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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January 31, 2007

Central Bank Forecasting

The Financial Times reports:

Sweden’s Riksbank, the world’s oldest central bank, has just joined a small group of institutions with a no-nonsense solution: policymakers publish a forecast of where they expect to set interest rates in the future. This is not as radical as it sounds. If they are competent, they should have a view. And it forms another step towards transparency. Europe’s central banks once made inflation forecasts on the assumption of constant interest rates – a pretty silly premise. Now the European Central Bank and BoE [Bank of England] assume a more realistic market yield curve. But they expend an inordinate amount of energy hinting at how plausible they believe that curve is. Far better just to say, explicitly, what they think.

Seems sensible, though the article contains a picture that does sort of suggest that such forecasts may not be all that useful:




I shouldn't push too hard on that picture because it really doesn't prove anything beyond the obvious point that forecasting is tough business.  If a central bank's policy responses to its forecasts are consistent, there is plenty of information conveyed by those forecasts, even if they prove to be wildly off-base after the fact.   

But I do have to object to the claim that an inflation forecast made "on the assumption of constant interest rates " is "a pretty silly premise."  One might argue that the most sensible approach to policymaking is to take each meeting as it comes, without assuming too much about the shape of future policy to come.  In other words, assume no change in policy, check out the forecasted path of inflation and whatever else you care about, and change things if the forecast deviates from the direction you hope things will go.  Show up at the next meeting and repeat.

This has the benefit of pretty clearly revealing the central bank's objectives without emphasizing the path that will be taken to reach those objectives.  And if you are wondering why a policymaker might want to emphasize the ends rather than the means, see the picture above.

You could still convince me that the assumption of a constant interest rate isn't the best way to go -- perhaps because information about how the central bank views the likely path of future policy really does help anchor expectations, for example.  But silly?   I'm thinking not.

January 31, 2007 in Federal Reserve and Monetary Policy | Permalink


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doesn't discretionary optimization introduce distortions, reflecting the fact that such a policy approach does not take into account its effect on shaping expectations?

Posted by: annonymous | January 31, 2007 at 10:57 PM

anon -- Right you are, but acting in a non-discretionary way just means that the central bank behaves in a rule-like manner. Publishing forecasts based on a presumed path for the policy rate doesn't guarantee that it will be so -- after all, there is nothing to require that the forecasted paths remain consistent meeting-to-meeting. On the other hand, conditioning forecasts on a constant policy assumption does not preclude acting in a perfectly rule-like manner. As long as the counterfactual forecasts are constructed consistently, and the policymaker responds to those forecasts consistently, the trick can be done. -- da

Posted by: Dave Altig | February 01, 2007 at 06:57 AM

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January 30, 2007

That Vacant Look

This news raised a few eyebrows...

The number of vacant homes waiting to be sold surged 34% to 2.1 million at the end of 2006 compared with the end of 2005, by far the fastest increase ever recorded, the Census Bureau reported Monday.   

... at Angry Bear, at Beat the Press, at Calculated Risk, just to cover the ABC's down my blogroll.  And indeed, the jump looks pretty impressive:




I can't think of any particularly positive spin to put on that, but I did notice that there seems to have been a compositional change underneath that number:  The share of for-sale vacant housing units accounted for by multi-unit properties rose by about 3 percentage points:





I don't know what that means -- if anything -- but if anyone follows Dean Baker's advice and gives the vacancy report the coverage he thinks it it deserves, maybe they will explain it.

January 30, 2007 in Housing | Permalink


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It's all simple. Sellers took the news that "market is bottoming" at face value and took homes out of market until Spring comes.

I personally know 2 people who have empty homes waiting to be put on market in Spring. They both failed to sell in Summer and decided that Spring will be much better.

What it means is that 2 months from now we will have absolutely astonishing inventory coming for sale. It will be something we never saw.

I think the last year "housing crash" was just a warmup. The real crash is coming during the next 3 years. I think 2009 will be the worst.

Posted by: theroxylandr | January 30, 2007 at 11:24 PM

I've been watching the MLS listings in my Northwest Chicago suburb since about two years ago, and quite closely since May last year. In January 2005 less than ten homes were listed for rent. Today the number is 64. (Most of these have "wishing prices" that seem to me quite unrealistic -- anyone who could pay them would probably choose to buy, unless in a short-term posting/transfer job situation.)

Although nearly all the sales action is in the under-$500k price range, about 40% of the single-family homes listed are priced above $600k. A significant fraction of those are obviously spec homes still abuilding (no photo, photo showing construction, etc.), and a significant fraction of the others have photos showing rooms that are empty of furniture or appear staged with rental pieces (one giveaway is lack of the window treatments you'd expect in a lived-in $600k+ home). And many of those empty/staged homes were the same back in the summer. Moreover, I've noticed a few homes whose summer '05 listings appeared empty/staged that have been delisted but haven't shown up in the Chicago Tribune's listings of recorded sales (which pick up all sales with about 1-1/2 month delay).

There've been some price reductions, but mostly only one-time and only around 5%. It will be interesting to see how long these people will hold out, adn what will happen to the overall market price structure if they can't and the $600k+ homes start sagging into the range buyers are actually able to pay (esp. as llending standards tighten).

Posted by: jm | January 31, 2007 at 11:27 AM

OF COURSE the number of vacant homes is up, the number of people buying more than one home was way up in '05 & '06!
Let's get back to business. There's a VERY simple way to assess the state of our residential real estate sector, and if I've thought of it so has FED Senior Staff.
These make up some 40% of all our sf homes and are the homes whose prices TRIPLED in only nine years ('97-'05). IF '06 purchases were financed as they were in the three prior years (with funny loans), it's clear all the FED's efforts last year merely postponed the endgame.
Is it coincidental that CA, NV AND FLA, three HUGE Bubble states, have yet to sign onto the CSBS Directive on nonconforming mtgs.? This guidance is all but toothless, so why the reluctance of bubble-states to sign onto it?
I think the FED has a MUCH bigger problem to reconcile than trying to disprove a statistical phenomenon. Supporting efforts to prevent home prices from naturally reverting to their long-term historical growth rate risks changing the role housing has played in perpetuating our country's most cherished values.
So, what is the role of the FED, to see we never again have to endure the horror of two successive quarters of negative growth, or to look out and act for our long-term economic viability?
I sure wish someone would look BB in the eyes & tell him it's his time to stand up!

Posted by: bailey | January 31, 2007 at 12:34 PM

so bailey what is your solution?-drive up short term rates so you break the back of the housing market?

lower rates to give unsold stock a better chance to sell-but you risk creating a bigger bubble?

print lots of cash so that people can afford the super premium prices being asked on a lot of these homes?

or hold rates steady and give the market time to sort itself out?

I vote for hold rates steady unless you really start to see some inflationary pressures. then crank up rates. I would not lower rates, unless you had a spiraling situation, which I don't foresee.

gentle ben has been doing a good job with some really tough problems to handle.

Posted by: jeff | January 31, 2007 at 07:32 PM

Jeff, Good question. What's the objective if holding rates steady facilitates the same old profligate lending policies that created the housing bubble?
BB should immediately distinguish HIS FED from the failed policies of his predecessor's.
I think he should use his bully pulpit to start preaching fundamental economic principals to the Administration, Congress, its Banks, our largely deregulated financial sector & even consumers. He should follow that up by submitting a detailed plan to Congress asking the FED be appointed single body regulatory oversight of our financial sector. He should immediately stop acting as an Administration stooge (his China trip was humiliating, not embarrassing, his recent comments about our out of control entitlements ignored the simp[le point that this Administration's spending spree might have squared us for many, many decades (see Stiglitz on true Iraq cost). I'm still not over BB's analysis that our housing rush was driven by "fundamentals". I'd like to see him publicly question the value of FF as a spending/saving balancing point.
Early last fall his own Banks told him they were planing on loosening their already loose mtg. lending criteria this year to "remain competitive". A week later he released his toothless nontraditional Mtg. "Guidance". Huh? Since he stopped raising FF at 5.25% he's bought via open market purchases 16 times. Every time he buys out the curve he's supporting artificially low mtg. rates & I think he's signalling market players. He should stop this immediately.
And, what happened to his belief the FED should be transparent. Instead of worrying about what a r.e. price retracement would do, what no retracement will do.
What our economy needs most is someone to speak as an honest broker for our longterm economic wellbeing.

Posted by: bailey | January 31, 2007 at 09:23 PM

Among the many statements & actions I failed to mention is BB's recent claim that CPI STILL (significantly) OVERSTATES inflation. Huh? I'd love it if he'd share his definition of inflation & show us a representative population sampling that supports this claim.

Posted by: bailey | February 01, 2007 at 01:44 PM

Excerpt from Wm. Poole's 1/17/06 speech:
" the Federal Reserve has a responsibility to maintain financial stability. That responsibility includes increasing awareness of threats to stability and formation of recommendations for structural reform."
Sounds good like a good idea, doesn't it?

Posted by: bailey | February 02, 2007 at 11:55 AM

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January 29, 2007

The Road To Real Development

Amar Bhide and Carl Schramm (Columbia University and the Kauffman Foundation) write on the opinion page of today's Wall Street Journal:

The Nobel Prize lectures given last month by the economics and the peace laureates strikingly emphasized entrepreneurship. But the kinds of entrepreneurship espoused by the laureates are profoundly different. The economist Edmund Phelps's lecture highlights the contribution of entrepreneurial individuals, firms and financiers in transforming stagnant societies dominated by small-business owners into dynamic economies with large and highly productive commercial enterprise...

The Nobel Peace Prize winner Mohammad Yunus also lauds entrepreneurship. His lecture mentions entrepreneurs or entrepreneurship an unprecedented six times. Mr. Yunus observes that the Grameen Bank, which he started in 1974, has made seven million microloans in Bangladesh, for housing, education -- and micro-enterprise. The bank has turned 85,000 borrowers from "begging to business." Looking ahead, Mr. Yunus envisions a new "social stock market" for investors who will support the mass-proliferation of microloans, and to "defining entrepreneur in a broader way [so that] we can change the character of capitalism radically."

Bhide and Schramm don't leave much doubt about where they stand:

Economic development does wonders for peace, but what does microfinanced entrepreneurship really do for economic development? Can turning more beggars into basket weavers make Bangladesh less of a, well, basket case? A few small port cities or petro-states aside, there is no historical precedent for sustained improvements in living standards without broad-based modernization and widespread improvements in productivity brought about by the dynamic entrepreneurship that Mr. Phelps celebrates.

In principle, microfinance does not preclude modern entrepreneurship. But in practice, we wonder if the romantic charm of the former might distract governments in impoverished countries from undertaking reforms needed to foster the latter...

Meanwhile, over at Economist's View Mark Thoma reports on some of the latest from Jeff Sachs, who contemplates the sorry case of war-torn states (like Afghanistan):

Everywhere, politicians, generals, and even diplomats talk of military strategies and maneuvers, but everywhere something utterly different is needed. Stability will come only when economic opportunities exist, when a bulging generation of young men can find jobs and support families, rather than seeking their fortune in violence...

It’s important to distinguish four distinct phases of outside help to end a conflict. In the first phase, during the war itself, aid is for humanitarian relief, focusing on food, water, emergency medicine, and refugee camps. In the second phase, at the war’s end, aid remains mainly humanitarian relief, but now directed towards displaced people returning home, and to decommissioned soldiers. In the third phase, lasting three to five years, aid supports the first phase of post-war economic development, including restoration of schools, clinics, farms, factories, and ports. In the fourth phase, which can last a generation or more, assistance is directed to long-term investments and the strengthening of institutions such as courts.

And then there is this, from Douglass North, John Wallis, and Barry Weingast (which I arrived at awhile back via Arnold Kling):

... our perspective redefines the problem of economic development. In contrast to the perspective in modern economics, our framework suggests that economic development is not an incremental process, such as gaining more education, capital, and making marginal improvements in the rule of law. Each of these can improve a developing limited access order by moving it a bit toward the doorstep conditions, but these incremental changes can take a limited access order only so far: they are not the process of development.

The process of economic development is instead the movement from a limited access order to an open access order. This process is very difficult to engineer. Despite the massive attention to economic development by international donor agencies, only eight countries have made this transformation since WWII. Our approach implies that development requires a transformation in society from a limited access to an open access basis. This transformation takes place through what we have called creating the doorstep conditions, which represent a radical change in both the state and society: rule of law for elites; perpetual life for organizations, including the state; and political control of the military.

An "open access order" is defined as follows:

The natural state strictly limits access to positions of power within political, economic, and religious systems. What we call “open access orders,” began to develop around 1700. These societies are characterized by open political and economic competition, rather than the limited political and economic privileges enjoyed solely by elites in natural states.   

The Bhide-Schramm position seems most consistent with the North et al position, but I suspect the answer from the latter is really "none of the above." And I suspect we ought to take that seriously.

January 29, 2007 in Economic Growth and Development | Permalink


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Posted by: acshoes | January 29, 2007 at 11:53 AM

It is too bad that the American tax system is not set up to encourage entrepreneurs. It is the best route out of poverty-you don't rely on anyone but yourself.

AMT and other taxes discourage risk taking. People are generally risk averse anyway. We shouldn't point them in that direction with taxes.

Posted by: Jeff | January 29, 2007 at 03:08 PM

Is it just me, or do others also think Bhide and Schramm have imposed a false dichotomy? Somehow, Grameen banking, though it has successfully lifted hte living standard of many of its 85,000 borrowers, is worthy of dismissal because it doesn't remake society on a huge scale. Well, if you define the goal as changing the face of entire societies, then raising the living standards of tens of thousands of people may not qualify. However, at the cost involved, I can't see what all the moaning is about. North and company are also talking about changing the face of society. Similar goals as those favored by Bhide and Schramm will make North and B/S seem sympatico on the surface. The questions to ask are then whether North would agree in detail with B/S (sorry, note the "/"), and whether agreement in detail between the two in any way makes improving the lives of tens of thousands of the world's poorest people a lesser goal.

If we have a micro-tool that reliably improves lives, and we have an "undertanding" of the macro-process by which we can change the face of society, but that understanding has not led to reliable tools, why should we prefer the macro to the micro?

Posted by: kharris | January 30, 2007 at 11:12 AM

I suspect that Kling includes Singapore and South Korea in his list of eight countries that have developed. But neither of these countries are what I would describe as "open access" societies. Rather,
at least in the early stages, they
were more like some form of crony capitalists.

Not that I'm trying to say the article from him is a bad article, but what we have discovered over the last 50 years of dealing with the issue is that it is a very complex problem that is still very poorly understood. The type of micro-financing Yunus is working with can be part of the approach and make a contribution. But on the other hand the type of large scale institutions Bhide and Schramm talk about is also necessary.

Both can be part of the solution and there is no need to disparage one because it does not offer the entire solution.

Posted by: spencer | January 30, 2007 at 04:51 PM

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January 28, 2007

Moving The Bottom On The Dollar

My real job has interfered with my blogging activities this past week, but I have been meaning to take note of this Wall Street Journal article (appearing on A1 of Thursday's print edition, and highlighted in real time by Mark Thoma):

In Call to Deregulate
Business, a Global Twist

Onerous Rules Hurt
U.S. Stock Markets,
But So Do New Rivals

It begins:

Prominent figures in the U.S. are warning that the nation's financial markets have been handicapped by post-Enron regulatory overreach. Treasury Secretary Henry Paulson has made addressing the problem a signature political issue. A blue-ribbon committee chaired by former Bush economist Glenn Hubbard has echoed this sentiment, as does a report commissioned by Sen. Charles Schumer of New York and New York City Mayor Michael Bloomberg.

Their key evidence is data suggesting that U.S. stock markets are increasingly unattractive places for companies to list shares. Mr. Hubbard, now dean of Columbia University's business school, says this is the "canary in the coal mine," an early warning of the increasing costs to U.S. companies of raising money, which in turn threatens investment and growth. Their solution: a lighter touch in regulating corporate behavior.

I would also draw attention to an issue I pondered just a handful of posts back:

Are the days of the US dollar as the predominant world currency over?  Maybe not.  As was noted in the research of Menzie Chinn and Jeffrey Frankel cited in my 2005 post, there are many factors that determine which country's monetary assets become the leading international reserve currency. But to the question of what currency will emerge, we are increasingly ticking off items on the list that would make the answer "the euro."   

Burdensome regulations that make our financial markets less attractive are at the top of that list, and in the pecking order of things to worry about regarding our global economic position I would advise thinking a lot less about what China is doing to us and a lot more about what we may doing to ourselves. 

January 28, 2007 in Exchange Rates and the Dollar | Permalink


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I absolutely agree with your point, "I would advise thinking a lot less about what China is doing to us and a lot more about what we may doing to ourselves."
But, who's interest deserve our consideration?
My concern is that we made a monumental mistake when we totally repealed Glass-Steagall without completely rewriting regulations over our financial sector. Honestly, what's a larger threat, whether our markets favor our business interests more than those of another markets, or whether our markets are leading us at warp speed toward our economic armageddon. For just one example, how long will we shut a blind eye to the enormity of our eponentially growing derivatives risk? Our system requires effective checks and balances to power to survive.
I fear we cannot endure the fallout from the unfettered deregulation of our financial sector much longer and the costs are growing daily.
What I argue is obvious, the unanswered question is, who's to argue for the longterm viability of our economy when it was the FED itself (AG) who vigorously lobbied to get us here?

Posted by: bailey | January 28, 2007 at 11:00 AM

I wonder whether it is really that negative to observe fewer firms listed in the US? I indeed wonder whether firms currently use regulatory arbitrage to avoid the high standard demanded in the US. However, this strategy might not be sustainable. Investors eventually will figure out that lower standards might worsen corporate governance. From a global perspective the most important aspect is whether it will be possible to convince and maybe teach investors that a race to the bottom [of the regulatory stance] will hurt investors. Very sound theoretical arguments can be made that a race to top is more likely than a race to the bottom. However, many investors are rationally ignorant and hence I am not 100 percent sure that the best regulatory framework will win regulatory competition. America offers a good example of the complexity of the matter. Still it is not clear whether the importance of Delaware for corporate law is the outcome of regulatory competition or of a race to the bottom.

Posted by: Manfred Jäger | January 29, 2007 at 04:19 AM

If Wall Street were really suffering, salaries would be plunging. Wall Street's main competitive disadvantage vs. London and Hong Kong is excessive compensation, not over regulation.

Posted by: rex | January 29, 2007 at 11:21 AM

But many Europeans are not positive about the Euro

Your thoughts then on whether the euro is a viable alternative?

Posted by: RB | January 29, 2007 at 07:07 PM

I partly agree with Bailey in that we need to keep a sharp eye on derivatives et al. I was for the elimination of Glass-Stegal, and am unsure of how to rewrite regulations. It is always a huge catfight when you do that. I had some experience with that with the rewrite of the CFMA in 2000.

SOX is for sure written wrong. That is generally what happens when government quickly writes regs to counter or appease a populist movement.

Careful thought needs to go into rewrites. The SEC is perhaps the most antique backward looking regulatory agency in world wide finance.

Cox seems to be making progress there-but it is like eroding a mountain.

My thought is that if we try to level playing fields, we will create unlevel playing fields elsewhere. Better to fix the externalities of regulatory arbitrage, because companies are doing it. They are also engaging in tax arbitrage. No way to stop it.

Posted by: Jeff | January 29, 2007 at 07:21 PM

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Small Things That Bring Big Changes

This story, from the Wall Street Journal Online's Davos World Economic Forum blog, seems like one of them:

Mircosoft Corp. is developing on an online payment system that will be cheaper than credit card transactions, making it possible for companies to charge small fees for Web-based content and services they now offer for free...

Mr. Gates described a system that would undercut credit card fees, making it profitable for an online newspaper to charge small fees for an individual article, for example. “If you want to charge somebody $0.10 or $1 a month, that will just be a click … you won’t have to manage some funny thing or pay some big credit charge, where half of it goes to the clearing,” Mr. Gates said.

I have seen the future.

January 28, 2007 in This, That, and the Other | Permalink


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Ok, but how is it different from or better than PayPal? PayPal is a pretty good payment system that already has a wide network of users.

Knowing only what you and the WSJ report, I would have to guess that it has to do with integrating it into Windows and IE.

Oh yeah, PayPal already has a Firefox extension.

Color me unimpressed.

Posted by: William Polley | January 28, 2007 at 02:34 PM

William -- You have a point. I don't really know of a difference from paypal, though I was responding to the implicit claim that they think processing costs can be so made so low that very, very small transactions would be feasible. (The 50 cent newspaper, for example.) I guess Microsoft doesn't have much of a record on this stuff, so who knows.

Posted by: Dave Altig | January 29, 2007 at 07:09 AM

Micro payments has been an issue in the community for a long time with no resolution that I know of. M$ is always behind the curve.

Posted by: DILBERT DOGBERT | February 04, 2007 at 12:11 AM

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January 25, 2007

Do-It-Yourself Funds Rate Probabilities

If you are reading this, chances are you are familiar with these pictures depicting what the future (or the Federal Open Market Committee) might bring for the federal funds rate, as estimated from options of fed funds futures:






These used to be a regular feature here at macroblog, and have for some time been available daily at the Federal Reserve Bank of Cleveland's website.  They still are, but now the Cleveland site also has a new feature that allows you to customize the estimates, selecting how many alternative rate options you want to consider, whether to include a term premium, and if so how big you want that premium to be.  Knock yourself out. 

January 25, 2007 in Fed Funds Futures | Permalink


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I like this piece of information about the implied probs. I wonder whether something similar exists for the ECB?

Posted by: Manfred Jaeger | January 26, 2007 at 03:58 AM

Hi Manfred -- Not that I know of. But I'll keep my eyes open.

Posted by: Dave Altig | January 28, 2007 at 09:05 AM

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January 23, 2007

What Separates Pessimists From Optimists

You know what side of the fence Nouriel Roubini is on:

Among the hard landing pessimists, David Rosenberg – U.S. economist for Merrill Lynch – is very thoughtful. While he is – like me – pessimistic about 2007 he has recently argued that a series of six factors may keep Q1 growth better than expected. These factors include: “a delayed boost to retail sales as consumers use their holiday-season gift cards, the upcoming introduction of Microsoft's Vista operating system (which is shifting the timing of some capital spending plans), the late Chinese new year (which influences the timing of exports), government spending patterns and distortions introduced by the weather. Another reason is the decline in energy prices, which is giving a lift to real income.

Of these six factors I see low oil prices and the unseasonably warm weather as the most important ones that may temporarily boost growth to 2.5% in Q1.

Well, OK, but wouldn't it be just as fair to say that the rapid acceleration in oil prices suffered over the first three-quarters of the year temporarily restrained growth in the last part of the year?  And though it seems reasonable to argue that favorable weather may be providing a winter boost to economic activity, and though it may very well be that this in whole or part represents a shift in business activity that would have otherwise been realized in the spring and summer, doesn't that at least imply that the business was there to shift?  And doesn't that imply that the more pessimistic scenarios were not quite on target?

It's all how you look at it.

January 23, 2007 in This, That, and the Other | Permalink


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Roubini's style seems to be to arrive at a conclusion first and then try to find the data to justify the conclusion.

Posted by: Steve | January 24, 2007 at 04:42 AM

Sorry, but I just don't get it. If you're not happy with the way Roubini framed his argument, why not reframe it historically, say - since the Bush Administration took office, or for the last 30 years?
Or, if you feel the decrease in oil prices over 3 quarters is significant to our economic prospects, what about the increase in easy credit over the same period?
Here's one piece of short-term info. I do find relevant. I recall reading that some 40% of all homes purchased last year were financed with NO down-payment by borrowers who opted to pay higher mtg, rates rather than provide documented earnings history.
Is it the FED's job to see we never again suffer the horror of two successive quarters of negative GDP growth?

Posted by: bailey | January 24, 2007 at 09:00 AM

I have difficulty seeing how people will spend more with falling oil prices when they did not cut back much during rising ones.

Posted by: Lord | January 25, 2007 at 02:08 PM

The fall in oil has been met with a corresponding increase in grain prices. This will increase the costs of some foodstuffs in the food supply. Short term, you may see lower meat prices, because the higher grain price will force animals to market. Longer term, meat prices will be higher, because there will be less animals around.

Foreign demand for US commodity products is accelerating. I don't see the economy slowing down, unless there are tax increases, or health care cost increases.

Fed will be on hold, or will likely raise another quarter-but I am in the severe minority on this view.

Posted by: Jeff | January 25, 2007 at 10:39 PM

Jeff I agree Fed will be on hold and will only pressure the markets to adhere to their view. I don't believe they will raise rates for the risk of putting our economy into a hard landing scenario is too great. Rather they will rely on hawkish comments implying the rate hike scenario. Thus forcing the bond market to realign their expectations, which is what we saw today in the market. Expectations are just as effective if not more effective then the actually act. Which in the trading arena buying the rumor selling the fact, usually holds true. I think the US economy is ok for now but cannot bow to external pressure on commodities. If the rest of the global engine picks up the demand slack and the US consumer retrenches I believe that to be a good thing. The avg consumer is over extended and if Mr.Potter comes calling to early then the hard landing scenario will most certainly occur. The FED also cannot be to vigilant for the world is very unstable and I don't think our bond or stock market could handle a major disruption at this point. The FED targets price stability as much as Inflation and right now it is getting what it wants.

Posted by: Mike Agne | January 26, 2007 at 01:42 AM

Nouriel has been negative for so long it's almost depressing to see him wrong

he articulates everything so well --- but keeps upgrading his own GDP estimates , and pushes the recession further out into the future

he'll be right eventually.... maybe ( very Ritholtz-esque )

Posted by: john E | January 26, 2007 at 01:42 PM

A broken clock is right twice a day, which is more accurate than Roubini.

Posted by: cb | January 30, 2007 at 03:08 PM

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January 19, 2007

The Yield Curve: Still A Wild Card

Although the incoming data related to real activity in the U.S. may not prove the case against the 2007 crash-and-burn scenario, it sure is not providing much support for it.  From housing starts, to retail sales, to industrial production, you have to actually work to generate some negative spin. One should always seek perspective, of course, and there are indeed reasons to restrain your optimism.  Listen, for example, to Dean Baker:

The consensus estimate for retail sales growth in December was 0.5 percent. Naturally, people were surprised when growth was reported at 0.9 percent, as the NYT (among others) told us. Well, they really should not have been surprised, because the November numbers were revised down by 0.4 percent, which means that the December sales level was just where the consensus estimate put it.

You might make a similar case for the industrial production index, which grew more than expected in December, but was revised down (into negative growth territory) in both November and October. And you can always blame the weather for making things look too darn good.

Nonetheless, I think a fair-minded assessment -- if I may speak fair-mindedly myself -- would be "not bad."

Then there is the yield curve where, despite some recent movement, the spread between long-term and short-term interest rates remains stubbornly south of zero.  Writing in the online version of the Cleveland Fed's Economic Trends feature, Joe Haubrich and Brent Meyer review a little history, and do a little extrapolating:

The slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last six recessions (as defined by the NBER). Very flat yield curves preceded the previous two, and there have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998. More generally, though, a flat curve indicates weak growth, and conversely, a steep curve indicates strong growth...

While such an approach predicts when growth is above or below average, it does not do so well in predicting the actual number, especially in the case of recessions. Thus, it is sometimes preferable to focus on using the yield curve to predict a discrete event: whether or not the economy is in recession. Looking at that relationship, the expected chance of a recession in the next year is 43%.

Not everyone is convinced, of course, but right now it looks to me to be the bears' strongest suit.

January 19, 2007 in Data Releases, Housing, Interest Rates | Permalink


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Posted by: acshoes | January 19, 2007 at 12:05 PM

ECRI WLI has been briefly negative this past year and is currently at a robust 4% growth rate, so a recession is currently not on the cards. It remains to be seen whether the index has peaked but the Fed yield curve recession model did not enter +50% probability for any sustained period of time. Perhaps a severe slowdown is still on the cards though.

Posted by: RB | January 19, 2007 at 02:51 PM

"in" the cards, I believe is the expression, RP. Scuse me for bein so picky, but I believe the escalation in the Middle East will postpone the recession...and I'm hoping that this is not undertaken for economic reasons ie. the military industry will take over from the flagging housing market.

Posted by: calmo | January 19, 2007 at 08:05 PM

What if the price of our limited supply of 10 year Treasury securities is being driven by financial sector "must" purchases, as oil commodity prices were? Doesn't the liklihood of this seem high enough for independent analysts to drop the "inverted yield curve" explanation?

Posted by: bailey | January 21, 2007 at 09:55 AM

"In the cards" is the American version, "on the cards" the British. Prepositional use being highly idiomatic, there is little to gain from arguing about which makes more sense.

Now, back to our sponsor. I agree that recession is not the most likely outcome this year, but I don't see that either the retail sales or industrial production releases strengthen the case against recession. One month does not make a trend, and even the one month is ambiguous. December retail sales and industrial output grew more than was expected, but due to prior revisions, as our host notes, that left levels of activity just about where they were expected to be. Revisions to October and November data mean that, for all of Q4, retail sales and IP data were weaker than expected. That adds up to less strength in Q4 than advertised prior to the release. How does that add to the case against recession? This seems a case of seeing what one wants to see, rather than analysis.

A fair-minded assessment might be "not bad" but there should be no implication the retail sales and IP data strengthened the "no-recession" case, and I detect an effort to make that implication. There were a number of upward revisions to Q4 GDP estimates among major banks last week, but they seemed largely due to better merchandise trade data, rather than IP or retail sales.

Posted by: kharris | January 22, 2007 at 08:40 AM

If Dean Baker won the lottery he would find a bearish implication for his financews.

Posted by: Zephyr | January 24, 2007 at 11:36 PM

Historically a negative yield curve has almost always been accompanied by a falling stock market. So if we are not getting the usual stock market reaction to a negative yield curve why should we expect the standard economic downturn.

It seems a negative yield curve is not signaling the same tight money policy it use to.

Posted by: spencer | January 28, 2007 at 04:38 PM

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January 18, 2007

Housing In The Midwest: No Boom, All Bust

Last month the good folks who bring you the Case-Shiller Home Price Index unveiled the addition of ten new metropolitan areas to the their existing collection of data on housing prices: Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland (Oregon), Seattle, and Tampa. I've posted a look at the latest C-S details for the now fully electronic version of the Federal Reserve Bank of Cleveland's Economic Trends, and you can find a great interactive map at the website of MacroMarkets LLC (who possess "exclusive license and sublicensing rights to the CSIs for the purposes of developing, structuring and trading financial products.") But here's what I've come to moan about this morning:





Compared to the overall averages -- captured by housing prices in the "composite 10" (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington D.C.) or all 20 metro areas in the C-S "composite 20" index --  the rapid appreciation of 2002-2006 was either less spectacular or simply did not occur in the major Midwest cities.  We were not, however, spared the rapid deceleration of price gains.

You might argue that the Minneapolis area had its boom somewhat ahead of schedule, and that despite slowing the growth rate of prices in and around Chicago are still pretty healthy.  For Detroit and Cleveland, however -- well, there's just no excuse.

January 18, 2007 in Housing | Permalink


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The difference is leverage. It is usually positive in metropolises but only neutral in smaller cities like Cleveland because mortgage rates are national but growth rates are local.

Posted by: Lord | January 18, 2007 at 02:00 PM

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January 17, 2007

Optmism And Pessimism In The Housing Market

The pessimists get their time in today's Wall Street Journal (page A2 in the print edition):

Though some economists say the worst of the housing slump is over, the latest developments show that bad news from lenders and builders can still jolt the market. Steeper discounts from builders desperate to unload excess homes could add further downward pressure on prices, as could rising foreclosures, which dump more properties on the market.

"There are going to be more negative surprises," said Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse who has long had a bearish view on the industry. "I think it's just getting started."

That is indeed a contrarian position.  According to to the folks placing their bets by way of futures on the Case-Shiller price index, the worst of it is just about getting ended:




That's a picture of the rate of appreciation in the 10-market (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington, DC) composite price index.  To be sure, there are more negative reports expected -- price depreciation (as opposed to slower rates of appreciation) look to be the story for this year.  But even on this score, the outlook has become more optimistic -- OK, less pessimistic -- over the past month:





Surprises do happen, of course, but thus far they are running in the right direction.   

January 17, 2007 in Housing | Permalink


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People never learn. In 1991-1995 it took 5 years to reach the real estate bottom.

"This time is different" - that's what I heard about Nasdaq in 2000, and hear now about RE.

Of course it's different.

Maybe this time real estate slump will take 4 years. Or maybe 6. That's what will be different this time.

Posted by: theroxylandr | January 17, 2007 at 10:45 AM

Here in Chicago's Northwest Suburbs there is a large and steadily rising inventory of vacant high-priced condos, McMansions, and true mansions that aren't selling, but neither are being reduced in price, as to reduce the prices to levels at which the properties would move would be tantamount to declaration of bankruptcy by the sellers. For the true impact of this glut ov vacant luxury homes to become visible in pricing, the homes must first be taken over by the banks, but then there will be more delay while the banks refuse to sell them because the market prices will be so far below the loan values as to destroy them, too. When this stuff finally starts getting discounted enough to sell, it will crush the values in the mid-market beneath it.

But this will take some time. The real decline hasn't even started, yet.

Posted by: jm | January 17, 2007 at 11:30 AM

Why would nearing a bottom while housing prices are at extremely lofty levels signal the "right direction"? In our Bubble zones (>40% of the country), housing prices are almost triple what they were in 1997 while wages have barely moved. Isn't this a great example of why reversion to long-term mean growth is in our best interest?
I don't understand why FED associates (from fomc voters to staff to researchers) appear to be jaw-boning a hope that our (long-awaited) housing correction is nearing a bottom. Why is defending a predecessor's highly questionable asymetric response policy a good thing?
I would prefer to see the FED instruct its researchers to reexamine the merits of the policy using newer data. At the very least I'd expect FED people would question whether its recent non-traditional guidelines have kicked-in.
We have plenty of Wall St. Economists to turn to for positive housing arguments, what we need is for the FED to resume its role as honest broker.

Posted by: bailey | January 17, 2007 at 11:47 AM

Have to agree with the above posters, but curious about the stickiness of the house prices. It looks like one might be able to hold them for a lengthy period (to be determined by economists much sharper than me), paying the taxes and maintenance but this would seem to be more easily borne by some than others. Are the modest to low priced houses more at risk from precipitous declines than luxury houses? Is there a record of this in past housing declines?

Posted by: calmo | January 17, 2007 at 11:49 AM

Following up on my earlier comment dashed off on the way to work...

The MLS today lists 80 homes with asking prices $700k or higher in my suburb. The Chicago Tribune's database of actual sales in 2006, now current thru Dec 8, shows only 60 sales in in that price range, and only 94 at or above $630k. So even if the sellers were willing to take 10% below asking, and there were no more homes in that price range to come on the market in 2007 (and none FSBO, or by builder direct, or otherwise not on the MLS), the current MLS stock is about ten month's supply. Although some of the MLS homes are surely under contract pending closing, that number is probably no more than a month's worth.

That this inventory equals ten months of sales doesn't mean that ten months from now the glut will have been worked off -- more homes are going to come on the market in this price range: resales by people moving out, perhaps still more new construction too far along to abort, and perhaps some foreclosures on people who bit off more than they can chew, especially if we slide into recession.

Posted by: jm | January 18, 2007 at 02:54 AM

A couple of thoughts --

jm -- I wonder how much non-price negotiating is going on. (The straightfoward answer, I suppose, is "not enough" if the properties aren't selling. But the other thing we don't know much about is whether the reservation prices of the sellers of houses are simply high, and for any variety of reasons they are simply not that anxious to move to the houses.)

bailey -- Of course, there is a lot of attention paid to signals coming from all manner of data. As I've said many times, it is true that, as far as potential financial market distress is concerned, the Fed's job is to regulate banks, and hence the outlook remains bank-centric. Time will tell if that is wise, but that is the way it is.

As for jawboning, that is a misdiagnosis. I speak for no one but myself, but my first instinct is to beleive that people with their money on the line know a lot more about things than I know. Prices in any particular market may reflect the supply of and demand for something other than what I think, but for now I'm operating on the assumption that the information in the C-S indexes are about what I think they are.

Posted by: Dave Altig | January 18, 2007 at 08:21 AM

Dave, It (jawboning) wouldn't be the first misdiagnosis I've made. I fear way too many homeowners have a tremendous portion of their total wealth tied to their homes & they are borrowing way too much because they believe it's very unlikely prices will fall substantially. They're hearing everywhere that home prices never fall & nowhere that there are good reasons why this time may be different.
I sure didn't understand why Mishkin commented yesterday that home prices rarely fall much & I'm at a loss why he felt it important to say. When in our history have prices of 40% of our homes escalated so much, so rapidly? (By the way, I loved the inference that the FED might have cut short the bubble had it better overseen its banks' risk-management practices.) I really agree! Had the FED done this AND used its pulpit to lambast Congress and our GSEs for pushing irresponsible mtg. lending policies (to forward the Bush Administration's "ownership society") we wouldn't be in this mess.
In short, I agree with Mishkin that we didn't need a symetric FED policy to avoid the housing bubble, we just needed an independent and responsible FED. It wasn't low interest rates that caused the housing bubble & the huge housing price increases we've seen were not driven by "fundamentals".

Posted by: bailey | January 18, 2007 at 06:33 PM

Couple thoughts to add:

jm-I think that the banks will more quickly lower foreclosed values than one would think. Why? Because they just write it off on the balance sheets, which they don't care about since they know that the earnings are going to suffer through a housing bust anyway. I think that is why they made sure to squeeze huge bonuses out in 2006, they knew they would have to accept no bonuses for several years ahead. They'll have to take the losses sometime, just get it over all at once. Remember JDSU writing off $50 billion in one qtr? The insider sales and bonunes have made them all rich now, they knew it was coming.

bailey-the Fed can't turn against Greenspan's policies, they were in bed with him! Bernanke practically worshipped the fool. They will cling as long as possible to the easy money policy even though they know its risks. Only when foreign investment dries up will they change policy direction, and then I still wouldn't expect an admission of error.

Posted by: dotcommunist | January 22, 2007 at 02:49 PM

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