First, residential investment continues on high burn. Not only did it grow 9.8% in the second quarter (following an equally hot 9.5% rate in 2005:I), but overall residential investment now contributes 6.0% of overal US GDP -- the highest quarterly tally since 1955. That it, the present US economy is the most dependent on housing construction in fifty years.

Second, exports were up and imports down in the second quarter. This was the first quarter in two years that the real trade deficit did not increase. Of course, there is every indication this is going to turn around rather quickly in the third quarter, probably as soon as July.

Third, American consumption has finally all but outstripped American income. In the second quarter American consumers managed to not spent a mere $18bn of their income garnered. You also have to go all the way back to 1955 to find a number that low -- but that's in nominal terms. In 2005:II, US savings out of income totaled a nearly invisible 0.2% (in 1955:I it was 6.4%). And no surprise in that over the last year total US disposable personal income has risen 5.1% (in nominal terms) while total US personal consumption expenditures are up 6.5%. This marks the second quarter in a row that personal savings was below 1.0%. Pretty soon the US consumer will be tapping into his/her savings to spend -- except that as Americans we have no savings except the equity in our houses, and we've pretty much tapped them dry.

In sum, a lot of what makes this GDP report good are clearly unsustainable trends. But then, as a country our motto is clearly "Eat, drink, and be merry, for tomorrow we die."

For a stronger working body

I'm in the Midwest for the next two weeks catching up with relatives, old friends, and the Red Sox (who are playing the Twins next weekend -- look for me in center field!). So blogging will be light for the near future.

In the meantime, here's a theme: sometimes you have to get sicker for a chance to really become well.

We believe in very fundamental change, not incremental reform.

We believe in accountability, not what ‘should’ happen but what “shall” happen.

We believe we can and will succeed based on our own efforts – not a rescue by others.

We know…that when you’re heading down a road and you know where it ends…you have to get off that road and go in a different direction where there is hope.

The end of ultra-easy mortgage money

Two weeks ago the interest rate on one-year adjustable rate mortgages broke the ceiling of the fluctuation band it had been in for the last two-and-a-half years. In September 2002 the one-year ARM rate fell below 4.3%, eventually falling as low as 3.36% in March 2004. It began rising sharply after that and occasionally bounced against that 4.3% ceiling as in November 2004 and steadily since March 2005, even peeking through it once in late March before settling into the band again.

This little historical review is context for the dramatic rise in rates on one-year ARMs this summer. The week of July 7 they peeked through the ceiling again, averaging 4.33% nationally. Yet unlike in March, rates didn't fall back again but only kept rising. The week of July 14 rates were 4.39%, and yesterday Freddie Mac reported that last week one-year ARM rates averaged 4.42%. This is 18 basis points higher than just three weeks ago and the highest they have been since August 2002.

The use of ARMs to buy newly-built homes has come off its 2004 boil. Last summer and fall, nearly half of all buyers of newly-built homes were using ARMs; in April and May that figure was down to a third. Thus news that June housing starts were flat should be more common in the months to come.

These interest rate hikes should hit ARM-dependent markets in particular -- and that means California. Sales in the Bay Area are dramatically lower today than this time last year even though prices are still soaring, and the average monthly mortgage payment for a home-buyer is up 8.2% y-o-y. I think we can be certain average monthly income hasn't risen as much. In Southern California, the number of sales is still rising (although San Diego is an outlier, with annual sales -8.8%) and the average monthly mortgage payment up 4.8%.

San Diego and the Bay Area seem the most vulnerable as we start closing out the era of ultra-easy mortgage money.

End of Japanese deflation?

This is old news, but for three months in a row now consumer prices have actually been increasing in Japan. After hitting their post-1997 trough in February, the annualized (NSA) inflation rate since that time has been a dramatic +3.3%, although with seasonal adjustment, the figure is a much more tepid +0.4%.

May also marks the first time since December that Japanese consumer prices have risen year-over-year. Annual inflation currently stands at +0.2%. Yet without skyrocketing oil prices, one suspects even this level of inflation couldn't exist.

Revaluation

Well, it's finally here -- the new and improved renminbi (in a slightly more powerful formula)!

The yen jumped sharply against a range of currencies following the announcement by the People’s Bank of China that it would revalue the renminbi, following pressure from leading industrialised countries.

The PBOC said it would re-peg the renminbi to Rmb8.11, from Rmb8.2765, and it would adopt a currency basket for managing the currency.

The trading band in which the renminbi would be allowed to fluctuate stayed the same, at 0.3 per cent on either side of the new central level.

As expected, the Chinese sprang this move on world financial markets. On July 11, the Singapore financial newspaper The Edge reported that hot money speculating on a revision had begun leaving Asia. If true, the gamblers were caught (somewhat) unawares.

The revaluation is hardly large, of course -- a mere 2%, less even than the diminished expectations of US revaulation skeptics. This is a far, far cry from the 27.5% revaluation that some in the US Congress are demanding.

And also as expected, the renminbi peg has moved to a basket of currencies, although the content and weight of that basket is as yet unannounced. Thus the renminbi should rise against the dollar by more than 2% because of this move, but probably not by much.

Furthermore, the adage "as goes China, so goes Asia" has been borne out as well. The yen strengthened from around ¥113 yesterday to nearing ¥110 today, and some see the yen reaching that magic ¥100 later this year -- although with US inflation and Japanese deflation, that is hardly a sign of inordinate yen strength any longer.

The most important fallout from the renminbi revaluation is not going to be felt in international trade markets, but instead in international bond markets. As Bloomberg reports,

China's announcement spurred a sell-off in U.S. Treasury securities, amid speculation that the country will reduce its purchases. China is the second-biggest foreign holder of Treasuries, with more that $243 billion at the end of May, according to the Treasury Department. . . .

The yield on the benchmark 10-year Treasury note rose more than 6 basis points, or 0.06 percentage point, to 4.22 percent.

As more revaluations and more basket tinkering occur in the months and years ahead, one hopes the animal spirits won't take over and drive US interests rates through the roof. Broad Asian currency revaluation now has its chance to truly pare down our gargantuan trade imbalances. Here's wishing it luck.

Is Bush hoodwinking pro-lifers?

The accolades from the social conservatives this morning for Bush's nomination of John G. Roberts, Jr. are deafening.

"There's no question that President Bush is a promise keeper," said Tony Perkins, president of the Family Research Council, which is marshaling support among evangelicals for Bush's judicial nominees.

The Rev. Louis P. Sheldon, chairman of the Traditional Values Coalition, described Roberts, who has served for two years on the U.S. Court of Appeals for the District of Columbia Circuit, as an "all-star" on key social issues such as abortion and same-sex marriage.

"Conservatives who supported George W. Bush have no reason to be disappointed," Sheldon said. "He has more than fulfilled his pledge."

Yet what is the foundation for all this enthusiasm?

It seems that both activist sides on the abortion debate are basing their judgments on one piece of evidence: Roberts' role as Deputy Solicitor General in the G.H.W. Bush administration and its 1991 brief in the Rust v. Sullivan case in which Poppy Bush now famously argued:

We continue to believe that Roe was wrongly decided and should be overruled.

What social conservatives don't seem so much interested in is the fact that Roberts was the sixth author of said brief and didn't even argue the case before the Supreme Court. Roberts, in his capacity as Deputy Solicitor General, had the obligation of advancing his client's interests to the best of his ability. There seems no reason to assume that this comment represents Roberts' personal beliefs.

Roberts has been more candid about his personal beliefs concerning Roe. During his 2003 confirmation hearings to the D.C. Circuit, Roberts said

The statement in the brief was my position as an advocate for a client . . . Roe v. Wade is the settled law of the land. . . . There's nothing in my personal views that would prevent me from fully and faithfully applying that precedent.

Interesting how that quote isn't making the rounds, either among pro-lifers or the NARAL set.

Perhaps we need to move to the level of code language. Roberts is being praised by social conservatives for his commitment to "judicial restraint". That being said, in light of Roberts comments regarding Roe as the "settled law of the land," a commitment to judicial restraint would suggest being supportive of Roe. In this light, consider the comments today of Sean Rushton, executive director of the conservative Committee for Justice:

Roberts "rules based on the application of existing laws and specific facts of the cases before him, rather than making new laws or creating new policies based on personal opinion."

Again, this doesn't sound hostile to Roe.

What else do conservative pro-lifers have to support their glee? The New York Times reports that Roberts and his wife are "devout Catholics". It's hard to find anybody else noticing or commenting on this fact, including pro-lifers.

My sense from reading social conservative commentary today and last night is that [1] they trust Bush and want to believe and support him; [2] they are reading a lot into the 1991 Rust brief; and [3] they are up to their necks in oppositional interest group politics which says 'if NARAL is against him, then we're for him!'.

There seems no doubt that Roberts will give capital everything it asks for and then some. But why social conservatives are absolutely convinced that Roberts is not another Souter is unclear to me.

Core values (again)

OK, I read these two comments from some pretty prominent voices on the left side of the Democratic Party today. The first from MoveOn. org (via mass emailing):

In the past weeks, Republicans and Democrats have called on President Bush to nominate a moderate for the Supreme Court—someone who would honor the legacy of independent Justice Sandra Day O'Connor. But last night, President Bush nominated Judge John Roberts, a far-right lawyer and corporate lobbyist, to fill her post on the Supreme Court.

The second from Markos Moulitsas:

Bush could've chosen a moderate in the O'Connor mold, and he could've kept the pretension that the GOP isn't extreme, isn't out to eliminate hard-won rights. He chose otherwise.

O'Connor a "moderate"? An "independent"?? Note that these descriptions aren't designed to put on a face for the national media; these communications are to supporters on the left. I'll quote Nathan Newman who said it best:

It makes me nauseous hearing various Democratic leaders lauding Sandra Day O'Connor as a great heroine of moderation. Yes, she made a few token bows on social issues, but her time on the Bench has been one of unmitigated hostility to working people.

Newman said this over a week ago and MoveOn.org and kos are still calling her "moderate". How can I help but believe that the only core value of Democratic Party liberals is abortion on demand?

UPDATE: Just this afternoon I received yet another email, this time from John Kerry with the subject line being "No Sandra Day O'Connor!". The first two sentences are:

This much is clear already. Judge Roberts is no Sandra Day O'Connor.

Last night we learned that President Bush wants to replace a woman who voted to uphold Roe v. Wade with a man who argued against Roe v. Wade, and that sends a clear signal that this White House remains bent on opening old wounds and dividing America.

It's not just liberals in the Democratic Party; it's the leadership as well. Nauseous.

Bush's true base

The Associated Press reports today that "speculation is converging" around Edith Clement to replace Sandra Day O'Connor for the Supreme Court. There are two relevant bits of information you should know regarding Clement.

The first, from today's AP story:

Known as a conservative and a strict constructionist in legal circles, Clement also has eased fears among abortion-rights advocates. She has stated that the Supreme Court "has clearly held that the right to privacy guaranteed by the Constitution includes the right to have an abortion" and that "the law is settled in that regard."

The second, from a CNNMoney story two weeks ago:

Glenn Lammi, chief counsel of the conservative Washington Legal Foundation, identified at least three possible nominees that big business would cheer: John Roberts Jr., Edith Brown Clement and Janice Rogers Brown. . . .

Corporate America would favor Roberts and Clement because both were once private practitioners who represented business interests -- experience the Rehnquist court now lacks. Given their past experience, the thinking goes, both judges might be friendly to corporate America.

Looks like Bush is playing to his true base.

UPDATE: Well, it looks like it's Roberts instead of Clement. The spirit of the post still stands, however. Roberts was on capital's short list, too, of course -- he even headed it. That being said, Roberts has a record of being hostile to Roe, at least in his role as G.H.W. Bush's solicitor general.

It looks like Bush is playing to both capital and pro-lifers. I should have remembered that only Democrats attack their base.

On second thought . . .

On Wednesday I said

June delivery contracts for petroleum on the NYMEX were much higher than for May delivery three months out, but were actually lower one month out. Thus we probably won't see a big oil import bill in the June trade report either

I should have consulted the latest BLS report on import and export prices before saying that.

Per the BLS, US petroleum import prices jumped 7.6% in June. Combined with a stronger dollar (broad dollar up 1.1% over May), China's record $9.7bn June trade surplus, and strong retail sales (up 1.7% over May with auto-related sales up nearly 5% -- and the auto sector makes up about 15% of US goods imports), we could see a real blow-out for the June trade deficit back into the high $50bns.

Brad Setser is right; we haven't yet seen the monthly trade deficits peak -- and July should make June look downright tame.

Inflation, shminflation part 4

Another tepid inflation report released today by the BLS.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in June, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The June level of 194.5 (1982-84=100) was 2.5 percent higher than in June 2004. . . .

On a seasonally adjusted basis, the CPI-U was unchanged in June, following a decrease of 0.1 percent in May.

While the annual consumer inflation rate (SA) now stands at 2.5%, the annualized 3-month rate is a mere 1.9%. Core annual consumer inflation is just 2.0%, and the annualized 3-month rate is 1.2%. Core inflation has been trending downwards since its February peak of 2.4% and in June was back to the level of last fall. The 3-month core annualized rate hasn't been this low since December 2003 -- the deflation scare days.

This report continues to demonstrate the dramatic differences over the last three months in US inflation rates by sector: deflation or near-deflation (<2%) in most goods, mild inflation (2-5%) in most services including medical care, and relatively high inflation (>5%) in energy and a few high-end services like college education. Here are a few examples of annual inflation (NSA) in June 2005 at the ends of the spectrum:

Information technology, hardware and services: -8.7%
Toys: -7.6%
Apparel: -1.5%
Video and audio: -1.2%
Household furnishings and operations: +0.3%
New cars and trucks: +0.6%
Food at home: +1.4%
Financial services: +1.7%

. . .

Airline fares: +5.8%
Gasoline: +6.9%
Fuels and utilities: +7.2%
College tuition and fees: +8.1%
Energy commodities: +8.2%

If it wasn't for rocketing energy prices, we'd be talking about Ben Bernanke's deflation speech all over again. Remember that Bernanke delivered his speech in November 2002 when core CPI (NSA) stood at 2.0% and falling -- the same level and direction as June 2005.

In two inflation posts yesterday (here and here), Barry Ritholtz at The Big Picture argued

Any time you see a fund manager or eoconomist on CNBC discussing how benign inflation is, you can comfortably file that person away as clueless cheerleader.

Barry is right to the extent that he points out the dramatic differences across sectors as well as the failure of real wages to keep up with important goods and services like fuel and education. That being said, overall we are looking at incredibly -- and I think potentially dangerously -- low inflation levels. And my track record shows I'm no cheerleader.

The trade report oil wrought

May's trade figures show the third largest trade monthly deficit on record with China, but a big drop in petroleum imports (by value, not by volume!) helped shrink the May trade deficit to its second smallest size this year. Hey, every little bit helps.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $106.9 billion and imports of $162.2 billion resulted in a goods and services deficit of $55.3 billion, $1.6 billion less than the $56.9 billion in April, revised. May exports were $0.2 billion more than April exports of $106.7 billion. May imports were $1.4 billion less than April imports of $163.6 billion.

Per the Commerce Department's summary, the $1.55bn reduction in the deficit was due almost solely to a reduction in the goods deficit, that in turn due almost solely to the $1.61bn reduction in goods imports, and that in turn thanks overwhelmingly to a $1.31bn fall in petroleum imports.

The NSA figures show that US energy-related petroleum products imports in May increased 8.0 million barrels, but thanks to prices being $1.68 per barrel lower, the total value of ERPP imports decreased $333 million.

Thus far in 2005, US non-petroleum goods imports (SA) are growing 12.2% while total exports are growing 11.4%. Cheaper petroleum prices can help matters, but the fundamental problem of the US trade deficit is that the US simply imports too much stuff. Goods imports from China (NSA) hit $19.1bn in May, the highest level this year and the third highest montly total ever. On the other hand, imports from Japan -- the country with which the US runs its second largest goods deficit -- were at their second lowest level of the year and imports from Canada are also trending down from their March peak.

There continues to be problems with the EU as well. Imports from the EU in May hit $26.6bn and the monthly goods trade balance came in at -$10.5bn, the largest of the year. This is nothing compared to the -$15.8bn May balance with China, yet the sluggish EU economies are nearly as big a contributor to the US trade deficit as is overproducing/underconsuming China.

One final note: June delivery contracts for petroleum on the NYMEX were much higher than for May delivery three months out, but were actually lower one month out. Thus we probably won't see a big oil import bill in the June trade report either; but take cover when the July and August figures are released!

The trade defi-what?

Global currency traders have been careening between the cyclical and the structural this past week. On July 5 the broad dollar reached its highest point since October 2004; one week later it's fallen 3%. Why the big change? Oh, folks just remembered that 6.4% of GDP current account deficit.

The dollar fell, heading for its biggest two-day decline against the euro since January 2004, on speculation a government report tomorrow will show no shrinkage in the U.S. trade deficit.

. . . figures on July 8 from the Commodity Futures Trading Commission showed wagers on the dollar's advance rose to the most since December 1999, said Paul Mackel, a currency strategist at ABN Amro Holding NV in London.

``People had got incredibly long of the dollar,'' said Mackel. ``The fact that we have the trade data tomorrow may lead to an acceleration'' in selling, he said. A long position is a bet on a currency's appreciation.

According to Bloomberg, the consensus forecast for the May trade deficit is $57.5bn. That would top April's deficit by $0.5bn and turn in the fourth largest tally of all time.

Calculated Risk says that oil import prices fell in May compared to April which should take a little off the top. However, imports from China are expected to have surged yet further thanks to China's massive $9.0bn overall trade surplus in May -- not to mention its still larger $9.7bn surplus in June (the whole of 2004 was a "mere" $32bn). Since the US is China's market of first resort, expect to see the US monthly goods imports from China pushing $20bn.

The free traders among us have already decided to send the textile and apparel sectors to China, but they've more recently chosen to ship out computer and electronic products, machinery, electrical equipment and appliances, and furniture and related products as well. But who needs to sell things, after all, when you can just sell debt instead? Although, of course, in April of this year foreigners weren't so keen on those exports, either . . .

Yes, the job market really is weak

A small debate has ensued between James Hamilton of Econbrowser and Pro-Growth Liberal of AngryBear over the interpretation of recent employment data, with the central dispute over whether current employment levels are 'good enough'. Rather than wrestling over the distorting effects of teenage employment or the question of whether a return to the total employment levels of 2000 is either realistic or desirable, I suggest focusing in on a group of workers who over time are almost always in need of work, who do not wax and wane with educational or retirement opportunities, nor with social trends toward greater workforce participation rates: men age 25-64.

The below graph shows the quarterly employment-to-population ratio without seasonal adjustment for men age 25-64, from 1977:I to 2005:II. As you can clearly see, at the peak of the last two economic cycles the ratio topped out in the 85.5-86.0 range. Currently the level is just 83.2, right where it was three years ago and nowhere close to the levels of the late 1990s.



Perhaps more distressingly, today's EP ratio is still below the 4-quarter moving average trough of the mid-1990s and around the levels of the early-1980s trough (save the disaster of 1983:I). The chart also shows that the late 1990s was hardly an anomaly in terms of employment for "working age" men. In fact, the late 1990s saw a slightly lower peak than the late 1980s did.

I think there's no doubt about it: this job "recovery" needs a recovery of its own.

American Politburo

American Politburo, today at The American Street.

Times praises culture of death

Most readers of the Globblog, I suspect, are cultural liberals. When Markos Moulitsas listed assisted suicide and abortion on demand as "core values" of the Democratic Party, I suspect most readers of the Globblog agreed with him.

I don't.

The New York Times has long been a megaphone for what Pope John Paul II called the "culture of death" (FYI: I am not Roman Catholic). On the issue of euthanasia, the Pope wrote:

Here we are faced with one of the more alarming symptoms of the "culture of death", which is advancing above all in prosperous societies, marked by an attitude of excessive preoccupation with efficiency and which sees the growing number of elderly and disabled people as intolerable and too burdensome. These people are very often isolated by their families and by society, which are organized almost exclusively on the basis of criteria of productive efficiency, according to which a hopelessly impaired life no longer has any value.

Nick Kristof, on the other hand, thinks suicide to be an essential element of "death with dignity" -- dignity more of less summed up as final control over one's bodily destiny. In his opinion piece on a retired Oregon tugboat captain, the theme of productive efficiency is everywhere, hidden under the language of "burden" upon others, control and rational planning.

• "he doesn't want to put his wife and 17-year-old daughter through the trauma of caring for him as he loses control over his body."


• "I don't want to linger and put my wife and family through this."


• "I want to go out on my own terms"


• "his biggest concern isn't pain so much as the loss of autonomy and dignity. That's partly why he wants the medication on hand - if he feels himself losing the self-control he has prized all his life, he can hasten the process."


• "It's pretty weird knowing what day you're going to die, but we could plan for it"

Autonomy, control, and rational planning are indeed the cherished cultural touchstones of the technocratic new middle class which runs the Democratic Party, which is why this class is so enthusiastic about managing death. Of course, any Christian faithful to his/her religion believes that, since we have not given ourselves life, we have no right to take it in turn. As the Pope writes again,

[suicide] involves the rejection of love of self and the renunciation of the obligation of justice and charity towards one's neighbour, towards the communities to which one belongs, and towards society as a whole. In its deepest reality, suicide represents a rejection of God's absolute sovereignty over life and death

The culture of death says first and foremost "I am God". No wonder the Democrats have a religion problem.

June employment report: Not good

The June jobs figures have been released by the BLS, and the news is not good.

Hiring around the country picked up slightly in June with employers adding 146,000 jobs — helping to push the unemployment rate down to 5 percent, the lowest in nearly four years. . . .

The modest payroll gain of 146,000 jobs in June was up from 104,000 net jobs added in May. Payroll growth for both April and May turned out to be better than the government previously reported. Still, the strength of job growth seen in June was likely to disappoint economists. Before the release of the report, they were forecasting a more robust increase of around 195,000 jobs for the month.

One economist called the US labor market "anemic", and I think that's the best adjective for it.

First, the June total is nearly 50,000 jobs short of the market consensus and nearly 30,000 jobs short of Briefing.com's rather tepid forecast. While the May numbers have been revised upwards, the June tally still falls over 40,000 jobs short of the 2005 average (through May's revised numbers). May and June of this year are averaging 125,000 new jobs per month, the slowest growth since July-August 2004.

The SA figures show big contributions by professonal and business services (+56,000), health care and social assistance (+34,500), construction (+18,000) and food services and drinking places (+17,600). In fact, that's 86% of the net total growth right there. Nearly half of the professional and business services growth was in administrative and support services. In total, the big job winners last month appear to be secretaries, health care workers, cooks, wait staff, day care providers and construction workers.

Some of this gloom might be caused by seasonal adjustment. The NSA June number was 611,000, which makes June 2005 the best June since 1999. Turning to the NSA numbers, one can see the continuing importance of the real estate sector for US employment. Of those 611,000 real seasonally-unadjusted jobs created in June, we have: 196,000 in construction; 31,700 in real estate; 31,000 in architectural and engineering services. Together these three real-estate related sectors contributed 42.3% of the actual new jobs in June (the SA figure is a more reserved 22.6%).

The real state sector is beginning to get squeezed by higher interest rates, however, and thus one has to wonder how much longer this sector can carry the US economy. Yesterday Freddie Mac reported that rates on one-year ARMs are now up to 4.33%. That makes this week the second time this year that the one-year ARM has broken the 4.30% ceiling of its long-standing fluctuation band. Considering how many homebuyers rely on ARMs today (34% nationally, over 50% in every California market), squeezing the marginal buyers will have more than marginal effects.

June jobs numbers TBA

Tomorrow the June employment numbers are released. The Briefing.com folks are forecasting nonfarm payroll growth for the month of 175,000 jobs while the "consensus" expects 195,000. While both these numbers are a world better than May's anemic 78,000 jobs created, don't be fooled by these apparently big forecasts. Over the last six months, monthly job growth (SA) has averaged 175,500; over the last twelve months, job growth (NSA) has averaged 167,750. Thus the Briefing.com forecast is simply a "stay the course" estimate, and the consensus forecast is only slightly above that. Note that even 195,000 jobs would put June as only the third best month for job growth this year.

Mike Shedlock links to Paul Kasriel on the subject, and the latter observes that the "labor market is losing its forward momentum".

When the data is released tomorrow morning, remember that any figure under 175,000 (SA) has to be considered a major disappointment. Any figure under 100,000 will be a disaster.

Take a peek at the NSA figures, too, devoid of BLS hocus pocus. Healthy June job growth is anything over 500,000. Over 600,000 would actually instill some confidence. If this economy can't even hit half a million, you know things are not going well no matter what the hype is.

London Underground

I know you're not visiting the Globblog today to hear news of the London terrorist attacks, but I thought I'd give you my personal reaction nonetheless.

As regular readers know, my family and I recently returned to the US from spending four months in London (January 31 to May 31 of this year). I rode the Metropolitan Line almost every day going into the LSE or to tourist attractions in Central London from our terrace in Harrow, and from news reports it appears that not only did the first bombing occur on that line, but four of the six tube stations attacked today are on the Metropolitan.

While no one yet knows the full extent of the attack, it is certain that the London transit system will be in major disarray for many many days -- perhaps weeks -- to come. Not only was the Metropolitan Line hit, but the six stations attacked affect also the Circle, Hammersmith and City, Northern, Central, Picadilly and District lines. The murder of London commuters darkens today, and the choice of stations ensures that this attack will continue to plague London long after the victims are laid to rest. These sonsabitches knew what they were doing.

UPDATE: There appears to have been three explosions on tube trains. The structural damage to the Underground system appears to be extensive.

Here's the official word from Transport for London: "At 09:46, the London Underground was suspended and all stations commenced evacuation following incidents at: Aldgate station heading towards Liverpool Street station on the Hammersmith & City line; Russell Square station heading towards Kings Cross station on the Piccadilly line; and Edgware Road station heading towards Paddington station on the Hammersmith & City line."

Edgeware Road sounds particularly severe: "The explosion occurs at 0917 BST on an Underground train at the station. It rips through a wall and affects two further trains." This could affect up to four lines: Hammersmith & City, District, Circle and Bakerloo.

Both northbound and southbound trains were affected on the Piccadilly line near King's Cross.

I've read several reports that suggest the train near Liverpool Street was a Circle line, not a Hammersmith & City line. That being said, the Circle line shares tracks with Hammersmith & City near Liverpool Street, and the Metropolitan line will also be affected.

More information here.

Boston bubble

I've been spilling a good amount of electronic ink on the California housing bubble of late (see here, here, here and here for posts in June alone) and thought it's high time to begin widening my horizons. So today I turn the lens on the Northeast and the Bay State in particular, a region which is especially similar to the Bay Area in combining wild home price rises and a stagnant job base.

Massachusetts has a stunning 5.1% fewer seasonally-adjusted jobs today (May 2005) than at its jobs peak of February 2001. The jobs recession in the Bay State ended only in January 2004, and over the last 16 months Massachusetts has had a mere 1.1% growth in jobs (the US minus MA has had seen 2.3% growth over the same period). Over the last 24 months, job growth has been a nearly invisible 0.3%.

Since January 2004, 20.4% of that meagre number of new jobs (SA) in Massachusetts have been in construction. The state is not as dependent on building as California certainly, but considering the anemic job growth in the economy overall, a figure some 50% higher than the national average has to be cause for concern.

Despite the weak state economy, home prices have been rising dramatically. After all, this is America and who needs jobs and income to drive up prices, anyway?! While job growth has been just 0.3%, the median selling price for single-family homes in the state since May 2003 has jumped 19.0% and the median selling price for condos is up 19.6% (data from the Massachusetts Association of Realtors).

This froth built upon nothing but sand cannot last forever, of course. Calculated Risk is one who says the Boston market has already "peaked". One look at y-o-y home price inflation in the state shows he has a point.

After riding high in the double-digit saddle for most of the last 15 months, inflation in both single-family homes (SFH) and condos has trailed off considerably this spring. The last two months have seen the lowest inflation levels since the Mass. Association of Realtors started keeping median home price data in early 2003, and condo inflation has plummeted from 18.0% in February to just 4.7% in May.

While one or two months does not a trend make, two things make me stand up and take notice. The first is the depth of the inflation rate plunge from where it was just six months ago. The second is the fact that the y-o-y job growth rate (NSA) in Massachusetts is actually slowing -- from an annual 1.1% in January and February of this year to 0.7% in April and May. The Boston bubble seems built by the foolish man . . .

Happy 4th

"The care of human life and happiness and not their destruction is the first and only legitimate object of good government."

-- Thomas Jefferson

UK as harbinger for US economy

All signs are that the Bank of England is beginning to rue its August 2004 interest rate hike. That final round of tightening took the repo rate to 4.75%. Since that time, UK home price inflation has fallen from 18.9% to 4.1%; home sales fell from a seasonally-adjusted 96,000 per month to 53,000; mortgage equity withdrawl fell from £11.3bn a quarter to under £7bn (2005:I data to be released on July 8); retail sales volume peaked the following month and has not recovered, with June turning in the worst monthly showing in 22 years; and GDP growth has fallen precipitously from a 3.1% annual growth rate to 2.1% today.

The heavy dependence of the UK economy on housing and its salutary effects on retail sales is only heightened in the US. Thus I have to agree with Paul Kasriel today when he argues that the Fed is going to be stopping rate hikes sooner rather than later -- regardless of what the Greenspanspeak is.

The Fed does not want to risk a rapid deflation of the housing bubble at this juncture. If the housing bubble were to burst in the next year, it would have the potential of precipitating a serious recession. As my colleague, Asha Bangalore, reported, housing-related employment has accounted for 43% of the increase in private nonfarm payrolls since this recovery/expansion got started. So, a sharp fall off in housing activity could have a significant negative impact on employment growth. Because households have been extracting large amounts of equity from their homes -- $324 billion in 2004 - to maintain their high levels of consumer spending relative to their after-tax incomes, a bursting of the housing bubble would also have an indirect negative impact on consumer spending inasmuch as "tappable" home equity would rise more slowly. Last, but by no means least, the bursting of the housing bubble could cripple the banking system in that over 60% of commercial bank loans and investments are mortgage related - mortgages, mortgage backed securities, home equity loans and the liabilities of government sponsored enterprises such as Fannie Mae and Freddie Mac.

Note as well that while disposable household(UK)/personal(US) income has growth at a very similar rate in both countries over the past five years -- 24.2% in the UK, 26.7% in the US (nominal) -- British residents have managed to save 4-7% of that income every quarter. Americans have saved 1-3.5% of their income every quarter.

And don't forget that as the Fed raises rates, everybody else is cutting or contemplating cutting. Higher US rates merely encourage more of the capital glut to flow into US securities, pushing up the dollar further and exacerbating the current account deficit. With so many export-dependent economies in the world today, they'll only be too happy to plow even more investment capital (secured through ultra-cheap loans) into their tradable sectors and sell to Americans with their stronger currency.

The American economy is riding an asset wave, and the Fed will do what it can to keep it from crashing down on the reckless surfers riding it. One hopes the Fed is also thinking a CA deficit of 7% of GDP is too big for comfort. I'm bold enough to make a prediction: the Fed takes a breather at 3.50%.