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.

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December 30, 2005

The Chinese Are Watching The US Housing Market Too

In an otherwise slow week for data releases, all eyes yesterday were on the National Association of Realtors report on existing-home sales for November.  The very short story:

Existing-home sales declined in November while home prices sustained double-digit annual gains...

Total housing inventory levels rose 1.2 percent at the end of November to 2.90 million existing homes available for sale, which represents a 5.0-month supply at the current sales pace.

You can get your fill of blogger commentary at Calculated Risk, at Housing Bubble 2, and at the Skeptical Speculator.  But from China Daily we learn that some are advising the People's Bank of China to pay attention too:

China is on track for robust growth next year but a drop in the dollar could fuel pressure on the yuan and erode the country's foreign currency reserves, an adviser to the central bank said in remarks seen on Friday...

... Yu [Yongding] warned that the United States might stop raising interest rates in 2006 and start guiding the dollar downward, putting upward pressure on the yuan.

"More seriously, China's economy would take a big hit if the U.S. dollar weakened sharply due to such factors as a bursting of the U.S. property bubble," he said. "The loss for China's foreign exchange reserves would be extremely serious."

At the end of September China had $769 billion in foreign exchange reserves, the world's largest after Japan's.

I'm not exactly sure what the designation "adviser" amounts to. Nor am I clear on what serious consequences follow from losses on the central bank's portfolio, except, perhaps, efforts to recapitalize China's struggling banks with transfers of dollar reserves.  That, in fact, could be a big deal:

"Some firms feel that bank credit is tight, but that's resulted from banks' efforts to tighten up risk controls rather than monetary policy, and we cannot resolve the tight credit problem by expanding money supply," Yu was quoted as saying.

Economists have said stringent government requirements on capital adequacy ratios had forced banks to slow down lending.

When it comes to the near-term fortunes of the Chinese economy, I'd keep my eyes on stories like this one, from today's Financial Times:

A consortium led by Citigroup has doubled its bid for Guangdong Development Bank to about US$3bn, underlying the US group's determination to win control of the state-owned Chinese lender.

December 30, 2005 in Asia, Data Releases, Exchange Rates and the Dollar, Housing | Permalink


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Yu Yonding's "advisor" title comes from the fact that he is not a member of the PBoC as a career member of the government; rather, he is an Economist at the Chinese Academy of Social Sciences, and serves on the Monetary Policy Committee at the PBoc. So while "advisor" may make him sound like an unofficial voice, he is very much an insider who knows what he's talking about.

Posted by: Zac | December 30, 2005 at 05:06 PM

Zac -- Thanks very much for that info. Do you know if these guys generally speak on behalf of the Bank, or is it to be assumed that "their views do not necessarily represent those of the PBoC"?

Posted by: Dave Altig | December 31, 2005 at 08:06 AM

I have wondered if they aren't going to bail out the banks anymore whether they will continue to bail out the depositors. They don't exactly have the most transparent financials so depositors are on their own.

Posted by: Lord | December 31, 2005 at 03:38 PM

He almost certainly does _not_ speak for the bank (the last thing PBoC will do is reveal its thinking; it does nothing but motivate speculators and destabilize, in direct opposition to its goals), and in fact likely what's happening is that this is signaling a marked disagreement among officials in the bank and he's using the public press as a sort of power play in an internal struggle.

Posted by: RN | January 01, 2006 at 04:48 PM

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December 29, 2005

Inflation Targeting For Japan?

With positive economic news as a backdrop, Sebastian Moffett speculates on what is next for the Bank of Japan, in this morning's Wall Street Journal (page A9 of the print edition):

Now that Japanese prices have stopped pushing relentlessly downward, the time is approaching for a new monetary policy from the Bank of Japan. The question is: What kind?..

The central bank's policy since 2001 has been a "super easy" approach that amounts to an emergency treatment designed specifically to halt falling prices. The central bank has again targeted zero overnight interest rates to encourage borrowing, and -- in a policy called quantitative easing -- it pumps liquidity into banks to encourage them to make loans.

The central bank has said that once core consumer prices -- which exclude volatile fresh-food prices -- start to grow consistently, it will abandon this policy. But central-bank officials haven't yet made it clear what the bank will do afterward...

Much of the debate involves setting a numerical inflation target, as the European Central Bank and the Bank of England do, and which the U.S. Federal Reserve may consider under Chairman-designate Ben Bernanke.

"A target is needed for monetary-policy guidance" so that people understand what the central bank is doing, says Takehiro Sato, senior economist at Morgan Stanley.

The central bank so far has avoided a numerical inflation target, fearing such a commitment would reduce its flexibility to forestall another asset bubble: If it always has to adjust policy just to meet a consumer-price inflation target, it won't be able to tighten policy when necessary to put a lid on asset prices...

Many economists side with the politicians. Mr. Sato of Morgan Stanley says that, unlike the Fed, which has won a high degree of respect for its handling of monetary policy, Japan's central bank isn't yet trusted by markets because of its past moves and so needs to be disciplined by a target. "The [central bank's] policy track record is bad," he says. "If there is no target, there will be anxiety over future expectations of monetary policy, due to the lack of credibility" of the central bank...

So an increasing number of economists expect the central bank to announce a loose kind of inflation target if consumer prices rise in the first few months of 2006. "The political pressure is increasing," says Kiichi Murashima, chief economist at Nikko Citigroup. "The issue now is how concrete the target will be."

Question: By this time next year, how many major central banks will be without some type of explicit numerical inflation objective?

December 29, 2005 in Asia, Inflation | Permalink


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"Inflation Targeting For Japan?"

In fairness to him Krugman has been arguing for this from the late ninetees, but the BoJ always shied away.

I still have strong doubts they won't continue to do so. The BoJ are so fearful of letting an inflation bonfire burn that they want to begin winding down massive monetary easing ASAP.

To see why they may be reluctant to go for a formal figure, lets just do a little thought experiment.

You are right Dave to indicate that most observers take the view that Japanese prices *have* stopped pressing relentlessly downwards.

But BoJ policy needs to be risk balanced. They need to ask the 'what if' question, not to do so would be just plain irresponsible.

So what if - come the next downturn - Japanese prices begin to press relentlessly down again (we have, remember been here before).

Then the BoJ would be mired in deflation, and stuck with an inflation target. Just where they don't want to be.

So my guess is no, we want be seeing an official target, not anytime soon at any rate.


"A target is needed for monetary-policy guidance" so that people understand what the central bank is doing, says Takehiro Sato, senior economist at Morgan Stanley."

And, one of the GEF stars, Joaquim Fels says:

"Inflation Targeting Wholly Inadequate"?


Which flavour would you like? Please feel free to chose.

Posted by: Edward Hugh | December 29, 2005 at 11:42 AM

The BOJ has set a sort of inflation targetting.

You can see it in the Wall Street Journal's article posted above.

"The central bank has said that once core consumer prices -- which exclude volatile fresh-food prices -- start to grow consistently, it will abandon this policy."

That means the BOJ changes the policy if inflation rate is above zero.

One of the BOJ's policy maker said, "We have adopted a loose inflation targetting."

Then, you may ask, "Why doesn't the BOJ set more explicit inflation targetting?"

The answer is easy; it is useless.

Do you really think that the BOJ has'nt done anything to ease monetary policy?

The reality is quite contrary.

The BOJ has pumpted a huge amount of money into the market by buying short-term bonds from banks.

Its amount is more than a small country's GDP.

However, banks cannot find firms that need money, because firms are eager to pay back loans borrowed in the previous years.

Therefore, banks have nothing other than adding the government bonds to their portfolios, using money from the BOJ.

That has resulted in the extremely low interest rates, which eases the government to issue bonds.

The consequence?

Money circles from the BOJ to banks to the government.

Not to private firms.

How can the BOJ ease monetary condition even with explicit inflation targetting?

Do you say, "Oh, then, the central banker should hand out money directly to each indivisuals all over Japan!"

Even so, people will save it in banks.

The result will be the same.

This situation will continue in 2006.

Therefore, the BOJ will not adopt numerical inflation objectives in 2006.

Posted by: bonnie | January 01, 2006 at 12:06 AM

This raises 2 rather interesting points. 1) the BoJ has a de-facto inflation target - one of the pre-conditions for ending quantitative easing, is that the year-on-year change in the core-CPI should register above zero, ie, a numerical inflation target.

The more interesting point is the purpose of introducing an inflation target. The majority of central banks that have moved to an explicit inflation target have done so in high inflation periods. The Australian and New Zealand central banks stand out! As such, the purpose of the inflation target was to anchor inflation expectations at a lower level and thereby adjust corporate and household sector behaviour towards low inflation expectations (ie, lower wage claims and less speculative investment).

When we look at the behaviour of both corporate and household Japan, we can see that the adjustments to the end of deflation/higher inflation are already underway. There appears to be a structural shift up in the desired capital stock and marginal propensity to consume over the past year. As such, the outcomes an inflation target would achieve already appear to be in place.

Posted by: Pooky | January 05, 2006 at 06:12 AM

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December 28, 2005

Are Workers Losing Ground? Part II

Menzie Chinn, taking his turn over at Econbrowser, asks the question "How well are workers doing?"  His answer, to quote pgl at Angry Bear, is "not as great as advertised."  I'm no expert on advertising, but I have waded into these waters before, and have become sufficiently immersed to know that the numbers have become pretty slippery. 

One of Menzie's points is that labor's share of income -- measured by the ratio of paid compensation to gross domestic product -- has fallen way off its 1967-2005 average:


That picture is fairly compelling, but it loses some of its bite with slightly longer perspective.  Here's the same picture, this time for the entire period since 1967:


The last couple of years look strange only when compared with the immediately preceding years -- which themselves look like an aberration in the period after the great disinflation of the early 1980s.  The labor share calculated by the Bureau of Labor Statistics is a wee bit more favorable to the proposition that workers took it on the chin the last couple of years...


... but it is still not clear that this expansion is progressing much differently than the last one.  And, really, this is just where the trouble begins.  My colleagues Paul Gomme and Peter Rupert explain:

... the “historic lows” in labor’s share are observed only in the nonfarm business sector series produced by the Bureau of Labor Statistics. Other measures of labor’s share—for example, for the nonfinancial corporate business sector or the macroeconomy more broadly—are currently near their averages over the last several decades.

Those alternative measures are ones that avoid, for example, the problems associated with allocating rental income and proprietor's income between labor and capital.  (In other words, they avoid imputing things that we don't observe.)

To me, the labor market remains something of a mystery.  The crux of Menzie's post -- and pgl's endorsement -- is that employment growth, the returns to labor, and so on have been less than they should have been. But I still wonder -- what should they have been?

December 28, 2005 in Labor Markets | Permalink


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OK. Total compensation does include the COST of fringe benefits like employer provided health care insurance. But as Kash of Angrybear has pointed out - the cost has risen in the past 5 years even if the value has not. And as the Economic Policy Institute documents, the dip in measured compensation to GDP during the late 1990's was in part due to health care becoming less costly relative to its value.

Posted by: pgl | December 28, 2005 at 05:18 PM

Hi pgl - Although we both agree on the essence of Kash's point, we disagree on its relevance in assessing the "health" of labor markets. A tax, for example, drives a wedge between what employers pay and what workers receive in terms of purchasing power. If we compared two periods that were equivalent except for the wage-tax, I don't think we would conclude that the performance of the labor market was worse in the period with lower after-tax wage payments. I see the health cares cost issue in a similar light. As long as these sorts of benefit payments are linked to employment compensation, they should be included in our assessment of what workers get for working (for better or worse).

Hope you are having a great holiday season, by the way.

Posted by: Dave Altig | December 29, 2005 at 07:41 AM

I'm an executive recruiter working in the healthcare industry. We've seen wages increase from top to bottom increase an average of 7% per year for the last three years. I have an acquaintance who recruits in the Banking industry and he says wages have increased at an average of 10% per year for the past four years.

It's a matter of supply and demand. Manufacturing pay has stayed basically flat (negative if including inflation into the equation) for roughly five years.

Bottom line, the gap between "rich" and "poor" will continue to widen until the peasants elect a socialist gov't into office...and then we're all screwed.

Posted by: Mr. Z | December 29, 2005 at 10:56 AM

If you want to 'improve' this statistic, you should hope for a recession.

Posted by: Lord | December 29, 2005 at 02:26 PM

David - I understand your point. In fact, I have mentioned it as one of the possible real business cycle reasons why the employment to population ratio is lower now than it was in the late 1990's. However, I'm still not convinced that the Keynesian lack of aggregate demand reason has disappeared.

Posted by: pgl | December 29, 2005 at 06:21 PM

Suppose a family were to save a down payment, buy a beach home and rent it out. Their wages would have declined relative to their "GNP". Would a population of such families help explain a decline in wages relative to GNP?

Posted by: Jack K. Miller | December 29, 2005 at 06:47 PM

Dave -- "To me, the labor market remains something of a mystery."

That's quite a statement, Dave. What is that supposed to mean in layman terms?

What baffles you?

Posted by: Movie Guy | December 30, 2005 at 12:49 AM

Jack -- The answer is yes -- what you describe would reduce labor's share. However, one of the things I was suggesting in the post was that it isn't so clear that the falling labor share is a fact.

MG -- pgl really put his finger on the issue. I'm finding it very hard to disentangle what aspects of what we see on the employment/compensation front ought to count as "weakness," in the traditional Keynesian "too little demand" sense. Something really seems to have changed in labor markets post-1982. You can see that in the compensation patterns above, and it is manifested in slow (in historical context) recoveries of employment out of both the 1990-91 and 2001 recessions. This is presumably related to the decline in volatility in economic activity post-1982 -- it is at least correlated with it -- but why? What's the connection? I think we are still pretty much in the dark about this, and am not at all convinced that our traditional macroeconomic framework for thinking about such things is adequate to the task.

Posted by: Dave Altig | December 30, 2005 at 07:53 AM

The reason the employment to population #'s are lower is because more people retired. See the BLS surveys.

Posted by: cb | December 30, 2005 at 12:46 PM

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Korea Puts The Kibosh On Currency Speculation

From the Wall Street Journal (page B6 of the print edition):

South Korea said that as of February, bid-offer quotes on the won will be released to the public only through local banks in a bid to deter speculation, to reduce market volatility and to bring its foreign-exchange system in line with international practices.

The Seoul Foreign Exchange Market Committee said that as of February offshore and corporate customers no longer will have access to real-time currency quotes but will be offered rates referenced to a spread over the real-time rates.

Bank dealers said the move should help authorities tighten their grip on trading. The won has been a favorite among foreign-exchange traders this year, with sharp swings against currencies such as the U.S. dollar and yen providing plenty of opportunities.

"Basically, the foreign-exchange rate that is traded between banks will be offered to interbank participants only, and offshore traders or corporate dealers have to refer to the rate that will be offered by banks," said the foreign-exchange committee, which comprises the Bank of Korea, the Ministry of Finance and Economy, and commercial banks...

"For now, the rate tends to surge or dive easily as customers can see the real-time matching prices, but once we adopt the system, the market will move in a more stable manner," a local bank dealer said. "Offshore speculators, for instance, will find that it's not so easy to play tricks in the forex market...

Another local bank dealer said the change will allow economic fundamentals to play a bigger role in influencing won trading, while speculative forces no longer will be able to move the market as much.

One more reason to be hopeful that that whatever "global imbalances" exist, they can unwind in an orderly fashion.

December 28, 2005 in Asia, Exchange Rates and the Dollar | Permalink


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December 27, 2005

An Inversion Arrives

Last week's positive inflation report, coupled with what was perceived as relatively weak news on durable goods orders and home sales, had little impact on estimated market expectations for the outcome the Federal Open Market Committee's January meeting.  Another 25 basis points on the federal funds rate remains the runaway favorite among those trading in options on federal funds futures.



Expectations for the March meeting, however, softened by just over 10 percentage points:



That notwithstanding, even a halt at 4-1/2 may not be enough to keep short-term interest rates above long-term rates.  From CNNMoney

The yield on the benchmark 10-year Treasury fell below that of two-year notes early Tuesday, inverting the yield curve for the first time since December 2000.

At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396 percent.

At least some influential people think we shouldn't be overly concerned:

Fed Chairman Alan Greenspan has said the yield curve has lost its ability to signal pending changes in economic conditions because markets have become more complex.

Others, of course, are less sanguine.

UPDATE: Edward Hugh sees some changing fundamentals behind the flattening of the yield curve. But Barry Ritholtz thinks too flat is still "worrisome". The Skeptical Speculator says investors are "concerned."  Ben Jones notes that some think this could be trouble for the new Fed Chairman. And you can watch a video of some talking heads talking, from the Wall Street Journal Online (at least for awhile).

UPDATE II: Mark Thoma is "not worried.

UPDATE III: Dr. John Rutledge believes "This is not the end of the world. It is, however, a time to be thoughtful about the economy and the markets."

UPDATE IV: Jim Hamilton has more to say (and more blogs to which to link).

December 27, 2005 in Fed Funds Futures, Interest Rates | Permalink


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» When The Curves Invert from A Few Euros More
Two bits of news this week appear to be unrelated. The interesting question is whether appearances are deceptive. Firstly the US Treasury note situation: At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396... [Read More]

Tracked on Dec 28, 2005 3:00:43 AM

» When The Curves Invert from A Few Euros More
Two bits of news this week appear to be unrelated. The interesting question is whether appearances are deceptive. Firstly the US Treasury note situation: At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396... [Read More]

Tracked on Dec 28, 2005 3:35:29 AM

» When The Curves Invert from A Few Euros More
Two bits of news this week appear to be unrelated. The interesting question is whether appearances are once more deceptive. Firstly the US Treasury note situation: At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note... [Read More]

Tracked on Dec 28, 2005 3:47:14 AM

» When The Curves Invert from A Few Euros More
Two bits of news this week appear to be unrelated. The interesting question is whether appearances are once more deceptive. Firstly the US Treasury note situation: At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note... [Read More]

Tracked on Mar 10, 2006 2:10:41 AM


Greenspan probably does not currently own a business and a bunch of inventory.

Posted by: nate | December 27, 2005 at 09:35 PM

Greenspan doesn't always listen to the beat of the market. Irrational exuberance aside, when the yield curve inverts, there is something at play. If it is a recession, which could happen because peopel expect it to happen if there is an inverted yield curve, then it is what it is. There may be other things at work, carry trades, foriegn buying, and credit derivative manipulation in underlying markets that are causing it. I know that for sure, many traders are caught "long" spreads and are getting beat up buy it. Momentum of them getting out of bad trades may carry this thing a little further.

Posted by: jeff | December 28, 2005 at 11:17 AM

Jeff, you left out the Zurich gnomes, you fluffheaded non-efficient market conspiracy theorist fluffhead.

Posted by: TCO | December 30, 2005 at 07:30 PM

Do you have any other articles or info on credit derivatives pricing or trading? I found some interesting information on the following sites:



Posted by: Credit Derivative | April 16, 2007 at 12:10 PM

Do you have any other articles or info on credit derivatives pricing or trading? Been looking to find out more info on the player in the market... I've some interesting information on the following sites:

Know where I can find any additional info on the other players?

Posted by: Charlie Mann | April 30, 2007 at 12:49 PM

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December 24, 2005

Ending The Year With A Bang.. er, Whimper... er, What?

The November report on durable goods orders was about the last major non-housing data release of the year, and it was met with decidedly mixed emotions.  On the one hand, here was the headline from CNNMoney:

Durable goods orders surge
Aircraft jump a catalyst for 4.4% November gain, the largest since May; results top expectations.

But then there was this, from the Washington Post:

Investors Snub Durable-Goods Report

What gives?  I think the Nattering Naybob pretty much nailed it:

Durable orders +4.4% vs est. +1.5% vs prior +3.0% the biggest jump in six months, showing seemingly robust durable orders on demand for commercial aircraft +134%. However, upon further review, bookings for non defense capital goods excluding aircraft, a proxy for future business investment, -2% vs. prior +1.2% and shipments -0.1% vs prior +1.6%.

A little bah humbug on the eve of Christmas?  The Skeptical Speculator suggests a little perspective:

The November dip in non-defence capital goods orders ex aircraft notwithstanding, the pace of durable goods orders has been strong over the past year. Year to date, new orders for durable goods have risen 7.5 percent over the corresponding period last year. Over this time frame, non-defence capital goods ex aircraft have done even better, rising 10.4 percent.

The same might be said of yesterday's home sales report, which came in less than expectations and revealed that median home prices are on the wane. From Calculated Risk:

According to the Census Bureau report, New Home Sales in November were at a seasonally adjusted annual rate of 1.245 million vs. market expectations of 1.30 million...

On a year over year basis, November 2005 sales were 1% higher than November 2004...

This report is still reasonably strong.

Hey -- it's the season of good cheer.  Feel free to see the glass half full.

December 24, 2005 in Data Releases, Housing | Permalink


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Hope that you give us some more trips reports of your most recent adventure. I want to know about the blonde.

Our economic future?

If you are successful at coordinating real hourly wage improvements as well as real hourly compensation improvements, neither of which exist YTD in 2005, then your informal 2008 presidential campaign might light a fire under the citzens of the United States of America.

Of course, it would help if you could trim that trade deficit by about 50-60% going forward.

2005? We held our own.

Merry Christmas and Happy New Year

Posted by: Movie Guy | December 24, 2005 at 02:31 PM

Blonde? I heard about a brunette but I did not know the blonde! Interesting!

Posted by: Secret Admirer | December 29, 2005 at 07:59 AM

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December 23, 2005

More Good Inflation News

The scoop, from Reuters:

U.S. Treasury debt prices rose sharply on Thursday after a lower-than-expected November reading on the Federal Reserve's favorite inflation indicator revived hopes for a fast end to the tightening cycle...

In its monthly personal spending report, the Commerce Department said the core personal consumption expenditures (PCE) deflator rose just 0.1 percent in November, below forecasts for an advance of 0.2 percent.

For the year through November, the core PCE rose by 1.8 percent, inside the Fed's perceived "comfort zone," to suggest that inflation pressures, for now, were contained.

That would be referring to core inflation measured by the PCE excluding food and energy components, but the basic story is confirmed by the Dallas Fed's alternative (and, in my opinion, superior) trimmed-mean measure of core inflation:

One-month PCE inflation, annual rate

                  June      July      Aug.     Sept.      Oct.     Nov.

PCE              0.1       3.6       5.2       12.0       1.4      -5.0


and energy
   0.6       0.7       1.8        2.6        1.8       1.6


mean PCE
    1.4       1.8       2.8        3.0         2.0      1.7 

12-month PCE inflation

                   June      July      Aug.     Sept.      Oct.     Nov.

PCE              2.2       2.6       2.9       3.8         3.4      2.7


and energy
    1.9       1.9       2.0        2.0        1.9      1.8


mean PCE
    2.1        2.1      2.2        2.3         2.2      2.2

Using my preferred measure of PCE core, the conclusion really is inescapable -- the underlying rate of inflation is simply not budging.

Of course, the Reuters article also includes this observation:

Regardless of whether outright yield have been rising or falling, the Treasury yield curve has been flattening all week.

The two-year/10-year spread fell toward three basis points, a level some dealers see as the last line of defense against a move to parity, or zero basis points.

Based on our last report of market expectations,  the prospect of spread turning negative looks like a real possibility.  On the other hand, those expectations are pretty fluid at the moment:

In futures, chances that the Fed will raise interest rates in March as well as January slipped to 62 percent from as high as 70 percent on Wednesday.

On the spending side of the Commerce department report, The Skeptical Spectator characterizes the
as "good."  Dean Baker apparently disagrees (although I'm not sure why).  In either event, General Glut still frets that the personal saving rate is negative.

December 23, 2005 in Data Releases, Inflation | Permalink


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» Trimming to the Core of the Matter from Economist's View
New Economist finds research on which measure of core inflation is best: New Economist, Measuring core inflation in US and Canada: How best can central banks measure core inflation? Two new central bank working papers shed some light. New York [Read More]

Tracked on Dec 30, 2005 4:25:16 AM



Did you note CR's post on port traffic with Asia?

Posted by: Movie Guy | December 23, 2005 at 08:29 AM

Consider an article on the cover of the "Money&Investing" section of today's WSJ:

"Industrials Climb 55.71 to 10889.44 But 'Santa Claus Rally' May Not Fly"
by Mark Whitehouse

"In economic news, the number the Commerce Department uses to measure changes in the real value of personal spending - one of the Federal Reserve's favorite measures of inflation - fell 0.4% in November. It was the largest drop on record."

You might confirm I did not misread something, or inadvertently make a typo that adds fog to the situation.

Posted by: nate | December 23, 2005 at 12:01 PM

"Using my preferred measure of PCE core, the conclusion really is inescapable -- the underlying rate of inflation is simply not budging."

Thank you David for NOT being a member of SLAP (Statistical Liars & Academic Prostitutes). http://naybob.blogspot.com/2005/12/slap-core-pce-soohey-pig-pig.html

And further thanks for the recent plug. I know I am hard to read and not a "soundbyte" type as "the devil is in the details".

Interesting codicil and YES it requires digging into the 12/23 Soapbox:

Durable orders +4.4% vs est. +1.5% vs prior +3.0% the biggest jump in six months, showing "seemingly" robust durable orders on demand for commercial aircraft +134%.

However, upon further review, bookings for non defense capital goods excluding aircraft, a proxy for future business investment, -2% vs. prior +1.2% and shipments -0.1% vs prior +1.6%.

Indicating that businesses trimmed orders for most types of equipment and are moving slowly to replenish depleted inventories in anticipation of an economic downturn.

Warning, Danger, Will Robinson, with limited economic slack and low inventories, it won't take much of an increase in demand to result in an exponential increase in inflation...

which could boomerang on everyone.

Posted by: The Nattering Naybob | December 23, 2005 at 05:16 PM

It is amazing to me that inflation is contained given all the economic growth in the world. Production must be that much more efficient. Monetary policy must be that much more precise.

I am not encouraged by a negative yield curve though. Historically, it points to recession. Would a recession have the effect of causing deflation to become a problem? Should we be concerned that there isn't more inflation in this type of economic growth environment?

Posted by: jeff | December 24, 2005 at 04:47 AM

MG - Hadn't nioticed CR's post. Thanks for bringing it to my attention.

nate -- The statement is correct. However, the drop was obviously nowhere near a record for the PCE ex food and energy. Interstingly, that distinction goes to September 2001. (Nice pictures of Chicago, by the way.)

NN: You must have read my mind, or me yours. I actually referenced your comments on the durable goods report before I read these comments.

Jeff -- I have long been on the side of the argument that growth is not intrinsically inflationary, so I feel conmfortable that the conditions for contained inflation are well in hand. However, I still do feel that the ever-flattening yield curve ought not be completely ignored.

Posted by: Dave Altig | December 24, 2005 at 10:31 AM

"However, the drop was obviously nowhere near a record for the PCE ex food and energy."

Thanks for the response!

It was a quote out of the newspaper. You might write the WSJ and point to September 2001.

I am not sure how personal spending is 100% correlated with or causes inflation (or deflation).

Posted by: nate | December 24, 2005 at 10:46 AM




Posted by: bbn | November 11, 2006 at 12:48 PM

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December 21, 2005

Free Trade And Freedom

asiapundit was loaded with items yesterday on internet censorship in China -- here, here, here, and here --  which prompted me to reflect on the juxtaposition of two seemingly unrelated events during my own recently completed trip. 

The first "event" was my own face-to-face with the limitations on internet access imposed by the Chinese government.  There appears to be some confusion about what is, and what is not, blocked in China these days.  Apparently Typead was blocked before, was unblocked, and then blocked once more. Blogspot supposedly lit up again, but maybe not everywhere.  The commentary at asiapundit posts suggests that the situation is, well, confused.

Here is my story, which I have relayed before, in bits and pieces.  During a visit last January, I discovered that I was unable to locate any weblogs hosted by the Blogspot service. Subsequent to that visit, news arrived that Typepad -- my host -- had joined the list of blocked blog services.  It was a pleasant surprise, then, when I found that, upon arriving in China this month, I was having no problem reading all of my favorite weblogs, or posting on my own site. Then a minor disaster befell me, my trusty laptop decided it had had enough of my abuse, and it would henceforth decline to operate. As a consequence, I was driven to the public computer in my hotel's business center.

Uh-oh.  Once again, no Typepad, no Blogspot.  I tried to access these sites in many other public or quasi-public places -- a university, airports and airport lounges, other hotel business centers. All to no avail.  I was led to conclude that, at least where I was -- Guangzhou mostly -- I had relatively unfettered access in the privacy of my own hotel room, but nowhere else.  One conclusion is that travelers -- particularly non-Chinese travelers, who are probably the majority in the hotels I stayed at -- are simply less likely to create trouble than are Chinese citizens.  But that can only be half the answer.  The other part must be that the government finds that it is not useful to put restrictions on foreigners used to a less heavy hand, either because it repels them or because it does not project the desired image of a thoroughly modern China.   

Which brings me to the second event during my visit, the all-too familiar protests surrounding the World Trade Organization talks in Hong Kong. This time around the demonstrations were concentrated among the South Korean farmers.  There appeared to me not much, if any, of the hodge-podge of anti-capitalism, anti-globalization groups that have plagued past meetings.  That is  probably due more to the particular venue than some newly found enlightenment among the groups to which I allude.  In any event, we now have yet another moment in the ongoing attempt to tear down the barriers to global trade marred by considerable noise from those who want no part of it.

The connection between this and my personal internet trials? The irony, of course.  I believe that, if China continues on its current course, the on-again, off-again relaxation of personal freedoms for the Chinese people will soon or later be on-again for good.  That will in main part be due to the dynamics of the relationship between the government and a citizenry growing ever wealthier.  But it will also in part be due to the imperatives of trade, the increasing role of foreigners that trade-driven development requires, and the presumptions of basic freedoms (and economic necessities) that outsiders bring with them.  Foreign business concerns are increasingly moving out of the hotel rooms and into the population, and that itself provides an impulse to change.

I understand that there will always be some interest group that stands to lose from free trade.  And I am not unsympathetic to their plight.  But I take it as an absolute article of faith that those losses are swamped by the returns to humanity as a whole.  And those returns are not just measured in dollars and cents.

UPDATE: myrick stays on the case.

December 21, 2005 in This, That, and the Other, Trade | Permalink


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Interesting comments that jive totally with friends of mine that have recently been to China. A friend of mine was at Tianneman(?) Square with a high ranking Chinese official. He noticed all the cell phones being used by people in the square. He commented to the official that there is no way you could roll tanks in here ever again. The official said he was right.

There has been a lot in the press about the wealth of the Chinese, their development of commodity markets et al. My guess is that they are about to take another leap forward, or they are posturing before a big fall. It is hard to tell with the communists. I think their banking system has a lot of holes in it similar to the Japanese in 1980, and we will have to see how that shakes out.

They always release information for a reason, it just is not clear what the reason is.

Posted by: jeff | December 21, 2005 at 03:49 PM

In the U.S. I have noticed that some businesses or public places have curtailed internet access to certain sites. I am not sure why this is done. In some instances, it is public policy (eg, a library blocks email services because it wants the PCs used for education and research and does not want chit chat on email). In other instances, it may be cost. Businesses do not want to unnecessarily pay for PCs that are broken down by people downloading inappropriate things from the internet.

Posted by: nate | December 21, 2005 at 05:30 PM

One more: the recent edition of Technology Review has an article called "The Internet is Broken". It may or may not be relevant.

Posted by: nate | December 21, 2005 at 06:06 PM

You are quite right about fewer restriction being placed on foreigners. Satellite television, as well, is still technically banned outside of hotels used by foreigners and diplomatic compounds (although not in a way that is either effective or enforced).

Posted by: myrick | December 21, 2005 at 06:18 PM

David --

Last I checked, trade/ GDP is already quite high in China, far higher than the in US. but internet usage is still controlled -- here in the US too, perhaps, though the snooping is on a more limited scale :). The Chinese government certainly is not democratically accountable. That helps facilitate business in some ways -- want to evict a bunch of farmers for a factory or infrastructure, no problem. In China, the farmers don't actually own the land they work on. hence the protests. And it facilitates the off balance sheet subsidy the PBoC provides to US consumption rght now. If the central bank takes big capital losses on its reserves (as say Yu Yongding expects), it can be confident that it will not be subject to ex post legislative scrutiny.

My point: Free trade = freedom sounds right, but China seems to have already achieved a high degree of economic integration into the world economy without providing some basic freedoms. Not just freedoms that matter to the middle class, but others too -- including the freedom to own your own (farming) land (that one gets to me, given my roots). And given that much of that integration hinges on widening global imbalances, it would not surprise me if China's economic integration (measured by trade/ GDP) hits a plateau soon and then starts to fall. That is the likely implication of shifting away from 30% y/y export growth toward other, more domestic sources of dynamism. Us import growth slows to 5-6% per year, keeping M/ GDP constant. US imports from China grow at a similar rate. But China's economy grows faster, driven by domestic demand. That is a good scenario, one of orderly rebalancing. And even in that context, it seems that the free trade = freedom equation might prove to be a bit more complicated.

Posted by: brad setser | December 22, 2005 at 10:51 AM

Uh, Dave. What were the beverages of choice over there?

And were you trying to access typepad after....

Posted by: Movie Guy | December 23, 2005 at 08:31 AM

Brad -- Don't disagree. Overall, though, I do think that there is generally a limit to how far economic liberalization can go absent substantial political liberalization -- especially in a country the size of China.

MG -- Tsing Tao. Yes, of course...

Posted by: Dave Altig | December 24, 2005 at 10:34 AM

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December 20, 2005

Success In China And Japan

As was widely reported last week -- and picked up by Edward Hugh this morning -- China's economy is a lot bigger than we thought.  From the Wall Street Journal (page A12 of the print edition):

The world's fastest growing large economy, China, has just gotten nearly 17% bigger. Beijing on Tuesday said it has recalculated the size of its economic output in 2004 to better reflect the activity of consumers, as opposed to manufacturers.

The impact is that China's gross domestic product was 16.8% larger in 2004 than previously known. China, therefore, ranked as the sixth largest global economy last year instead of seventh, moving ahead of Italy but holding behind France.

The new figure for 2004 GDP is 15.988 trillion yuan, or about $1.931 trillion based on the exchange rate then, compared with 13.688 trillion yuan as calculated under the previous method, according to the National Bureau of Statistics.

The main difference is that China relied on consumer activity and services for 40.7% of national economic output last year, compared with just 31.9% as previously reported. The change is the result of the statistics department's first economic census.

A bigger services economy means China's economy is healthier than previously known since it relies less on manufacturing and exports. It is also richer per capita. Plus, the bigger size of the economy suggests China is more efficient in allocating investment, which based on the old statistics had reached worrying levels.

That revision reminded me of an item posted at Sun Bin about a week ago.  This graph, copied from Sun Bin's item, shows the service sector share of total output across the world:


In that earlier picture, China clearly looks to be a significant outlier in its reliance on manufacturing. With these new statistics, the China part of the map turns to green, in the same category now as India.  As Sun Bin notes, the service sector share of GDP "shows strong correlation to GDP/[per capita]".

Meanwhile, page A12 of this morning's Wall Street Journal also includes this story:

Japan's real economic growth is likely to slow next fiscal year but prices should increase after eight years of declines, the government said, suggesting the fight against deflation may end soon.

In an economic forecast issued yesterday, the government also stressed it will remain cautious when declaring an end to deflation, apparently warning the Bank of Japan against ending its ultraeasy monetary policy too soon.

The gross-domestic-product deflator, which widely reflects consumer prices, will rise 0.1% in fiscal 2006 after falling an expected 1.1% this fiscal year, according to the forecast, which was approved by a cabinet meeting...

Japan's real gross-domestic-product growth is expected to slow to 1.9% next fiscal year from this year's expected 2.7%, as growth in private consumption and capital spending moderate from this year's exceptional strength, the cabinet office said in a forecast it compiles each year to help officials plan policy...

If the forecasts are realized, the government would meet its long-term goal of ending deflation and achieving nominal GDP growth around 2% next fiscal year

That roughly 2 percent real growth rate still seems on the low side compared to the United States.  Population growth in Japan is about 1/2 zero percent compared to about 1 percent in the U.S., implying that estimates of potential U.S. GDP growth per capita remain a good bit above Japan's. But the slower growth of Japan, and every other developed economy, relative to China is no big surprise.  Emerging economies -- where the fruit hangs low and the returns to relatively scarce capital are high -- ought to grow substantially faster than developed economies (at least until they themselves join the developed economy club). Given that Japan is shooting for no deflation and  2 percent real growth, their forecast looks like success.

UPDATE: My friend Edward Hugh, he of Fistful of Euros and A Few Euros More, caught me in a moment of brain lock.  In my original post I described population growth in Japan as about 1/2 percent, having read 0.05% as 0.5%. The mistake is corrected above. Thanks Ed.

December 20, 2005 in Asia | Permalink


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We suggest China consume more, and with a snap of the fingers, they do. Now that's efficient government. :-)

Posted by: Lord | December 20, 2005 at 01:38 PM

What is most surprising about the chart-map is the extent to which economic activity in Chile, Argentina and Brazil is services driven. This is of course in value terms, not volume of employment, but still.

In part I suppose it represents the historic importance of the middle class in those societies. What will be interesting will be to follow the evolution of this going forward.

Posted by: Edward Hugh | December 21, 2005 at 01:13 AM

"Population growth in Japan is about 1/2 percent compared to about 1 percent in the U.S."

While I think the general point you are making is an absolutely valid one, Japan's population is *not* growing at 0.5% per year. The latest preliminary estimates from the Japanese govenment for first half of 2005 suggest that the population may now be *declining* (2005 may be the turning point, earlier it was estimated that this would happen in 2007).

I posted on this here:


The labour force situation is more confused. There is no retirement age in Japan, and anyone over 15 is potentially a member of the labour force. People over 75 tend to withdraw in growing numbers for obvious reasons, but the overall participation rate seems to have stabilised at just over 60% thanks to increasing female participation rates. Wages are rising, in part, since the labour market is tightening for ageing-related reasons (something similar to this has been happening in Italy).

Latest Japan employment and participation data here:


Posted by: Edward Hugh | December 21, 2005 at 01:37 AM

Edward -- Good catch, my bad. The mistaken population number is corrected above.

I was surprised by the South American result as well. I'd be interested if anyone has any insights.

Lord -- Right!


Posted by: Dave Altig | December 21, 2005 at 04:19 AM

The recent hard-copy Technology Review (MIT publication) has an interesting look at China, with an emphasis on China's plans for science.

Posted by: nate | December 21, 2005 at 05:52 PM

Isn't inflation significant in South America, and currently worse than other parts of the world? It would be interesting to know the impact of inflation on the ratio reported in this map (if any).

Also, on a per capita basis: what is non-services GDP in South America, and how does this compare to other parts of the world?

By region of the world: it would also be interesting to look at non-services GDP in total $s and as a % of world GDP.

Posted by: nate | December 22, 2005 at 10:37 AM

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December 19, 2005

Fed Funds Futures Sans Dave, Part II

Dave's reprieve from computer problems was short-lived, so he has been unable to respond to comments that readers have left on his most recent posts.  He will be returning to the blogging world relatively soon, however, as he is now headed home.  He may post a comment regarding the futures late this evening...  but I make no promises on his behalf.

The pictures for this week:



The slides, for your presenting pleasure:

Download imp_pdf_slides_for_blog_121605.ppt

UPDATE: Once again, many thanks to Shadya Yazback (and Erkin Sahinoz) for keeping this up-to-date with no help from me.  My only comment: There was certainly less action following the change in FOMC language than I might have thought.  All eyes now on the minutes due in a couple weeks, to see if the statement change was as little change as everyone seems to think. -- da

December 19, 2005 in Fed Funds Futures | Permalink


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