bizzXceleration: Performance, Value and Profit

 

Employment: Structure Outlook & Surprises

Which brings us to something else we've waxed on about but want to highlight as it's central, and that's the strategic and structural outlook for employment as well as the current situation. The last Payroll report surprised by showing Unemployment was nearing 10% and indicating that it soon would be as well as implying that job recovery would take a terrible long time. The jobs picture has surprised everybody to some extent though all the expectations were for a bad result it's worse than anticipated though it IS following the standard patterns. The top sub-chart is drawn from Greg Mankiw and shows the expected pattern with and without the stimulus package. As you can it was worse earlier in the year, got much worse recently and is beginning to level off at a higher than anticipated rate.

The stimulus package and monetary policy did their job and the situation is much better than it would have been BUT that's not saying much. A major part of the problem is continuing credit rationing, another is the beginning of large-scale structural shifts between sectors and another is business uncertainty about the duration of weak demand and business decisions about hiring. The structural shift part is important, messy and complicated. Normally as the economy cycles up and down the allocation of people and resources between sectors isn't changed much but with the over-investment in housing and other sectors those resources are being displaced. That takes time and is subject to a lot of friction. On the bottom when you add in the under-employed there are 10 openings for every job - which tells you how serious the situation is, how weak the economy is and how long it's going to take to get out of this.

Credit, Debt and Secular Changes

The next chart highlights some other aspects of the deeper changes that will take the rest of this decade to work out. The bottom shows the current state of Consumer Credit, as well as history. A topic we've invested some time and effort on exploring in earlier posts (even triggering a WSJ story on the subject!).

As we found earlier credit didn't grow appreciably until de-regulation and then accelerated in the '90s and bubbled this decade when it fell off a cliff. Given the condition of the banks with bad balance sheets, more loan losses, toxic assets to be written down, etc. etc. none of this should be a surprise. Nonetheless it tells us that for the short- and intermediate-term there will be NO debt-driven surge in consumer demand; as if we didn't already know that from the jobs indicators.

Then we get to the Net Worth problem. People were more badly hurt by this collapse than have been since the Great Depression. It's also unlikely that the majority of the population will ever recover. What made people comfortable with those huge surges in debt was that their apparent net worths would support the debt (or so they thought). Now consumers will be focusing on repairing their balance sheets as much or more than the banks. Or, put another way, we're going to be forced to re-discover frugality which means that we're going to become more of a nation of savers, not spenders. Another drag on demand growth!

The Trade Equations: S-I-NX

There's an interesting identity in international economics trade, and when we say identity we mean that it's a definition, not open to interpretative debates and that it governs the economy and trade as much as gravity governs the orbits of the planets and in the same way. It's also grossly mis-understood but it's also felt in every way by everybody every day.

The basic identity starts with the basic economic equation that Output (Y) = Consumption + Government spending + Investment + Exports - Imports. Or in h.s. algebra Y=C+G+I+X-M. Since X-M = Net Exports (NX) and Savings = Y-C-G that means that S=I+NX, or S-I=NX. In words that's Net Savings equals Net Exports. When we import more than we export (NX<0) then Savings is less than Investment (S<I). In other words all that excess spending had to be financed from inflows of foreign money. Turn it around though - if we shift to S>I then NX>0 and we won't be importing Arab oil money or Chinese savings to support our spendthrift ways anymore! This represents a huge...huge...huge structural shift in the world economy, which few are prepared for (if any) and fewer are preparing for as yet.

All of which is captured in the accompanying graphic where the UL sub-chart shows the collapse in trade brought about by the Recession and the UR nets out the impact of oil imports (boy, if we ever wean ourselves!). The bottom two sub-charts trace that history back to 1980. Notice that things were largely in-balance until the mid-90s and didn't really get out of whack until this decade. What that really tells us is that this wasn't some vast conspiracy but the natural, algebraic outcome of our debt-fueled over-consumption. As we continue to maintain a more frugal posture that'll lower the trade deficits and take a lot of the structural pressures off the dollar. BtW - it's also important to note that almost nobody is talking about these things, even though they're as natural as the tides (also the result of gravity!).

Structural Changes in Other Countries

The American consumer has been the driving engine of world economic growth for close to three decades now and Japan, Taiwan, South Korea and the Asian Tigers based their economies on an export-driven model of development. As has Germany and especially China. When you hear folks talking about a re-balancing of the world economy they're talking about two things. Those countries will have to either shift toward a more domestically-based and consumer-led economic structure or they will face severe and dramatic downshifts in their economic growth. That, in turn, implies huge structural shifts in their economies.

If we can take the case of China this graphic illustrates the situation and challenges pretty well. While Chinese consumption has been growing very rapidly it's a small part of their economy - the smallest part of any of the large economies. For them to continue to grow that'll have to change. Or, looking at the bottom sub-chart, what we're implying is that Chinese consumption will have to evolve from being 4% of growth to perhaps 6%, or more. Actually it's more strigent than that - it will evolve the real question is what will be the adjustment mechanism. Will it be a drop in overall Chinese economic growth or will it be a major structural shift to emphasize domestic production for domestic consumption?

On the answer to that question depends the economic outlook for the world economy over the next ten years and beyond. A failure to cross that barrier will result in political instability that would threaten the viability of the Chinese state. The good news is that they're well aware of the fact and are beginning to move in that direction. The bad news is that it will be difficult and take some time.

Debt, Government Spending and Finance

Another shibboleth (an icon that people use to recognize membership in the in group but really meaning an old way of thinking that people uncritically worship without recognizing how the world has changed) is all the sturm und drang you hear about long-term deficits and the crowding out of private investment. As well as the associated one of the inflationary impacts of huge reservoirs of liquidity and the inflation outlook. Let's take that a piece at a time.

In the UL you see the "credit liabilities" of private vs federal borrowing. Consistent with our earlier points private borrowing skyrocketed until it collapsed while Federal borrowing gradually went down in the '90s. Now they've displaced one another. Federal borrowing is, right now and for the next several years, the only thing holding the economy together and is NOT displacing private borrowing. And with the slow growth and a shift to savings the demand won't grow as it might have in the past, plus there'll be more domestic savings to provide funding. That'll be offset somewhat by decreased inflows of funds from abroad of course. In the UR chart you see the surge in Fed liquidity flows but, bearing in mind excess reserves are what the banks hold on the Fed's books and don't put in circulation, those flows aren't getting into the economy. If they do and aren't sopped up there might be a problem but, again, a problem which the Fed is well aware of, is not a problem now and won't be for quite a while and one which they are preparing to deal with. Another shibboleth bites the dust. Which is directly reflected in the LR sub-chart where the stock of money is actually shrinking!

The final shibbolethic worry is the "huge" federal deficits that are going to destroy the future of the country. As a side note the biggest problem is Medicare, which would (one would think) lead to a massive surge in conservative support for Healthcare reform but...anyway. The LL sub-chart shows the Federal deficit back to 1950 and ahead to 2020. There's clearly a surge right now and the questions would be what's the alternatives and how bad would it be otherwise? The other interesting thing to note is that the prior biggest surges were under Reagan and BushII, while it was actually paid down to a surplus under Clinton. The final de-shibbolething should be to notice that the going forward projections after we get thru the Recession aren't that far out of line with the Reagan spending. Though admittedly they're projected to stay relatively level and that's not a good thing, but it's also not unaffordable or intolerable. We covered the other side of that coin in discussing fiscal policy btw (Realities vs Rhetorics: Economy, Policy, Real Data). On the whole we're in pretty good shape and NOT facing the kind of really deep adjustments that ALL the rest of the world is facing. Secular changes, yes. Not a complete re-engineering of the fundamental structure of the economy!

Kipling's Friends and the Outlook

The good news is that the awareness of our needing to wrestle with these issues is growing. Ultimately, as we discussed several times previously (Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness), as the US shifts from a dis-saving to a savings economy we will free up more funding for investment in productivity and economic growth. The process will not be easy, short or painless of course. But it should be some small consolation that the periods of highest growth in the US were pre-deregulation when savings and investment were at their highest. There was an interesting discussion on Morning Joe that shows the awareness of these issues beginning to creep into the wider consciousness, which is all to the good in our 'umble opinions.

We'll close with two sets of thoughts, the first from our favorite poet, Rudyard Kipling:

I keep six honest serving men

 (They taught me all I knew);

Their names are What and Why and When

 And How and Where and Who.

I send them over land and sea,

 I send them east and west;

But after they have worked for me,

 I give them all a rest.

 Or put another way, be sure when you're reading the next headline, listening to the next talking head and preparing to sacrifice the burnt offerrings of your savings to some of their shibboleths that you've asked your six serving-men to take more than a simple look at the realities behind those mythologies and ask for proof. You don't have to like, or agree, with our answers. But the ones you're getting cheap and easy are going to be more expensive than you think in the long-run.

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 Economy: Outlook, Employment & Sales

The Shoals of Depression Have Been Avoided, but the Economy Still Faces Strong Headwinds The recovery has commenced.

1. Balance sheet repair by financial institutions and households will restrain the pace of the recovery through 2010.
2. Because the recovery will be muted initially, the unemployment rate is likely to continue rising through the first half of 2010, perhaps peaking out at a level over 10-1/2%.
3. The sharp increase in Fed credit is not currentlyi nflationary, but has the potential to be if the Fed does not neutralize this credit at the appropriate time.
4. The earliest the Fed is likely to begin “neutralizing” the credit it has created is midyear 2010 and then, only tentatively.

• Most economists believe recession is over
• Carlyle’s David Rubenstein: The Recession Is Not Over
• Can Consumer Recover Amid Slow Jobs Growth?
• El-Erian `New Normal' May Beat Summers `Rocket Ship' in Economic Reports
• Crisis Leaves Europe in Slow Lane
• Will stimulating nominal aggregate demand solve our problems?

The Workweek in “Jobless Recoveries” The current upswing in economic activity is most likely to be the third “jobless recovery” following the 1991 and 2001 economic recoveries when employment growth was subpar for several months after the official recovery commenced. The reduction in the duration of the average workweek is standing out in recent employment reports. Historically, the workweek has shown a downward trend for several decades (see chart 1). In September 2009, the average workweek dipped to 33 hours, a record low, a similar reading was also seen in June 2009. Following the trough of the 1990-1991 recession, the workweek rose to 34.6 hours from 34.0 hours even as employment conditions were sluggish. By contrast, in the 2001 recovery and early stages of the expansion phase, the workweek continued to decline after economic activity gathered strength (see chart 2). More recently, the work week was 33.8 hours in December 2007 (the official designation when the recession commenced) and declined to 33 hours in September. In addition, the number of part-time workers for economic reasons (involuntary part-time status) is at a record high (see chart 3). The record low reading of the workweek and the abundance of part-time employment allows firms to extend the workweek and/or change the employment status of part-time employees as demand conditions improve before they can increase payroll employment. The absence of hiring in the coming months should be viewed in light of these aspects of the labor market conditions.

• Labor Force Shrinkage
• 10.9 People Unemployed per Job Opening
• Job competition toughest since recession began

The Lost Generation Bright, eager—and unwanted. While unemployment is ravaging just about every part of the global workforce, the most enduring harm is being done to young people who can't grab onto the first rung of the career ladder. Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago. For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods. Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.

• Costs of Employment Up... Just Not in Wage Form

Many retailers report September sales declines The nation's stores saw their first sales gain in 14 months in September, a sign of life from shoppers that fuels some hope for the holiday shopping season. A late Labor Day and delayed school openings helped boost back-to-school sales in September. And stores' figures are looking better as they are compared last September when spending plummeted amid the ballooning financial meltdown. But analysts dissecting the figures say they feel encouraged by Thursday's reports even as they acknowledge that business still remains weak and consumers tight-fisted. "Let the retail recovery begin," said Michael P. Niemira, chief economist at International Council of Shopping Centers. "This is the start of a better performance and better fundamentals." The International Council of Shopping Centers-Goldman Sachs preliminary tally registered an increase of 0.1 percent for September, compared with a 1.0 percent drop a year ago. While still tepid, the results mark the first gain since July 2008, when the index was up 1.3 percent. The tally is based on sales at stores opened at least a year and are considered a key indicator of a retailer's health. The tally excludes Wal-Mart Stores Inc., which stopped reporting monthly sales after it released April results. Stores had struggled with 13 straight months of sales declines, hitting the bottom in November 2008 when sales plummeted 7.7 percent.Niemira had projected a 2 percent drop in sales at stores open at least a year for September. As stores announced their results Thursday, J.C. Penney Co., Macy's Inc., and Target Corp. all reported smaller-than-expected declines in sales at stores open at least a year. Limited Brands Inc., which runs Victoria's Secret and Bath & Body Works, and accessories chain The Buckle Inc. both posted increases for the month. Still, industry worries remain high heading into the holiday shopping season because shoppers, many of whom were afraid to spend a year ago, are now grappling with rising job losses, reduced hours or unavailable credit.

• Sept. Sales Rise: Retailers "Not Dying Anymore - Just in Critical Condition"
• Same Store Sales Rebound.... To 2005 Levels

Economy: Housing

Home Sellers in U.S. Cut Asking Prices by $28 Billion as Recovery Stalled -- U.S. home sellers cut their asking prices by a total of $28.4 billion to attract buyers as the real estate recovery stalled, Trulia Inc. said. The average discount was 10 percent as of Oct. 1, the San Francisco-based real estate data provider said today. Homes listed for more than $2 million were cut the most, with owners taking an average of 14 percent off the original price. Luxury homes accounted for 25 percent of all of the reductions. Sales of existing U.S. homes unexpectedly fell in August for the first time since March, according to the National Association of Realtors, signaling the recovery will be slow to gain speed. The median price dropped 12.5 percent from August 2008. “Consumers have to be slashing the prices of the homes they list,” Pete Flint, chief executive officer of Trulia, said in an interview. There’s a “significant inventory” of homes for sale. “You’re still going to see further price declines before the market stabilizes in 2010.” Half of the 10 states with the highest percentage of discounted homes are in the Northeast: Massachusetts, Rhode Island, Connecticut, New Hampshire and New Jersey. A third of residences for sale in those states were reduced at least once, Trulia said. New York, California and Florida accounted for 35 percent of the total value of price cuts nationally. In Nevada, Idaho, Arizona, Wyoming, Hawaii, Utah and California, sellers have dropped an average of 13 percent off the original price, according to Trulia.

Thirty-Year Mortgage Rates in U.S. Drop to Near-Record 4.87%, Freddie Says Mortgage rates for 30-year fixed U.S. home loans fell for the second consecutive week, pushing borrowing costs to near record lows. The average U.S. 30-year rate dropped to 4.87 percent from 4.94 percent last week. The 15-year rate was 4.33 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Falling rates helped boost home-loan applications last week to the highest level since May. The Mortgage Bankers Association’s index of applications to purchase a home or refinance rose 16 percent. Rates around 5 percent, slumping home prices and a government tax credit for first-time homebuyers are bolstering demand for housing. “We’re not expecting the housing market to come roaring back to anything close to what it was during the boom,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “It’s going to be a long, gradual recovery.” The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. The purchases from Fannie Mae, Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The plan helped drive home loan rates to a record low of 4.78 percent twice in April.

• Ivy Zelman on Housing
• A Bounce? Indeed. A Boom? Not Yet.
• Foreclosures Movin' on Up or Euphoria Express?
• Foreclosures Grow in Housing Market's Top Tiers
• Distressed Sales: Sacramento as Example

Economy: Finance & Credit

Failures of Small Banks Grow, Straining F.D.I.C. A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009. In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank. While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves. Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy. Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red. The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses. The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners. In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.

Banks cutting back on loans to businesses U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts. According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace. The decline in bank lending mostly affects smaller businesses. Larger corporations have alternative sources of funding, including retained earnings, corporate bonds, securitized loans and new equity. Those other sources of capital have increased in recent months, but not enough to offset the decline in bank lending. In the first and second quarters, the U.S. private sector consumed more capital than it raised for the first time in more than 60 years. Negative net investment is "the hallmark of depression and difficult to reverse," said economist Leigh Skene of Lombard Street Research. The big drop in credit also shows up as slower money growth. In the past 13 weeks, the money supply has fallen 0.3%. Most new money is created by borrowing, as banks credit the borrower's account with the proceeds of a loan. Conversely, the money supply is reduced when debts are paid off or written off. Deflation is not a threat -- it's already here. The question is whether the decline in lending will be reversed soon. If the drop-off in lending is mainly due to weak demand by businesses, then there's some hope that the recent upward momentum in industrial output and sales could lead to more optimistic business sentiment, greater demand for capital, and more lending by banks. But if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.

• Writedowns on Mortgage-Collection Servicing Make Even JPMorgan Vulnerable
• Bank Earnings to Offer Scant Relief
• The madness of the monetary hawks (wonkish)
• Prospects for a small business-fueled employment recovery
• Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness
• Moscow, Stalingrad, Kursk: Edge of the Abyss to "Recovery"?

Trade and Re-balancing to Oil/Energy

The IMF warns about surplus countries and global imbalances The IMF seems increasingly to be agreeing with the “global imbalances” analysis of the economy, probably to the dismay of China and other surplus countries. Early in the report it says: To complement efforts to repair the supply side of economies, there must also be adjustments in the pattern of global demand in order to sustain a strong recovery. Specifically, many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand and imports. The interesting thing for me was this focus on surplus countries. Although there does seem to be an economic rebound, the report says, the recovery will be weak unless countries with large trade surpluses step up domestic demand. To keep growth up, surplus countries like China must boost domestic spending, and appreciate their currencies. This pretty tough claim will probably not make Beijing, Berlin or Tokyo very happy, although it does chime with US views on global trade imbalances. In their own words: To complement efforts to repair the supply side of economies, there must also be adjustments in the pattern of global demand in order to sustain a strong recovery. Specifically, many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand—notably emerging economies in Asia and elsewhere and Germany and Japan. For those of us who worry about China’s having recently increased its already-excessively-high investment rate, this passage was an uncomfortable read. In addition for people like me, who believe strongly that the very process of misallocated investment will act as a damper on future consumption growth (and I think this is becoming much more widely accepted, or at least discussed, in policy circles), the combination of warnings over overinvestment and pleas for more consumption from trade surplus countries is deeply worrying. The truth is everyone in the world is against the creation of “excess” capacity, but as long as Beijing has in place policies that explicitly subsidize investment and production, it will take an awful low more than fulminating against wasteful investment to eliminate it. I would argue that wasteful investment is the automatic consequence of policies that lower the cost of capital to “unreasonable” levels, implicitly socialize risk, and otherwise subsidize producers in the name of boosting employment. Since Beijing has very explicitly chosen to attack rising unemployment in the short term – probably wisely, although also probably more ferociously than was optimal – there is little they can do to prevent a massive rise in wasteful investment. You cannot take an economy with the highest investment rate in history, and already massive waste, and very quickly force investment rates up even higher, without also increasing waste. The problem with all this wasted investment, of course, is that someone must pay for it, and that “someone” will undoubtedly be Chinese households, who will then almost certainly go on to disappoint us by failing to splurge on consumption.

• Currency depreciation and global imbalances

Does Asia's Economic Rebound Signal the Return to Stellar Growth? Asian economies rebounded in Q2 2009 as aggressive monetary and fiscal stimuli cushioned domestic demand and quick inventory adjustment eased the downturn in industrial production. Capital inflows have buoyed the asset markets and net exports have contributed to GDP growth as imports have contracted faster than exports. However, policy measures are inadequate to close the output gap emanating from sluggish private demand and sharp export contraction. All Asian economies will slow sharply in 2009 and grow below potential in 2010. RGE forecasts Asia to grow a mere 2.6 % in 2009 and 5.4% in 2010. Asia ex-Japan (AXJ) will grow 4.9% in 2009 and 6.6% in 2010. As the impact of policy measures fade in 2010, the pace of Asia’s recovery will hinge on the recovery of global export demand and continued risk appetite. RGE projects that Japan will contract sharply in 2009 and grow below 1.0% in 2010. Fiscal stimulus will push China’s growth to over 8.0% during 2009 and 2010. India will grow less than 6.0% in 2009 and below potential in 2010. The Asian Tigers (Singapore, Taiwan and Hong Kong), Thailand, Malaysia and New Zealand will contract in 2009 while the contraction in South Korea will be mild and Australia will barely grow. The Philippines, Indonesia, Vietnam, Pakistan and Sri Lanka will slow sharply in 2009. Unlike 1997 or 2001, Asia cannot employ an export-led strategy to drive the economic recovery. As consumers in the advanced economies deleverage over the next few years and foreign direct investment (FDI) recovers slowly, attaining the pre-crisis GDP growth rates in Asian countries will largely depend on the governments' ability to rebalance growth towards domestic demand and accelerate structural reforms. Under RGE’s baseline scenario, the U.S. economy will have a U-shaped recovery with anemic GDP growth and consumer deleveraging over the next few years. In that case, Asia, too, will have a U-shaped recovery. While Asia might have a stronger rebound compared to other regions, the strength of the recovery will vary across countries. Economies highly dependent on exports, such as Japan, the Asian Tigers and Malaysia, might witness a slower recovery and will take longer to go back to the pre-crisis growth rates. Countries with larger domestic demand, attractive asset markets, greater policy space and/or faster reforms, such as China, India, Indonesia, Vietnam and the Philippines, might witness a stronger recovery.

As Americans Stop Buying, Trade Deficit Declines Dire warnings about the need for Americans to save more and spend less didn’t work. Nagging China, Japan and Germany to buy more American products didn’t work. No matter how much economists and political leaders warned about huge global trade imbalances and the astronomical foreign debt of the United States, American consumers kept buying more and borrowing more from the rest of the world. Until the financial crisis, that is. In a striking case of shock therapy, global trade imbalances have declined by almost half since the financial system nearly collapsed one year ago. On Friday, the Commerce Department reported that the trade deficit of the United States shrank by another $1.2 billion in  August, to $30.7 billion. American exports edged up to $128.2 billion and imports declined slightly to $158.9 billion. But the real news is the change from one year ago. For the first eight months of the year, the United States trade deficit with China is down by about 14 percent or $20 billion, compared with one year ago. The nation’s trade deficit with Japan has shrunk by almost 20 percent, and its deficits with Mexico, Canada and the European Union are down more than 40 percent. The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal. And even though the economy is beginning to recover, economists say the global trade shift still has some distance to go. The value of the dollar, which has been falling sharply, will make imports more expensive and restrain American appetites for at least the next year. All of which raises a question: is the free market suddenly imposing the kind of brutal rebalancing that global political leaders, for all their pronouncements and handwringing, never came close to achieving?

Trade Turnaround: Can It Last? Evidence that world trade is turning up is proliferating. Data released in late September by the Netherlands Bureau for Economic Policy Analysis showed that total trade volumes grew 3.5% between from June to July, the biggest increase in a month since December of 2003. Their survey, which yields the earliest data on trade trends is based on data provided by the governments of 23 developed economies and 60 developing economies. Still, trade volumes were still 15.9% off their high in April 2008. And there are widespread worries about the strength and durability of the upturn. In Germany, particularly reliant on exports,  there is widespread concern among companies  that the emerging recovery is dependent on government economic stimulus policies that are due to run out next year in many countries. That could mean the export recovery slows or stagnates. Asian exports also are enjoying demand from China, whose massive stimulus package has spurred demand, but the strength and sustainability of the trade rebound is unclear. Both Korea and Taiwan saw some strength in exporting goods to China, and reported encouraging trade figures in September over August, continuing a trend that has built steadily over the summer. The value of Korea’s trade in September increased 11.1% from August, led by sharp increases in exports of semiconductors, autos and liquid crystal displays. But for a genuine trade recovery to happen, economists say a robust renewal in trade will have to come from Europe, the U.S. and Japan, whose economies together make up much of the world’s demand for goods.  An analysis of trade data by Goldman Sachs found that Taiwan in recent months has seen increased month-on-month demand for its goods — especially semiconductors — from Europe and the U.S.  September Taiwan exports to Europe were up 6.8%, seasonally adjusted, the fourth month in a row. Exports to the U.S. was up 6.9% after a 2.2% drop in August. Even modest change in growth in the West acts as a powerful multiplier on China’s export sector — in good times and bad. For every 1% change in GDP in the U.S., E.U. and Japan, Chinese exports move seven percentage points, Mr. Ma says. That phenomenon hammered China’s export economy when the economy in the West stumbled last year. It will help revive trade on the way up. Investors betting on the trade rebound are piling into stocks related to the export sector. Some analysts are skeptical that the recovery in trade will be sustainable once businesses restock depleted inventories and the oomph of fiscal and monetary stimulus fades. Most investors will first be shocked by the sharp pick-up in Chinese exports heading later into this year and early next year, but then surprised by how quick the momentum will disappear,” Vincent Chan, head of research for China at Credit Suisse wrote in a recent note.

• Paul Krugman: In Trade, 'It's Not the Great Depression -- It's Worse'
• A Tale of Two Depressions

Working harder and harder to keep oil production from falling The challenges for private oil companies to increase oil production are pretty daunting.ExxonMobil (XOM) has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade. The dark blue line in the figure below shows the company's production each year since 1999. Four years ago, Stuart Staniford noted that ExxonMobil's 2001 annual report predicted 3% annual growth in production between 2001 and 2007. That projection appears as the red line in the graph below; didn't quite come out as planned. Stuart's theory was that the company correctly predicted the contribution of its new discoveries, but underestimated the declining production rates from mature fields.ExxonMobil again predicted in 2006 that it could achieve 3% annual growth over 2006-2011. I've shown that forecast as the lighter blue line in the figure. We still have two more years to make that one right, I suppose.But what else is the company to do? It's not like they haven't tried to take advantage of Russia's or Venezuela's strong commitment to protect foreign investors or the peaceful aspirations of Nigerian rebels. Chevron (CVX) and many other companies are finding clever new ways to get more oil out of mature U.S. fields. That may well succeed in slowing the rate at which production from those fields declines over time. But to get the plot in the graph above to slope up you really need to develop new fields.The New York Times is encouraged by the "brisk pace of new discoveries" which the paper reports "have totaled about 10 billion barrels in the first half of the year".The Oil Drum, always a party pooper, notes that the world likely consumed that much in the first four months of the year.