macroblog

Bad News Bulls

From the Wall Street Journal (page A2 in the print edition):

Economic growth in the U.S. is likely to recover as the year goes on, but that might not be an entirely good thing, according to the latest Wall Street Journal survey of forecasters.

The Journal's seers are feeling rather chipper about the near-term prospects for economic growth... 

Having run a veritable gantlet of threats to its health, the nation's economy is in a better place than it was just a few months ago...

The 60 economists who took part in the survey, conducted in mid-June, offered a mostly upbeat outlook for an economy that has recently sustained declines in both manufacturing and business investment, and that still faces a deepening housing slump.

With consumer spending holding up, a weaker dollar propelling U.S. exports and a pickup in production and investment, they expect real gross domestic product -- a broad measure of economic activity, adjusted for inflation -- to grow at an annualized rate of 2.6% in the second half of this year and 2.9% in 2008. That is down from 3.3% in 2006, but much better than the 0.7% pace of the first quarter of 2007.

... but worry that the Fed might ruin the party:

Forecasters, however, also see a mounting risk: Thanks to longer-term shifts in the U.S. and global economic landscapes, even a little growth could lead to a resurgence of inflation, which would be painful for American consumers and could cause the Federal Reserve to ride the brakes by keeping short-term interest rates higher.

The real-side rationale is pretty straightforward:

With consumer spending holding up, a weaker dollar propelling U.S. exports and a pickup in production and investment, they expect real gross domestic product -- a broad measure of economic activity, adjusted for inflation -- to grow at an annualized rate of 2.6% in the second half of this year and 2.9% in 2008. That is down from 3.3% in 2006, but much better than the 0.7% pace of the first quarter of 2007.

It is probably worth pointing out that the survey was conducted over the period from June 8th through  the 18th, before last week's run of negative news in the housing market.  And looking at the most recent spending data, Calculated Risk -- not a member of the survey panel as far as I know -- is skeptical that consumer spending is "holding up":

You can use the monthly series to exactly calculate the quarterly change in PCE [Personal Consumption Expenditures]. The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next (several people have asked me about this). Instead, you have to average all three months of a quarter, and then take the change from the average of the three months of the preceding quarter...

... in general, the two month estimate is pretty accurate. Maybe June was exceptionally strong, or maybe April and May will be revised upwards, but the two month estimate suggests real PCE growth in Q2 will be about 1.5%.

That seems entirely plausible, but month-to-month and quarter-to-quarter changes in specific categories of spending tend to jump around:

    :

Thus, to CR's initial question on perusing the May PCE numbers...

Is this just a one quarter slowdown? Or is this the beginning of a housing related slump in consumer spending?

... I'd side with those saying not slumpy enough to cause real problems -- at least not so far as we can tell at this point.  No, what the Journal's experts really seem concerned about is the price picture:

An increasing number of economists worry that the battle with inflation isn't over, despite the benign message sent by recent data. As of May, the Fed's preferred measure of inflation -- the "core" index of personal-consumption prices, excluding food and energy -- was up only 1.9% from a year earlier. That compares with 2.4% as recently as February.

It seems to me that The Skeptical Speculator has about the right take on the issue:

The Federal Reserve Bank of Dallas publishes two other measures of inflation based on personal consumption expenditures. The first is the overall personal consumption expenditures price index that is already reported by the Commerce Department. The other is the trimmed-mean price index that excludes components of personal consumption expenditures that have the highest and lowest rates of change.

The latest data provided on the Dallas Fed website show that these other measures of inflation remain above the Federal Reserve's comfort zone. The 12-month inflation rate based on the overall PCE price index was 2.3 percent in May and the inflation rate based on the trimmed-mean measure was 2.2 percent...

Based on this observation the Skeptical One draws this conclusion...

...  with the economy expected to recover from the second quarter onward, further moderation is likely to be limited. In fact, many economists think inflation will re-accelerate as the level of resource utilisation in the economy remains high despite the recent slowdown.

... an opinion that is shared by the WSJ panel:

In the survey, one in five forecasters saw a resurgence of inflation as the greatest risk facing the economy. That is more than twice the proportion who saw it as the No. 1 risk six months ago. As a result, they now see little chance that the Fed will lower its target for short-term interest rates from the current 5.25% by December. They do, however, lean toward a cut to 5% by June 2008. Six months ago, they were betting the Fed would cut rates to 4.75% by December.

December is, of course, a long way away.

What's That Unpleasant Sound?

According to Lombard Street Research, it's a credit crunch.  From the U.K. Telegraph (hat tip, Action Economics):

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."...

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.

The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.

The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.

The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.

It is worth noting that those are specifically mortgage-lending corporations not commercial banks, so I am not clear on the basis of this claim:

Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches” of lower grade securities held by the banks.

Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fiction”, said [Charles Dumas, the group's global strategist].

In fact, the article contains more assertions than facts.  But I think it is agreed that if there is going to be a really big spillover effect from ongoing housing woes, this is where we'll find it.   

Taking It Slow

The recent spate of relatively good economic news has some people thinking rosier scenarios.  From the Wall Street Journal (page A3 in yesterday's print edition):

The latest data show employment and manufacturing growing at a vigorous rate, suggesting the U.S. economy is regaining momentum after a slow start to 2007...

Nonfarm employers added 157,000 jobs to their payrolls in May, nearly double the 80,000 new jobs recorded in April, the Labor Department said Friday. Led by the service sector, the rebound brought the three-month average job gain to about 137,000, a pace strong enough to keep unemployment low and wages rising. The unemployment rate held steady at 4.5%.

Meanwhile, the Institute for Supply Management, a purchasing managers' trade group, reported that its index of manufacturing activity came in at 55 in May, up from 54.7 in April, indicative of expanded factory production. That is a stark contrast to earlier this year, when manufacturing activity was contracting.

Economists saw the reports as confirmation that the economy is regaining momentum despite the pain that high gasoline prices and the housing slump are inflicting on the consumer...

How quickly the economy rebounds will depend to a large extent on how U.S. consumers, whose purchases make up more than two-thirds of all economic activity, respond to the conflicting influences of high gasoline prices, falling house prices, a robust stock market and rising incomes. Friday, the latest reading on the University of Michigan's consumer sentiment index suggested they were still in relatively good spirits: The index rose to 88.3 in May from 87.1 in April.

It does feel like we've gained a little breathing room, but this picture sticks in my mind:

   

   

   

That second quarter of 2000 should remind us that it sometimes looks pretty sunny before the storm.

Soft, Not Too Soft

This morning's email from the Goldman Sachs Global Markets Research Group contains this assessment:

The recent industrial news, including April US industrial figures yesterday, have been positive, especially as it reduces the probability of one of the tail risks in the market, i.e. too soft growth. Nevertheless, we think the market remains too optimistic about US growth trends going forward.  This is highlighted in the current Blue Chip Consensus, which shows US GDP growth rebounding from 1.3% in Q1 (which as the US Daily discusses overnight is likely to be revised down) to 3% as soon as second half of this year.

If our US growth views prove correct, the market may yet need to revise down its growth expectations. In that regard, it is striking how growth expectations in the equity markets (as captured by our Wavefront US growth basket) have continued to grind higher. 

So, while we are comfortable with our view of a US soft landing, markets may need to adjust to a less optimistic macro reality than is priced in. This potential downward adjustment could prove to be one of the several road bumps for risky assets in coming quarters.   

Not everyone will have to revise down those expectations.  The economists queried for last week's Wall Street Journal forecasting survey seem to (at least broadly) share the Goldman view:

On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.

Certainly the voices of Fed chairs past and present, while not endorsing a particular forecast, are aligned with the no-tailspin crowd.  From Bloomberg:

The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.

Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.

"The prime market is doing reasonably well,'' Greenspan, who retired in January 2006, said today at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. "Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market.''

Meanwhile, the rest of the world seems to be doing pretty well, thank you.  Back to the Goldman boys:

We do not expect the prolonged period of sub-trend US growth that we foresee to cause major problems for the rest of the world. Recent data has shown further evidence of global decoupling with softer US economic news on the one hand (soft retail sales), and robust growth dynamics in the rest of the world, particularly in Europe and China (Q1 GDP growth in Euroland was above consensus and the April activity data for China have been strong).

However, this begs the question of how bad it would have to get for the global decoupling theme to unravel?

In our latest Global Economics Weekly, we extended the spill-over analysis we conducted last year to study the growth experience of other major economies (Japan, Germany, UK and France) conditional on whether US economy is contracting (i.e. real growth on qoq terms is negative) or expanding (i.e. real growth on qoq terms is positive)...

... Overall, our analysis supports our thinking that as long as US growth remains in expansion mode (which we forecast), other major economies should be able to decouple.

According to a report in todays the Wall Street Journal, some rather astute folks think it may be the other way around:

Early last year, [chief investment officer at Pacific Investment Management Company William H.] Gross's outlook for the U.S. bond market hinged on housing. "We did our homework," he says. "We sent out scouts into middle America, down to Florida." They did make some correct calls, such as predicting a drop in long-term interest rates last summer.

What Pimco didn't foresee was the impact on the U.S. of the strength in the global economy, led by China and the rest of the Asia. Mr. Gross says they recognized there was inherent strength abroad. But they counted on issues such as the U.S. trade deficit and increasing leverage around the world to have "snapback potential like a rubber band" that would restrain growth and allow the Fed to lower rates. That didn't happen.

Either way, the soft-landers appear to be feeling their oats.

Where The Risk Is

And so it appears that the moment of truth is near, when we will finally see beyond the immediate fate of the housing market and determine the magnitude of the collateral damage (no pun intended).  I think that there is a consensus that, if the worst is to come, some sort of substantial disruption to financial markets will be in the middle of it all.  Nouriel Roubini covers about every inch of territory you can on this theme, even managing to juxtapose Alan Greenspan and Ben Bernanke with foreign-policy neo-conservatives.  In somewhat more measured tones, Kash Mansori and Calculated Risk have begun to fret about the potential for spillover into the commercial banking sector.  Says Kash:

In my previous post I explained why I think that the quantity of bad mortgages in the US economy may actually be enough to significantly affect the non-performance and write-off rates for the US banking system as a whole. Yesterday, Calculated Risk followed this up with a discussion of why he thinks that the health of commercial real estate loan portfolios may soon suffer the same fate that residential loan portfolios are currently experiencing.

Some of that is not speculation, as this story from own neck of the woods so clearly shows:

The quaking U.S. market for subprime mortgage loans is rattling National City Corp. too.

The parent of National City Bank of Pennsylvania has decided it won't try to sell $1.6 billion in subprime loans after all, due to "adverse market conditions," National City said in a securities filing Thursday. The loans "are currently not saleable at what management considers an acceptable price," the bank said.

Instead, Cleveland-based National City took a write-down of $11 million in February, and sometime this month will return to its portfolio the loans it had intended to sell. "A further write-down is likely," the filing said. Spokeswoman Kristen Adams would not elaborate...

Additionally, National City expects to add "on the order of $50 million" to its reserves for possible loan losses, the filing said.

But here's how the story ends:

National City shares closed yesterday at $35.99, up 30 cents.

Hmm.  Frankly, I just don't think the traditional banking sector is where be the dragons.  Instead, I worry about the answers to three questions: 1. Will a growing perception of risk begin to choke off lending to investment projects that are otherwise economically viable?  2. Will a growing perception of risk cause businesses to forgo or defer an increasingly large quantity of investment projects?  3.  Have hedge funds, private equity funds, and specialty financial corporations become such important parts of the credit channel that there is scant relief to be found from a relatively unscathed traditional banking sector?

To question 1, we have this, from Bloomberg:

Risk premiums on investment-grade corporate bonds are at their highest level in more than three months on concern rising delinquencies by subprime borrowers will slow the U.S. economy...

"This period of volatility is likely to continue as long as there is divided opinion about the magnitude and resulting financial impact of the subprime problem,'' said Edward Marrinan, head of North American credit strategy at JPMorgan Chase & Co. in New York. "Subprime risks and accompanying fears of a spillover into the broader consumer sector are the catalysts for the heightened volatility currently exhibited by all risky asset classes,'' he said in an interview...

The 7-basis-point increase in investment-grade spreads is the index's worst three-week performance since the period ending May 20, 2005, Merrill data show. The increase means a company would pay $70,000 more in annual interest for every $100 million borrowed.

We might hold on to the belief that firms are partially insulated from rising borrowing costs (or restrictions on loan availability) due to the fact the corporate cash-flow to investment ratio remains relatively high...

   

   

... but there are two problems with seeking shelter in that picture.  First, we have data only through the third quarter of 2006, which is pretty stale information at this point.  Second, and more importantly, a high cash-flow to investment ratio may itself be a symptom of business's unwillingness to commit to fixed investment spending.

To question number 3, I have no idea what the answer is.  And I wish I did.

Are We Panicking Just A Bit Too Soon?

If there was any doubt about it before, that groaning sound from the residential housing market definitely has our attention now.  A woefully incomplete list of blogger commentary from the past several days would include items at Alpha.Sources blog (here, with some international perspective here), at Angry Bear, at Beat the Press, at The Big Picture, at Bizzy Blog, at Brad DeLong's, at Daniel Gross, at Economic Dreams - Economic Nightmares (here and here), at Economics Unbound, at Economist's View (here and here), at Euro Intelligence, at Felix Salmon, at The Housing Bubble Blog (here and here), at Mish's Global Economic Trends Analysis, at the Skeptical Speculator, and at The Street Light.  I won't even bother to list individual items from Calculated Risk or Nouriel Roubini.  Just head on over and start reading.

In the midst of this, let me make one brief plea for a little perspective:  It might be good to remember that this was not entirely unexpected.  Since at least summer I have been giving "economic outlook" speeches with the same basic message:  Weakness in the residential housing market will continue for some time -- the bottom in prices seems unlikely until at least mid-year.  Adjustments of this sort are never easy, there will be some pain, and probably a disruption in the pace of economic expansion as things sort themselves out.  The punch line is always something like, "but things do sort themselves out, and there is no reason to expect that the economy will fail to return to a normal pace of growth after a sluggish quarter or two."

Anything yet make that projection look wrong?  Not within my confidence intervals.  Forecasters, economic pundits, and other human beings are congenital slaves to the latest surprises in the data, so confidence has ebbed and flowed and ebbed again as the news has surprised to the downside, to the upside, and back again.  But would anyone really want to argue that we aren't in the neighborhood of where most informed observers thought we would be about now? 

Trouble, of course, often looks worse when it arrives than it did when we were merely contemplating its arrival.  It is understandable that we feel a little wobbly now that the shake-out among certain mortgage lenders is here at last.  And there are parts of the "soft-landing" scenario that look a bit tenuous at the moment -- I would put the worrisome signs of weakening business investment expenditures, emphasized by pgl at Angry Bear and Jim Hamilton at Econbrowser, at the top of my list.  But for the time being, I'm going to go easy on the panic button. 

Summing Up 2006

With the results on economic activity in 2006 nearly in -- details available at Econbrowser -- I think the verdict, as Kash concludes, is pretty clear: 

Despite the worries of some (such as myself), 2006 turned out to be a pretty good year for economic growth. Not great, but certainly solid.

The Capital Spectator is even more upbeat: "Expected or not, 3.5% growth is impressive."  Carpe Diem gets to the point: "The Dangerfield Economy Rocks." 

The themes are nicely captured by the employment picture:

   

   

Michael Mandel focuses on the pace of net job creation in health services, but I see no particular reason to place special emphasis there. Outside of retail trade, employment growth in the service-producing industries did just fine, thank you.

Although manufacturing is almost never a source of significant net job creation, the dichotomy between the fortunes of the service and manufacturing sectors has been showing up clear as day in the ISM business conditions indexes -- nicely illustrated by the Capital Spectator and covered from a global perspective at The Skeptical Speculator. Construction employment reflects the housing-centric part of the story, which is as much about what will come as what has been. Calculated Risk looks ahead, and sees substantial declines in construction employment in the months to come, and it is the view of many -- I'd say most -- that there are more shoes to drop in the housing sector. Dean Baker, for example, notices that the Wall Street Journal notices "the record vacancy rates of ownership units." And I noticed that the Journal articled also noticed something else I noticed:

Not surprisingly, buildings with five or more units -- which include condos that were magnets for speculators -- had the highest rate of vacancy. The vacancy rate among these units rose to 11% in the fourth quarter from 7% in the first quarter. For single-family homes, the vacancy rate rose to 2.3% in the fourth quarter from 1.8% in the first quarter.

Ben Jones rounds up yet more commentary on the vacancy rate report, which has become the latest piece of proof that, no matter what you see, things just aren't as good as you think.  Indeed, in the midst of plenty of reasons to have positive feelings, skepticism abounds. PGL touches the employment elephant and feels higher unemployment, a decline in the labor-force participation rate, a shorter average workweek, and "very modest" growth in wages.  Under The Street Light, Kash has some similar thoughts.  Michael Shedlock sees a declining trend in job growth (albeit in the murk of revisions that has apparently become getting increasing unrealiable in real time).

But, but, but. Fact is, we did pretty well last year, and indications so far are that, in early 2007, the US economy is keeping on keeping on.  Not that the risks being touted are safely ignored.  It is a fact that there was a surge in mortgage originations with adjustable rate contracts during the height of the housing boom:

   

 

   

If reports are to be believed -- and I have no information to suggest that they shouldn't -- a good chunk of those new adjustable rates are soon to be adjusted, to uncertain effect.  And I take seriously Dean Baker's admonition to beware the seasonals -- just how much weather might have distorted the statistics or shifted production and spending decisions, we don't yet know.

A sensible person should always take account of the risks that exist.  But the truth is that the evidence from last year does not easily support an assertion that the US economic train is about to derail.  Do worry, but go ahead, be happy. 

Forecasting Season

Barry Ritholtz catches the general theme of the latest Economic Forecasting Survey from the Wall Street Journal (page A1 in the print edition):

Economy Poised For '07 Rebound,Forecasters Say

Weakness in Housing, Manufacturing Is Likely To Take a Lighter Toll

That doesn't mean exactly mean a gangbuster year: The average GDP forecast for the first half of the year is just 2.3 percent -- though the median forecast was higher and not a single one of the 60 respondents was willing to predict negative growth over the first two quarters.

Of course, Calculated Risk had that story last week...

Other than a few economists, the overwhelming consensus view is for a soft landing and GDP growth of 2.5% to 3.0% in 2007.

... in a post that included this bit from Reuters (emphasis added):

The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index slipped to 138.5 in the week ending Dec. 22 from 139.7 in the prior week, due to higher interest rates and more jobless claims.

However, annualized growth in the week ended Dec. 22 rose to 3.8 percent from 3.4 percent in the prior period, a reading not reached since last February.

"Given the steady improvement in the WLI, recession is no longer a serious concern," said Lakshman Achuthan, managing director at ECRI.

And Peter Gordon pronounces:

Ten-year Treasuries and mortgage rates have not gone through the roof. As a result, housing is going to be OK -- and a thousand doomsday forecasts must be put aside.

Nearly alone on the other side of the fence, Nouriel Roubini claims, in a post reviewing his not-too-bad 2006 predictions, that he has not given up on expecting the worst:

... the next few months will show whether my mid-2006 forecast of a US hard landing in 2007 will be proven true or not. Certainly some of my more recent forecasts for financial markets (equities fall, fixed income rally), about Fed easing in 2007, lack of real economy decoupling in the rest of the world are highly conditional on this US hard landing call. I am still of the view that the risks of a hard landing are high.

Indeed, the forecasters in the Journal survey do see some Fed easing in the cards:

The economists surveyed expect year-to-year inflation to decline to 1.7% in May from 2.0% in November. As a result, they expect the Fed to shift its focus from fighting inflation to helping the economy grow, lowering short-term interest rates to 4.75% by the end of 2007 from the current 5.25%.

Though Tim Iacono disagrees and James Hamilton is not so sure, neither of them is looking for a Fed rate hike.  Not so in Europe, at least according to The Skeptical Speculator:

It looks like the Bank of England may not be done with interest rate hikes. Not with the continued house price increases reported by Reuters...

And there could be more rate hikes from the European Central Bank as well. Reuters reports:

The case for more euro zone rate hikes got a boost from stronger than expected November money supply data on Friday and from comments on Thursday by ECB Governing Council member Yves Mersch, who said rates remain low in historical terms...

At Eurozone Watch, Daniela Schwarzer and Sebastian Dullien concur:

Is the ECB going to raise interest rates towards 4 percent?

Yes. The strong growth outlook will push the ECB to raise its interest rates to 3.75 percent in the first half of the year and by a further 25 basis points later on. As inflationary pressure is still limited, the ECB will refrain from tightening much faster. Risks to this call are, however, a stronger than expected US downturn or a strong appreciation of the euro. In these cases, the ECB might delay a further hike beyond 3.75 percent.

They also predict:

The euro will most likely further gain in value. There is a significant risk that it rises above 1.40 $ in 2007. Two factors are supporting the young currency: With further interest rate hikes by the ECB, investment in the Eurozone will become more attractive. Moreover, the possibility of a rate cut by the US Federal reserve still remains. Finally, there is a risk that central banks in Asia and from OPEC countries continue to diversify their portfolios and buy euros.

For their part, the consensus among WSJ group is that the dollar will stabilize near 1.3 per euro, about where it is today (though Claus Vistesen thinks there has already been enough appreciation and monetary policy to make a "dent" in eurozone growth).

Now we'll all wait and see how it is we will be wrong.

UPDATE: Cotango is going to "hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth" and beleives that "If it does get rough, the Fed will have to open the liquidity valves full blast".  David K. Smith reports on forecasts for the UK (where projected growth is close, but still higher, than expectations for the US).

Mr. Greenspan And The IMF Find Common Ground?

Mark Thoma reports...

Greenspan warns on global asset price fall, Financial Times/Reuters: Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.

... while Kash has this at Angry Bear:

WASHINGTON (MarketWatch) -- After several years of low interest rates and ample liquidity, storm clouds are developing over global financial markets, according to a new report from the International Monetary Fund.

Well, by definition higher interest rates mean lower bond prices, and I guess the idea is that, because an equity price is something like the discounted flow of future dividends, higher interest rates mean lower equity prices too.

Is this bad?  Before you answer that question, the first thing to recognize is that interest rates are prices, and prices don't just magically change -- they rise or fall because demand and/or supply change.  If interest rates are rising because global economic growth is strengthening and investment opportunities expanding, I'll have to put that in the good, or at least benign, category. (And note that higher interest rates do not mean that equity prices fall -- while higher interest rates mean a larger discount is applied to dividend or earnings flows, it is also the case that faster growth means those flows themselves increase.)

On the other hand, interest rates may rise, particularly in the United States, because global savers lose confidence in the dollar, or financial fragilities cause global production opportunities to contract.  I'll put those types of rate increases in the bad, or at least not-so-good, category.

If I had to guess, I would put Mr. Greenspan closer to the good-to-benign story.  From the (UK) Times Online:

Mr Greenspan said that the situation would end when the amount of excess capital dropped. “I don’t know when the liquidity is going to decline, but I am reasonably confident that what we have is an abnormal situation,” he said. His comments echoed his famous 1996 warning over “irrational exuberance” in markets. However, asked yesterday whether the same diagnosis applied to present conditions, he said: “I would hesitate to use it in today’s context. Irrational exuberance, I think, would be a stretch at this point.”

Comparing that savings-gluttish take with the "storm clouds" rhetoric of the IMF, I'm not quite sure Mr. G and the good folks at the IMF see quite the same picture just yet.

UPDATE: Kash suggests, in the here and now (as the 10-year Treasury yield finally breaches the 5 percent threshold), the "rise in rates reflects a belief that the economy will continue to remain strong through the rest of the year."

Hard Landing? Still Waiting

Calculated Risk samples Brad Setser:

Thomas Palley is right: "Foreign flight" (a shock to the United States ability to borrow savings from abroad) is very different from "Consumer burnout" (a slowdown in US demand growth). In both the foreign flight and the consumer burnout scenarios, the US economy slows and the dollar falls. But in the foreign flight scenario, as Palley notes, the fall in the dollar and rise in US (market) interest rates triggers the US slowdown, while in the consumer burnout scenario, the US slump triggers dollar weakness. Foreign flight would combine dollar weakness with higher US (market) interest rates, consumer burnout combines dollar weakness with lower interest rates.

This morning's news brings this observation on the "consumer burnout" front, from Bloomberg...

Sales of previously owned homes fell in December for a third straight month, evidence that housing demand was starting to falter at the end of a record year, economists said before a private report today.         

Sales of existing homes fell to a 6.87 million annual pace last month, the slowest since March, from 6.97 million in November, according to the median of 59 forecasts in a Bloomberg News survey. Sales haven't fallen for three straight months since 2002. They are down from a record 7.35 million rate in June.         

Higher home prices and borrowing costs will curtail demand this year after home sales reached a fifth straight record in 2005, according to real estate industry forecasts.

... and this on the "foreign flight" business, from MarketWatch:

Treasury prices closed at their lows Tuesday, keeping yields higher, after lukewarm response to an auction of 20-year Treasury Inflation-Protected Securities re-inforced worries that there is not enough demand for this month's heavy fixed-income supply...

The weak response played into fears that an exceptionally plentiful amount of government and corporate bonds issuance this month is weakening demand and driving up borrowing costs.

On the bright side though, a full 56.1% of the bids came from indirect bidders, a category that includes foreign central banks. That result should help soothe concerns that foreigners may be backing away from U.S. assets.

Place your bets.