The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

March 26, 2006

Odds And Ends

Another quarter begins at the University of Chicago Graduate School of Business, and I have once again cleverly fallen behind on my reading, giving me the excuse to introduce some of my favorite weblogs to new students, via this review of things I should have talked about last week.

First things first, the week ended with economic news that was mixed, at best. Kash at Angry Bear reads the durable goods reports and concludes (fairly, I think) that business investment spending is still short of spectacular.  On the other hand, at The Nattering Naybob Chronicles, Mr. Naybob is able to look on the bright side: "Both [the durable goods and house sales] reports eased inflation fears and bond yield dropped."

With respect to the real estate news, Calculated Risk, a consistently fine go-to source on the housing market, has the latest on home mortgage applications (down slightly), existing home sales (up, but perhaps not the best indicator),  and new home sales (a better indicator, and coming in "very weak".) CR also has a handy chart, mapping the pattern of home sales in recessions.  At the Big Picture, Barry Ritholtz opines: "The [Real Estate] market has dropped from white hot to red hot to mid-plateau."  Calculated Risk says   "The sky may not be falling, but... housing sales are clearly trending down."  Captain Capitalism, however, is not cheered by that prognosis, and Michael Shedlock pores over the Calculated Risk pictures, to find that his disposition is soured as well.  ElectEcon finds a prediction that things are going to get ugly fast

For those who simply must have more housing indicators to watch, Daniel Gross bears good news, from Standard & Poor's.  For those who just can't get enough detail on economic data period, Mark Thoma has more at Economist's View.

Speaking of data, a nice summary of U.S. wealth as reported in the Federal Reserve's Flow of Funds can be found at Angry Bear. (Although I don't necessarily endorse the conclusions, you might also enjoy the pictures provided at Economic Dreams - Economic Nightmares.)

Last week I (sort of) came to the rescue of the Consumer Price Index.  Barry Ritholtz (again) counter punches, with a Wall Street Journal survey of readers indicating the vast majority don't think very highly of the Consumer Price Index, but Russell Roberts effectively (in my view) defends the beleaguered index, at Cafe Hayek.

Also in the inflation vein, Mark Thoma follows up my post on the relationship between the CPI and the PPI with some work of his own -- broadly illustrating the point of the research I was citing.

Mark also relays the crux of Federal Reserve Chairman Ben Bernanke's speech on the yield curve.  Meanwhile, the inverted yield curve watch continues, at The Capital Spectator.

Shifting to the fiscal side of the government house, Kash breaks down the sources of federal spending growth in the United States over the past five years.  The guys at Angry Bear have had several useful, even if a bit partisan, posts on the subject in the recent past -- here, here, here, here, and hereGary Becker and Richard Posner provide some much needed perspective on how to think about the build-up in defense spending. 

In other legislative news, Andrew Chamberlain at Tax Policy Blog indicates that tax reform may not be dead just yet (good), and at Vox Baby, Andrew Samwick reports on the progress of pension reform (decidedly not good).

David Weman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better).  The Skeptical Speculator concurs that "protectionism looms." Asia Pundit reminds us that, in the United States, the impulse is bipartisan (and Sun Bin channels Stephen Roach's comments on the subject). William Polley deems it "Nothing if not predictable." Mark Thoma provides an extended commentary from the Financial Times on the dangers of "Dobbism" (as in Lou).  Daniel Drezner, however, has better news. Brad DeLong takes notice of a Alan Blinder's sometimes less charitable view of trade and globalization, to which Arnold Kling replies -- here and here.

Steve Antler (of EconoPundit) makes the connection from trade protectionism to immigration reform.   Russell Roberts is even less tolerant of the anti-immigration argument.  So is Arnold Kling (at EconLog).  EurActiv reports on how the EU is attempting to deal with its own immigration questions. The New Economist provides a glimpse of research suggesting that outsourcing explains about 28 percent of the growth in the wage gap between high- and low-skilled labor between 1980 and 1999.

Continuing with the international theme, Brad Setser thinks both sides are at fault in the ongoing tensions over Chinese exchange rate policies.  He also has terrific coverage of Larry Summers' must-read views on the current state of global financial markets and capital flows.  Mark Thoma notes an article on the relationship between exchange rate policies and trade gaps and a summary of research on foreign direct investment. Steve Antler suggests an explanation for "why the dollar still reigns".  Barry Ritholtz is pretty sure the answer is not Dark MatterMenzie Chinn, writing at Econbrowser, is even less convinced.  (He follows up that post with a very nice discussion of "purchasing power parity."  Don't worry if you don't know what that means -- Menzie will fill you in.)

Speaking of China, Daniel Gross carries a story from the New York Times on the development race between China and India, the latter a country that I think gets far less attention than it deserves.  (Lest there is any confusion, I mean positive attention.)  Interestingly, Toni Straka at The Prudent Investor -- who  unfailingly does not ignore India -- reports that India is about to float its currency and remove foreign exchange controls.

About Economics has a macro-relevant post on the, increasingly quaint, problem of the so-called zero nominal interest rate bound.  Digging even further into the history of monetary theory, Jane Galt ruminates on "free money." In the some-think-it-matters-I-don't category, The Capital Spectator comments on the retirement of M3.  So does Tim Iacono. That makes the graphs at Economist's View on M3 velocity -- explained here -- somewhat obsolete, but don't worry -- there is still M1 and M2 to absorb your attention.

UPDATE: Oh yeah -- Tyler Cowen has a new gig at the New York Times.

SPECIAL BRAIN-LOCK UPDATE:  Above I hat-tipped A Fistful of Euro's David Weman for a Guardian article  "bemoaning  the rising tide of protectionism" (my words).  Unfortunately, the Guardian article that does the bemoaning is not the one David cites.  I had in mind an earlier article by James Surowiecki.  David was pointing to another article, by Daniel Davies, arguing that capital controls do not count as protectionism.  Double hat-tip to David for keeping me on the straight and narrow.  (Oh, and by the way -- I'm with Surowiecki.)

March 26, 2006 in Asia, Data Releases, Deficits, Europe, Exchange Rates and the Dollar, Federal Debt and Deficits, Housing, Inflation, Interest Rates, Labor Markets, Saving, Capital, and Investment, Taxes, This, That, and the Other, Trade , Trade Deficit | Permalink


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» Round-up of Recent Economics Blog Postings from EclectEcon
Dave Altig at Macroblog has a very comprehensive round-up of recent blog postings from all over creation, all grouped by various economics topics. It is very thorough and ... [Read More]

Tracked on Mar 26, 2006 9:04:00 PM

» Carnival of the Economists from The Big Picture
Over at Macroblog, Dave Altig collects lots of Odds And Ends from the week's economic writings. He's a one man Carnival of the Economists. Looks like it took hours to put together. If you are looking for additional sources of economic writing and discu... [Read More]

Tracked on Mar 27, 2006 9:46:30 AM

» What Has Happened to U.S. M3 Growth Rates? from EclectEcon
If you're interested in growth rates of the U.S. money supply (and Fed policy concerning them), you might enjoy [Read More]

Tracked on Mar 28, 2006 1:06:21 PM


Great site. Great post. But, do you really think India is being underreported? I sure don't. It's hard even finding articles on China these days (such as your post) that don't mention India.

Posted by: China Law Blog | March 26, 2006 at 09:51 PM

CLB -- Fair enough. The indictment should really be aimed squarely at me. (By the way -- I just checked out your site. Very interesting. I'll make it regular reading from now on.)

Posted by: Dave Altig | March 27, 2006 at 07:20 AM

I'll add a few on-line print business columnists for your insatiable readers. O.C.Register's Jon Lansner is always on top of the socal economy, & I think Dallas Morning News' Danielle DiMartino's piece this morning, "Systemic risk is on the bubble", speaks loudly & well of her ability.

Posted by: bailey | March 27, 2006 at 10:40 AM

"David Weiman at A Few Euros More gives us the heads up on an item (from the Guardian Unlimited (U.K.) blog) bemoaning the rising tide of protectionism (among countries, including the U.S., that really ought to know better)."

Actually, no.

Posted by: David Weman | March 27, 2006 at 10:56 AM

David -- Sorry about the typo. All fixed.

Posted by: Dave Altig | March 27, 2006 at 04:16 PM

Sorry, I meant that Daniel Davies doesn't say what you think he says, but rather:

'Basically and historically, "protectionism" (and "mercantilism" and related terms) always used to refer to tariff policy, with respect to goods markets and trade between buyers and sellers. The use of the terms to refer to policies about capital markets and ownership of companies is a new one; I spotted it beginning to arise in the FT and Economist around the beginning of the 1990s and have been writing Mr Angry letters on the subject ever since. Because capital markets "protectionism" is much less bad than the goods market type and might not even be bad at all.'

Posted by: David Weman | March 27, 2006 at 06:16 PM

David -- Oops. Wrong article. Thanks for keeping me honest. I trust the update is better?

Posted by: Dave Altig | March 27, 2006 at 08:50 PM

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January 12, 2006

The Trade Report

Blogworld has plenty of good commentary on the November trade deficit news released today: Calculated Risk has the basics; Kash nicely breaks down the contribution of oil imports, as does Menzie Chinn (who contributes some nice pictures for perspective); Brad Setser provides his usual peerless (if pessimistic) analysis; The Skeptical Spectator informs us that European trade deficits are getting bigger -- except in Germany.

The views in MSM commentaryland were, let's say, mixed.  From BusinessWeek online:

Mark Zandi, chief economist at Moody's Economy.com, said if oil prices keep retreating and Japan and Europe continue to show a rebound in economic growth, the U.S. trade deficit may finally start to show sustained improvement.

"I am guardedly optimistic that we may be seeing the worst of our trade problems," he said.

Oh yeah?  Well, take this (from Bloomberg):

"Higher oil prices and a strong dollar will push the trade deficit to new record highs, with the monthly trade deficit likely exceeding $75 billion by mid 2006,'' said Peter Morici, a professor of international business at the University of Maryland in College Park.

If you are longing for consistency, here's something you can count on, from BBC News:

... an industrial lobby group, the American Manufacturing Trade Action Coalition, accused the Chinese government of "predatory trade practises" and currency manipulation.

The group's executive director, Auggie Tantillo, said the US government should impose hefty tariffs on imports from China - until Beijing agreed to float freely its currency, the yuan.

January 12, 2006 in Trade Deficit | Permalink


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"Mark Zandi, chief economist at Moody's Economy.com, said if oil prices keep retreating and Japan and Europe continue to show a rebound in economic growth, the U.S. trade deficit may finally start to show sustained improvement."

Well I wouldn't be counting on this. Look at the news from Germany yesterday. It is the data not the spin (or even the confidence index) which counts in the end.

Posted by: Edward Hugh | January 13, 2006 at 04:44 AM

“Auggie Tantillo said…impose hefty tariffs on imports from China - until Beijing agreed to float freely its currency…” Can someone explain to me why this would even be necessary? If the US thinks that Yuan overvaluation is worth getting aggressive about, why can’t we just intervene to push up the Yuan? Surely the US has the wherewithal to beat China at this game if it chooses to play.

Posted by: knzn | January 13, 2006 at 08:56 AM

Edward -- Spot on, as usual.

knzn -- I think the answer is that "the US" doesn't think it is worth getting *that* aggressive about.

Posted by: Dave Altig | January 13, 2006 at 09:10 AM

Dave, I think you’re right, but my puzzlement is why tariffs seems to be the only countermeasure that China-hawks propose. China is following a policy that can’t be maintained without US acquiescence, but rather than “stop acquiescing”, the proposed solution is always to do something else to remedy the policy’s effects.

Posted by: knzn | January 14, 2006 at 09:46 AM

I suppose part of the answer is that tariffs can be applied piecemeal (a tariff here, a tariff there, see how China reacts, see how the WTO reacts), whereas breaking China’s peg would be pretty much all-or-nothing. (Once the US has demonstrated that it’s willing to control the $-RMB rate, any Chinese intervention would have to be coordinated with the US.) And the US might end up in a position of having to defend the dollar without Chinese help, a situation which even many trade hawks might regard as medicine worse than the disease. But why is the “nuclear option” of intervention never even mentioned? Shouldn’t it at least be put forward as a negotiating chip?

Posted by: knzn | January 14, 2006 at 11:35 AM

Intervening with what? Pretty much any intervention by the USA would have to be financed with money borrowed from abroad or through printing USD.
The former will just make things worse and the latter would probably overshoot (by making everyone and his grandma wary of holding USD).

The USA wants the Yuan to revalue, but it doesn't want the cheap credit to end either. However you can't have both.

Essentially the end of the cheap credit would force the US government to end the cut taxes/increase spending policy of late.
That's a big no-no politically.

Posted by: iasius | January 15, 2006 at 03:01 AM

isaius, The problems you are citing with intervention exist also with tariffs. Anything that succeeds in reducing our trade deficit will (as a matter of accounting) involve reducing lending to the US. Thus you haven’t explained why people advocate tariffs but not intervention.

(As for “intervening with what”, that’s really a trick question. If China understood that they were fighting a losing battle, then no actual intervention would be necessary. It would only be the threat of intervention. If China refused to give up, we would be intervening “through printing USD”, but the Chinese would be absorbing those dollars as fast as we could print them, so they would have no economic effect – until the Chinese capitulated, at which point we could stop intervening.)

Posted by: knzn | January 16, 2006 at 10:04 AM

knzn -- I would draw a distinction between an exchange rate peg and trade restrictions like tariffs or, what is especially relevant to the Chinese case, capital controls. The reason is that, given enough time, fixing the nominal exchange rate is not alone sufficient to manipulate the real exchange rate, which is ultimately what determines trade flows. Tariffs and capital controls, on the other hand, do work through the real exchange rate.

Posted by: Dave Altig | January 16, 2006 at 06:06 PM

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January 04, 2006

Trade And Debt

One of my New year's resolutions is to work through some the random bits of things I have been meaning to blog on about, stored in my ever-useful copy of EverNote.  So far I am making about as much progress on that as on my promise to eat less ice cream.

Oh, well.  Baby steps.  One piece of old business comes from Don Boudreaux's campaign last month to undermine the view that current account deficits imply indebtedness.  If I might paraphrase, Don's argument -- which you can find here, here, and here -- is essentially that that trade deficits represent an act of deferred consumption -- and hence investment -- by someone in the world. This is crystal clear when the funds made available by countries with trade surpluses are used to purchase plants, properties, or significant equity claims outside of their own border -- an activity known as foreign direct investment

Here's a picture you have probably seen before:


Here's a picture you may not have seen, from Sun Bin:


Since about 1980 the United States has, for all practical purposes, run permanent trade deficits.  It has also been a magnet for direct investment.  And though some of the income from that direct investment is repatriated to other countries, I think you would be hard pressed to argue that the situation shown above represents a loss to Americans.

You can certainly quibble with the size of the U.S. current account deficit today.  Or that in present circumstances current account deficits are primarily financing consumption, not investment. Don would probably say shame on you for your parochial perspective (because those deficits surely represent saving for someone else in the world, even if globally they just swap their consumption today for our consumption tomorrow).   Either way, a blanket aversion to trade or current account deficits just does not seem justified by the record.

January 4, 2006 in Trade , Trade Deficit | Permalink


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Power to the keyboard, Right oN!

Posted by: Edward Hugh | January 05, 2006 at 06:45 AM

Power to the keyboard, Right On!

Posted by: Edward Hugh | January 05, 2006 at 06:46 AM

The Bernanke/Bill O'Reilly view, well argued.

Everybody has to send their money here because, well, they have no choice: the US is just the greatest nation on earth.

But to look at it through another lens, if I'm the US and you're sources of capital, currently:

You throw money at me because if you don't I won't buy your stuff, because after all I don't have a real job myself. Also because if you don't throw money at me, I'll go broke and then _nobody_ will buy your stuff, because I'm the only one stupid enough to keep spending ever-increasing amounts of money I don't have. But to me it's all ok; I think I'm so great you'll keep sending me money forever.

What the Bernanke/O'Reilly/Altig argument seems to conveniently ignore is that these inflows aren't gifts, they're investment that needs to be repaid by our children, by one or more of the following: higher taxes, lower spending power per a falling dollar, and perhaps more than anything, a lower standard of living in the form of opportunity cost if inflow goes to consumption and not productive investment.

I genuinely wonder how some of these people can look their children in the eye.

Posted by: RN | January 05, 2006 at 10:06 AM


what do labor force participation rates look like these days?

Posted by: nate | January 05, 2006 at 10:48 AM

Nice summary of Don's argument but I have the following problem with it. Suppose that I borrow $1 million to open pizza parlors in Los Angeles. I did invest but I still owe the bank $1 million. Of course - as James Hamilton often reminds us - the U.S. is saving LESS not more.

Brad Setser recently posted an interesting paper with "Dark Matter" being part of the title. The upshot is that when one sees the fact that the U.S. has positive net income from abroad even today, one has to ask whether the MARKET value of US investments abroad so greatly exceedks the BOOK value that our investments abroad might actually be worth more than the recorded $12.5 trillion in US obligations to the rest of the world.

As I note over at Angrybear, it's an interesting claim, but then we have been offering transfer pricing manipulation as an alternative explanation as to why recorded net income from abroad is still positive for the U.S.

Posted by: pgl | January 05, 2006 at 05:13 PM

There are many things I am willing to give up, but Blue Bell ice cream is not on the list.

Moderation perhaps, but that's about it.

Hook 'em, Horns!

And pass the chocolate syrup.

Posted by: Movie Guy | January 05, 2006 at 06:55 PM

Unless "COMPNENTS" is something new, you've made a common blogger mistake - you typed in the title to the chart, looked at it quickly one time, then never looked at it again.

Happens to me all the time.

Posted by: Tim | January 07, 2006 at 08:32 PM

I hold that the Asian mercantilist manipulation of exchange rates that underpins the trade and current account deficits is simply a variant of the "vendor financing" fraud that fueled the telecomm bubble.

Just as the managments of Nortel and Lucent deceived their stockholders into thinking that business was great by lending customers the money to buy their products, though those customers had no real prospect of ever being able to repay the loans, so do the governing and managing classes of the Asian countries do essentially the same thing to deceive their citizens into thinking that export manufacturing is a great business.

In the cases of Nortel and Lucent, there were outside agencies in a position to expose the fraud and call management to account. In the case of the Asian export economies, there is not. These unsustainable trade imbalances will continue until they have so distorted the world economy that some constraint makes it simply impossible for them to go on. Put differently, straw will continue to be piled onto the camel until its back breaks.

Posted by: jm | January 09, 2006 at 10:27 AM

RN: "What the Bernanke/O'Reilly/Altig argument seems to conveniently ignore is that these inflows aren't gifts, they're investment that needs to be repaid by our children." If the issue is foreign direct investment, then the returns to that investment is what pays for the trade surplus today. And it is still a winning proposition for domestic households because more capital makes our labor more productive, independent of who owns it. I think what what you are worried about is the case where the extra resources we are belssed with from abroad are consumed away. Although I still think there is some room for discussion about how muh we should worry about this, it is fair to propose that this may represent passing a burden on to future generations.

pgl -- Right, as always. Investing with borrowed funds generates its own income to finance the loan, of course, so that does not worry me. I found the dark matter discussion quite interesting. Maybe some day I'll have something intelligent to add.

jm -- As I said above, I don't want to push the story to the point of claiming that trade deficits should be unquestionably accepted as a positive development. However, the trend for the current account deficit since the beginning of the 1980s is definitely toward deficit, and it has been associated with a lot of investment in the US. That, to me, suggests Don's point was worth taking note of.

Tim -- Yes, my RAs were mortified by sloppiness as well.

MG -- God bless Vince Young! (Both for beating USC and for deciding to be absent when Texas plays the Buckeyes next fall.)

Posted by: Dave Altig | January 09, 2006 at 01:42 PM

But what about this?

I am extremely skeptical that much of the inflow is foreign direct investment.

I read and speak Japanese fluently, was associated with the country in various trade-related areas until about five years ago, and live in the area near O'Hare Airport where many Japanese companies have US offices. The Japanese presence in this area is dramatically less than it was ten years ago. The clientele of my favorite Japanese restaurant, which used to be mainly Japanese, is now almost entirely American.

And I read the Japanese business and economics press fairly regularly, and have seen nothing about any boom in FDI to the US.

Japanese FDI, at least, is going to China, not the US.

Posted by: jm | January 10, 2006 at 03:00 AM

Where you're likely to find increased Japanese private investment in the US is in the MBS market, from financial entities rendered desperate for yield by the zero-interest-rate policy.

As the MBS market goes south with the bursting of the real estate bubble, there'll be an immense scandal back in Japan, and that source of funds will dry up.

I'd be surprised if the Japanese are not also active in selling credit default insurance -- the big boys' equivalent of selling naked puts. But it's late...

Posted by: jm | January 10, 2006 at 03:42 AM

jm -- The picture from Sun Bin above is data, so it speaks for itself. It, of course, only extends through 1998 and most critics of recent US economic policy have argued that the cause of rising trade deficits in the past 4 or 5 years are not comparable to the forces that have yielded a general trend in deficits in the post-1980 period. I'm not really objecting to that claim here -- only pointing out that up to 1998 trade was indeed associated with FDI flowing into the US (big time). Them's the facts.

Posted by: Dave Altig | January 10, 2006 at 11:55 AM

But David, how can data for expansion of FDI from '80 thru '98 have much serious relevancy regarding the nature of today's trade and current account deficits, when pre-'98 they were nowhere near their present horrific scale, as your own graph at page top shows?

BTW, before I go any farther, I should state that I completely agree that free trade is a win-win proposition, strongly believe that unfettered comparative advantage will lead to optimal partitioning of production among nations -- and even agree that, at least in the short term, having foreign governments force their citizens to work for us at below-free-market wages by manipulating their currencies is overall to our benefit.

But exactly because I believe in free markets and comparative advantage, I can't see how the blatantly mercantilistic exchange rate manipulations of the Asian governments can possibly be to the world's and our advantage in the long run. And I find it simply amazing that putative foes of government interference in markets such as Don Boudreaux not only fail to rise up in outrage against such manipulations, but seem to tie themselves in knots finding ways to defend them.

As you must well know, in the five quarters of 2003 through Q1 2004, the Japanese government expended about $320 billion in direct intervention against the yen/dollar exchange rate, and authorized the expenditure of about $1 trillion more.

Consider that, Japan's GDP being about half ours, that is equivalent in scale to the US government expending $640 billion on currency intervention and authorizing $2 trillion more.

What would Boudreaux be writing if the US government did that?

What would you be writing?

How can any serious person use the words "free trade" to describe the current international trade regime?

Are not prices the fundamental means by which participants in free markets signal to each other their relative economic preferences? Is exchange rate manipulation by government buying of massive quantities of US Treasury securities anything other than blatant manipulation and falsification of those sacred pricing signals?

How can the mechanisms of comparative advantage possibly function correctly in the presence of such distortions?

Posted by: jm | January 11, 2006 at 12:47 AM

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December 15, 2005

A Piece Of Good News In The Trade Report

There has already been a fair amount (of very good) commentary about yesterday's trade report for October. Here's the summary picture from the Census:


Calculated Risk points out what you can see in the picture above: "The October record was the result of the significant increase in imports and only a small increase in exports."  Menzie Chinn characterizes the report as coming in "at the tail ends of the distribution of expectations." Kash has a nice breakdown of the deficit by country. General Glut says "Wow, That's a big one." Brad DeLong says "it's not good news." And Brad Setser thinks it's just going to get worse.

But only the Skeptical Spectator (and the Nattering Naybob, if you look hard into the Market Soapbox) took note of the silver lining. From Monsters and Critics:

Cheaper oil helped cut U.S. import prices last month by 1.7 percent, and export prices all fell dropping 0.9 percent, the biggest such decline in 14 years.

The Labor Department Wednesday said November`s decline in import prices followed a 0.3 percent rise in October and was the largest one-month drop since April 2003...

That prompted this, from Bloomberg, via The New York Times:

The Standard & Poor's 500-stock index reached a four-year high yesterday as a drop in import prices fueled speculation that the Federal Reserve might soon stop raising interest rates.

I, of course, cannot speak to that, but it does suggest we might finally be getting some pressure off those nasty headline inflation numbers we've been seeing.

December 15, 2005 in Data Releases, Trade Deficit | Permalink


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Well here we go, and bang on time:

"U.S. consumer prices fell 0.6 percent in November, the largest decline in 56 years, as energy prices posted a record 8.0 percent drop in the month, the government said on Thursday."

"The slide in prices was slightly larger than the 0.4 percent reversal expected by Wall Street and was the biggest decrease in prices since July 1949."

Of course this trend, if it continues, is now going to make it very hard for Bernanke to win his 'inflation fighter' spurs.

Posted by: Edward Hugh | December 15, 2005 at 09:36 AM

It is truly amazing what the volatility in energy prices can do. Even though that component is less than 10% of the basket, an 8% drop over the month can produce the largest decline in the larger index in 56 yrs.
Edward is suggesting that oil prices can influence FF rates and I wonder to what extent oil prices can be managed/manipulated to obtain just that result.

Posted by: calmo | December 15, 2005 at 03:35 PM

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November 10, 2005

More Chinese Trade Surpluses -- And U.S. Deficits

The attention getting news morning is that, yes indeed, those Chinese trade surpluses started growing again -- and ours keep shrinking.  From Bloomberg:

China's trade surplus swelled to a record $12 billion on a jump in exports that's strained ties with the U.S. before a visit by President George W. Bush.

The surplus widened in October from $7.56 billion in September, the Beijing-based customs bureau said in a statement today. Exports rose 29.7 percent from a year earlier, led by electronics, outpacing a 23.4 percent gain in imports...

Shipments of electrical appliances and electronic products jumped 34 percent, and machinery exports surged 29 percent.      

Clothing exports rose 21 percent to $61.1 billion and the nation sold yarn and fabric abroad worth $34 billion, 25 percent more than a year earlier.

Along with this comes the inevitable suggestions that China rethink the scope and pace of policy reforms.  But it is useful to place Chinese developments in a broader global context.  From the Wall Street Journal (page A2 in the print edition):

China's trade surpluses to a large extent are the result of the globalization of manufacturing. Companies from the U.S., Japan, South Korea and Taiwan have all shifted production to China, where goods are assembled for export using mainly imported parts. Lately, exports have been boosted as a result of overinvestment in everything from steel to furniture making, which has prompted Chinese factories to sell some of their surplus output overseas.

I'm not exactly sure why "overinvestment" and "surplus" are the right words -- in other words, I'm not sure why we should think of this export activity as a mistake (as the language implies) rather than an exercise in comparative advantage.  Neither am I sure  why we accept the implication that the bulge in the surplus is a temporary development (absent changes in existing controls on the yuan and financial capital flows).  In fact, the WSJ article warns otherwise:

A dip in the trade surplus last month, when imports grew more strongly than expected, was seen by many economists as further evidence that domestic demand was picking up, and that surpluses would start trending lower.

However, it now looks like the September figure might have been just a bump in the road for the Chinese export juggernaut. For the first 10 months of this year the trade surplus has hit $80.4 billion, compared with $32 billion for the whole of 2004. Most economists believe the full 2005 surplus will reach $100 billion, an all-time record.

That may make this morning's trade report all the more dramatic. From MarketWatch:

The U.S. trade deficit widened by 11.4% in September to a record $66.1 billion, the Commerce Department said...

As is often the case, though, it's not just China:

The trade deficit with China widened to a record $20.1 billion in September from $15.5 billion in the same month last year. The trade gap with China rose to $146.3 billion in the first nine months of the year, up from $114.3 billion in the same period last year.

The U.S. also set record trade deficits with Canada, South/Central America and OPEC.

That said, these numbers, like all those in the immediate aftermath of the summer energy-price spike and hurricane disruptions, are a bit hard to read:

A surge in energy imports needed after Hurricanes Katrina and Rita laid waste to the energy infrastructure along the Gulf Coast in September boosted imports. At the same time, a strike a Boeing Co. sharply cut the number of airplanes exported in the month.

Even though economists had anticipated these factors, the trade deficit in September was well above expectations.

The October surge in the Chinese surplus might suggest that it is not so clear that we would want to take much solace in the possibility that things will look better on the other side of the "temporary factors."  On the other hand, this morning also brings this news from the Bureau of Labor Statistics:

Import prices declined 0.3 percent in October, the Bureau of Labor Statistics  of the U.S. Department of Labor reported today, after increasing 2.3 percent in September.  A downturn in petroleum prices more than offset higher nonpetroleum prices.  The U.S. Export price index rose 0.6 percent in October following a 0.8 percent advance the previous month.

That may, in the end, be the bigger story when we finally see the October trade numbers.

UPDATE: Calculated Risk agrees that September was a difficult month to forecast..  Brad Setser is not totally surprised, and eagerly awaits the October report on Chinese reserve accumulation.  The Skeptical Speculator also notes that energy-price effects are moving in the opposites direction, and,
along with Edward Hugh reports,that the French economy is showing signs of life.

UPDATE JR: More good stuff, from Menzie Chinn a now official member of the Econbrowser team.

November 10, 2005 in Asia, Exchange Rates and the Dollar, Trade Deficit | Permalink


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October 25, 2005

Getting The Savings Glut Right

Perhaps it is because he is the most forceful discouraging word at the moment, but for the second day in a row I find myself reacting to a comment from Barry Ritholtz at The Big Picture.  What got my attention this morning relates to Barry's reservations about Ben Bernanke's nomination to replace Alan Greenspan at the helm of the Federal Reserve Board of Governors:

My only reservations with Bernanke are a couple of his speeches as a Fed Governor:

The Global Saving Glut and the U.S. Current Account Deficit -- was just so much political blather. It completely fails intellectually.

I have used the global savings glut story many times -- most recently here -- but I do agree with those that have urged us to put more emphasis on the global investment bust side of the story. Although a glut by definition implies a surplus relative to a deficit in something else, from which side of the saving-investment equation the surpluses arise is relevant for many of the policy questions we want answered.  But that quibble aside, I think Brad Setser has exactly the right perspective:

But Bernanke's savings glut speech also got two key things right -

The counterpart to the increase in the US current account deficit has been a rise in the current account surplus of the emerging world.    He rightly puts far more emphasis on the emerging world than on Europe or Japan...

And Bernanke recognizes that the transition from a housing-centric to an export-centric economy (when it happens) may not be easy.

An intellectual failure it was not.

October 25, 2005 in Trade , Trade Deficit | Permalink


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» More Glut from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 26, 2005 1:09:14 PM

» More on the Savings Glut meme from The Big Picture
Macroblogger David Altig got me thinking in more detail about the Bernanke/Clarida Savings Glut argument; As mentioned previously, I am not a fan of this flavor of rhetoric, nor the specific details. I find them wholly unpersuasive. Indeed, the entire... [Read More]

Tracked on Oct 29, 2005 7:04:51 AM


I also think Brad got it about right with regard to the savings glut. He raises some important questions that are worth debating.

Posted by: William Polley | October 25, 2005 at 08:52 AM

The savings glut argument is a semantic game that reminds me of The Simpsons:

"Oh, meltdown. it's one of those annoying “buzzwords." We prefer to call it an unrequested fission surplus."

While that settles the issue for me, others may want more details:

1) The US savings rate is almost nonexistent; It is exceedingly difficult for a stone cold drunk to lecture others on the virtues of fine wine;

2) Much of the rest of the world looks somewhat askance at what is often called the "excessive consumption" in the U.S.

Consider Europe: Their culture is much longer vacation time than us, shorter working week, and most of the Summer off. They are not nearly the consumer society we are. For us to suggest that Europeans need to start buying more stuff is not only unrealistic, it generates guffaws.

3) In all seriousness, The Savings Glut argument is a defense of a structural imbalance via a mostly painless solution, rather than the difficult medicine (most adults) know are necessary to cure the problem.

4) Then there's the "careful what you wish for" factor: What would happen if the rest of the world suddenly decided to go on a spending spree, racking up big debts, rather than buying our bonds?

Sheesh, tis a scary thought . . .

Posted by: Barry Ritholtz | October 25, 2005 at 02:43 PM

While I tend to agree with Barry that the global savings glut thesis does not fit the facts, I never considered Bernanke's statement to be motivated by GOP politics. It is interesting to note that the Bush cheerleaders over at the National Review do not like this appointment either - but their "reasoning" is full of BS. But then - what's new?!

Posted by: pgl | October 25, 2005 at 04:45 PM

I reread Brad Setser's piece (Here: http://www.rgemonitor.com/blog/setser/105474).

Its hard to find in his critique any evidence that he buys into the Savings Glut meme . . . Indeed, after agreeing with Dan Gross critique that the Savings Glut
is a self-serving explanation for America's bad habits (see this: http://slate.msn.com/id/2121017/), Setser goes on to list 5 major criticisms of the Savings Glut theory.

The two nice things he said was little more than a polite coda, IMHO

Posted by: Barry Ritholtz | October 25, 2005 at 05:25 PM

Ben Bernanke is more than welcome to quote or attempt to dispute my conclusions as outlined below. I believe the following explanation is accurate and comprehensive.

Dave, your people at the Cleveland Fed are welcome to try to take it apart. I have plenty of CEOs and other heavies sitting on my side of the table.

Economic Hydrology Theory

The Future of Domestic Production versus Offshoring and Outsourcing to Foreign Locations

Once the WTO and national governments improved the opportunities for corporations to invest in the least expensive global production locations, the stage was set. Coupled with continually improving transportation and communications efficiencies, the successes of offshoring and outsourcing corporations which led the way were met by competitive desires of other corporations to also seek new lowest cost production sources. At present, over 450 of 500 top U.S. corporations have operations in China, as an example.

Unimpeded and with regard to available skill levels and technologies, corporations will seek out the lowest cost blue collar and white collar production sources on the planet and will create new production empires in those locations as fit their market needs. Currency manipulations and other foreign and domestic government incentives that improve foreign-based blue collar and white collar production opportunities increase the rate of flow or transference to such locations. The larger concentration of global production in lowest cost production environments results in a convergence of foreign direct investment (FDI) monies targeted toward achieving greater scales of production at these locations. This effort, in turn, minimizes the need for investment and development elsewhere by such corporations which further eliminates the logistical and technical support chains that previously existed for duplicate operations at facility locations in other nations. The results are reduced overall investment costs, reduced production costs, labor substitution, and reduction of related supporting logistical and technical support services and employment in other nations.


Good Luck, Ben.


Posted by: Movie Guy | October 26, 2005 at 03:05 AM

Well since Ben Bernanke himself is probably suffering from a bit too much overbooking to speak out in his own defence, I'll throw in my two centimes worth (from here in Euroland) to see if I can throw any light on why he holds to such an apparently 'intellectually flawed' hypothesis. (gee, for someone who's main strength has been argued to be his intellectual prowess, this would certainly seem to be a failing were it to hold).

First I think that what needs to be said is that Bernanke did not simply talk about a "global savings glut", he spoke about the 'glut' *and* the US CA deficit, and it was undoubtedly this association which lead to all the fuss.

It was thought that Bernanke was trying to *justify* the CA deficit. I would argue he wasn't trying to justify anything, he was trying to understand something. I wish more people would follow his example in this sense.

And what was he trying to understand? He was trying to understand something which apparently has even Alan Greenspan puzzled: why long term interest rates remain at stubbornly low levels.

Bernanke was trying to understand and explain this phenomen, and I think it is behoven on his critics , in rejecting his explanation, to offer - as surely they are entitled to do - some rival hypothesis.

Simply to say that monetary policy has been extremely accommodative is circular and begs the question: why has monetary policy been able to be extremely accommodative, indeed, as Dave would be the first to recognise, why are central bankers having great difficulty in easing them upwards without pushing against yield-curve inversion?

This was Bernanke's first problem.

Clearly it is the historically low level of long term rates which facilitate the US CA deficit, even if the mechanism is via a wealth effect on US consumers produced by a housing boom which is fuelled by these same rates.

By-the-by Bernake made what I think is the extraordinarily obvious point that there is no necessary connection between substantial and sustained fiscal deficits and CA balances, with high government deficiters Germany and Japan running ongoing surpluses. This I think is what brought the boiling oil down on Bernanke's sun-baked back.

Now what did Bernanke actually say about saving? Well......

"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad."

Here we have one key point: demographic changes in the ex-US Oecd world are producing ever-higher saving rates, *and* a weak-internal-demand driven dearth of investment opportunities.

Some have referred to Bernanke's linking of saving and investment here as subtle. Pah! I would say it was basic Econ 101, ineed I would say that anyone who doesn't have the basic intuition involved here shouldn't even bother signing up for Econ 101. Saving and investmnent are connected, normally via interest rates, and low interest rates normally should be seen as indicating something about the supply of savings and the demand for investment.

Bernake here is simply citing IMF orthodoxy about the impact of demographic changes on global trade and savings patterns (see WEO October 2004, Chap 2), and the result of a lot of simulation studies which all point in the same direction.

Where I think what Bernanke said might be criticised is for using "too broad a brush". This is also something which has allowed his critics in through the back door. What he declares to be a stylised fact of all mature industrial countries is far from such. It is not true, for example of France, it is not true of the UK. So the argument does obviously need refining.

I have been arguing that we need to consider two factors here: median ages, and the rate of ageing. The two countries with the highest median age, Germany and Japan (both over 42) are well-characterised by this account, as are countries which are ageing rapidly (S Korea, Hong Kong, Taiwan, Singapore).

China is a connundrum, and many factors are undoubtedly in play, but at least part of the explanation for China's high saving rate must surely be the very rapid increase in life expectancy and the fact that the economically more prosperous urban population have few descendants thanks to the one child policy.

Bernake's thesis, however, isn't limited to the developed world since:

"a possibly more important source of the rise in the global supply of saving is the recent metamorphosis of the developing world from a net user to a net supplier of funds to international capital markets".

So why the change? Well, for Bernanke:

"In my view, a key reason for the change in the current account positions of developing countries is the series of financial crises those countries experienced in the past decade or so"

This view has been criticised on the grounds that many of those who suffered most during the crisis have now carried out "balance sheet repair" and this argument surely has a ring of truth to it.

Again, I think the original view needs re-defining, just as the term "mature industrial economies" is far to broad, so too is the term "developing countries", since in this he includes states as diverse as S Korea and Thailand (which are, in fact, rapid agers) and the oil exporting states which still (ex Russia) are extraordinarily youthful in general (ie still have to pass through the full demographic transition). Interpreting saving in this latter - oil producing - context again isn't easy. One explanation could be 'income smoothing' (if you expect the price of oil to fall again) or another could be a 'lop-sided' development impact with the sudden surge in earnings skewing even further societies with high levels of inequality and corruption.

Be that as it may, the absence of theory doesn't decry the reality, which is the accumulation of savings, and lower global interest rates, which is why I think the 'savings glut' argument will prove to be more than something of a passing intellectual fad.

Incidentally Barry, since Brad S doesn't seem to have passed by, he is *not* a 'savings glut' argument groupie (which I must admit I unashamedly am). He simply recognises that *some* of Bernanke's arguments make sense.

Also, from over here in ol' Europe, we love leisure, but not the kind which means that participation rates from 55 onwards are ludicrously low, and Paygo pension funds in constant danger of un-balancing. Also, there is no 'typical' EU ageing profile. French fertility is not that different from that in the US, the UK is still comparatively 'young'. The big agers are Germany, Italy and Spain. The interesting thing will be to watch whether after the housing boom ends Spain will enter the group of glut-inducing savers.

Posted by: Edward Hugh | October 26, 2005 at 04:40 AM

ok, I am a bit late to this party, but:

1) I cannot match Edward on aging, but I do know a thing or two about emerging market balance sheets, and to me, the "balance sheet" repair argument is the weakest bit of Bernanke's argument. China simply never had a external balance sheet weaknesses that it needed to repair (its levels of external debt to reserves were always healthy, and it has very small currency mismatches), and, while it is not worth going into here, buidling up fx assets to me is of very little use when it comes to repairing the domestic balance sheets of the banks. shifting fx reserves to the banks as capital just transfers the central banks currency mismatch to the banking system, and to a large degree, it has substituted for more fundamental repair. bottom line, balance sheet repair cannot explain why china's reserves went from 30% of GDP to 50% of GDP over the past couple of years. And Russia also has by now more than repaired its balance sheet, and it truly did need some repairs back in 99 and even 00 -- I take balance sheet vulnerabilities seriously, but reserve accumulation in EM land accelerated AFTER the key balance sheets already had been repaired.

2) you will note that I don't criticize Argentina, Brazil or Turkey for reserve accumulation -- i think all three have balance sheets that are still under repair. Turkey in particular should have built up reserves (net reserves) by intervening to offset lira appreciation in my view.

3) I think Bernanke's initial speech did put too much emphasis on the savings side, and only later did he modify his presentation to include the fall in investment ... it works better on those terms. ironically, it also works pretty well right now, largely because of the late 04 deceleration in investment growth in china led savings v. investment to swing a bit, and, above all, cause of the oil exporters.

4) I would note that a global savings glut (relative) to investment triggered larger net private capital flows to China (do the math -- FDI + hot money was 10% of GDP or so in 04; maybe a bit less in 05) but none of the mechanisms that Bernanke indentified that turned a smaller surge in inflows to the uSA into lower savings and investment took root in China -- presumably b/c the chinese authorities resisted. lots of my critique of bernanke comes down to not emphasizing enough that the private flow of capital has shifted back to emerging markets.

5) both my critique and my points of agreement were sincere -- I cannot tell you how often I run across arguments that work off the premise that emerging markets need access to financing from the US in order to develop. Maybe. But right now, the US needs financing from emerging markets even more ... Dooley et al also got the basic flow of funds right. lots of folks don't. this is one of my biggest pet peeves.

6) finally, edward, i would note that according to the IMF, investment in the euroland as a whole is about the same as investment in the us as a share of GDP, and if you net out residential investment, it might well be higher -- the big difference is not "attractive investment in us, but not in europe" so much as that, setting spaniards aside, europeans save and we here don't.

Posted by: brad setser | October 27, 2005 at 01:15 AM

p.s. i also don't like the 20 cents on the dollar fed study for the impact of fiscal adjustment on the current account quite as much as bernanke does ... but my critique of that study (which assumes lots of crowding out) is a bit at odds with my crique of the glut -- edward is right, the core mystery is why us real long-term rates are as low as they are despite the big swing in fiscal toward a structural deficit. Bernanke was on to something, even if i don't buy his balance sheet repair explanation ...

Posted by: brad setser | October 27, 2005 at 01:19 AM

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September 27, 2005

Morning Round Up, Odds and Ends

More stuff I read this morning:

--William Polley asks bloggers to weigh in on FOMC policy, and Everyone's Illusion predicts three more rate hikes are coming.  William hopes it isn't so.

-- Barry Ritholtz continues his campaign against the notion of core inflation.  Debate is good -- but I'm holding my position for now.

-- David K. Smith does some China myth-busting.

-- Econbrowser kicks out another must-read post on the origins of the U.S. current account deficit.  Jim is worried.  Mark Thoma helps out with some advice from The Economist.  The bottom line -- the U.S. should save more, China and other emerging-economy
countries should save less.

-- William Polley breaks the news that the Federal Reserve Bank of Chicago has brought the world its first official blogs from the central bank.  Gee -- wish I would of have thought of that.

UPDATE: I neglected to notice that Menzie Chinn was guest-blogging at Econbrowser.  Jim may or be worried.

September 27, 2005 in Asia, Deficits, Federal Reserve and Monetary Policy, Inflation, This, That, and the Other, Trade Deficit | Permalink


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The Econbrowser post on the CA deficit is excellent, but the author is new guest blogger Dr. Menzie Chinn, not Professor Hamilton.

So many good blogs, so little time ...

Posted by: CalculatedRisk | September 27, 2005 at 03:00 PM

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Morning Round Up, International Edition

A little of this, a little of that, from some of my blogger colleagues:

Edward Hugh brings our attention to a Financial Times report on a new proposal from Nicolas Sarkozy, president of France's Union for a Popular Movement (UMP) party that would make the largest countries in the EU

"...the motor of the new Europe."

Mr Sarkozy said this G6 - France, Germany, the UK, Italy, Spain and Poland - should make collective proposals to other EU leaders. The other members could accept or reject these proposals, but they should not be able to prevent the G6 from pursuing them.

In another post, Edward reports that the Swiss have voted to gradually ease restrictions on the free movement of workers from the EU-10 'new accession’ members.

And from Edward one more time, this news:

Eurostat reports that 12 EU states exceeded the 3% stability and growth pact limit last year...

All the larger EU states (with the honourable exception of Spain) had excess deficits...

Maybe that helps to explain this, from Nattering Naybob:

While most investors suspected there was wholesale diversification from USD holdings by major central banks, the IMF’s data paint a very different picture. The volume of EUR purchases last year was significantly less (about half) than the share of EUR holdings in total reserves at end-2003.

The latest IMF report shows global holdings of official reserves in USDs rose from 65.8% to 65.9%.

A related take, from The Prudent Investor:

I assume that the political uncertainties in Germany and fears of unabatedly rising deficits in the USA will keep currencies in an equilibrium.

September 27, 2005 in Asia, Europe, Exchange Rates and the Dollar, Federal Debt and Deficits, Trade Deficit | Permalink


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September 16, 2005

Consumer Sentiment Throws A Funeral -- And Nobody Comes

There's a technical term for the likes of today's report on the University of Michigan's index of consumer sentiment for September: Holy smokes!  The ugliness, courtesy of Reuters:

U.S. consumer confidence plummeted to a 13-year low in early September, battered by record gasoline prices and the full force of Hurricane Katrina, a report showed on Friday...

The University of Michigan's closely-watched consumer sentiment index eased to 76.9 in September from 89.1 in August, well below Wall Street forecasts and even the 81.8 recorded after the Sept. 11, 2001, attacks on New York and Washington.

Current conditions dropped to the lowest level since December 2003 while the expectations index plummeted to its lowest point since February 1992.

If this was bad news, equity markets forgot to notice. Every major index finished up for the day:

U.S. Stock Markets
Market Level   Change Last update 
djia 10,641.94 83.19/0.79% 9/16 4:30 
nasdaq 2,160.35 14.20/0.66% 9/16 5:16 
s&p 500 1,237.91 10.18/0.83% 9/16 4:59 
russell 2000 671.98 6.56/0.99% 9/16 4:59 
nyse composite 7,646.29 63.15/0.83% 9/16 4:12 
dow transport 3,633.72 36.73/1.02% 9/16 4:30 
dow utilities 428.85 4.84/1.14% 9/16 4:30 
amex composite 1,721.32 11.19/0.65% 9/16 4:08 

Perhaps the better-than-expected current account report for the second quarter helped, but this explanation, from Briefing.com, feels about right:

... the lowest reading on consumer sentiment since 1992 stalled early buying efforts; but since the market foresaw a considerable Katrina-induced decline and the data don't correlate well with consumption patterns, investors ultimately looked past the report.

If you're a central banker, however, the inflation expectations part of the Michigan survey does make you think twice.  This comes from the survey newsletter:

Consumers expected an inflation rate of 4.6% during the year ahead in early September, a substantial jump from the 3.1% recorded in August, and the highest inflation rate expected since 1990.

On the other hand:

Importantly, the average annual rate of inflation expected over the next five years hardly changed, inching up to 3.1% in September from 2.8% in August...

That's a comfort, but the bond markets did sit up and take notice.  Also from Reuters:

Treasury debt sold off for a third session on Friday, sending benchmark yields to one-month highs as bearish technicals and growing inflation fears obscured a Katrina-related plunge in U.S. consumer confidence.

The University of Michigan's sentiment index fell to a 13-year low in September, but the market was too worried about an accompanying spike in inflation expectations to glean any benefit from Americans' gloomy assessment of the economy.

An overreaction?  More to follow.

September 16, 2005 in Data Releases, Inflation, Trade Deficit | Permalink


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» Consumer confidence plunges from Econbrowser
Yet another key leading indicator turns gloomy. How much can the stock market and the Fed shrug off? [Read More]

Tracked on Sep 19, 2005 5:38:51 PM

» Consumer confidence plunges from Econbrowser
Yet another key leading indicator turns gloomy. How much can the stock market and the Fed shrug off? [Read More]

Tracked on Sep 23, 2005 2:12:35 AM


One word: Ouch!

Of course, none of us are sure how much Katrina influenced the consumer sentiment number ("animal spirits," I guess you could say). That effect could be an overreaction--or at least a reaction to events that have little to do with the business cycle, take your pick.

But even so, the trend in energy prices (and expectations for natural gas prices specifically this winter) are a major concern. That's probably less of an overreaction.

As we've all been saying. This is worth watching.

Posted by: William Polley | September 17, 2005 at 12:00 AM

"As we've all been saying. This is worth watching."

Quite William, quite. I think we're all sitting here riveted.

Obviously we'll have to wait and see what happens to the CCIs as the months pass.

On the energy thing, it is interesting to note the way many analysts think that the eurozone is more vulnerable to a supply shock than the US is. My feeling is that part of this is the willingness of US consumers to reach for the credit card to borrow themselves out of a short term spike. This would be one way to read what James Hamilton has been arguing about oil futures.

But what if it isn't a short term spike? Aha, that's why we're all riveted - or welded - to our seats, peering out across those screens.

Posted by: Edward Hugh | September 17, 2005 at 06:11 AM

We are celebrating the wake.

Posted by: Lord | September 18, 2005 at 02:40 AM

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August 13, 2005

The Trade Report: Back To "Normal"?

The bottom line, from the New York Times:

The nation's trade deficit surged in June to its highest level in four months, pushed up by the rising cost of imported oil and the reluctance of foreigners to purchase more of what America produces.

The $58.8 billion deficit in the trade of goods and services was $3.4 billion above the slightly revised May level, the government reported yesterday. Imported crude oil and petroleum products accounted for roughly half of the increase...

Brad Setser thoroughly covers the oil-price impact, and the Times article suggests you may as well start building more of the same into your trade deficit forecast:

... with oil prices continuing to rise since June, the promise is for even larger trade deficits in coming reports.

Add to that a reasonably good retail sales report for July, and you would be justified in feeling that prospects look pretty dim for much improvement in the trade deficit over the near horizon.

If you are looking for a reason to be a contrarian, you might note that weak exports loomed large in the June trade number. Better economic news in the rest of the world (here , here, at The Skeptical Spectator, for example) gives some hope that the export trend will again turn upward.

And though The Capital Spectator is singing a little of the dollar blues, isn't that what the doctor ordered to bring the trade-deficit under control?    Maybe, but as the Times article points out, the exchange-rate/trade-deficit connection is always tenuous:

Some economists argue that faith in exchange rates is misplaced. They say that consumption and economic growth are much stronger in the United States than in other countries and that Americans, as a result, suck in imports at a greater pace than people abroad.

"The trade deficit is much more responsive to the growth and consumption differential than to exchange rates," said David Malpass, chief economist at Bear, Stearns & Company, representing this view.

Brad Setser makes a similar point...

As Menzie Chen notes, dollar depreciation generally reduces the trade deficit by increasing the dollar value of US exports, not by reducing the dollar value of US imports.  We got the surge in US exports.   But the surge in US exports has not led to a fall in the trade deficit because strong US demand growth has kept US import growth rates high.

... and General Glut concurs.

Looking backward, the June report does introduce the possibility of another revision in second quarter GDP.  Again from the Time article:

The trade deficit narrowed in the late winter and early spring, getting as low as $53.6 billion in March, and the Commerce Department had assumed that the June number would continue that trend. That assumption was incorporated into the department's initial estimate of economic growth for the second quarter, which ended in June.

The initial estimate was for a 3.4 percent rise in the gross domestic product. That was published in late July, before the June trade numbers were available. Now the June deficit is likely to shave one- or two-tenths of a percentage point off the G.D.P. estimate, some economists say. The reason is that the extra outlay for imports represents money diverted from spending for domestically produced goods and services. Domestic production is the source of economic growth.

An Aside: Calculated Risk also reports on the trade report, but I mention that mainly as a reason to give a periodic reminder that CT is an excellent place to keep abreast of the housing market news. Just yesterday he had four -- count 'em, four -- posts on the topic: On rising inventories in Virginia and elsewhere, on warnings from the New York Times and a UCLA professor.

UPDATE: I painted Brad Setser's comments about the effects of exchange rate changes with a brush that was a bit too broad.  See Brad's clarification in the comment section below.

August 13, 2005 in Data Releases, Trade Deficit | Permalink


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Not sure I am totally comfortable being cited in support of a Malpass opinion ... we are usually found on opposite sides of exchange rate debates.

Just to be clear, i think both relative growth rates and relative prices (i.e. exchange rates) matter. But the impact of relative price changes is seen mostly clearly on the export rather than the import side of the ledger (price and volume effects work in opposing directions on imports, while there is no price impact on exports ...). Right now US exports to slow growing europe are growing faster than US exports to the fast growing Asian-Pacific region (even Asia-Pacific ex. Japan). The reason, in my view: the shift in the euro/ $, pound/ $ , swiss franc/ $, swedish krone/ $ etc.

But the US external deficit is now so big and the gap between imports and exports so large that to get a major improvement in the trade deficit, you need both channels to fire at the same time. i.e. relative (demand) growth rates also have to change. and realistically, that (sadly) likely implies US growth will have to slow relative to the world (at least US demand growth). Remember, world growth was strong in 2004, even world demand growth. But US demand growth was also strong, and the US has a high income elasticity for imports ...

Posted by: brads | August 14, 2005 at 01:17 PM

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