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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February 28, 2006

News That Seems A Lot Less Bad This Time Around

It appears now that fourth quarter GDP growth was just a tad higher than originally reported but, as expected, not by much.  From the Bureau of Economic Analysis:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.6 percent in the fourth quarter of 2005,according to preliminary estimates...

That, of course, is some improvement over the 1.1 percent advance estimate, but it's still pretty measly.  Nonetheless, much of the sting had already been taken away by the influx of positive news thus far this year and the growing sentiment that the end of last year really was just one of those things.   From Reuters:

Forecasters, however, expect the economy to bounce back in the first quarter with a growth rate north of 4 percent, helped by warmer-than-usual weather at the start of the year, and financial markets largely ignored the data.

"We did have a stumble. It was related a lot to the hurricanes, and it's very clear that the economy is bouncing back nicely in the first quarter," said Dana Johnson, chief economist at Comerica Bank in Detroit.

OK -- not everyone, or everything, is so bullish. From Forbes:

Analysts said below consensus outcomes in existing home sales, consumer confidence and the Chicago manufacturing PMI data more than offset an upward revision to fourth quarter US GDP to an annual rate of 1.6 pct.

'Even allowing for the GDP upward revision, the data today has generally been regarded as disappointing and take the steam out of the dollar,' said Neil Mackinnon, chief economist at ECU Group.

And if you are looking for it, you can certainly find more to frown about.  Again from the BEA report:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.6 in the fourth quarter, 0.3 percentage point more than the advance estimate; this index increased 4.2 percent in the third quarter.  Excluding food and energy prices, the price index for gross domestic purchases increased 3.0 percent in the fourth quarter, compared with an increase of 2.5 percent in the third.

But that news is more than balanced, I think, by this, from Reuters:

Within the GDP data, the core PCE price index, the Fed's favorite measure of inflation that strips out food and energy costs, increased at a 2.1 percent rate in the fourth quarter of 2005, from the previously reported 2.2 percent pace...

"The fourth quarter core PCE deflator was revised to be a little lower than it was before," said Pierre Ellis, senior economist at Decision Economics in New York, adding "even though that revision is small, it's still a critical number and a downward revision is better than an upward revision."

So, as is often the case, there is a little something for the optimists and pessimists alike.  Feel free to stick with your priors.

UPDATE: The Skeptical Speculator joins the opinion that this week's round of economic data is weak.  Kash is "skeptical that growth will be that strong this quarter." Mark Thoma agrees that the the news is part of "an emerging and somewhat confusing picture of the strength of the economy. Dave at voluntaryXchange raises the fourth  quarter grade to a C.

Also at Angry Bear, Calculated Risk covers Monday's new home sales report ("slowing, but not crashing").  (It's also at CR's own blog.)  On the existing home sales data, The Nattering Naybob believes the "declines reflect a weakening in consumer confidence, and a rise in mortgage interest rates which have sidelined nervous home buyers." Barry Ritholtz says 'nuff said.

February 28, 2006 in Data Releases | Permalink


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Here is what happens when labor force participation rates dip for young people:


(read 2/28 or 3/1 posting)

Posted by: anon | March 01, 2006 at 09:13 PM

What happens exactly?

The 3/1 posting was a stone cold joke...you know?

Posted by: Kerry | March 01, 2006 at 10:19 PM

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Posted by: friends | May 27, 2006 at 09:38 PM

nice site...

Posted by: journal | May 27, 2006 at 11:02 PM

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The PBoC Reiterates: Slow And Easy Does It

From Reuters, via China Daily:

China needs to keep its currency stable because an overly rapid appreciation could hurt its economy, a senior central banker was cited by the official China Securities Journal as saying on Tuesday.

"If the yuan rises too rapidly, a lot of overseas investors might move their factories or companies out of China," Tang Xu, director-general of the research bureau of the People's Bank of China, was quoted as saying.

"That would increase unemployment and hurt our economy, and commercial banks could also face a difficult operating environment," Tang said.

More, from the Wall Street Journal (page A13 of the print edition):

Mr. Tang said China wouldn't want to follow Japan's example in the 1970s and 1980s, when the yen rose rapidly and hurt the Japanese economy.

He said China will continue to develop and enhance the "market-based framework" for exchange rates and interest rates as part of its 2006 monetary-policy outlook.

In other words, steady as she goes.

February 28, 2006 | Permalink


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i understand his point. too much yuan appreciation would create some erious shocks in the chinese economy. but i don't necessarily agree with some of his comments.

where would they relocate to? i heard india has an overheated land market. you can't relocate to arab countries or african countries because the govts are not at all stable. korea is out. there is malaysia, or south america. SA looks like it wants to flirt with socialism, so that is out.

china is it.

Posted by: jeff | February 28, 2006 at 08:49 PM

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February 27, 2006

Looking For A Sure Bet?

If so, options on federal funds futures (or at least those who trade them) suggest you lock in 5 percent by May.  Here's the short story:



I have been largely of out of commission in the last several weeks, but there was plenty of good honest blogging done elsewhere aimed at the events in the pictures above, on the FOMC minutes (at the Big Picture -- here and here, from Mark Thoma, in the Nattering Naybob Chronicles, at The Prudent Investor, from William Polley), on the CPI report  (by Mike Bryan here at macroblog,  by Barry Ritholtz, from The Capital Spectator, at Economist's View, from The Nattering Naybob, at The Skeptical Speculator), on Fedspeaking from Fed speakers (from Mark Thoma), on the bad-but-probably-not-bad January durable goods report (at Econbrowser, from Mr. Naybob again, from The Skeptical Speculator).

Meanwhile the yield-curve-inversion watch goes on
. (Ten-year yield at close today: 4.59%.)

Here's the data from above, if it pleases you:
Download Imp_pdf_slides_for_blog_022406.ppt
Download implied_pdf_march_022406.xls
Download implied_pdf_may_022406.xls

February 27, 2006 in Fed Funds Futures | Permalink


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» Autos limp forward from Econbrowser
Could be better, could be worse. [Read More]

Tracked on Mar 3, 2006 8:23:17 AM


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February 24, 2006

An Important Question, Awaiting An Answer

This comes from yesterday's Wall Street Journal (page C1 of the print edition):

The world's banking titans, including Bank of America Corp., Royal Bank of Scotland PLC and Merrill Lynch & Co., have spent billions of dollars buying small stakes in China's biggest lenders. So far, they are looking pretty smart.

When Bank of America took a 9% stake in China Construction Bank Corp. last June, the North Carolina lender agreed to pay $3 billion. That stake is valued at about $9.2 billion, following a surge in the shares after the bank's initial public offering of stock in October. HSBC Holdings PLC's 19.9% interest in China's fifth-largest lender, Bank of Communications Co., is valued at more than $5 billion, more than double what the British bank invested. Shares in both Chinese banks have soared about 40% so far this year.

Those numbers help explain foreign investors' decision to put down a lot of money with not a lot of say in how their investments are managed. The investors have minimal influence over the operations of their Chinese partners, and so far they have received few of the benefits they anticipated, such as credit-card joint ventures. They are barred from holding more than 25% of a Chinese lender.

Here is at least part of the reason:

Risks like China's chronic bad-loan problem have in part been mitigated through guarantees that the Chinese banks have made against future financial troubles. A recent Standard & Poor's Corp. report said the sector is high-risk in comparison with its global peers, but found that profitability, asset quality and the quality of information have improved.

More competition (and opportunity) looms...

China is opening its vast retail-banking market to foreign institutions at the end of the year, under its World Trade Organization obligations. Foreign investors will then have a shot at China's $1.7 trillion in savings.

... sort of:

But foreign banks' true access to that money is limited by their tiny branch networks. HSBC has the biggest presence of any foreign bank in China, with its 20 banking outlets, compared with some 20,000 for ICBC, the country's biggest bank.

And there is this (also on page C1):

Chinese regulators are planning a policy change that could trip up foreign banks in China just when they are being granted fresh rights to expand.

Within the next few months, the China Banking Regulatory Commission plans to ask foreign banks to change the way they are incorporated, as well as to make accounting and management changes, to roughly conform to the way Chinese banks are structured, according to a senior official at the watchdog agency...

The most far-reaching measure is a request that foreign banks put China operations into a stand-alone entity that is locally incorporated, according to the official and a senior officer of a foreign bank who has been briefed on the plans. The steps are necessary to enhance regulation and control risk, the regulator said.

Under the new rules, foreign banks would face requests to pony up more capital and possibly higher taxes than they now pay, the official said.

From the original article, the mulit-billion dollar question:

For a major Western bank, though, it remains an open question whether taking a minority stake with little control makes for a good China strategy. The returns can be huge, but there is no assurance that the investors' highflying stakes won't decline before their three-year lockup expires -- or that China will succeed in turning its banks into institutions that the foreigners will be glad to be part of...

Investors "have these short-term windfalls and huge returns on their investments," says Mei Yan, a banking analyst at Moody's Investors Service in Hong Kong. As to the chance they will find long-term partners, she says, "we have questions in our mind whether eventually that will work out or not."

February 24, 2006 in Asia | Permalink


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» How's progress on opening up the banking system in China? from William J. Polley
Apropos of my last post on China, macroblog quotes from these two Wall Street Journal articles. His parentheticals along with a couple of quotes... More competition (and opportunity) looms... China is opening its vast retail-banking market to foreign i... [Read More]

Tracked on Feb 24, 2006 5:25:01 PM


Western Naivety and greed combined with corrupt and fradulent Chinese book keeping will ultimately lead to a banking disaster.

1,500 years ago, the Chinese not only invented accounting, they then invented quadruple accounting; a true set for limited internal use, another for the government, one for the investors and then one for their wives.

We are suspicious that mustard-keen western MBAs, whose sights are fixed on 1.3 billion consumers and their near-term bonuses, rather than the $750 billion worth of bad debts in the system, can see through these multiple fictions.

Posted by: The Nattering Naybob | February 24, 2006 at 09:34 AM

I'd sure like to see BofA or HSBC -try- to take their profits and expatriate them to their shareholders. Face it, they gave money to the Chinese banking system and get a quarterly statement back that says how much that money would be worth if the government ever decides to release it.

So what I see here is $6.2 billion of BofAs recent profit is not liquid. Add to this the untold amounts of accrued but unpaid mortgage interest from below market and payment option ARMs and you've got a policy for disaster. They are going to have to liquidate real assets at the worst time to cover these paper shortfalls.

Posted by: Robert Cote | February 24, 2006 at 12:54 PM

Any input on United Airline's defaults during bankruptcy?

Posted by: nate | February 24, 2006 at 09:47 PM

this is precisely why i roll my eyes when i hear that the chinese are going to take over the world. they need to clean up their monetary system before they can set their sights on the world.

until they do, their day of reckoning is coming

Posted by: jeff | February 26, 2006 at 09:32 PM

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February 22, 2006

The January CPI: Drip, Drip, Drip?

Note to Macroblog Readers: It’s CPI day so I get to blog. Remember, these are my views, not Dave’s, not those of the Cleveland Fed, and not those of the Federal Reserve Board of Governors. Michael F. Bryan

One of the problems I have with the inflation numbers near the upper end of most people’s comfort zone is that small up-ticks in the data take on a greater significance than they might otherwise. Take this morning’s CPI report for January. The "headline" number showed an 8.2 percent (annualized) rise for the month—just about wiping out the cumulative declines we got in November and December. Of course, food and (especially) energy costs accounted for nearly all of the January acceleration in prices. The "core" CPI rose a much more moderate 2.4 percent for the month, about what we saw at the end of last year and just a bit above this measure’s 12-month trend (2.1 percent.) So, if you were thinking last year’s over-sized energy price hikes would come spilling into the retail numbers early this year, you won’t find that in this morning’s report. Well, that’s one way to view the January numbers—your worst fears weren’t realized.

I’ve also looked at the data sliced a number of different ways and they tell a pretty consistent story—they seem to be inching a little higher. If we consider the core CPI at three-month cuts, the 2.4 percent increase in the core CPI over the most recent three month period is up from 2.0 percent over the previous three months and 1.6 percent over the three months prior to that. Likewise, the 6-month numbers show a similar, small uptick, 2.2 percent over the past six months compared with 2.0 percent in the earlier 6-month period. OK, these are slight increases and hardly compelling evidence of a change in the inflation trend, but you can’t like the derivative.

Consider also that the median CPI was up 2.6 percent last month, a tad above the pace it has shown for the past year (2.5 percent), and the 16 percent trimmed mean CPI (which excludes just the most extreme outliers) was up a surprising 4.2 percent (and is 2.6 percent above a year ago). Again, these numbers by themselves don’t argue loudly that the inflation trend is on the move, but they certainly don’t give one a great deal of comfort, either.

So, if you're looking to me for a heads-up on any growing inflation pressure, what would I say about this morning’s CPI report? I’d say that the retail price data seem to be creeping a bit higher, but that the rise is so modest that it can’t be clearly distinguished from the transitory noise that is common in the price statistics. If you respond, "Is this how inflation works? Does it creep into the data so quietly, so nearly imperceptibly that you can’t tell it’s there until it’s taken a spot on your couch?" I’d say, "No, probably not." But then I’d have to add, "Of course, it’s hard to know for sure." You know, I don’t think that answer is going to be the high point of your day.


February 22, 2006 in Inflation | Permalink


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The highlight of my day would be for all Economists commenting on the CPI to start their commentary with: "the CPI wasn't designed to monitor inflation, it (questionably) excludes the rapid credit expansion we've seen in the last five years & much of its data collection is extremely subjective. Oh yeah, and if we add back in the (questionable) Boskin recommendation cuts before we compare it to long-term trend the following discussion might be very different." But, that's just me.

Posted by: bailey | February 22, 2006 at 05:26 PM

The CPI is a biased downward measure of the costs of mantaining the existing basket of government supplied goods and services. It is not applicable to general inflation. That said the CPI on a monthly basis is far too liable to extreme flucuations to be of any good for forward predictions.

Hey, I've got a new way to not measure inflation; SocSec contributions versus outlays. That way we can pretend we have deflation for the next 18-20 years and actually keep the system solvent. I know, I know, the SocSec "surplus" is actually an inflationary component but who cares it still comes in with the numbers the Fed wants to report.

Posted by: Robert Cote | February 23, 2006 at 01:14 AM

It seems spuriously precise to me to try to draw any conclusion by comparing January data to other months of the year. A lot of sellers only increase their prices in January. I’m not sure just how strong this tendency is, but in the extreme, it would mean that the rest of the year is all noise, and the only thing that matters is comparing each January’s increase to the previous January. By that admittedly extreme criterion, core inflation is clearly declining. (Using the unadjusted data I calculate a 3.0% annual rate for January 2006, vs. 3.7% for January 2005.)

A lot of people (including me) were surprised to see less pass-through of energy prices during 2005. One possible explanation was that sellers were waiting for January to do their price increases. The January data puts that explanation to rest, which seems like good news to me.

Another slightly more realistic assumption might be that sellers increase their prices the same month every year but not necessarily January. In that case, the appropriate measure might be a 12-month rate of change, which (core rate) is also declining (2.0% for January vs. 2.2% for December).

(BTW there seems to be a problem with your typeface. I’m guessing the all-bold post was unintentional.)

Posted by: knzn | February 23, 2006 at 09:08 AM


What ever happened to the idea that inflation accelerates as resource capacity is hit? So, what starts as a creep, can turn into a walk, then a trot, then a run.

Those derivatives you mention.

That's why, in the markets, we are very alert to any positive second derivative, especially in a world presumed to be so flat that the phillips curve is assumed dead!

Posted by: andres | February 23, 2006 at 10:56 AM


Yes, but...

Not all annual price hikes stick. Especially in recent years of low pricing power, January price hikes have been subject to roll back. That means you do need to monitor prices in other months, for erosion of January's gain.

In addition, non-core items and some of the factors influencing owners equivalent rent in particular are not all that attuned to the pattern of annual, scheduled price hikes.

Posted by: kharris | February 27, 2006 at 03:20 PM

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February 21, 2006

No Surprises

According to Reuters, St. Louis Fed president William Poole had the following to say during Q&A following a speech delivered last week:

Asked whether he was comfortable with futures markets' expectations for Fed interest rate moves -- contracts are currently pricing in two more Fed hikes -- Poole said: "yes, I think so".

Priced in they are indeed:



The release of the minutes from the January FOMC meeting did little to change the impression that the end is near... or not.  From BusinessWeek online...

"They are definitely off auto pilot," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Although another increase at the end of March seems likely, the statement in the minutes reinforces the view that future policy steps will depend more on the behavior of economic statistics."

... from MarketWatch:

"The general tone indicated some concern about modestly higher core inflation, but by no means any sense of panic," said Josh Shapiro, chief U.S. economist at MFR Inc.
"The tenor of the commentary is consistent with a general belief on the part of most FOMC members that the tightening process was nearing an end," although some surprise might alter this, Shapiro said.

... from the Financial Times...

Markets were broadly steady on the news. Observers said the comments were “nothing new” to the markets.

Brian Robinson, bond market strategist at 4Cast consultancy, said: “[The] minutes have not revealed anything that has not been conveyed by previous comments by various Fed officials.”...

“The comments certainly are consistent with Bernanke’s recent testimony, as well as with market expectations for at least one more more rate hike, if not more, depending on the disposition of the [economic] data through the spring,” said analysts at Action Economics.

...from Reuters...

"If the economy slows down, more hikes would not be necessary. But right now, there should be an assumption that the Fed would push rates toward 5 percent," said Charles Lieberman, chief investment officer at Advisors Capital Management in Paramus, New Jersey.

... from Bloomberg...

Some forecasters are predicting more rate increases. Bear Stearns & Co. today raised its outlook for the fed funds rate to 5.25 percent from 5 percent because of faster inflation and a lower jobless rate than the Fed predicted last week. Citigroup Global Markets Inc., which a month ago said the Fed would be done raising rates at this point, now expects the central bank to lift its main rate twice more to 5 percent.

... you get the idea.  Most reports picked up on this piece of the minutes:

Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance. In the view of some members, the possibility of additional policy moves was reinforced by readings on core inflation and inflation expectations that were somewhat higher than was desirable over the long run. However, all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence.

One interpretation: Neutral has arrived, now the question is whether, or how much, to tighten.

February 21, 2006 in Fed Funds Futures | Permalink


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What do bloggers think of the Fed's expansion of the Mar. 28 meeting to Mar. 27-28? Is it a sign that they need more time to discuss a change in policy, or just "catch-up" from not having a two-day meeting Jan.31-Feb. 1., courtesy of Greenspan wanting to preside over one more meeting?

I don't want to read too much into it, since it's also Bernanke's first FOMC meeting as chair, but given that the real decision-making, posturing and positioning is done in the weeks leading up to the meeting, why else would they need two days except to discuss pausing their rate hikes?

Posted by: Bond investor | February 27, 2006 at 10:08 AM

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February 17, 2006

Two Inflation Statistics for the Price of One.

Note to Macroblog Readers: It’s PPI day and Dave is letting me drive.  Remember, these are my views, not his, and not those of the Cleveland Fed or the Federal Reserve Board of Governors. Michael F. Bryan

OK, we’ve got the first major inflation report of the year out of the way.  The January Producer Price Index released this morning showed a 3 percent rise (annualized)—not so good.  And once the volatile food and energy goods are stripped from the measure (the so-called “core” PPI), wholesale prices looked worse yet, posting a 4.7 percent increase—the index’s biggest gain in a year.  What does it all mean?  Not much, I think.  The extreme monthly volatility of the PPI, and its rather narrow basket of goods, argues against putting any weight on the monthly PPI as an indicator of rising (or falling) inflation.  And despite the intuitive appeal of the wholesale-then-retail inflation story, the PPI has never demonstrated a very useful track record as a leading indicator of retail inflation (as my colleague Todd Clark has demonstrated here.)  If that weren't enough reason to be skeptical of the PPI report, I am especially wary of January PPI reports.  It’s true that the BLS tries to filter out any seasonal patterns in wholesale price data but still, some “seasonality” seems to creep in.  Over the past twenty years, the January core PPI has tended to be about 1 ¾ percentage points higher than other months, presumably as a disproportionate number of firms adjust their prices at the first of the year.  Consider that on a year-to-year basis, the core component of the PPI actually slowed in January to a 1 ½ percent rate, continuing a moderation path that began about six months ago. 

Also released this morning (but less widely reported) was the early February reading on household inflation expectations.  The people at the University Michigan say that the year-ahead inflation expectations of households inched lower in early February to 3.7 percent (thank my colleague Linsey Molloy for the following slide.) 


This is much improved from last fall when, in the wake of the twin hurricanes, near-term inflation expectations jumped to 5 ½ percent.  Longer-term (5 to 10 years ahead) inflation expectations also softened in early February, to 3.3 percent, bringing household inflation sentiment back down to the levels they have held to over much of the past 10 years.  What does it mean?  Quite a lot, I think.  Yes, there are a number of problems with using survey data to directly gauge the inflationary sentiment of households, and I hope to bring you some of that controversy at a later date.  For those of you who just can’t wait, you can check out some of the recent work on this subject at a workshop sponsored by the Central Bank of Poland.  Or mull over the peculiar demographic characteristics of these surveys, including the observation that women tend to hold persistently higher inflationary expectations than men.  Still, the survey data offer us some reason to believe that the public is seeing the monthly gyrations in the price data for what they are—mostly noise—and their expectations for inflation would appear (to use the language of the FOMC) “well anchored.” 

February 17, 2006 in Inflation | Permalink


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How did the NSA core PPI compare to the same data point last year?

In the NSA core CPI over half the annual increase occurs in the first quarter because of the tendency of firms to raise prices once a year and at the start of the year. But by comparing the first quarter of this year with the first quarter of last year you get an extremely good indicator of how the annual data will end up comparing to the prior years annual data. If the first quarter is higher(lower) the annual data will almost always be higher(lower).

Posted by: spencer | February 18, 2006 at 10:28 AM

By producing "Two Inflation Statistics for the Price of One" aren't you introducing strong deflationary pressure on the value of economic forecasts? How long at this rate before such predictions become worthless?

Posted by: Robert Cote | February 18, 2006 at 12:34 PM

while ppi and cpi are informative, your blog brings up an interesting point. these are backward,not forward indicators. what forward indicators does the fed use to track future interest rate movements? the price of gold? commodities? the fed risks being behind, or in front of the curve. they have done a pretty good job the past few years, but they may have left rates too low for too long this last time down, creating a housing bubble. the low rates may have fueled inflationary fires on thier own without any help from the chinese or indians.

Posted by: jeff | February 18, 2006 at 06:24 PM

I'm curious as what is the historic difference between the Michigan measure of expected year ahead inflation and trailing 12 month inflation. Do the two measures have something like a 0.9 correlation, etc. ?

Posted by: spencer | February 19, 2006 at 04:07 PM

At the same time MSN contributer, Bill Fleckenstein at http://moneycentral.msn.com/content/P143795.asp , reminds us that we're seeing "12%-plus growth in short-term credit and 8%-plus growth of M3." If you sampled a million people I wonder which reading would more closely reflect the inflation they're seeing?
The weakest statement Gentle Ben made last week was his leading explanation that the Fed's dropping the reporting of m3 for budget considerations. I sure hope that's not an example of the clear-speak he's known to favor.
The Fed's in shambles, under AG it all too readily gave up ANY appearance of political impartiality & independence. Bernanke's tenure will be judged on his desire & ability to return the Fed, not just its building facades, to prominence. Is he up to the task? I HOPE SO, we've got an awful lot riding on it.

Posted by: bailey | February 20, 2006 at 10:16 AM

Spencer, 1) the year-to-year NSA PPI is also 1.5 percent. We'll keep an eye on your "as goes the first quarter so goes the year" prediction. 2) the correlation between the Michigan year-ahead survey and the 12-month lagging CPI is pretty high when inflation in on the move (yep, expectations appears to have a large backward-looking, or "adaptive" component.) That correlation isn't so large in recent years, however, but I wouldn't expect two series that have been relatively stable for some time to reveal much of a correlation.

Jeff, can't say what the "Fed" tracks for a lead on the inflation statistics as each FOMC member has their own favorites and models. The Board staff tends to look at labor costs among other things. You can read about their model in a speech given last year by Gov. Kohn (who is pretty familiar with the forecast): www.federalreserve.gov/boarddocs/speeches/2005/20050929/default.htm.

Bailey, believe me when I say I am a quantity theorist at heart. I really am. And as much as I would like to tie myself (again) to a money measure, I have seen my money-based forecasts blowup so many times in the past that I just can't--at this time--but much faith in the aggregates, especially M3. But, my hope remains kindled.

Robert Cote, well, from one price watcher to another, remember that we must first quality adjust any price for it to make much sense. If you are getting two for the price of one, but the quality of the analysis is on the decline, they may still be very expensive numbers indeed.

Best wishes, Mike.

Posted by: Michael F. Bryan | February 20, 2006 at 12:12 PM

Mike, Please don't take my shrill rants on this topic personally. I've read & enjoyed your papers.
Lest we forget, speed kills.

Posted by: bailey | February 20, 2006 at 02:47 PM

Hi all,

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Posted by: real1 | February 21, 2006 at 05:24 AM

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February 15, 2006

The Good Economic News Parade Continues

January looks like it was a pretty good month.  With the economy apparently stumbling across the finish line in 2005, my generally optimistic outlook was being sorely tested at year end.  But I've yet to see any evidence in this still very young year that would lead me to believe the fourth quarter of last year was anything more than just one of those things.

Add the January retail sales report to the list of evidence to set the bears a-frowning.  From the Wall Street Journal (page A1 of the print edition):

Consumers went on a post holiday shopping spree in January, a strong sign of economic vigor that increases the likelihood the Federal Reserve will keep raising short-term interest rates.

The Commerce Department said yesterday that retail sales surged a seasonally adjusted 2.3% in January from December, largely because of gift-card redemptions and abnormally mild winter weather. The January jump followed a tepid 0.4% rise in December. January sales were up 8.8% from a year earlier.

Coming after an earlier report that employers added nearly 200,000 jobs in January and pushed the unemployment rate down to 4.7%, the retail-sales report was cheered as evidence that the economy has roared back from a fourth-quarter lull. "It wipes out the weakness we saw in preceding months," said Peter Hooper, chief U.S. economist at Deutsche Bank. "We were expecting the fourth-quarter slowdown was transitory. This confirms that."

The best news was that the gains were not driven by the ever-volatile auto industry or higher prices at the pump:

Even excluding the 2.9% increase in sales of motor vehicles and parts and a 5.5% rise in gasoline-station sales driven by higher pump prices, the remainder of January retail sales -- everything from department stores to bars -- were up 1.8% from December, when such sales rose just 0.3%.

"It was extraordinary," said Rosalind Wells, chief economist at the National Retail Federation, a trade group.

Here's the picture proof (from the Census Bureau report):





Too much good cheer for you?  Here -- this will make you feel better:

Ms. Wells of the retail federation and other economists cautioned that two primary drivers of January's sales growth -- balmy weather and gift-card purchases -- will likely evaporate this month, particularly after a blizzard last weekend snowed in consumers throughout the Northeast...

The January bounce was "a one-month shot," Ms. Wells said. "We're likely to see weak February sales because of the blizzards in the Northeast, and then generally I think the economy is going to slow as the year goes on."

That may very well be true, but it increasingly looks like the slowdown might be relative to a very robust beginning.

February 15, 2006 in Data Releases | Permalink


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How much of this is due to economic statistics not capturing income in the underground economy? The amount of money being paid under the table to illegal immigrants must be substantial.

Posted by: jm | February 15, 2006 at 10:39 AM

We need to look at the redemption rate on gift cards - year 2005 and year 2006. If the redemption rate is a lot higher in year 2006, then it needs to be explained. If people are scrounging and more desparate in 2006, it might show up in higher redemption rates of gift cards and a spike in January sales.

Redemption rate on gift cards=(total dollars redeemed and used by those who received gift cards)/(the total dollars used to purchase gift cards)

Posted by: anon | February 15, 2006 at 01:31 PM

Let's not get too excited yet. The January data have been stellar, but a lot of it's just the warm weather. Look at the housing starts for January: Do you really believe homebuilders are setting new records? That's not what Toll Bros. says.

Posted by: fred c. dobbs | February 16, 2006 at 10:48 AM


The underground economy shouldn't affect the retail sales report: retail sales to illegal immigrants are still sales, after all.

Posted by: Peter Summers | February 16, 2006 at 11:06 AM

The seasonal adjusment process makes it a function of the last few years experience. So the emergence of gift cards can distort the seasonal adjustments. But the distortion will decline each years as the historic experience with gift cards is built into the history used to calculate the seasonal adjustment factor.

Actually, the original retail sales data is one of the least reliable data releases because it is only based on a one-third sample. I always found the most important data in this release is how they revised the prior months data.

Posted by: spencer | February 17, 2006 at 12:24 PM

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February 13, 2006

Betting On Ben, Market Version

How high will we go?  The market speaks, and it speaketh at least another 50 basis points.  Here are the  probabilities for the next two FOMC meetings, based on the usual Carlson-Craig-Melick estimates from options on federal funds futures:




Just for reference, here's the latest from the Treasury market:

Bonds fell Monday as traders prepared for possibly hawkish congressional testimony from new Federal Reserve Chairman Ben Bernanke.

The benchmark 10-year note declined 2/32 to 99-8/32 to yield 4.59 percent, little changed from the previous session. The 30-year bond declined 9/32 to 98-26/32, yielding 4.57 percent, up from 4.56 percent late Friday...

Bernanke is scheduled to testify before the House Financial Services Committee Wednesday, his first public appearance to discuss the economy and monetary policy since becoming the head central banker.

Speculation is swirling that the Fed will continue to raise interest rates to stem inflation in the face of high energy prices and a strong economy...

Swirling indeed.

If you like, the data:
Download Imp_pdf_slides_for_blog_021006-1.ppt
Download implied_pdf_march_021006.xls
Download implied_pdf_may_021006.xls

February 13, 2006 | Permalink


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» The Bernanke era begins from Econbrowser
New Fed Chair Ben Bernanke provided his first testimony before Congress this morning. [Read More]

Tracked on Feb 15, 2006 1:14:36 PM


Ironically, I think that after the dust settles, the market may rally after fed comments, assuming they are hawkish.

Since we are expecting more rate increases, and the data released today bear that out, the market will rally when expectations are met. More inversion. tens will outpace the twos and fives.

Posted by: jeff | February 14, 2006 at 10:01 PM

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Betting On Ben

Edward Hugh (he of A Fistful of Euros) took a break from his research labors to give me the heads up on this item from Bloomberg, helpfully informing us what new Federal Reserve Chairman Ben Bernanke will be saying when he testifies before Congress this week:

Gentle Ben he won't be. 

Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers' calls for a pause in the central bank's credit-tightening campaign and vow vigilance against inflation, analysts say.

Cementing the Fed's inflation-fighting credibility at a time of regime change at the central bank is particularly important because some in the markets are already suspicious that Bernanke will be soft on inflation. Behind those concerns: Bernanke's suggestion in 2002 that the Fed would pull out all stops if needed to fight a deflationary downturn in the economy, a strategy he compared to a "helicopter drop'' of money.   

"He's given his helicopter speech and established his anti- deflation credentials,'' says Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money- management and research firm. "Now he's got to give his howitzer speech and establish his anti-inflation credibility...

There are risks to Bernanke's taking a tough stance against inflation. If he raises rates too far, he runs the danger of bursting what Yale University economist Robert Shiller has called the biggest property bubble ever.         

Already, there are signs the housing market is cooling off. Toll Brothers Inc., the largest U.S. builder of luxury homes, said on Feb. 7 that fiscal first-quarter orders plunged 29 percent as buyers waited to see whether prices would fall.         

Fed staff economists are convinced that the economy is strong enough to withstand a slowdown in the housing market. Armed with their reassurances, Bernanke is likely to try to burnish his inflation-fighting credentials.         

"He's going to err on the side of hawkishness, not dovishness,'' [Lawrence Lindsey, a former Fed governor and chief economic adviser to President George W. Bush who now heads his own consulting group] says.

There you have it.

February 13, 2006 in Federal Reserve and Monetary Policy | Permalink


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Yes, but John Berry, also writing for Bloomberg, implies that this is non-sense. No chest thumping and declaring a fight to the death with inflation. Berry, who is probably better this stuff than anybody else at Bloomberg, thinks Bernanke will tell Congress that they have handed a double mandate - prevent infaltion and foster growth and he intends to pursue both. Caroline Baum (for what it's worth) has suggested that Bernanke won't breath fire during his testimony, either.

Posted by: kharris | February 14, 2006 at 11:24 AM

You are probably right, but the street is expecting fire and brimstone from the new man in the pulpit.

They will focus on this, and not the growth statements. More risk to the downside than upside.

That being said, this market is so counter intuitive that treasuries will probably rally after he speaks.

Posted by: jeff | February 14, 2006 at 10:04 PM

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