Monday, January 30, 2006

All hail the housing ATM

The American consumer turned in his/her third lowest personal savings rate of the year in December, -0.7%.
Personal outlays -- PCE, personal interest payments, and personal current transfer payments increased $81.3 billion in December, compared with an increase of $49.8 billion in November. PCE increased $80.2 billion, compared with an increase of $48.6 billion.

Personal saving -- DPI less personal outlays -- was a negative $67.4 billion in December, compared with a negative $21.6 billion in November. Personal saving as a percentage of disposable personal income was a negative 0.7 percent in December, compared with a negative 0.2 percent in November.
And remember that this massive consumption in lieu of income delivered only a ho-hum Christmas season for US retailers.

There will be minor revisions to come, of course, but we now have the first clear look at the personal savings rate for all of 2005: -0.5%, down from 1.8% in 2004. Not only is the US running the first negative personal savings rate since 1933 (yes, I know you're getting sick of hearing that from me, but it bears frequent repeating and at least the press is picking up on it too). This is an incredibly steep descent as well, -230 basis points in a single year. The last time one can find such rapid abandonment of saving out of income in the US was 1947 when the country was at the tail end of a three year period of dissaving after years and years of pent-up demand due to WW2. The lowest the saving rate ever reached then, however, was +4.3%.

Well, as long as the East Asians want to stick more and more of their growing and growing reserves into the US housing sector, some Americans can go on using their homes as ATMs. In fact, it seems the only way to keep the US economy -- and the global economy -- from plunging into recession.

Friday, January 27, 2006

Fourth quarter shows the end of cheap credit

The end of cheap credit in America finally begins to show its effects in the broadest of measures, gross domestic product.
The economy grew at only a 1.1 percent annual in the fourth quarter of last year, the slowest pace in three years, amid belt-tightening by consumers facing spiraling energy costs. . . .

The Commerce Department report, released Friday offered the latest figures on gross domestic product, the best measure of the country's economic standing.

The 1.1 percent growth rate in the fourth quarter marked a considerable loss of momentum from the third quarter's brisk 4.1 percent pace. The fourth-quarter's performance was even weaker than many analysts were forecasting. Before the release of the report, they were predicting the GDP to clock in at a 2.8 percent pace.

The 1.1 percent growth rate was the smallest gain since the final quarter of 2002, when the economy expanded at just a 0.2 percent rate.
Three big changes from 2005:III to 2005:IV make up the slowdown. The one I least expected was government expenditures and investment which changed -2.4%. This is mostly due to a -13.1% change in defense spending, coming on the heels of a very big 2005:III increase. In the fourth quarter, defense spending actually dropped to its lowest real level in a year (since 2004:IV).

The second big contributor to the GDP slowdown was imports. Imports grew tremendously, almost four times faster than exports, and considering the US import bill is about 60% larger than our export tally, that makes for a big dent in GDP growth. Most of that big import bill was oil-related.

Which feeds into the third and largest contributor to the GDP slowdown: consumer spending. Overall real growth in personal consumption expenditures was a meager 1.1%, and real spending on durable goods tanked an incredible -17.5%. In fact, the durable goods tally in the fourth quarter was at its lowest since 2004:III.

Why the big cutback on spending? Obviously part of the answer is higher energy costs. But that is only part. The neglected side of the story is the American consumer's cutback in deficit spending. In the third quarter, the US personal savings rate was -1.8%, while in the fourth quarter Americans tried a little harder to live within their means, taking the personal savings rate to -0.4%. That cutback in spending on credit meant less spending on big-ticket items that need credit -- you guessed it, durable goods and especially the motor vechicles and parts subcategory which saw real spending in 2004:IV drop to its lowest point in over four years.

The US economy is profoundly dependent on consumer spending growth for its overall health. Note that of the seventeen full economic quarters since 9/11 (i.e. 2001:IV to 2005:IV), 15 of 17 have seen personal consumption expenditures make up over 70% of US GDP. Before 9/11 the US never had a quarter in which PCE was over 70%. Never. Yet now it is routine.

If you're a regular reader of General Glut's Globblog, you know that in 2005 all this consumption was fueled by debt. For the first time since the depth of the Great Depression, the US racked up a negative personal savings rate, and this consumption in excess of income was essential in keeping the US economy from actual contraction in the third quarter. The real growth rate of the US economy from 2004 to 2005 was 3.5%. However, of the $375.4bn in real growth (in constant 2000 dollars), $191.4bn (in constant 2000 dollars, deflated by the PCE price index) was in personal consumption expenditures over and above income -- i.e. negative personal savings. Without that extra credit-injected economic fuel, the real GDP growth rate for 2005 would have been a paltry 1.7%. That would put the US economy right back where it was in 2002.

Private job growth (of actual non-seasonally adjusted jobs) in 2005:IV was only +303,000 compared to 2004:IV's +508,000. Private sector year-over-year job growth by month hasn't been over 2 million since September (from July 1993 to September 2000 the monthly figure dropped below 2 million only for only one three-month stretch). Real average hourly earnings of production workers (i.e. the 80% of us who have a boss) have been sliding for two years.

No wonder Main Street isn't feeling the love this winter.

Monday, January 16, 2006

On Iran's nukes and analogies

Now that the Sunday morning talks shows have come and gone and the Sunday papers are read and thrown in for recycling, the talking heads have gotten everybody and their Aunt Bessie hot and bothered over the Iranian nuclear program. Perhaps the most incendiary talking head is our friendly neighborhood imperialist Niall Ferguson in the Sunday Telegraph:
The origins of the Great War of 2007 - and how it could have been prevented

. . .

Under different circumstances, it would not have been difficult to thwart Ahmadinejad's ambitions. . . . [military] strikes against Iran's were urged on President Bush by neo-conservative commentators throughout 2006 . . . But the President was advised by his Secretary of State, Condoleezza Rice, to opt instead for diplomacy. Not just European opinion but American opinion was strongly opposed to an attack on Iran. . . .

So history repeated itself. As in the 1930s, an anti-Semitic demagogue broke his country's treaty obligations and armed for war. . . . As in the 1930s, too, the West fell back on wishful thinking. . . .

The devastating nuclear exchange of August 2007 represented not only the failure of diplomacy, it marked the end of the oil age. Some even said it marked the twilight of the West. . . .
Obviously, Ferguson likes analogies. So let's play his game. Why is Munich 1938 the proper analogy instead of, say, China 1964?

In 1964 China was considered just as radical and unstable and irrational as Iran is today. In fact, probably more so. The Great Leap Forward had just ended, which consumed 25-60 million lives. The split with the USSR had come a few years previously as well because Khrushchev thought Stalin wasn't all that and a bag of chips, with Mao accusing the Soviets of "counter-revolution". China condemned Khrushchev's actions in the Cuban Missile Crisis as "capitulationism" and didn't give a damn that Khrushchev thought Mao's advice would have led to nuclear war. China had also just finished up a brief border war of its own with India in 1962 and supported communist rebels throughout Southeast Asia including Vietnam where the US was digging in for a war of its own.

And yet when the US had the chance to bomb Chinese nuclear facilities to forestall a nuclear China in 1964, it refused.
The bases for direct action against Chinese Communist nuclear facilities were explored in April 1964 in a paper by Robert Johnson of the Department of State Policy Planning Council, which paper it was apparently decided should form the basis for any subsequent consideration of the subject. . . .

The major conclusion of the paper is to the following effect:
"It is evident . . . that the significance of a [Chicom nuclear] capability is not such as to justify the undertaking of actions which would involve great political costs or high military risks."
This conclusion appears to be based on the observations summarized above regarding technical feasibility, impermanence of effect, and political difficulty, and, very importantly, on arguments to the effect that the near and medium term consequences in Asia of a Chinese nuclear capability will be small, and that direct threat to the US will be very small.
If we could live with a nuclear China which was seen as a very grave threat to world peace and security in the early 1960s, then why can we not do the same with a potential nuclear Iran? Let's be clear: I neither relish nor welcome a nuclear Iran. However, the risks of bombing the country strongly exceed the potential benefits in my book.

So tell me why this is Munich 1938 and not China 1964?

Friday, January 06, 2006

Trials and tribulations in the coalition of the unwilling

Good luck to the South Korean government and to the Bank of Korea. They'll need it.
South Korea’s finance ministry said on Friday it would mobilise all possible means to curb the won’s recent sharp appreciation against the US dollar.

The statement came a day after the currency hit an eight-year high against the greenback, intensifying concern among government officials that the stronger won could hurt exports, which account for more than a third of Asia’s fourth-largest economy.

“We’re deeply worried about moves in the foreign exchange market that can’t be seen as normal,” said Kwon Tae-shin, a vice finance minister, after chairing an emergency meeting with central bank and trade ministry officials and other regulators. “The market has seen an excessive herd mentality because of speculative forces.”
Korea is the most battered member of the East Asian bloc propping up the US dollar. Perhaps "bloc" is too strong a word. "Coalition of the unwilling" might be better for it certainly describes Korea's participation in it.

Led by the Chinese peg to the USD -- or rather now, the Chinese "basket" which continues to function as a crawling near-peg to the USD -- the Japanese yen, the Korean won and the Taiwanese dollar (along with their respective central banks) are also moving in a flock, trying desperately to hold their currencies down by holding the dollar up in order to keep China's pace.

Korea has rebelled briefly several times in the past against membership in a coalition which is costing the Bank of Korea billions. Back in May 2005 the Koreans tried it when the won dipped under 1000 to the USD. They tried it in February 2005 as well to no effect. The problem was always the pain of a rapidly rising currency which the government and the Bank of Korea could not stand.

The won found some relief in the summer and fall of 2005 as the dollar rose across the board. However, since October the won has reversed course -- and rapidly so. In mid-December the rise became a rocket and the Koreans once again have found themselves between the Scylla of the yuan and the Charybdis of the USD.
The won is trading at levels unseen since the 1997/98 Asian financial crisis, driven by the country’s economic recovery and strong exports, and has gained 2.3 per cent this week
Without the capital controls on financial inflows, surrended upon membership in the OECD back in the 90s, Korea is resorting to attempts to drive money out of the country as fast as possible. But this is a tide which won't be held back for long. The tried and true answer: More central bank reserves, sir? Your order will be coming out shortly -- and we don't care how full you are!

The big job growth slowdown

While one can blame Katrina for the amazingly weak US job growth figures in September and October, there is no natural disaster to save us from the December job numbers released today.
Job growth slowed in December — following a big hiring spurt in November — with employers expanding payrolls by just 108,000, underscoring the sometimes choppy path traveled by job seekers. . . .

December's gain of 108,000 jobs was about half of what economists were expecting. Before the release of the report, they were forecasting employers to add around 200,000 positions during the month.

Job losses in construction, retail and transportation helped to blunt job gains in manufacturing, professional and business services, education and health services, government and elsewhere.

For all of 2005, the economy added 2 million jobs — a solid amount and about the same as last year. The unemployment rate averaged 5.1 percent last year, an improvement from the 5.5 percent average registered in 2004.
The seasonally unadjusted tally for private sector jobs in December was -197,000, the worst December since 2002. This follows on the heels of the worst September since 2001 and the worst October since 2002. Since Katrina hit, the US has added 416,000 seasonally adjusted private sector jobs. But of course, nobody actually works an SA job. The NSA tally of actual jobs in the US since Katrina is -162,000 -- the worst September-December stretch since 2002.

No wonder the US economy is dependent on debt-fuelled consumption.