June 12, 2003

A Glass That Is One-Third Full

The Federal Reserve's "beige book" finds that the postwar business cycle-recovery glass is not half full. But there is water in it...

Yahoo! News - Fed Says Economy May Be Near a Rebound : ... The central bank said that four of its 12 districts -- Dallas, Kansas City, New York and Minneapolis -- detected signs of increased economic activity and no district reported further deterioration since the last report in late April. "The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggest that the effect has not been dramatic," the central bank said in its latest survey of business conditions.

The central bank cautioned against reading too much into the scattered signs of a rebound, describing overall activity in many districts as still "sluggish, subpar or subdued." The survey of business conditions, known as the beige book for the color of its cover, will be used by Fed policy-makers when they meet June 24-25 to set interest rates.

Many analysts are convinced that the Fed will cut rates for a 13th time at that meeting in an effort to make sure that the current weak patch the country is going through does not deepen into something worse such as another recession.

The conviction among analysts that the central bank is prepared to reduce its target for the federal funds rate, already at a 41-year low of 1.25 percent, has been strengthened by recent comments made by Fed Chairman Alan Greenspan (news - web sites). He has said the Fed would do whatever is necessary to guard against the remote possibility that economic activity in the United States will slow so much that deflation -- a widespread fall in prices -- could become a problem...

Posted by DeLong at June 12, 2003 05:04 AM | TrackBack

Comments

As I understand it, cutting interest rates will make the dollar weaker and make imports more expensive, thus driving up inflation.

As a world debtor, supported by loans from Japan and Europe the US could end up in a nasty situation where her increasingly cheap exports are dumped on world markets, thus suppressing the manufacturers of the country dumped on. This could lead to a worldwide recession, as manufacturing worldwide goes into a slump.

With no-one to buy her products, and imports increasingly expensive, the US could come out of this recession worse than her competitors, for a change.

But I expect she will engineer an oil price shock, to try to the destroy European and Japanese economies again. When she does so, interest rates to the world's biggest debtor will be jacked up, thus increasing the deficit. Let us hope the US does not do this.

We truly live in interesting times.

Posted by: Larry Lurex on June 12, 2003 07:26 AM

I'm not sure I agree with your analysis. The Fed is down to a half-bullet (half interest rate percentage) to combat deflation. This MIGHT weaken the dollar, but not necessarily since its strength is tied to myriad factors.

My guess is that the FED is really worried that if this rate cut does begin to pick up the economy, they'll be stuck on the sidelines essentially waiting for a mircle.

The central problem still remains: where will demand come from? Obviously a weaker dollar will help overseas demand, but considering the state of Germany and Japan that is my no means assured to be enough (It is scary to think, but it might be economicly rational for them to "undercut" American imports/exports and drive further deflation). The developing world demand isn't doing so great either. In theory, the President's tax cuts might help stimulate national demand, but don't bet on it. In particular, if the additional money simply increases the pools of capital available for investment that won't do much good. We already have excess capacity - so why invest new money in a place unlikely to produce returns?

BTW, and oil shock (by this I think you mean a sharp increase in oil price) would make the whole situation worse, except for OPEC nations.

The Fed report confirms what many of us suspect.

Posted by: SZ on June 12, 2003 09:20 AM

Another 417,000 new unemployment claims last week. Employment cup is running backward. We have lost 3.1 million jobs since March 2001. The losses have slowed, but are still losses. The Administration predicts 5.5 million jobs will be created by December 2004. That is over 325,000 a month.

Oh well, at least our taxes have been cut again.

Posted by: anne on June 12, 2003 09:29 AM

I'm with Anne -- the number of people whom I know who are unemployed make me reluctant to declare a recovery in place until the job situation improves. Every May delivers a fresh onslaught of high school and college graduates to the labor market, and if the economy can't absorb most of them, then we're still in a recession.
I respect the official economic, GDP-based calculations of what is and isn't a recession, but for my purposes (wanting to get my friends to stop whining, and wanting to cut down some of the law school admissions competition) a recession is defined by the number of unemployed -- particularly of the college educated unemployed.

Posted by: PG on June 12, 2003 09:49 AM

http://epinet.org/

Private-sector payrolls are down 260,000 this year and are down by 3.1 million, or 2.8%, since the recession began in March of 2001, the largest percentage decline in any post-WWII recession.

Persistently high unemployment has caught up with wage growth; for the first time since the 1990s, real median earnings fell for the last four quarters in a row.

Posted by: anne on June 12, 2003 10:34 AM

Bloomberg News

Continuing unemployment insurance claims rose to 3.8 million, the highest since the first week of April 1983.

Initial jobless claims totaled 430,000 last week.

Retail sales rose 0.1 percent in May after a 0.3 percent April decline, the Commerce Department reported.

Posted by: jd on June 12, 2003 10:40 AM

Amazing, bond prices just keep going up. All sorts of analysts report the economy is strengthening, but bonds seem to be pricing in a weakening economy. I really do not understand.

Posted by: dahl on June 12, 2003 11:35 AM

Larry:

You are right that easier money tends to devalue the dollar. But there is a benefit - increase net export demand.

Posted by: Hal McClure on June 12, 2003 11:48 AM

dahl: the bond market is saying loud and clear what it really thinks of economic prospects. The LIBOR curve is now inverted 1 year out, believe it or not. The message is very clear.

Posted by: JT on June 12, 2003 01:23 PM

I wish I thought there was some export demand to stimulate. The fears expressed above that lower Dollars will simply drive other major economies further under seems the more rational expectation. If we can't stimulate domestic demand, there probably aren't many prospects offshore.

Posted by: Stan on June 12, 2003 01:29 PM

Agree with Stan - trade balance comes out tomorrow. We'll see if this weaker dollar results in an export rise.

I think exports have fallen in the Bush presidency from about 11% of GDP to 9% of GDP. Under Clinton they rose from 6% of GDP to 11%. So Bush is giving back all the export gains we made through this silliness of steel and agri protectionism. They're trying to stem the bleeding with bilateral trade deals to Chile and Singapore, but its not working thus far.

Posted by: X Man on June 12, 2003 01:37 PM

I'm not sure if this is the right place to bring this up, but an interesting article in the economist online today about the impending death of the American car industry.

http://www.economist.com/opinion/displayStory.cfm?story_id=1842437

For all of the economists out there- first is this likely to occur, and second, the article seems to say that pensions and labor inflexibility are the primary culprit, since the japanese make their US cars in business friendly southern states.

To my mind this may be simplistic. How about the fact that all the US car manufacturers make are SUVs, trucks, and crappy, poorly designed gas guzzlers? The ford focus being an exception, but then again it is a european-designed ford. It has always pained me to see european and world model Fords and GMs do quite well and compete in global markets, and then for the domestic market they make oversized, defect ridden junk for the retirees. Perhaps it has more to do with quality than with labor problems? Or not...

Posted by: non economist on June 12, 2003 02:31 PM

I've been watching the auto industry for a while and thing look bad for the big 3 (big 2 and a german). Toyota and Honda's sales are growing at the same time. Toyota and Honda are not paying as a big an incentive to "move metal" as Detroit is. Toyota and Honda are making bigger cars, such as the Honda Pilot and the Toyota Sequoia. Which leads me to that most sacred of differentiators used against the Japanese, the V8. Several years ago Totoya started selling V8 full-sized trucks. The last bastion of profitability for Detroit (Ford F-150 is the best selling vehicle in the US).
So, while the Big 3 are looking for plants to close down, Toyota is breaking ground on a new plant in San Antonio to build more full size pickups and SUVs. Honda is expanding production in Alabama to build more minivans. Nissan is preparing to introduce its full size pickup.
This article points to cost(supply) issues that are starting to weigh heavily on the Big 3. I''ve just outlined several demand factors that don't look very good either.
The glass in Detroit looks about 2/5's full, with a leak at the bottom and a Japanese straw at the top.....

Posted by: section321 on June 12, 2003 03:01 PM

Oops... edit
Replace

with

Toyota and Honda's sales are growing at the same time Ford and Chrysler's are dropping.

Posted by: section321 on June 12, 2003 03:02 PM

dahl - "All sorts of analysts report the economy is strengthening"

I think they're saying it is "poised" for recovery, not actually recovering yet. Recovery is staying "just around the corner."

I'm worried about all the people buying houses and refinancing to spend their equity. If we are starting deflation, or even if not but we pop the housing bubble, this just increases the number of people who will be wiped out.

Posted by: IssuesGuy on June 12, 2003 03:34 PM

Prediction: There either is something wrong with the dataflow, or it will soon show an amazing turnaround.

What I just saw on a trip from Seattle to Modesto via I-5, with a return trip by plane from San Jose to SeaTac airport, is not consistent with economic doldrums: Heavy truck-trailer traffic going both north and south, crowded airplanes, busy restaurants, rush hour traffic jams, construction activity all over....

My business just broke its sales record for May by 40%, and I'm approaching the record for June before the month is half over. My suppliers are similarly busy and I may not be able to fill all the orders I'm getting.

Then again, maybe I'm the anti-Joe Btfsplk.

Posted by: Patrick R. Sullivan on June 12, 2003 04:17 PM

Demand side stimulus is the best way to stimulate the economy and ease the overcapacity problem. A good start would be a combined payroll tax cut and providing health care. Capital is cheap for the supply side so the deficits should be balanced by increasing taxes at the upper end.

A weaker dollar is good for American jobs and the deflation issue but is only sustainable without huge deficits. A weaker dollar makes huge deficits unaffordable.

The Economist predicts the demise of the US auto industry every 4 years.

Posted by: Dan on June 12, 2003 08:37 PM

"Amazing, bond prices just keep going up. All sorts of analysts report the economy is strengthening, but bonds seem to be pricing in a weakening economy. I really do not understand."

Posted by dahl at June 12, 2003 11:35 AM

Analysts have been playing the 'recovery is just around the corner' song since 9/10/2001, IIRC.

Sooner or later, they'll be correct. In the long run :)

Posted by: Barry on June 13, 2003 04:08 AM

Re: the weaker dollar - import prices (ex-oil) showed a 0.2% fall in May, following a revised 0.9% fall in April. How is this possible? I would have thought exchange-rate effects would overwhelm whatever else is going on there. Is this a sign of how weighted imports are to Asia, and especially China, where there is (obviously) no exchange rate effect at all?

Posted by: Dave Larson on June 13, 2003 04:24 AM

Dave, I assume it shows how little demand there is outside the Anglophone world but I don't have any data to point to.

Posted by: Stan on June 13, 2003 06:38 AM

Patrick R. Sullivan writes:

>Prediction: There either is something wrong with the
>dataflow, or it will soon show an amazing turnaround.
>
>What I just saw on a trip from Seattle to Modesto via I-5,
>with a return trip by plane from San Jose to SeaTac
>airport, is not consistent with economic doldrums: Heavy
>truck-trailer traffic going both north and south, crowded
>airplanes, busy restaurants, rush hour traffic jams,
>construction activity all over....

Well, I'd like to believe this is true. The problem, I guess, is that nothing you point out here is inconsistent with the possibility that unemployment is still rising as long as productivity gains are strong while overall growth is weak. I think everybody can agree that the current situation is very weird. Interest rates are incredibly low, but producer prices are flat to slightly negative. Retail sales are weak, and consumer expectations for future economic conditions are not strong. I think I could believe almost any reasonable story about where the economy is going next, although I'd be a bit surprised to see the kind of growth in employment that the administration is predicting.

Posted by: Jonathan King on June 13, 2003 07:43 AM

Jonathan, I think the unemployment number is, in Bushspeak, misoverestimating the reality. I can't find people to work on my construction projects, and my most reliable unemployment indicator--the quality of the cashiers at McDonalds--tells me that there is no oversupply of workers. In the late 90s ex-convicts, grade school drop-outs, and other hard core unemployables were finding work at the drop of a hat.

Maybe it's Hayek's revenge, we're just going through the necessary re-allocation of resources from a prior anomalous period.

Posted by: Patrick R. Sullivan on June 13, 2003 09:24 AM

Funny, my business is as hot as could be but it never occurs to me that people who are struggling to find work month after month are mere rotters to be sneered at. I am always surprised at how mean-spirited the radical right is, but I really should not be. Sneer away radical-righties, as long as you are all doing so well.

Posted by: bill on June 13, 2003 09:42 AM

Remember when the righties were telling us how wonderful Secretary of the Army Thomas White was. Poor Thomas White was being called to question for failing to know nothing about nothing about Enron, yet worthy of being Secretary of the Army.

Well, Thomas White was dropped fast as fast could be by Secretary of Defense Donald Rumsfeld. Not a word from the righties who were all aglow when White was appointed and all arage was White was so justly criticized.

Posted by: bill on June 13, 2003 09:52 AM

It's pretty predictable that Patrick can't find construction workers since the housing market is the hottest thing out there. Now talk to a recent college graduate or unemployed white collar employee about the job market. It stinks! Happy you're doing so well Patrick. Maybe I'll pitch my degrees and be working for you soon.

Posted by: Dan on June 13, 2003 09:55 AM

Patrick Sullivan writes:
>Jonathan, I think the unemployment number is, in
>Bushspeak, misoverestimating the reality. I can't find
>people to work on my construction projects, and my most
>reliable unemployment indicator--the quality of the
>cashiers at McDonalds--tells me that there is no
>oversupply of workers.

Well, I'm not sure how the payroll numbers could be that far off. There are a lot fewer people working in the private sector than 2 years ago. Now, that said, construction *should* be the place you might see strength right now, and that is also according to the numbers. I don't think there has been much spec office building lately (and less retail than in the late 90s), but residential construction is quite healthy. Hey, if housing starts go down a lot when mortgage rates are this low, you know we're all going to die. :-)

Also, the McDonald's (okay; Sonic) indicator in my area has definitely shown some "flight to quality" recently, but that's arguably true in part because I live in a big-time college town, and the state-funded university (and other outlets) have not been coming through as a source of part-time jobs as they once did.

Posted by: Jonathan King on June 13, 2003 11:03 AM

The economy is simply growing slowly, not faltering. So, if you are happily employed there is every reason to feel contented. Still, that does not mean all is well with the economy. Slow growth has caused a loss of 3 million jobs in little more than 2 years. Jobs will continue to be lost unless growth accelerates. The effect of the tax cut is likely to be fairly small. There is likely to be more stimulus by the Fed. The problem is that tax cutting and Fed lowerings have still not generated rapid GDP growth. The longer we grow too slowly, the more employment is likely to weaken.

Posted by: jd on June 13, 2003 01:12 PM

Perhaps the US car business problems have something to do with the fact that they make most of their money by financing their cars and that they have been offering ridiculously low financing rates (including 0%) since 9/11.

Posted by: Ian Welsh on June 13, 2003 01:22 PM

Regarding the car industry:

They're in trouble, but not likely to go under. If nothing else, Ford (which is in the worst shape) will recieve a Federal bailout.

The problem is that the car industry has a glut of capacity, and demand for SUVs has been falling. This fall of demand is masked somewhat by the lower prices from competition of late-comers (like Honda and Toyota).

The point remains is that the Detroit renassaince of the 90s we unsustainable. They enjoyed record profits per vehicle because of the good economic times and they make more money per SUV sold. However, higher oil prices and a recession hits Detroit with a double-wammy.

As for the so called "MacDonalds" factor - employment availability varies enormously all over the country. I'm sure that the wages are quite high for a MacDonalds in, say, downtown San Fansico vs West Virginia. The point is that the national statistics provide an overall guide of what we can expect - but they do not predict individual behavior.

Also, certain companies are going to do very well during a recession. Canned food, for instance, can expect to sell a lot more volume as fewer people eat out or buy fresh. So the success of any individual business does not tell you much about the economy as a whole.

Posted by: SZ on June 13, 2003 01:41 PM

I absolutely live for moments of self-betrayal like this:

"Funny, my business is as hot as could be but it never occurs to me that people who are struggling to find work month after month are mere rotters to be sneered at. I am always surprised at how mean-spirited the radical right is, but I really should not be. Sneer away radical-righties, as long as you are all doing so well."

Gee bill, now all you have to do is find someone "sneering", if you want to remove all that egg from your face. Similarly this from you:

" Remember when the righties were telling us how wonderful Secretary of the Army Thomas White was. Poor Thomas White was being called to question for failing to know nothing about nothing about Enron, yet worthy of being Secretary of the Army.

" Well, Thomas White was dropped fast as fast could be by Secretary of Defense Donald Rumsfeld. Not a word from the righties who were all aglow when White was appointed and all arage was White was so justly criticized."

is also evidence that you have a little too much self-esteem. I'm not aware of anyone who was all aglow over Thomas White. But a lot of people were outraged at a certain NY Times columnist who casually slandered the man in several columns. Even the NY Times editors finally blew the whistle and made Krugman print a non-retraction retraction.

BTW, with perfectly consistent hypocrisy Krugman is now shedding crocodile tears over White's firing. But he couldn't bring himself to mention the man's name, only "the secretary of the Army".

Posted by: Patrick R. Sullivan on June 14, 2003 08:03 AM

To the several posters who commented about residential construction, sorry to have mislead you. I'm not in that market. I sell systems for repair of concrete and asphalt to government and industry. In ten states in the West (coming soon to the mean streets around Berkeley, Prof.)so my observations are not confined to a narrow area.

Further, my business and that of my competitors had a pretty rough year and a half, post 9-11. What we are now experiencing is similar to Milton Friedman's analogy of a rubber band. The more you pull it, the more forceful the "snap back". In my case, deferred maintenance is being attended to.

As far as the unemployment numbers go, it's just a ratio that is based on how you define the numerator and denominator. If people who had traditionally not been part of either suddenly get captured, then it seems to me it can give misleading comparisons.

Posted by: Patrick R. Sullivan on June 14, 2003 08:35 AM

Paul Krugman

"Consider the case of Thomas White, secretary of the Army, a former general who became a top Enron executive in 1990. His behavior in office has raised eyebrows. He did not follow the rules about disposing of stock options; he and his wife are alleged to have taken a military jet to Aspen on personal business; and he sold $12 million of Enron stock shortly before the company's implosion, though he says that no inside information was conveyed in the 70-plus phone conversations he had with his former colleagues. But this stuff — which would have led to multiple investigations had he been a Clinton appointee — is actually secondary.

The really important information about Mr. White is that the enterprise he ran, Enron Energy Services, was a fraud — a money-losing operation dressed up to appear highly profitable through deceptive accounting. It is possible though implausible that Mr. White was duped by his subordinates, that he honestly thought that he was doing a great job. But that only makes him a fool rather than a knave.

Stories about Mr. White's questionable behavior at his current job have emerged only recently, but it has been apparent for months that he was a Potemkin executive: all facade, with nothing behind it. Given that he was hired for his supposed business skills, this means that he is like a surgeon general who turns out never to have finished medical school." 4/12/02

"I may have done Thomas White, secretary of the Army, an injustice. He ran Enron Energy Services, a division that — or so I thought — was mainly used as a way to generate phony profits, inflating Enron's stock price. But the division turns out to have had another role: to create phony energy transactions, inflating Enron's actual profits at the expense of the state of California. Why, exactly, is Mr. White still in office?" 5/10/02

"When Gen. Eric Shinseki, the Army chief of staff, warned that occupying Iraq might require hundreds of thousands of soldiers for an extended period, Paul Wolfowitz said he was "wildly off the mark" — and the secretary of the Army may have been fired for backing him up." 6/10/03

Posted by: arthur on June 14, 2003 09:09 AM
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