Friday, December 22, 2006

The indefatigable consumer

Apparently it's all coming up roses on the consumer spending front, yet shouldn't the following continue to be causing somebody in high places some concern?
Americans earned and spent more as the holiday season began, reinforcing the role consumers will play in extending the economic expansion to a sixth year.

Spending rose 0.5 percent in November, the most in four months, and incomes increased 0.3 percent for a second month, the Commerce Department said today in Washington.
Yes, income was up, but spending was up more -- a lot more -- in November. Personal income rose $33.8bn while personal consumption expenditures ran up $50.5bn. No surprise then that the personal savings rate took another plunge, down to -1.0%, the reversal of a late summer-fall trend toward more savings (or actually less dissaving).

If the personal savings rate in November had simply remained where it was in October (at -0.7%), consumption would have been $27bn less than actual, which would have dragged down the growth in consumption from the actual 0.5% to 0.2%. I doubt the press would have been crowing then. If personal savings had magically reached simply zero in November, consumption "growth" would have been -0.5%.

Is this fuelled by rising debt? Equity withdrawals? Selling the family jewels?

Monday, December 18, 2006

Have we reached the summit?

The third quarter US current account figures are out today, and -- you guessed it -- we hit (another) all-time record deficit: $225.6bn.

This is a bit deceptive in that the CA deficit in real terms was actually higher in 2005Q4 (in constant 2000 dollars per the GDP deflator, the CA deficit was $195.6bn in 2005Q4 while $193.7bn in 2006Q3), but who wants to quibble over a couple billion? The damned thing is big and, unfortunately, for the last two quarters getting bigger.

Surprising to me was the fact that the AP actually included this important tidbit of information:
The Commerce Department reported Monday that the current account trade deficit increased 3.9 percent to a record $225.6 billion in the July-September quarter. That represented 6.8 percent of the total economy, up from 6.6 percent of the gross domestic product in the spring quarter.
A remarkably useful piece of information, which means it rarely appears in reporting on this issue. The CA deficit was again larger in relative terms in 2005Q4 (7.0% of GDP), but that record setter was due largely to two things which I want to highlight today, one ephemeral and one an apparent (and long forecast) new trend.

In 2005Q4 there was an enormous turnaround in net unilateral current transfers, from -$9.5bn the quarter before to a whopping -$26.2bn. Transfers of that size -- and particularly a shift of that size -- have proved fleeting, settling since then into the normal $19-21bn quarterly deficits of long standing.

The new trend which first appeared in 2005Q4, however, has only been reinforced in the quarters since, and especially so in the data from 2006Q3. In 2005Q4 the US balance on income -- that is, the income from financial assets made by Americans on their foreign holdings minus that made by foreigners on their American holdings -- turned consistently negative for the first time in post-war US history.

What do I mean by "consistently"? Well, the most convenient definition for my argument of course, which is three or more consecutive quarters. The US had a negative income balance for 1998Q3-4, 2001Q3 and 2002Q2, but we're now at four consecutive quarters in a row and the beast is growing.

So much for all that delicious dark matter we started hearing of, oh, just about a year ago. Strangely enough, just after the last quarter of positive balance on income. Hmm.

Thus what we have is an apparently long-term force now operating strongly against the return of the US current account toward (not "to") balance. In 2005Q4, the US required an extra $2.2bn in exports to compensate for its negative net income balance. By 2006Q3 that grew to $3.8bn. After nine years of gargantuan current account deficits, this was bound to catch up with the US and promises to eat more and more into exports' contribution to resolving the deficit. A falling dollar should help slow the leakage somewhat, but that will of course dissuade investors from plugging new money into the hole in the dike. And note in the chart above that when the dollar slid precipitously in 1985 and 1986, the US income suprlus nearly vanished as well.

From here on out it looks like the US is set to run the Red Queen's Race. Happy jogging!

Friday, December 08, 2006

So, is 132,000 a lot?

The Associated Press' take on the latest US employment numbers from the BLS:
Employers boosted payrolls by a respectable 132,000 in November, but the unemployment rate edged up to 4.5 percent as jobseekers streamed into the labor market by the thousands with the onrushing holidays.

The tally of new jobs added to the economy last month marked an improvement from the 79,000 new positions generated in October and was the most since September, the Labor Department reported Friday. It was mostly a cheerful economic message at a time of year when shopping peaks.
So, is 132,000 new seasonally-adjusted jobs a lot?

This is a variant of one of my favorite questions I pose to my political economy students. For example, the World Bank claimed that static efficiency gains from completion of full liberalization through the Doha Round would deliver $287bn. Sounds like a lot -- but is it? (Here's your answer to that one.)

Let's compare November 2006 to the ghosts of Novembers past, and use the non-adjusted numbers. I like focusing on private sector jobs, too, rather than the whole enchilada, so these numbers are just for total private employment.

In November 2006 the US economy added 160,000 real private-sector jobs -- quite a lot fewer than in November 2005 (349,000) but a bit more than November 2004 (103,000). Over the past three months (September-November 2006), the US economy has destroyed 62,000 actual private sector jobs. Over the same period in 2005 the tally was +73,000; in 2004, +230,000.

So is the US economy doing a "respectable" job on jobs? In comparison to even the recent rather lackluster past, I think we have to respond with a resounding "no". Is it a "cheerful economic message"? Certainly to capital, which rejoices whenever labor is taking it on the chin. To the rest of us, perhaps we can hope for a Christmas Carol-like change of heart from old Mr. Scrooge. But I wouldn't just now take out a big loan to buy Tiny Tim a new pair of crutches.

Sunday, December 03, 2006

Why now?

From Friday's Financial Times:
The dollar has fallen against currencies where base rates are both significantly higher and lower than in the US, indicating that current yield differentials are not playing a significant role. But a strong Ifo survey of German business sentiment, against a backdrop of poor US data, may have reinvigorated the view that rates on each side of the pond are heading in different directions. This survey was released on Thanksgiving, into light trading volumes, perhaps exacerbating the sell-off. By the time turkey-gorged US traders returned to work, the trend was established.
Of course, this comment ignores the fact that the dollar has been plunging since Columbus Day, not only since Thanksgiving. Against the euro, the USD fell 2.4 (euro)cents from 10/10 to 11/22 and another 2.3 (euro)cents from 11/22 to 12/1; against the pound, down 1.7p from 10/10 to 11/22 and another 1.7p since 11/22.

Certainly the pace of the Big Skid has picked up recently, but it's only accelerating a more long-standing trend.

Friday, December 01, 2006

As I was saying . . .

Good ol' Mr. Washington isn't dropping his jaw over the new Britney Spears photos.


While this most recent decline in the USD has been under way since November of last year, the real dramatic slide began just after Columbus Day. Up to yesterday, the broad dollar is -2.4% and the major currencies dollar is -3.3% over just these seven weeks. And as usual, dollar decline is vented upon the European currencies first and foremost: the USD is -5.4% against the euro and -5.8% against the pound since 10/10.

It will be interesting to see the October 2006 TIC data when it comes out on December 15. For the 12 months up through September 2006 the US was importing in net terms around $75bn per month of both long-term and short-term portfolio investment. That figure is a bit deceptive, however. In recent months, foreign net short-term portfolio investment has completely dried up. Perhaps long-term purchases have begun drying up, too, over the last two months. We'll have to wait another two weeks for a peek at the data.

In the grand scheme of things, this is not a bad outcome for the US. It would be better if dollar decline could vent against the Asian currencies more, but overall decline is a good thing in the big picture. One just needs to hope that these tremendous global imbalances unwind relatively slowly rather than precipitously. I'm the last person in the world who wants to see Volcker Shift II.