ExRussian

Japan’s industrial production “surged” 1.9% in June for its fifth monthly gain. From MarketWatch:

Japan’s industrial production index rose a seasonally adjusted 1.9% on month in July, the Ministry of Economy, Trade and Industry said Monday. The result was above a 1.6% on-month gain expected by economists polled in a Dow Jones Newswires and Nikkei survey, though it was still 22.9% below the year-ago level.

Alongside Japan, many developed economies are showing some rebound in industrial production, a measure of physical output.

Wow, Japan is really experiencing a rebound in factory output. However, looking back a little farther back in time, one really sees how low is industrial output. At the trough (February 2009 for Japan), production fell back to levels not seen since:

• 1998 in the US
• 1992 in the UK
• 1997 in Canada
• 1999 in Germany
• 1987 in Italy
• 1983 in Japan

Yup, Japan’s down hard. It’s gonna take a huge push in demand to get production levels back.

Rebecca Wilder

The Cash For Clunkers program represented a new wave of American thinking: let’s get the bottom tail of the fuel-efficient autos distribution off the road. Scrap the environmentally unfriendly clunkers. Although the program did get the auto inventory moving, did it really scrap the worst of the worst?

This is a sample of 6, but it seems to me that the car most worthy of scrapping did not get scrapped. Was it the objective of Congress to scrap the marginal clunkers? Well, if it was, then they succeeded (again, in this sample size of 6). According to CNNMoney, here is what the proud owner of 1983 GMC Vandura (11 mpg), pictured above, said about his/her experience:

My smoke-belching, fuel-guzzling diesel van doesn’t qualify for Cash for Clunkers. I have insurance, current license plates, a safety-inspection sticker… but my van is one year too old to qualify. Is my 1983 van a classic, Congress?

Maybe they consider it too classy to be scrapped and think it should still be running up and down the highways. Well, that’s what I do with it now, and I expect this old thing will be alive and kickin‘ for decades to come.

I don’t know, seems a little off to me.

Rebecca Wilder

Hello loyal News N Economics readers! I will be contributing to Angry Bear; and on those days that I do, I will not post here. However, I will link to the Angry Bear article…just like I am doing here.

Trends in home values: becoming murky

ExRussian

Wow, this post got a lot of attention/criticism on the web (see comments on RGE Economonitor, Investment Postcards from Cape Town, and of course News N Economics). I guess it’s hard to believe that the mortgage buildup over the last decade was financing health care rather than durable-goods consumption.

The chart illustrates annual real spending, as released by the BEA (see data here). The mortgage data comes from the Fed’s Flow of Funds accounts. The BEA is smack in the middle of updating its history, following the comprehensive revisions, and some of the data is truncated at 1995.

I agree, but only to the point that the line dividing types of debt-fueled consumption growth is not clear – consumption was just growing. But I find this chart to be rather remarkable: notice how the trend term for durable-goods consumption growth peaks in the late 1990′s, well before the run up in mortgage debt was established. Services got a bit of a push during the same period, but nothing like durables. And notice the positive correlation between some of the quicker rates of mortgage debt growth and the pace of health care spending.

Obviously this is not a quantitative study, rather a qualitative approach. But it does support the premise that the debt was going, at least in part, to finance health care spending. Frankly, I don’t know why it is so hard to believe. Anecdotally, I have a friend that is just swimming in debt, all on an uninsured week at the hospital.

Rebecca Wilder

I know that it’s a bit cheesy relating the Fed balance sheet to Bob Dylan lyrics, but it just happened. The Fed’s exit strategy is policy talk numero uno these days; but that’s just it, talk. The balance sheet is still growing!

The annual Federal Reserve Bank of Kansas City Economic Policy Symposium is now over, with a list of top-tier talks addressing macroeconomic policy and financial stability. Carl Walsh says that the Fed must raise rates quickly…when the time is right. From the WSJ Real Time Economics blog (I will be looking for Walsh’s paper, as it is not available at this time):

In a paper prepared for a two-day Fed conference here, Mr. Walsh argued that the U.S. must avoid the mistake of the Bank of Japan in lifting rates too soon. The way to do that is to keep rates low past the point at which the economy’s equilibrium, or natural, real rate of interest has risen above zero, he said.

However, once the Fed does start raising the federal-funds rate out of its current record-low range near zero, “it should be increased quickly,” Mr. Walsh argued. “There is no support for raising rates at a gradual pace once the zero rate policy is ended.”

Well, raising rates (i.e., grow the fed funds target in order to target higher long-term rates) is the last thing on the Fed’s plate right now with the reserve credit ex currency swaps trajectory still very much upward.

The chart illustrates the accumulated growth rate of reserve bank credit indexed to September 2008 (i.e., 2 implies that bank credit is double that what it was in September). On the surface, the Fed appears to be in a holding pattern, with reserve bank credit peaking in December 2008 and relatively flat since then (around $2 trillion). But the foreign currency swap lines of credit are masking the true trend in the balance sheet. At the beginning of the year, the Fed held $543 billion in assets related to currency swaps, and these holdings have dwindled to just $69 billion (see the Fed’s current balance sheet here).

Ben Bernanke noted the importance of this program in Jackson Hole on Friday:

During this period, foreign commercial banks were a source of heavy demand for U.S. dollar funding, thereby putting additional strain on global bank funding markets, including U.S. markets, and further squeezing credit availability in the United States. To address this problem, the Federal Reserve expanded the temporary swap lines that had been established earlier with the European Central Bank (ECB) and the Swiss National Bank, and established new temporary swap lines with seven other central banks in September and five more in late October, including four in emerging market economies.6 In further coordinated action, on October 8, the Federal Reserve and five other major central banks simultaneously cut their policy rates by 50 basis points.

The Fed is still beefing up, rather than unwinding, its balance sheet. Discussing its exit is prudent, but far from a reality given that the recovery is still up for debate (see David Altig’s post at Macroblog relating the speed of the recovery to the estimated output gap).

Rebecca Wilder

The Bank of Canada, Bank of England, and European Central Bank set short-term rates in order to achieve a medium-term inflation target of around 2%: 1%-3% at the BoC, 2% at the BoE, and 2% at the ECB. The Fed, although it has no such target explicitly listed in as a policy objective (its mandate is to promote high employment, stable prices, and moderate long-term interest rates), has listed the “central tendency” of the FOMC’s inflation projection, i.e., what the Committee would deem a target; that central tendency is 1.7-2.0%. Sounds reasonable, right? Probably not, given its history.

The chart illustrates the annual inflation rate in the US, UK, Canada, and across the Eurozone 15 countries. The series are volatile, so I included a polynomial trend line for clarification.

In the last five years, the US annual inflation rate averaged 3.0%. And over a longer period, 1992-2008, the annual inflation rate averaged 2.5%. Accordingly, the Fed does not regularly meet this “target” (unless productivity dropped inflation, like it did in the early 2000’s). But the BoC and the UK are very good at targeting inflation, with average annual inflation equal to 1.86% and 1.96%, respectively, spanning the years 1992-2008. On the other hand, the EU (15) – admittedly, the data is truncated at 2006 but the ranking still holds if average rates are compared through 2006 – missed its target by 0.2% (2.2% average annual inflation rate).

So who’s the best at targeting inflation? Here’s the ranking, with a tie for first place:

First: BoC and BoE
Second: ECB
(Distant) Third: Fed

Rebecca Wilder

Since the G7 have now reported Q2 2009 GDP, except for Canada who doesn’t go through the excruciating process of multiple release dates for the same GDP report, I decided to update my really scary charts series (name stolen from the Financial Ninja) for G7 growth. And I see a high degree of synchronization during this Great Global Recession.

One would think that this is always what it’s like during a global recession. This made me think of the IMF’s April World Economic Report, which described global recessions in detail, as indicated in the IMF Survey report:

In addition to the current cycle, there were three other episodes of highly synchronized recessions: 1975, 1980, and 1992. These recessions were on average longer and deeper. Distinct from other episodes, the recoveries from these recessions feature much weaker export growth, especially if the United States is also in recession.

Yeah right, highly synchronized. Actually, this recession is redefining synchronized GDP growth. Look at the degree (or lack of) correlation among the same series, ex Germany, spanning the years 1980-1983. There is a 6-country dip in Q2 1980 (the IMF global recession). However, the rebound during the 1983 recovery – when the US (roughly 25% of global GDP) clawed its way back from 2 recessions in 3 years – appears to be more synchronized than the dip in 1980.

Yup, this one’s been bad.

Rebecca Wilder

Today I plan to rant just a bit about consumption because I was reading Yyves Smith’s article today, and she referred to “debt-fueled consumption” – the now pejorative phrase that just rolls off the tongue. She says:

“no where does the article [referenced WSJ article in her post on the consumption share] acknowledge that the consumption level was unsustainable and debt fueled.”

And this is where I get just slightly irked, because it seems to me that the phrase “debt-fueled consumption” strikes the following cord: every American household was loading up on home equity debt just to buy big ticket items like Hummers and large sofa sets with cup-holders galore from Jordan’s Furniture (a discount furniture shop in the Boston area – generically, every city has one).

I am sure that Yyves Smith knows this, but the debt-fueled consumption was more likely paying surging health care bills than buying cute kitchenettes.

Myth 1: The years of debt-fueled consumption went into goods spending, jumping the consumption share of GDP to an excess of 70%.

Reality: The goods share of total consumption has been falling quite dramatically, while the service component surged. Therefore, it is more likely that the debt fueled consumption was going predominantly into the service component (paying service bills).

In Q2 2009, 25% of service spending went to health care – outpatient services (physician, drugs, dentist) or hospital and nursing home services – and 29% of service spending went to housing and utilities – rent, water, electricity, and trash. As such, over 50% of service consumption is more likely to remain stable, even rise faster, with the Boomers out there.

And as for the speculation that workers are postponing retirement due the drop-off in wealth, and consumption will be meager into the medium term, I simply don’t buy it. If anything, the aging population is going to fuel recovery – no matter when they choose to retire. Service sector consumption growth – much of it based on health care consumption – will simply become a larger share of GDP growth (cutting out autos, perhaps), and pick up some of the slack.

And here’s another thing. Myth 2: durables consumption – i.e., autos and furniture – are important contributors to the initial stages of the recovery. It helps, but service consumption is the biggie.

The chart lists the average contribution each GDP component during the initial year of recovery spanning the 1950-2007 (nine recoveries in total).

Reality: The average growth accumulated during the initial stages of recovery (1-yr following the recession’s end) following the last nine recessions is a remarkable 6.43% (consensus forecast for growth in 2010 is currently 2.3%). Only 0.47% of that came from durable goods. A huge 1.67% of that stemmed from the service component of consumption (again, health care and housing).

And as long as service spending rebounds, so too will the economy – even without a big pickup in autos. Inventories are almost a foregone conclusion, the residential construction sector is bound to pick up – 500-600k units is simply unsustainable for a US population that is growing at roughly 1% a year, and growth rates on such a small base can be large.

And here’s another link to jobs that has not been incorporated to many forecasts – growth in jobs means new health care insurance, means added spending on health care.

I could go on, but I won’t.

Rebecca Wilder

Business excellence is an ideal that all good entrepreneurs strive to achieve. In fact, many organizations are devoted to honoring those businesses that best exemplify this concept. However, business excellence cannot be strictly defined. Rather, it varies from one industry to another. For example, in the automotive industry, business excellence includes customer commitment, quality control, efficient supply, and innovative management.

Leaders in the car industry understand the need to form a strong bond with customers. Perhaps more than other sectors, consumers are more likely to make a decision regarding an automobile purchase based upon their experience with those in the industry. Thus, entrepreneurs need to be concerned with two key features relating to customer commitment. The first is meeting the needs of the consumer, financially and socially. People need automobiles that meet their economic means. This not only means getting a good initial purchase price, but also finding a vehicle that will require minimal repair and maintenance down the road. Consumers also want to purchase automobiles that will not require excess money to be spent on fuel. Therefore, business excellence includes finding more cost-efficient production and distribution processes, and subsequently passing these savings on to the consumer.

The second aspect of customer commitment is meeting societal needs and desires. This means staying informed of what vehicle features are most critical to consumers. Such information can be garnered using formal surveys and demographic research. Once you understand the buyer, you are more capable of catering to him or her. For example, people in some regions are especially concerned with the environmental impact of their purchases. Thus, the automobile industry would need to show those people they are committed to using recycled materials and alternative fuels. Additionally, many consumers want family vehicles that are safe and comfortable for children. Therefore, excellent automobile entrepreneurs will focus their attention on crash test results and extra amenities.

In addition to customer commitment, business excellence must include exceptional quality control measures. This means ensuring that car vehicles are safe and easy to maintain. Appropriate testing should be undertaken for each new product model, and the results of these assessments need to be made public in a timely manner. Additionally, individual dealerships should take care to ensure every vehicle is inspected prior to sale and stored under ideal conditions prior to purchase.

Efficient supply is an aspect of business excellence that is frequently overlooked. The balance between supply and demand is vital to the automotive industry. Producing too many vehicles can lead to severely diminished profits. It can also lead to a waste of resources that could have been better utilized for vehicles more likely to be purchased. Meanwhile, a supply that is too short can cause companies to lose customers. When an individual needs to purchase a vehicle, he or she may not be able to wait any extensive period for a desired product to come into supply. As a result, they will simply find an alternative automobile to purchase.

Finally, business excellence in the car industry requires innovative management. There are several parties involved in the manufacture and distribution of vehicles, and financial as well as labor resources need to be managed from the top down as well as controlled on a micro-level. Thus, not only do large factories need to communicate with business executives and the dealerships that asses supply, but individual sales representatives need to be appropriately trained and supervised at each individual dealership.

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Are we going to see a surge in home sales at the end of the year? With the tax credit expiring, that is effectively an expected increase in the price of a home (all else equal). Hmm…I am a first time homebuyer (I personally am not, but let’s use the abstract version of “I”), the news about the economy is “less dire more hopeful”, and I see a subsidy expiring. What do I do? The LA Times is advising you to get on the ball, and buy that home before November 30:

Reporting from Washington – First-time home buyers had better get a move on if they hope to take advantage of the $8,000 federal tax credit. The window of opportunity is closing rapidly.

To qualify for the credit, any transaction involving a first-time buyer must close before midnight Nov. 30, when the valuable tax benefit expires. And because the buying and lending processes can be slow, you’re going to need every bit of that time to close escrow.

Although the end of November might seem a long way off, Diane Dilzell, president of the New Jersey Assn. of Realtors, rightly points out that it takes weeks, if not months, to manage the logistics involved in a real estate transaction. It’s also important to realize that any of a number of things can go haywire along the way.

Will we see a big surge in November existing home sales? Possibly – even likely – that certainly is not a “seasonal” thing.

Rebecca Wilder