February 2012 - Global Economic Watch

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Shlomo Benartzi on Saving: 'Self control is not a problem in the future'

02-29-2012 8:16 AM with no comments

When it comes to financial decisions, we humans can be very rational.  As long as the decision is in the future.  When we need to act, and avoid, say, making a frivolous purchase, we struggle.  So says Shlomo Benartzi.  Benartzi, Professor and Co-Chair of the Behavioral Decision-Making at UCLA's Anderson School of Management, says this is the real problem behind Americans' struggles to save.  We know what we should do, and if we are asked what we will do at a certain time, we say the right thing.  But when we have an option to put money into a 401K, most of us do not.  Benartzi discussed how to move toward a solution to our "present bias" problem" in this Ted Talk:

Posted by Graham Griffith

Case-Shiller: Home Price Indices Hit New Lows

02-28-2012 3:44 PM with no comments

Housing prices dropped across the nation again in December, according to the latest S&P/Case-Shiller Home Price Indices release.  The 10-city and 20-city indices dropped 1.1 percent drop from November to December.  And the national composite ended 2011 4.0% lower than the fourth quarter of 2010.  Atlanta, Las Vegas, Seattle and Tampa all continued their downward path and set new lows again in December.  Atlanta dropped 12.8% after dropping 11.8% in November.  Here's a look at the long term trend:

From the release:

“In terms of prices, the housing market ended 2011 on a very disappointing note,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “With this month’s report we saw all three composite hit new record lows. While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.

“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20- City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”

Read the full release here.

Posted by Graham Griffith

Five Rules for Business Success in China

02-28-2012 10:59 AM with no comments

Success in China is now of critical importance for many global businesses.  As a result, many US companies are sending top managers to work in China.  Those managers will quickly learn that the tools that they used for success in the US may not apply in their new environment.

Harvard Business School professor Lynn Paine interviewed new managers sent to China, and she came away with a greater understanding of how expat leaders can build sustainable strategies in their workplaces.  Paine has five rules for managers in China.  They are:

1) Understand the market, but work with the state;

2) Adapt to local conditions, but implement global standards;

3) Pay for performance, but build a people-centric workplace;

4) Drive down costs, but maintain quality;

and 5) Recognize complexity, but define clear priorities.

Paine explains her rules in this short video:

Posted by Graham Griffith

Durable Goods Orders Decline For First Time in Three Months

02-28-2012 10:42 AM with no comments

Durable good orders dropped 4% in January, the Commerce Department reports.  That translates to $8.6 billion of orders less than in December.  It is the biggest monthly drop in three years.  It helps that the last three months saw durable good orders climb enough that this drop doesn't seem as ominous as the big drop in January 2009.  Still, this is not the kind of news that suggests the recovery will speed up anytime soon. 

The good news in the report: shipments continued to go up:

Shipments of manufactured durable goods in January, up two consecutive months, increased $0.8 billion or 0.4 percent to $207.8 billion. This followed a 1.9 percent December increase.
Transportation equipment, also up two consecutive months, had the largest increase, $2.6 billion or 5.4 percent to $50.3 billion. This followed a 1.0 percent December increase.

Meanwhile, orders for capital goods went down:

Nondefense new orders for capital goods in January decreased $5.4 billion or 6.3 percent to $79.5 billion. Shipments decreased $0.6 billion or 0.9 percent to $70.9 billion. Unfilled orders increased $8.6 billion or 1.6 percent to $554.4 billion. Inventories increased $1.7 billion or 1.0 percent to $172.0 billion.

Read the Census Department report here.  

Posted by Graham Griffith

The New Yorker: Behind the Scenes at Davos

02-27-2012 5:13 PM with no comments

Nick Paumgarten attended Davos this year to give us mere mortals a sense of what exactly goes on at the World Economic Forum's mythic annual meeting.  In the latest New Yorker, Paumgarten shares his backstage impressions of the meeting, from the corridor conversations with bigwigs of business and global leaders, to the unofficial Davos party scene, and even to the Occupy movement protesters out on the streets of the Swiss town.  He finds it hard to define exactly what Davos is, but his efforts to do so make for a fascinating piece.  Here is an excerpt:

The mood at Davos: every year, people try to put their finger on it, as though a single state of mind can be attributed to so many stakeholders dwelling in so many silos. The economic and geopolitical context of the meeting this year was the potential collapse of the European monetary and political union, a teetering global financial system, the threat of chronic unemployment, widening wealth disparity, increasingly restive populations, and the shift in resources and capital, and therefore in power, from West to East and from North to South, to say nothing of ongoing environmental degradation, global poverty, and widespread armed conflict and mistreatment of women. So it is safe to say that, in terms of the W.E.F.’s stated commitment of “improving the state of the world,” the mood was a little blue.

The theme of the meeting was “The Great Transformation.” Schwab, early in the week, struck a note of self-flagellation. “Capitalism, in its current form, no longer fits the world around us,” he said. “We have sinned.” He also spoke of the danger of “intergenerational conflict.” In the next few days, the phrase “the end of capitalism” got tossed around, yet for all but a few of the stakeholders present such a prospect was as inconceivable as it would be unwelcome. David Roth, a protester with the Occupy movement, dismissed such talk as “staged self-criticism.” Certainly, all the commotion about the world’s problems didn’t yield many concrete solutions. As a foreign economic minister said dryly during one of the sessions, while discussing some common-sense alterations to the global financial system, “Implementation is problematic.”

“It’s as if we woke up and discovered we were now in a different world,” the economist W. Brian Arthur told me. “It’s like that bit in ‘Lord of the Rings,’ where they are underground, and they hear the distant rumblings of the Balrog. Here there are rumblings of dissatisfaction. But only rumblings.”

Read MAGIC MOUNTAIN What happens at Davos? here.

Posted by Graham Griffith

Former Argentine Economic Minister Calls his Country's Current Economic Expansion 'Unsustainable'

02-27-2012 9:31 AM with no comments

We have spent a lot of time reading about Brazil's economy over the last several months, but have not paid much attention to South America's second largest country: Argentina.  Helped at least in part by Brazil's rising global economic influence, the Argentine economy grew at a rate of 8.8% in 2011.  But economic news in Argentina is always complicated.  And so the question now is how sustainable this rate of growth is. 

Domingo Cavallo has had a front seat for the roller coaster ride that is the Argentine economy.  He was Economic Minister in the early 1990s, and again in 2001.  He is probably best known for being the man who ushered in Argentina's policy of tying the peso to the US dollar in 1991--a policy that seemed to work well in the 1990s but became more like fiscal handcuffs the following decade.  Now he is a fellow at Yale's Jackson Institute for Global Affairs, and runs DFC Associates--a consultancy firm.  As he tells Marilyn Wilkes of The MacMillan Center, Cavallo looks at the good news from Argentina and sees some dangerous signs:

Posted by Graham Griffith

David Glasner on Inflation and Recovery: 'We are in an expectational trap'

02-27-2012 8:57 AM with no comments

At Uneasy Money, Federal Trade Commission economist David Glasner takes a look at the potential impact of inflation on relative prices and household spending.  And he provides this chart, "showing the average rate of change in the CPI and in the selected components from January 2008 to January 2010 along side the changes from January 2011 to January 2012."

Glasner:

There seems to be some inverse correlation between the rate of price increase in a component in the 2008-10 period and the price increase in 2011. Of the 6 components that increased by less than 1% per year in the 2008-10 period, four increased in 2011 by 4.7% or more in 2011, the remaining components increasing by 4.4% or less in 2011. So the rapid increases in some components in 2011 may simply reflect a reversion to a more normal pattern of relative prices.

I agree that inflation is not neutral. There are relative price effects; some prices adjust faster than others, but I don’t think we know enough about the process of price adjustment in the real world to be able to say that overall inflation in conditions of high unemployment amplifies relative distortions. What we do know is that even after a pickup in inflation in 2011, inflation expectations remain low (though somewhat higher than last summer) and real interest rates are negative or nearly negative at up to a 10-year time horizon. Negative real interest rates are an expectational phenomenon, reflecting the extremely pessimistic outlook of investors. Increasing future price-level expectations is one way – I think the best way — to improve the investment outlook for businesses. We are in an expectational trap, not a liquidity trap, and an increase in price-level expectations would generate a cycle of increased investment and output and income and entrepreneurial optimism that will be self-sustaining. Say’s Law in action; supply creates its own demand.

Read the full post here.

(h/t Mark Thoma)

Posted by Graham Griffith

Tadas Viskanta Makes the Case for the Individual Investor

02-24-2012 8:40 AM with no comments

The markets look strong this week.  It is tempting to once again conflate the markets with the economy as a whole.  And the hourly newscasts are certainly susceptible to that simplification.  But with stocks rising, a lot of people who used to rely on their real estate as their primary form of investing are likely considering whether they should be more involved in stocks.  So is this a good time to be an investor?  Does more market activity mean more complexity for the individual investor?  Should we be letting pros handle the tasks of wading through all the complexity? 

Tadas Viskanta says "there has never been a better time to be an individual investor."  Writing at The Big Picture, Viskanta says investing is easier, cheaper, richer, more social, and smarter than it has ever been before.  Ease of investing does not translate to good investing.  In the end, while there are more accessible tools for investing, decision making remains key.  And for that, investors need to have a clear grasp over whether they can handle all the data or whether they should take advantage of resources like new automation services:

In many ways the automation of much of what constitutes investing today will be a godsend for investors.  The majority of investors really don’t want to manage their own portfolios.  Not do they a hyper-personalize portfolio.  An algorithmic service that managed in a low-cost fashion portfolios it would allow those investors to focus on the things over which they have some control.  The stuff of truly personal finance like:  savings rate, lifestyle choices and retirement options.

Sometimes in the midst of volatile markets we can forget just how far things have come.  Just a few years ago who thought you could trade a leveraged on $VIX futures.  But today you can.  Who would have thought you could buy an ETF for the Egyptian market, but you can.  However this example points out the double-edged sword that is today’s markets.  Now we do have access to all manner of investment and trading vehicles.  However like any tool these vehicles need to be used responsibly.  The vast majority of investors should likely take a pass.

The reason is that despite the many technological advancements we have seen in investing our brains are still largely hardwired for an age of scarcity.  That is why so many of the behavioral biases we have accumulated over time work against us when it comes to investing.  That is why we consistently buy high and sell low, i.e. the behavior gap.  That is why we oftentimes only seek out (and recognize) that information that conforms to our long held beliefs, i.e. confirmation bias.  In the end the most difficult hurdle to investment success is not the market environment or the range of investment vehicles, it is us.

Read There has never been a better time to be an individual investor here.

Posted by Graham Griffith

Gallup Poll Shows Small Business Owners Intend to Create More Jobs

02-23-2012 2:19 PM with no comments

More small business owners intend to make new hires over the next year, according to a recently released Wells Fargo/Gallup Small Business Index poll. 22% of small business owners expect to increase the total number of jobs at their businesses, while just 8% expect to decrease the number of jobs.  Here's a look at the index trend:

From Gallup:

The increase in small-business owner hiring intentions over the past year is consistent with the strong performance of Gallup's Job Creation Index in January and the decline in the unemployment rate as measured by Gallup at mid-month.

At the same time, small-business owners have often expected to increase hiring in recent years but later reported that they actually eliminated more jobs than they created. So it remains to be seen whether the greater expectations for hiring in the next 12 months will become reality.

The preference of small-business owners for hiring temporary, contract, and part-time workers may help explain why Gallup is seeing increasing numbers of people working part time but wanting full-time work even when the unemployment rate is lower. Further, this preference may reflect the continued caution on the part of many small-business owners toward the U.S. economy. Just a year ago, many owners also hoped to significantly increase their hiring in 2011, but their current reports of hiring they did last year indicates that this did not happen.

Many small-business owners also continue to say they are having trouble finding qualified employees. This situation could end up hurting a lot more than one in five small businesses if hiring begins in earnest later this year. While small-business owners tend to be agile -- and have demonstrated their ability to adjust to the business cycle as needed to survive -- weak economic conditions have persisted since 2008.

Read the full release here.

(hat tip Small Business Trends)

Posted by Graham Griffith

Brookings Discussion on Manufacturing, Innovation, and Productivity

02-23-2012 1:00 PM with no comments

We have been trying to keep up with the very robust public conversation among economists about the state of manufacturing in the US.  Ever since the president made a push for increased productivity in the manufacturing sector during the State of the Union, there has been no shortage of opinions, and, thankfully, analysis of the potential for manufacturing to be a significant part of the recovery.  Yesterday, the Brookings Institution held a panel discussion titled Why—and Which—Manufacturing Matters: Innovation and Production in the United States.  It was a thoughtful and informative--albeit wonky--presentation.

Susan Helper was one of the participants.  In this excerpt, Helper, professor of economics at Case Western Reserve University, speaks to how a successful marketing strategy features coordination of investment and creates both supply and demand:

Here is the full panel discussion:

Posted by Graham Griffith

A Tale of Two Companies: Planet Money Explains How Private Equity Firms Work

02-22-2012 11:54 AM with no comments

America's most well know private equity success, Mitt Romney, will be on stage for yet another debate in his push to secure the Republican nomination for President.  He may take some hits for the work he did while at Bain Capital, as he has in past debates.  But we still aren't sure most voters fully grasp what private equity firms do.  To help with that, Planet Money takes a shot at describing the role of private equity firms in today's business world by telling the stories of two companies Bain acquired:

Posted by Graham Griffith

Impact of Oil Prices on Gas Prices: or What drivers can expect to pay at the pump

02-22-2012 11:27 AM with no comments

With Iran cutting off its oil from Britain and France, oil prices have climbed to a nine-month high this week.  So what will the impact be on gas prices here in the US?  The answer may not be quite as simple as "gas prices rise when oil prices rise," says Econbrowser's James Hamilton. There's speculation involved, and the price fluctuations do not always follow as we expect:

Here's a closer look at the data over the last year. Average U.S. gasoline prices fell more than you would have predicted based on the Brent price. They have since come back up. But Brent has surged another $10/barrel over the last two weeks, and gasoline prices have yet to catch up to that latest move. Based on the historical relation, we might expect to see the average U.S. gasoline price rise from its current $3.59/gallon up to $3.84.

One factor that's been driving Brent and WTI up over the last few weeks has been rising tensions with Iran. But why should threats or fears alone affect the price we pay here and now? Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation:

We're seeing panic buying in Europe and Asia because they're absolutely convinced that they're not going to be able to buy Iranian oil or there's going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz.... there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it's going out of style.

Does it make sense for consumers to suffer now just because of something that may or may not happen in the future? If there are significant disruptions, the answer will turn out to be yes. We'll be glad that we used a little less today, and left a little more in storage, to help us better cope with the huge challenges we'll be facing in a few months. If the answer turns out to be no, then this is all just a lot of pain for nothing.

Read Crude oil and gasoline prices here.

Also see Oil Prices and Consumer Spending from the Richmond Fed.

Posted by Graham Griffith

Rogoff on Greece's Future in the EU

02-21-2012 6:17 PM with no comments

Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff.  Like many economists, Rogoff believes Greece's leaders have a lot of work still to do.  And he is firmly in the more austerity camp.  He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro."  In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden.  Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU.

SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading?

Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions.

SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart?

Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s.

SPIEGEL: Does that mean the whole idea of the euro was a mistake?

Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically.

SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled.

Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union.

Read the full interview here.

Posted by Graham Griffith

The Challenges of a Rising Global Middle Class

02-21-2012 10:01 AM with no comments

One of the great positive global economic stories of the young 21st century--perhaps the top story--is the rapidly rising middle class in developing nations across the globe, especially in South America and Asia. But Johannes Jütting,Head of Poverty Reduction at the OECD Development Center in Paris, warns us not to overlook the challenges that a burgeoning new middle class bring to nations and the global economy.  Writing at Project Syndicate, Jütting argues that the middle class's "dreams" can become "nightmares" if policymakers get complacent and overlook the structural challenges that they must face:

In today’s shifting world, with GDP in roughly 80 developing economies rising at twice the rate of per capita growth in the OECD, the club of the world’s richest countries, middle-class citizens paradoxically complain and protest regardless of whether fortunes improve or decline. Moises Naim, a former Venezuelan minister of trade and industry, even warns of a possible “emerging global war of the middle-classes.”

While anger over pay cuts and unemployment make sense, it is harder to understand the current protests in fast-growing countries like Thailand and Chile, where standards of living are improving. What is going on?

High growth in Asian and southern countries has meant greater export earnings and rents from natural resources. Unfortunately, this blessing can turn into a curse. In China, former Communist leader Deng Xiaoping’s vision – “let some people get rich first” – has led to impressive economic growth and poverty reduction; but it has also undermined the self-proclaimed “harmonious society,” as recent protests and labor conflicts indicate.

Indeed, it is telling that, in the spring of 2011, Beijing’s municipal authorities banned all outdoor luxury-goods advertisements on the grounds that they might contribute to a “politically unhealthy environment.”

Rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries’ current development model. A Gallup poll on subjective well-being in Tunisia and Thailand shows that, while income levels and social conditions in both countries improved between 2006 and 2010, life satisfaction dropped.

Read The Middle Class Goes Global here.

Posted by Graham Griffith

Terence Roth on the Bailout of Greece

02-21-2012 9:44 AM with no comments

After twelve hours of meetings in Brussels, European Union leaders have agreed to a 130 billion euro ($170 billion) bailout of Greece.  This was seen as a last minute deal to stave off Greek default.  But there is much work to be done.  As Dow Jones's Terence Roth tells his colleague Nick Hastings, this agreement was essential because it gives Greece's leadership just enough time to do all it must do to avoid collapse. 

Posted by Graham Griffith

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