Posts Tagged ‘Japanese earthquake and tsunami’

Want to Feel Better About the Economy? Take a Look at the Rest of the World

Monday, September 10th, 2012

There is no doubt that America needs to get its economic mojo back: in the 2nd quarter its GDP grew at an annualized rate of 1.7 percent, according to revised figures published on August 29th.  That growth number is down from two percent in the 1st quarter and 4.1 percent in late 2011. But, anyone ready to ascribe that number to mismanagement or competition from emerging economies should consider the state of much of the developed world.

Europe remains the cautionary tale with GDP shrinking by 0.2 percent (an annualized decline of 0.7 percent) in the 2nd quarter. The Greeks are on the verge of quitting the common currency and Spain is looking for a bigger bailout.  According to the Economist, the research firm Markit is predicting a further fall in GDP in the 3rd quarter.

Finland’s economy shrank by 1.1% in the second quarter. The country had been one of the euro zone’s best performers, but the crisis is now starting to take its toll on exports, which account for 40% of Finnish GDP. In July the finance minister said Finland would “not hang itself to the euro at any cost”.

The Japanese economy is feeling the European gloom with exports to the European Union falling by a steep 25 percent in the year to July.  The only reason their economy grew by 3.5 percent over the last 12 months is because of all the reconstruction work after the tsunami and earthquake.

Even the high-flier BRIC countries (Brazil, Russia, India and China) are sputtering.  Brazil’s fall from grace has been particularly marked:  Brazil’s economy grew at an annualized pace of only 1.64 percent in the April-June period. It is forecasted to grow 1.9 percent this year, less than the 2.15 percent in the U.S. and 2.5 percent expected in Japan. One bright spot – Brazil scored the rare coup of winning the bid for the 2014 World Cup and the 2016 Summer Olympics, leading to $38.1 billion in foreign direct investment this year.

Flagging imports suggest that China’s slowdown will prove to be more severe than previously expected.  The country’s exporters are also having a hard time.  In August, new export orders for manufacturers were at their weakest since March 2009, according to Markit.

So, while the campaign rhetoric heats up, with each side blaming the other, it is important to see the bigger picture. A big part of our weak job numbers was that U.S. factory activity shrank for a third straight month in August — because of factors outside our control.  Weak demand from China (our 3rd largest market) hits our farmers, IT firms and chemical companies. When Europe contracts, that makes our manufacturing free fall because they buy 20 percent of our exports.  In the end, we need to place our woes in context and recognize that the recession is indeed world-wide.

Rick Mattoon on the Economy: On the Brink or On the Mend?

Tuesday, August 30th, 2011

Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession.  This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago,  Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.

According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes.  Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors.  The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.

From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around.  At present, he says the issue isn’t so much one of supply but demand.  A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards.  The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.

The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs.  Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy.  A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions.  Another was the unanticipated spike in oil prices that dampened consumer spending.

The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy.  The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.

One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.

In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions.  The market’s comeback depends on job growth.  According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York.  Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt.  The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.

To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.

icon for podpress  Rick Mattoon on the Economy: On the Brink or On the Mend?: Download

Is QE3 On the Horizon?

Tuesday, June 21st, 2011

Now that QE2 (quantitative easing 2) is winding down – and with the economy sputtering – will Federal Reserve chairman Ben Bernanke call for a new round of stimulus in the form of QE3? The answer likely is “no”, although it’s doubtful that the Fed will tighten monetary policy until the economy is stronger.  The central bank’s strategy has been to buy Treasury bonds to increase the money supply and foster growth.  The second round of such purchases, worth $600 billion, ends June 30.

Writing in the Washington Post, Neil Irwin says that “The lousy unemployment report comes on the heels of other disappointing economic data, but Fed officials view the current situation as different from the conditions that led to last year’s bond buying.  The recent round of data is neither alarming enough nor definitive enough to make them reconsider the unconventional monetary policy.  For one, much of the economic slowdown in the first half of the year was likely driven by temporary factors.  The Japanese earthquake and tsunami appear to have disrupted the supply chain at U.S. factories more than initial forecasts, contributing to the drop in manufacturing activity and May’s sluggish employment report.  And although oil prices spiked earlier in the year, they have ebbed downward since late April.”

Mohamed A. El-Erian, CEO and Co-CIO of Pimco, agrees, noting that “Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3.  This view is based on an assessment of economic, political and international factors.  As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference, policy measures should be judged in terms of the expected balance of benefits, costs and risks.  I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.  It is also clear that, in its attempt to deliver ‘good’ asset price inflation (e.g., higher equity prices), the Fed also got ‘bad’ inflation.  The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption — thus countering the objective of QE2.”

There’s also the point that QE2 has had mixed results.  According to Bernanke, “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.  Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation…has risen to historically more normal levels.”

Philadelphia Fed President Charles Plosser warns that QE2 provides excessive stimulus: The central bank has “a trillion-plus excess reserves,” he noted, which could be “the fuel for inflation.”  Anticipated inflation could explain the sudden increase in long-term yields that began last November.  But the rate for 10-year Treasury Inflation Protected Securities (TIPS), rose at the same time, which contradicts that interpretation.  At the same time, the five-year TIP rate didn’t rise.  Had that rate increased, there would have been a sign of a stronger economy in the next five years.


UBS thinks that QE2 failed and is strongly opposed to another round of stimulus.  Maury N. Harris, UBS’ Managing Director and Chief Economist for the Americas, says that “The evidence that QE2 boosted economic activity is lacking.  Yields moved higher and equity markets did as well, although the latter was justified by rising corporate earnings.  They importantly reflected better volumes, which probably cannot be traced to any believable instantaneous response to policy that works with a lag.  Despite the recent weakness in the data, we continue to view the recent slowing as insufficient to prompt further QE from the Federal Reserve.  Relative to conditions in August 2010, when QE2 was floated by Chairman Bernanke, labor market conditions are better.  Additionally, the threat of disinflation last fall has given way to a somewhat more disturbing build-up in inflation pressures as core inflation continues to accelerate.”

Where’s Our Recovery? Job Growth and Productivity Falter

Monday, June 13th, 2011

Sluggish job growth in May could be a sign that the economic recovery is losing momentum.According to the ADP May Employment Report, a mere 38,000 jobs were added in the private sector on a seasonally adjusted basis.  That was well below consensus estimates of 170,000 new jobs.  The report also revised downwards the estimated change from March to April from 179,000 to 177,000. “A deceleration in employment, while disappointing, is not entirely surprising,” the report said.  “In the 1st quarter, GDP grew at only a 1.8 percent rate and only about 2¼ percent over the last four quarters.  This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.”

Patrick O’Keefe, director of economic research at J.H. Cohn, said that although some seasonal factors may have been at work in the recent claims data and in the ADP estimates, the report still disappointed.  “We can put away our balloons and party hats today,” he said.  “We expected a pull back in the rate of acceleration, instead we got deceleration.  It appears that the general expansion has lost a bit of momentum and employment numbers, which were already lethargic, are slowing further.”

“This only adds fuel to the argument that the slowdown story is here in the U.S.,” said Tom Porcelli, chief economist at RBC Capital Markets.  “I am fairly confident that people are going to be scaling back their estimates for nonfarm payrolls.  While it is a good thing that small and medium-sized companies are adding payrolls, there is no doubt that the pace has slowed.  This is exactly what we do not want when other significant data shows things are slowing down as well.  Having said that, I still do not believe the Fed will initiate QE3.”

Writing in the National Journal, Jim Tankersley takes a more optimistic viewpoint. According to Tankersley, “Reality is a little more positive and a lot more complicated than that.  Wall Street analysts are fairly united in their view that the recovery has entered a “soft patch,” just like it did last year, and that sooner or later, growth and job-creation are on track to pick up again.  Several analysts and columnists have been reminding Americans that recoveries from financial crises can often feel like stop-and-go traffic on the freeway.  For now, the economic brakes seem to be pumping.  The 2010 slowdown flowed from worries over Europe’s sovereign debt crisis.  This one is likely a combination of several factors.  The spike in oil and food prices has spooked confidence — though consumers are still spending apace, dipping into their savings to keep up — and may be driving businesses to scale back hiring.”

On the MarketWatch website, Rex Nutting says that “If you recall that government employment is declining by almost that much every month, the ADP report implies only a very small increase in total employment.  This is no way to get the unemployment rate down from nine percent.  The economy has been buffeted by both natural and man-made forces.  Extremely bad weather earlier in the year depressed activity, as did the surge in commodity prices, especially for energy and food.  Then the Japanese earthquake and tsunami knocked out vital supply chains.  Global economic growth, which had given a big boost to U.S. exporters, is slowing. Europe is dead in the water, so is Japan.  The fast-growing developing nations such as China, India and Brazil are downshifting to avoid overheating.  The strongest sector of the U.S. economy — manufacturing — is still growing, but the momentum is fading.  The Institute for Supply Management’s closely watched diffusion index (Defined by Investopedia as “A measure of the breadth of a move in any of the Conference Boards Business Cycle Indicators (BCI), showing how many of an indicators components are moving together with the overall indicator index) plunged by 6.9 points to 53.5 percent in May, the largest one-month decline since 1984.

Companies may need to start hiring again as a new report from the Department of Labor is showing that the productivity of American workers slowed in the 1st quarter and labor costs rose as companies boosted employment to meet rising demand.  The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington, D.C.  Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.

Productivity measures the amount of output per hour of work.  A slowdown in growth is bad for the economy if it persists.  But it can be good in the short term when unemployment is high because it can mean that companies are reaching the limits on how much extra output they can get from their existing work forces.  Output grew 3.9 percent in 2010, the biggest increase since 2002.  But many economists believe it will slow to 50 percent of that rate this year.  The expectation is that companies will hire new workers to further boost output.