February 2009 - Global Economic Watch


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GDP: 6.2% 4th Quarter Drop

02-27-2009 3:38 PM with no comments

At the beginning of the month, the Commerce Department predicted that fourth quarter gross domestic product (GDP) figures for 2008 would show 3.8% drop.  This seemed low to some economists, and it turns out it was.  Today Commerce released a revised estimate.  From October through December, GDP dropped at a seasonally adjusted annual rate of 6.2%--the biggest one quarter drop since 1982.  This from the Bureau of Economic Analysis's news release:

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports.

Final sales of computers subtracted 0.01 percentage point from the fourth-quarter change in real GDP, the same contribution as in the third quarter. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after adding 0.16 percentage point to the third-quarter change.

Exports decreased 23.6 percent in the 4th quarter.  They had risen 3% in the 3rd quarter.  The one area with significant growth was government spending--up 6.7%.

As noted above, the figures aren't a big surprise.  As Barry Rithotlz writes in a short but clear post, "WHO THE HELL IS STILL SURPRISED BY THESE NUMBERS?!?" But Marketplace's Steve Henn will have a report today on just how the Commerce Department got its estimates wrong. Local listings are here



Posted by Graham Griffith

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Yale Economists Discuss the Crisis

02-27-2009 10:16 AM with 1 comment(s)

Shortly after President Obama signed the $787 billion dollar economic recovery act, a panel of Yale professors discussed the state of the economy at Yale Law School in New Haven, CT.  John Geanakoplos, William Nordhaus, and Robert Shiller--all professors in the Econ department at Yale--joined Yale Law deputy dean Jonathan Macey.  The discussion, moderated by Yale president Richard Levin--himself a former professor of economics at Yale--covered the severity of the current recession, the root causes of the global economic crisis, and the specific problems of the banking system.  The panel seemed to be in agreement twhen it came to fiscal stimulus (they think we need it, and we might need more than what the Obama plan provides) and the banks (we can't allow them to fail).  And while there is a lot of talk of gloom, the panelists for the most part) do not give in to the gloom themselves.  And they do provide prescriptions.  Of course, you may or may not agree with them.  As always, share your thoughts by clicking on comments below. 

Here's the full discussion:

Posted by Graham Griffith

New Poll Shows More Americans Believe Small Business Can Lead The Way

02-27-2009 8:11 AM with 1 comment(s)

A We Media/Zogby poll shows a majority of Americans believe small business owners and entrepreneurs, and science and technology leaders "will lead the U.S. to a better future." Government and business leaders didn't garner nearly as much respect. And don't even get them started on media leaders: 

Nearly two-thirds of Americans (63%) said small business and entrepreneurs will lead the U.S. to a better future, while 52% said the same of science and technology leaders. Americans are far less optimistic about the leadership of government (31%), large corporations and business leaders (21%), or traditional news media such as newspapers, television, radio, and magazines (13%).

Read We Media's release hereSmall Business Trends weighs in on the poll here, with pride, of course. 

Posted by Graham Griffith

'Dangerous Home Loans', 2000-2007

02-26-2009 1:42 PM with no comments

According to a report out today from RealtyTrac, 1 in 54 homes received at least one foreclosure filing in 2008.  According to the USA Today, that is an increase of 81% over 2007. As we now know, a lot of Americans were taking on loans that were way beyond their means, and when the housing bubble burst, and their presumed home values sank, they could not keep up with payments.  USA Today has a good illustration of the growth in what they call "dangerous loans," or mortgages that were at least four times the applicant's annual income.  The number of these loans ballooned between 2000 and 2007.  The first map shows where and how many of these loans were issued in 2000:

And here's the map for 2007:

Maps by Brad Heath, Joshua Hatch, and Dave Merrill, USA TODAY

Bear in mind that the second map is for 2007, when as Brad Heath writes in USAT, "foreclosures and plummeting housing prices began sending shockwaves through the nation's economy." 

The size of those loans should have been a clear red flag, says Susan Wachter, who studies real estate and finance at the University of Pennsylvania's Wharton School. People who borrow that much money are more likely to default on loans.  "It's the continuation of loans that were clearly designed to fail," she says. "In 2007, we were clearly about to go into a disaster, but ... the loans were still being written." On average, buyers in 2007 got mortgages that were double their income.

You can read the full article, and see the USA Today's interactive map of dangerous loans from 2000 through 2007 here

Posted by Graham Griffith

'Here we go again: Are manufacturers the new farmers?'

02-26-2009 11:27 AM with no comments

In yesterday's post about January's mass layoff statistics, we pointed out that the manufacturing sector, once again, was hit the hardest.  So it is a good time to share this post from Clemson University professors William Ward and William Gartner:

In all of the talk to save automobile manufacturing jobs, doesn't it seem we've been down this road before?  One hundred years ago it was farm jobs that needed to be saved.  Later, creating manufacturing jobs was the universally-acclaimed path to economic development. As we begin this century, the immediate goal seems to be saving manufacturing jobs.

When the talk turns from creating jobs to saving them, foolish economic policies tend to follow. These include trade protectionism, income support and tax subsidies. None of these policies saved agricultural jobs, but they made agriculture the most distorted sector in the US economy.  So, as the political talk shifts from creating to saving manufacturing jobs, we ask: "Do we really need a manufacturing sector policy that matches our agricultural policy?"

Let's take a quick historical tour.  Thomas Jefferson argued that agriculture, forestry, fisheries and mining were the basis of economic wealth, a belief supported in employment terms by the US Census of 1820 that showed 83% of the US workforce to be farmers, while only 14% worked in manufacturing. By the end of World War I, farm employment had dropped below 33% of the workforce, and major programs began to emerge to keep agriculture at "parity" with the rest of the US economy. 

After nearly a century of these agricultural programs, farm employment represents barely 1% of the US workforce, and farm output barely 1% of US GDP-not because agricultural output declined but because manufacturing and services outputs grew faster.  US farm output in 2005 was actually 2.2 times the farm output of 1961. Likewise, world agricultural output went up nearly three-fold, while farm employment as a percent of global total employment declined.  Yet, government subsidies to farmers make up 16% of US farm income, one-third of farm income in some EU countries and nearly two-thirds of farm income in Japan.

Manufacturing employment is following the same downward trend as agriculture.  Manufacturing employment peaked at the end of World War II at 33% of US employment and has trended downwards to around 10% of the US workforce in 2008 and could easily be down to 5% by 2020.  Manufacturing employment is declining, not because US manufacturing output is declining, but because, like farming in the last 100 years, it takes fewer-and-fewer workers to produce more-and-more output.

 The decline in manufacturing employment, as a percentage of the total workforce, is not unique to the United States. We estimate that global manufacturing employment declined 15% (by 30 million workers) between 1995 and 2002 alone (years for which we have good data), while global manufacturing goods exports increased by 27% (current values).  It should be noted that China is not "absorbing" these manufacturing jobs.  China's manufacturing employment declined by 18 million during that period (from 98 million to 80 million), even as China's share of global manufacturing exports more than doubled (from a 2.49% share to a 6.08% share). While we don't have later data for China, we have it for the sixteen major competitor countries followed by US Department of Labor.  Between 1992 and 2007, manufactured goods production increased in all sixteen, while manufacturing employment fell in all except Spain (who started out with a 20% national unemployment rate), Taiwan (minuscule growth) and Canada (miniscule totals).  In South Korea, for example, manufacturing output-per-worker increased three-fold, exports increased four-fold and manufacturing employment declined by nearly 12%. At the same time, US manufacturing output increased more than 70% (in real terms), manufacturing exports were up by 170% (in current values) and US manufacturing employment dropped nearly 20%.

 The future of manufacturing, simply, is fewer jobs.  This is what increases in productivity means: Fewer and fewer people are needed to make more and more goods.  You simply cannot save jobs in sectors where there are increasing gains through productivity.  Providing subsidies to farmers hasn't increased farm employment.  So, do we really want future autoworkers and shareholders to get 16% of their income from the US Treasury in the same way that farmers do?

Ward teaches applied economics and statistics at Clemson. Gartner teaches entrepreneurial leadership at Clemson and is author of Handbook of Entrepreneurial Dynamics.  Gartner.  The above piece first ran in Greenville Magazine

Posted by Graham Griffith

Geithner on Stress Tests

02-26-2009 8:17 AM with no comments

The nation's largest financial institutions are going under the microscope this week.  The US Treasury Department began administering stress tests yesterday, with the aim of determining whether the banks have the necessary capital to make it through two years of adverse economic conditions.  On yesterday evening's All Things Considered Treasury Secretary Timothy Geithner described the purpose of the stress tests to NPR international business and economics correspondent Adam Davidson.

Geithner: What we want to do is to bring a more realistic, a more conservative, a more consistent, forward-looking assessment so that we are confident that these institutions are going to have the resources necessary to withstand a more challenging economic environment. And to do that we're gong to make sure they have support from the government — in terms of capital from the government — where that is necessary.

We know Davidson, and we've highlighted his work before.  He started Planet Money for NPR just as the global economic crisis struck last year. And his features for This American Life (Giant Pool of Money, parts 1 and 2 in particular), provide some of the clearest explanations of the root causes of the crisis.  And this interview is consistent wth his previous work. As Davidson presses Geithner on how the Treasury will go about administering the stress tests, he put the Secretary through a little bit of his own stress test.  You can catch the ATC interview here.   But there's more that didn't make it onto the ATC edited version.   The latest Planet Money podcast features the full interview with Geithner, and a description of the scene in Geithner's office.  Download, or take a listen to the full interview here

UPDATE: The Baseline Scenario reacts to the Geithner interview.

Posted by Graham Griffith

January Mass Layoffs--Fewer "Events" From December, More Jobs Lost

02-25-2009 3:38 PM with no comments

The number of mass layoff events--50 employees or more laid off in a single event--declined from December to January, according to the Bureau of Labor Statistics.  There were 2,227 mass layoff events last month, compared to 2,275 in December.  But the number of people who lost jobs in these layoffs increased to 237, 902--11,785 over December figures. 


The total number of events is up by nearly 50% over January 2008.  "Temporary help services" had the highest number of inital claims of any industry with 25, 467, but overall, manufacturing jobs were hit the worst.

The manufacturing sector accounted for 38 percent of all mass layoff events and 44 percent of initial claims filed in January 2009; a year earlier, manufacturing made up 30 percent of events and 35 percent of initial claims. This January, the number of manufacturing claimants was greatest in transportation equipment (57,173) and machinery (14,120). (See table 3.) The administrative and waste services industry accounted for 12 percent of mass layoff events and associated initial claims during the month.

The South was the hardest hit region (among the 4 census regions) in January with 115,630 jobs lost in mass layoffs.   The Midwest lost 114,195 jobs to mass layoffs, compared to 81, 846 in the West and 77,142 in the Northeast.  You can get the full data from the Bureau of Labor Statistics website here

Posted by Graham Griffith

Startup Advice for Lean Times

02-25-2009 11:14 AM with no comments

Cisco, Oracle, Lotus, Atari: all technology businesses that were start-ups during economic downtimes.  BusinessWeek's Spencer Ante spoke with some entrepreneurs who saw opportunities during recessions and shares some of their advice.  The article is yet another reminder that a lot of top American businesses owe some of their success to the decisions their founders made that ran against the economic tide.  As Harvard Business School's Tom Nicholas tells Ante, "Recessions can be really useful strategic opportunities."  Ante goes on to write:

Entrepreneurs, financiers, and historians point to several reasons for this phenomenon. For starters, everything is cheaper during a downturn, including the cost of labor, materials, and office space. There's less competition, both from incumbents that are trying to put out their own fires and from startups that find it harder to raise money. And the tough times force entrepreneurs to work on their business models earlier, so they end up reaching profitability more quickly than when money comes cheap. "The companies are tougher because they were tested during a tougher time," says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.

The advice in the article, though not necessarily brand new, serves as a good reminder to entrepreneurs to match up core strengths with clear opportunities.  And most of all, believe in what you are doing as you build a company and a culture. 

Another key lesson is to pick markets strategically, says Umang Gupta, who joined database maker Oracle (ORCL) in 1980 as employee No. 17 and wrote its first business plan. Ultimately, the company wanted to build a database program that would work with multiple types of computers, from minicomputers to PCs to mainframes, those hulking machines that crunched massive amounts of data. But Oracle couldn't do it all at once. It started out creating a database that worked on minicomputers such as Digital Equipment's PDP-11. Then Oracle methodically went upstream, pursuing mainframes next, rather than going for mainframes and PCs at the same time. "We concentrated our bets," says Gupta, now CEO of Internet measurement firm Keynote (KEYN). "We built a culture of an extremely focused, aggressive company."

Read the full article here

Posted by Graham Griffith

Economy Day--In Pictures

02-25-2009 7:50 AM with no comments

The New York Times counted President Obama saying "economy" thirty times in his address to Congress.  And that was just one chapter in a day of economic talk in Washington.  Earlier, Ben Bernanke, chair of the Federal Reserve, addressed the Senate Banking Committee and said, if the government makes the right moves, economic recovery could be just a year away. 

To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.  If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.  If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.  

Here is his opening statement from yesterday:


A transcript of Bernanke's testimony is here.

President Obama was up in prime time, and it certainly didn't hurt to have stocks rally in the afternoon, after Bernanke's testimony.  Before addressing specific details of his administration's economic recovery plans, the President said it is time for the country to "take charge of our future." 

Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity.  Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down.  That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight.

Here is an excerpt from his speech:

You can watch the full address here.

Before the day was up, the Republicans sent Louisiana Governor Bobby Jindal to the podium (at the Governor's Mansion in Baton Rouge) to respond to Obama's address.  Jindal stressed his party's belief that "the way to lead is by empowering you, the American people." 

That is why Republicans put forward plans to create jobs by lowering income tax rates for working families, cutting taxes for small businesses, strengthening incentives for businesses to invest in new equipment and hire new workers, and stabilizing home values by creating a new tax credit for home-buyers. These plans would cost less and create more jobs.

Here's an excerpt from his response:

Governor Jindal's office promises a full video of his address will be available here.  You can read a full transcript from CNN here

Posted by Graham Griffith

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An Animated View of the Credit Crisis

02-24-2009 4:52 PM with no comments

Los Angeles-based designer Jonathan Jarvis has created a whole new way of looking at the credit crisis.  Here it is:

Jarvis says "The goal of giving form to a complex situation like the credit crisis is to quickly supply the essence of the situation to those unfamilar and uninitiated."  The above project does seem to hit the mark.  Jarvis's Website is here

Posted by Graham Griffith

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Bailout Money for Venture Capital Firms?

02-24-2009 10:13 AM with no comments

Over the weekend, Thomas Friedman expressed frustration at the prospect of more federal bailout money going to GM and Chrysler, writing, "Bailing out losers is not how we got rich as a country, and it is not how we'll get out of this crisis."  Friedman thinks we need to focus on start-ups.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners - university endowments and pension funds - are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors' upside and keep 80 percent for themselves.

 This talk has Anita Campbell of Small Business Trends nervous.  She says "bailing out venture capitalists is a dumb idea."  Setting aside for a moment that Campbell's statement seems to misrepresent Friedman's idea (he is saying that federal bailout money would be better spent if we gave it to VC firms.  I don't see him arguing that we need to "bail out" those firms), her larger point remains worth exploring.  She points out that most small businesses don't get venture capital.

Look, venture capitalists play a valuable role. But venture capitalists are simply irrelevant when it comes to the vast majority of small businesses and the economic engine they create. And we definitely shouldn't be subsidizing VCs' high investment returns with taxpayer money, especially not my taxes as a small business owner.

Read Anita Campbell's post here

Is she right?  Or is there something in Friedman's idea that makes sense for economic growth, and therefore a net gain for small business?  Weigh in.

Posted by Graham Griffith

The Geography of the Meltdown and the Recovery

02-24-2009 8:39 AM with 1 comment(s)

Global crises have a way of reshaping nations, and it is likely the US will look very different in the years following this recession.  Some cities will have a much harder time climbing out of the economic hole than others.  Some might not ever recover, or will only do so by reinventing themselves.  Urban studies theorist Richard Florida considers how the crisis will change where we live, how we work, and the US's stature in the global economy in a comprehensive article in the March issue of The Atlantic titled, How the Crash Will Reshape America

No place in the United States is likely to escape a long and deep recession. Nonetheless, as the crisis continues to spread outward from New York, through industrial centers like Detroit, and into the Sun Belt, it will undoubtedly settle much more heavily on some places than on others. Some cities and regions will eventually spring back stronger than before. Others may never come back at all. As the crisis deepens, it will permanently and profoundly alter the country’s economic landscape. I believe it marks the end of a chapter in American economic history, and indeed, the end of a whole way of life.

While New York City was at the center of the global economic crisis when it touched off nearly 6 months ago, it looks like it will not bear the brunt of the storm over the long term.  While at the height of the bubble, "greater New York depended on financial sector for roughly 22% of local wages," the city has been attracted top minds from in a diverse array of fields for much of its existence.  Cities that were already in decline before the crisis--Rust Belt cities for example--are in much greater danger because they have not been adding talented minds.  Florida, who wrote The Rise of the Creative Class, has spent a big part of his career looking at how urban centers depend on attracting talented, innovative people, and that those people thrive in environments that are active, stimulating, and fun.  As a result, these places--New York, Chicago, Boston, Seattle, Silicon Valley--have grown and experienced ever increasing rates of innovation and wealth creation--something Florida calls "urban metabolism." 

Metabolism and talent-clustering are important to the fortunes of U.S. city-regions in good times, but they’re even more so when times get tough. It’s not that “fast” cities are immune to the failure of businesses, large or small. (One of the great lessons of the 1873 crisis—and of this one so far—is that when credit freezes up and a long slump follows, companies can fail unpredictably, no matter where they are.) It’s that unlike many other places, they can overcome business failures with relative ease, reabsorbing their talented workers, growing nascent businesses, founding new ones.

Economic crises tend to reinforce and accelerate the underlying, long-term trends within an economy. Our economy is in the midst of a fundamental long-term transformation—similar to that of the late 19th century, when people streamed off farms and into new and rising industrial cities. In this case, the economy is shifting away from manufacturing and toward idea-driven creative industries—and that, too, favors America’s talent-rich, fast-metabolizing places.

As "creative" capitals become more vital and recover from the crisis, other places that will likely suffer longer include a lot of old factory cities that have not evolved and possibly Sunbelt cities where rapid growth was centered on rising housing prices rather than new economic sectors.  The full article is a must read, as is an additional Q&A with Florida that focuses largely on the stimulus package and what sort of infrastructure will help foster growth in the new America. 

Also, The Atlantic has pust together an interactive feature that is highly useful.  For example, the map above shows the relative growth and decline of patents per capita in urban centers.  You can use the mapping tool here

UPDATE: Richard Florida was a guest on WBUR's On Point with Tom Ashbrook yesterday.  Listen here.

Posted by Graham Griffith

The Drumbeat of Bad Forecasts (no shades necessary)

02-23-2009 4:05 PM with no comments

We should expect this recession to continue at least through the first half of 2009, and the downturn will "rival that of 1973-75," according to a panel of economics forecasters surveyed by the National Association for Business Economics.  Other lowlights highlights include:

-Economic weakness will be dominated by a retrenchment in consumer -spending reflecting large employment and wealth losses.-Business investment will experience an exaggerated cyclical decline characteristic of economic downturns

-Real government spending is expected to advance a robust 2.8% in an otherwise grim 2009

-The jobless rate will peak at 9.0% by the end of the year.  House prices are predicted to decline 5% during 2009, though the S&P 500 index is expected to rise a solid 8% by December 31, 2009. 

There is some good news in the report.  The NABE panel projected moderate growth in 2010 of 3.1%.  This is only one of several gloomy reports that have come out recently.  Last week, the Federal Reserve even downgraded previous projections, and now forecasts that the economy will contract by 0.5 to 1.2%, and unemployment will rise to between 8.5 and 8.8%

Former Fed Chair Paul Volcker, now chair of President Obama's Economic Recovery Advisory Board, shared his own downcast views of the current economic climate in a speech before economists and investors at Columbia University on Friday.  The 81-year old Volcker told the audience he doesn't "remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."  Here are more of his comments:


Posted by Graham Griffith

Must Listen: Launching a Business in a Recession

02-23-2009 2:27 PM with no comments

There is plenty to suggest that, as counterintuitive as it may seem, recessions are a good time to start a business (assuming you have the right ideas, the money, and the patience).  We've written before (here and here) about the surprising number of successful businesses that started during economic downturns.  From Southwest Airlines to Microsoft to Target, the list goes on.  Today, on Weekday, KUOW radio's daily news-talk program, host Steve Scher spoke with entrepreneurs who started businesses during the current recession.  Here's the program blurb:

Stocks are down, pink slips are flying, and houses are in foreclosure. What better time to start a new business! What have you got to lose? We talk to entrepreneurs who venture into today's economy with high hopes. What are their business plans? And where are they getting funding?

KUOW, a Seattle based public radio station, is the top news station in Washington, and Seattle is one market that seems to have a concentration of entrepreneurs.  Washington state is one of the top five states for entrepreneurs, according to the Small Business Entrepreneurship Council.   So while this is a local program, it is an interesting look at what entrepreneurs are doing to find success in this recession.  Listen online or download the podcast here

Posted by Graham Griffith

CPI: The Good, The Bad, The Uncertain

02-23-2009 10:28 AM with no comments

January's Consumer Price Index (CPI), released Friday by the Labor Department, reveals a slight rise in prices last month, after siginificant drops in the last quarter of 2008--November's 1.6% drop was the largest since the government starting tracking consumer prices 61 years ago.  A lot of consumers, many with less to spend than recent years, welcome lower prices.  But given the overall trend during this recession, especially when compared to other recessions, some economists have been concerned about deflation.  See the below graph from the St. Louis Fed.


But James Hamiltonof UC-San Diego and Econobrowser, who has been concerned about deflation, sees some good news in the latest figures.  He says the .3% rise in the CPI for last month projects out to a 3.4% annual inflation rate--just above the 3% mark that he deems necessary (more on that below). 

Hamilton's enthusiasm remains tempered.  The 2.2% drop in the CPI since October works out to a -8.7% annualized deflation rate.  But he thinks these statistics are "worth watching."

The core motivation for policy stimulus is the perceived need to increase aggregate nominal spending. Some have claimed that with the nominal T-bill rate near zero, monetary policy is no longer capable of providing such a stimulus. I disagree with that assessment, though I can understand that it is a very legitimate position to take. But if we do get back up to a year-over-year 3% inflation rate, I would think that an objective observer would want to agree at that point that we've achieved all we can hope for with the tool of demand stimulus. I continue to recommend that the Federal Reserve think of achieving that 3% inflation rate as their primary policy objective at the moment.

Read the full post here

 The Bureau of Labor Statistics has a very useful Q&A on misconceptions about the CPI here

Posted by Graham Griffith

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