Economy (Readings): Surprise, Surprise, That's Not My Rate Cut
Again we're jumping the gun to free up the bandwidth for more interesting stuff and because there's so much which appears to be a cusp point indicator. BtW - if the terrible adolescent schoolyard joke punned on in the title means nothing we're not going to explain it either. But the real surprise is in the latest Fed minutes, encapsulated in the charts at right. Which are really worth contemplating. Particularly since they apparantly cratered the markets today by telling the truth about the economic outlook.
Let's start with the graphic showing the ranges and trends of estimates. While the Fed isn't expecting an outright recession in '08 it is projecting very low growth and, at best, a U-shaped, slow recovery with sub-par growth in '09 and middlin fair in '10. Accompanied by relatively high inflation and increased unemployment until the the latter and a slowing economy bring down the former. There are however some problems with and exposures with those expectations that we'll get into and are reinforced in the excerpts.
But let's take a look at the specific numbers in the outlook tables - which are really interesting for
the downward revisions, or should we say much more pessimistic, between these minutes and last Dec. Take a careful look as you get a sense of what kind of U the Fed's expecting and what they were expecting. Growth has been revised significantly downard in '08 while both unemployment and inflation have been revised significantly upward in '08 and '09. The return to relatively benign conditions '10 may be a bit of whistling past the graveyard but isn't unreasonable. At least on a traditional view of things.
The real surprise here is how surprised the markets were at these numbers since they aren't a) far off those from the last meeting nor b) unreasonble in light of the consistently weak economic numbers we've been seeing. At least when you look thru the headlines. Maybe the real tell here is how much people were fantasizing to themselves that indeed the worst was over and the recovery was easily in sight. Just to knock a couple of the common shibboleths on their respective heads we have indeed past thru the crisis of the market breakdowns but that moves into a real credit crunch where loan standards continue to be tightened further slowing the economy. And conversely increasing bad loans as well as spreading credit losses, e.g. car loans, commercial real estate, credit cards, etc. etc. will feedback. All "perfectly" natural characteristics of a normal business cycle. Of which we're in the early stages as yet - the "dude, where's my recession ?" meme is so ill-informed in terms of cycle timing, patterns and time lags that the journalist who wrote it should be embarrassed. Which he will be eventually.
After the break you'll find some interesting readings that extend the basic arguments. Part of the problem with the Fed's assumptions is that it's very traditional and well-grounded in history. Unfortunately our domestic monetary policy no longer entirely controls our future given that we've been importing inflation due to structural factors. That really puts the Fed between a rock, a hard place and a rising flood where it needs to maintain or raise rates to contain inflation and defend the dollar. At the same time China, which previously exported deflation, is now reversing because of its' own structural changes.
There are two readings to particularly draw your attention to. One is the "Six Signs of a Rebound" which we include to indulge our sense of twisted humor rather than endorse. The other is about a longer-term outlook, sans all these downside structural and cyclic risks, for an extended period of sub-par growth. That one is really worth thinking about IOHO.
Economic Assessment
Fed: Slower Growth, Higher Unemployment in '08 The Federal Reserve on Wednesday sharply lowered its projection for economic growth this year, citing blows from the housing and credit debacles along with zooming energy prices. It also expects higher unemployment and inflation. Fed officials viewed economic activity "as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year," the documents stated. Under its new economic forecast, the Fed said it now believes gross domestic product will grow between just 0.3 percent to 1.2 percent this year. That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 percent and 2 percent. With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.5 percent and 5.7 percent this year. That is higher than the central bank's old forecast for the rate to climb as high as 5.3 percent. Last year, the unemployment rate averaged 4.6 percent. And, with energy prices marching upward, the Fed raised its projection for inflation. The Fed now expect inflation to be between 3.1 percent and 3.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 2.1 percent to 2.4 percent.
Fed Minutes Say `Most' Officials Viewed April Rate Cut as a `Close Call' Most Federal Reserve officials viewed the decision to cut the benchmark interest rate as ``a close call'' in April, judging risks between weaker growth and faster inflation had become more balanced, the central bank said. ``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' minutes of the April 29-30 Federal Open Market Committee meeting said. ``Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.''
Post-Subprime Economy Means Subpar Growth May Become New Normal for U.S. A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down. Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital. Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages. The bottom line: The U.S. may have to get used to a new definition of normal, characterized by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial-services industry. Long-term growth in the U.S. may drop to 2 percent to 2.5 percent a year from the 3 percent rate of the last 15 years, according to Peter Hooper, chief U.S. economist at Deutsche Bank Securities in New York and a former Federal Reserve official. A record three-quarters of U.S. banks the Fed surveyed in April said they were charging corporate borrowers a higher premium over what the lenders pay for funds. More than half reported tightening lending standards. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University in New York, says the nation is ``in the grip of some structural forces that are moving the economy permanently to a lower level of economic activity, with an unemployment rate somewhere between 5 and 6 percent.'' Unemployment in April was 5 percent.
- The future's not what it used to be The way the stock market's been acting lately, you would think that the threat of a recession is a thing of the past and that global warming has reached the previously frozen financial markets. All of this has led some prominent people both in and out of government to declare that the worst is over. But as that great soothsayer, Yogi Berra, used to say, "it ain't over till it's over." As far as the economy goes, I don't think much has changed, notwithstanding the two-month rise in the index of leading indicators reported on Monday. April's retail sales were weaker than expected, payrolls have fallen for four months in a row and are lower today than they were six months ago, prices of imports are soaring and consumers are more dour now than they've been since the bad old days of 1980.
- Consumers can't save the economy Consumers are too tapped out to lead the economy out of its troubles, according to a report on household credit released Wednesday. And even after things turn around, consumers weighed down by debt won't be able to spend as they did in the past. Americans have little money on hand and banks aren't eager to lend anymore… Consumers had the lowest percentage of unspent cash in the first quarter of 2008 since fall 1991, the report found. Sluggish consumer spending power means that the recovery may be a little slower and less vigorous, leaving it to corporations to spur the economy. It will also take years for consumers to straighten out their household budgets since their debt burdens are near record highs. Americans put 14.3% of their disposable income toward debt in the first quarter, near the record 14.5% reached at the end of 2006. By comparison, the rate was 12.3% in 2000. Before the 1980s, consumer spending made up about 63% of the nation's gross domestic product, a key measure of the economy. Since then, it has grown to about 70% as Americans took on more debt to fuel their buying habits. Going forward, consumer spending will likely drift back to about 67% of GDP, Hoyt said. Americans simply can't sustain a near-zero savings rate and an ever-growing debt load.
Other Indicators: Retail, Commercial Real Estate and a "Joke"
Lowe's signals more uncertainty Commentary: Retailer's pain coming from high food prices and shaky jobs. Both Lowe's and its larger rival Home Depot Inc. rode high in the early part of the century, ringing up robust sales during the booming real-estate market boom. But the free-for-all ended as the real-estate and credit markets dried up, and the easy money that once encouraged consumers to refinance mortgages or take out home-equity lines of credit to remodel has become scarce, leaving many in a bind to finance such projects. Earlier this month, Home Depot ratcheted back its growth plan. . Data to be released this week is expected to show further weakening in home sales and prices, and there's no evidence that the declines are going to moderate. With the market moving in this direction -- and people worried about paying for groceries and gas -- the all-important spring home selling season is shaping up to be pretty dismal and there's no relief in sight.
- Anxious Retail Trends A look at a survey showing the biggest change in consumer priorities, with CNBCs Margaret Brennan
6 signs of an economic rebound By now you've had enough of the endless gloom in today's economic news: record oil prices, slower home sales, deepening loan losses, disappointing corporate earnings. What you're really looking for at this point are a few signs of hope. It's a certainty that the economy, the housing markets and the stock market have to bounce back sooner or later. If you could see that rebound coming, not only could you rest easier about everything from your job to your retirement, you could move forward confidently on all those financial plans you've put on hold until the way seemed clear. You could, maybe, take a chance in the job market. You could think about trading up to a bigger home or downsizing to a place that better suits your needs. And even though you've stood unwavering by your investment strategy as the stock market tumbled - and you have, haven't you? - you could feel good once again about putting your money in something besides a chickenhearted money-market fund. So what are the surefire signs that we're bouncing back? The only honest answer, of course, is that there are no 100% surefire signs. In every cycle there are wild cards that can trump even the best predictions. On the other hand, history shows that some hints of renewal are far more reliable than others. At least one of them is worth watching in every market that matters to you, from stocks to real estate to jobs. Read further to find out where you'll find these harbingers of economic spring, why they work and how you can make the best use of them.
The next building bust Demand for new homes collapsed last year. Next up could be a similar drop in the rest of the construction market -- and that could be the latest drag on an already sputtering U.S. economy. Nonresidential construction, which includes office buildings and retail centers, hotels and institutions such as schools, hospitals or government buildings, remained strong through much of 2007. But a combination of the economic slowdown and tighter credit appears to be putting the brakes on nonresidential projects. Even if work continues on those projects already underway, there are signs that the pipeline of new construction is about to dry up.
Energy
The end of cheap gas: Who's to blame It's hard to imagine now, but in 1999 gasoline sold for 90 cents a gallon. How'd we get from there to $4 a gallon? There is no short answer - many things happened, and together they formed a chain of events from cheap gas to $100 tankfuls. One of the most common reasons cited for the price jump is supply and demand - we are using more oil, which accounts for 70% of the price of gas, and finding less of it. Why we are finding less oil and using more of it is partly a result of the low prices during the 1990s. This was illustrated in September 2005, when Hurricane Katrina knocked out a significant chunk of U.S. refining and gasoline prices spiked above $3 a gallon for the first time ever. A new refinery hasn't been built in the United States in three decades, although capacity at existing refineries has been expanded.
Tanaka Says IEA Planning to Lower Oil Supply Forecasts May 22 (Bloomberg) -- Nobuo Tanaka, executive director of the International Energy Agency, talks with Bloomberg's Nina de Roy from Brussels about oil prices and the outlook for global supply and demand. Crude oil rose to a record above $135 a barrel in New York after U.S. stockpiles unexpectedly dropped and traders closed losing trades on bets that prices would fall. Oil has risen 19 percent this month as analysts have increased their price forecasts because of supply constraints and demand growth.
International
The World's Most Competitive Countries Half of the top 10 are European and the U.S. is still No. 1, but Asia's tigers are coming on strong. Asian economies are overtaking the U.S. and Northern Europe to become the most competitive in the world, according to an annual study by one of Europe's top business schools. The 20th World Competitiveness Yearbook, released May 15 by IMD business school in Lausanne, Switzerland, ranks the U.S. No. 1 for the 15th straight year. But the report's author, professor Stéphane Garelli, expects Singapore to take the top spot next year. The small city-state trails the U.S. by less than seven-tenths of a point in the 2008 rankings. While it still has the world's strongest domestic economy, the U.S. is particularly vulnerable because its financial sector contributes 40% to corporate profits. Meanwhile, Asia has proven relatively immune to the financial crisis gripping the U.S. Garelli says that Asia's roaring economies, led by China, will likely raise their competitive edge relative to the star-spangled superpower and slowing European countries this year. "Asia is discovering that it is not so much the hostage of the American economy, that it can have a life by itself," Garelli says. "They make life difficult for European countries, especially because, let's face it, Europe is suffering from the euro." Among the top 20 economies out of the 55 ranked, those in Asia-Pacific posted the greatest gains compared with last year. Malaysia climbed four spots to No. 19, while Taiwan and Australia each jumped five places to No. 13 and No. 7, respectively. Other strong gains were made by Thailand, which rose six spots to No. 27, and the Philippines, up five to No. 40. Table: The World's Most Competitive Countries 2008
Indian Bond Traders Are Misreading Growth Signs: Andy Mukherjee By the end of the week, there were few takers for the ``bond-bull'' scenario as inflation soared to a new 3 1/2-year high of about 8 percent. The Indian economy is slowing, though not to the extent where it makes sense to go long on bonds. For a start, the paltry 3 percent growth in the industrial- production index during March compared with a year earlier may not be an accurate reflection of real output. For instance, the value of cars and sport-utility vehicles produced annually at Indian factories is three times as large as the output of two- and three-wheelers; still, the latter group is twice as important to the index as the former, Chaudhuri wrote. Manufacturing in India is unlikely to fall off a cliff and certainly not because of a collapse in domestic demand caused by the high cost of capital. Where the drop in performance is most telling -- for instance, in cotton yarn, fabrics and textiles -- the culprit is lackluster foreign demand. The challenge for India is persistent inflation. That's what the currency market also seems to be signaling. The rupee has tumbled more than 10 percent in the past three months, the second-worst performer in Asia after the Korean won. government. Policy makers should enhance the productivity of agriculture. Crop yields are stagnating; small landholders with little marketable surplus are gaining nothing from higher food prices. The other bottleneck to sustaining growth is infrastructure: power, roads, airports and seaports. It has been seven years since India started an ambitious program to build 370,000 kilometers (230,000 miles) of village roads; wherever new roads have been built, the local economy and community have benefited.
China's newest export: Inflation It looks like the United States has seen the end of an amazing period of below-average inflation and above-average economic growth. The gradual integration of China into the global economy gave us those good times. And now it looks like the Chinese economy is going to take them away. For better than 10 years, the U.S. enjoyed the gift of low inflation. From 1993 through 2004, inflation averaged 2.5% a year. That was significantly below the long-term U.S. trend of 3.0% from 1926 through 2008. And it was a welcome relief after the above-trend inflation of 4.8% from 1980 through 1992. Because of low inflation, U.S. interest rates gradually fell during those 10-plus years. Interest on a 30-year mortgage dropped from 8.14% in 1993 to just 5.81% in 2004. Businesses and consumers borrowed that cheap money, with the former spending it on new plants and equipment and the latter on new cars and second homes. Economic growth during those years, discounting the gains from inflation (what's called "real" growth) averaged 3.19% a year, even counting the slump in growth after the 2000 stock market plunge. That was a huge half a percentage point higher than 1980-92's average real growth of 2.69%. The lower-than-expected inflation came from low-wage, low-cost manufacturing countries -- China, India, Vietnam, etc. As more manufacturing (and manufacturing jobs) moved from the U.S., Europe and Japan, these developed economies imported larger quantities of low-cost goods. In addition, manufacturers remaining in the developed economies were able to import cheaper subassemblies and cut the cost of their own products. Economists have dubbed this the Wal-Mart effect. Low prices at Wal-Mart Stores and other big-box discounters had a multiplier effect because low prices at these stores acted to depress competitors' prices. But now it looks like the process has gone into reverse. China is now increasingly exporting inflation