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  • EconBrowser: Climbing the Mountain that is the Mortgage-Debt-to-Income Ratio

    James Hamilton thinks that in order to return to a healthy economy we need to do something about this: Household mortgage debt skyrocketed in the 2000s, and income did not keep up. The solution depends on some mix of foreclosures, increased saving, and GDP growth. But these elements don't make good teammates with the economy in its current state. So Hamilton, writing at EconBrowser , offers some support for the Federal Housing Finance Agency proposal to alter the Home Affordable Refinance Program : One obstacle to refinancing has been mortgages that are underwater, which means that, as a result of declines in house prices since the time of the purchase, the principal owed on the mortgage exceeds the current resale value of the home. Previous rules would not allow Fannie or Freddie to guarantee a loan whose value exceeds that of the home, which refinancing an underwater loan would require. The new FHFA proposal relaxes that requirement so as to allow refinancing for underwater loans that were originated more than 2-1/2 years ago and on which the borrower is current on the payments with no late payments over the last 6 months. One question of interest is, who will ultimately end up losing the income that corresponds to the household's gain from refinancing? Since the original loans are currently guaranteed by Fannie or Freddie, and since Fannie and Freddie's liabilities in turn are now de facto guaranteed by the U.S. Treasury, one's first thought might be that the household's gain is ultimately the loss of the U.S. Treasury. However, Fannie and Freddie guarantee against default but not against the loss that comes from pre-payment, so it's the holder of the loan, not the U.S. Treasury, that loses. On the other hand, Fannie and Freddie own over a trillion dollars of the loans themselves, and the Federal Reserve owns another trillion. The Federal Reserve contributed $82 billion to the U.S. Treasury this year from its earnings on the mortgage-backed securities and other assets that it holds. A lower income flow from these would reduce the size of the payments to the Treasury that the Fed is able to make and increase the net contribution the Treasury needs to make to keep Fannie and Freddie solvent. Read Hamilton's full analysis here .

  • James Hamilton: Signs the US Economy Will 'Hang in There' In 3rd Quarter

    At Econbrowser , James Hamilton lays out the case for the economy to stabilize somewhat in the second half of 2011. He can't quite bring himself to say that it will get better, instead saying that he doesn't "expect things to get a whole lot worse." A major culprit for the slowing recovery has been oil prices--and specifically the impact of oil prices on new car sales. But Hamilton expects car sales to pick up as retail gas prices come down. He shares this look at the trend in car sales: Hamilton argues that the recent trouble for auto sales were very different from the back in 2008. Read his analysis here .

  • James Hamilton on 'A Weakening Economy'

    At Econbrowser , James Hamilton has a rather distressing roundup of recent economic data. The already sluggish recovery has slowed down, he says. Manufacturing numbers are getting weaker, housing prices keep going down in most markets, employment may not have hit bottom...all leading to meager GDP growth: The national income and product accounts updated last week by the BEA suggested that first quarter GDP growth was even weaker than previously indicated. GDP can be calculated in two ways, by summing up data on either what gets produced or the income generated by that production. Conceptually (and by definition) the two numbers should be exactly the same, but in practice you don't come up with quite the same number using different methods. Jeremy Nalewaik has argued that the income-based measure of GDP (referred to as gross domestic income, or GDI) may be a slightly better indicator of business cycle turning points. For example, GDI gave a clearer signal than GDP of a weakening economy in 2007. GDI had been showing a little stronger growth than the GDP indicator in early phase of the current recovery (2009:Q4-2010:Q2), but has been signaling weaker growth than GDP for the most recent quarters (2010:Q3-2011:Q1). The latest BEA numbers report that total U.S. real output was growing at a 1.8% annual rate in 2011:Q1 according to the GDP measure but at only a 1.2% rate according to GDI. Read A weakening economy here .

  • Gas Prices Up, Consumer Sentiment Down

    Consumer sentiment is dropping, according to the University of Michigan's Consumer Sentiment Index . Here are the key survey findings from Reuters : The preliminary March reading of the University of Michigan's consumer sentiment index for March came in at 68.2, down from 77.5 in February. That was the lowest level since October 2010 and was well off the median forecast of 76.5 among economists polled by Reuters. The survey's barometer of current economic conditions was at 83.6, down from 86.9 the month before and below a forecast of 86.0. The survey's gauge of consumer expectations tumbled to 58.3 from 71.6, the lowest level since March 2009. Here's a look at the Consumer Sentiment Index since 1978 (chart from James Hamilton ): At Econbrowser , Hamilton shares some helpful research on the relationship between rising gas prices and consumer attitudes: We had been getting some good economic news on other fronts lately, which I had been hoping would be enough to offset the hit to consumers' budgets from energy prices. The March numbers so far are just preliminary, and consumer sentiment is a somewhat noisy indicator. But whatever you make of the latest report, it is not good news. Another question asked in the survey pertains to expectations of inflation. Consumer expectations of inflation for the next year jumped from 3.4% to 4.6%. Again gasoline prices seem to figure more prominently in consumers' expectations than we might have expected, and again we can do a simple mechanical calculation of the direct effect. Gasoline prices have a weight of about 5% in the CPI, so if all other prices were held fixed, the 20% increase in gasoline prices we've seen over the last 3 months would add about one percentage point to the CPI. Read Consumers see bad news here .

  • Econbrowser: Progress Report on QE2

    At Econbrowser , James Hamilton takes a crack at evaluating the effectiveness of the Fed's latest quantitative easing tactics (and includes some helpful graphs for anyone trying to teach the subject): The graph below provides our calculations of the average maturity of publicly-held debt both before and after the Fed's operations, updated to include the first 3 months of QE2. The blue line is the average maturity (in weeks) of debt issued by the U.S. Treasury. The green line is the average maturity of publicly held debt, that is, the green line represents the results of subtracting off the Fed's holdings of Treasury debt. Historically the green line was above the blue. This is because the Fed preferred to buy the shorter-term debt, as a result of which the average maturity of the remaining debt held by the public (green) was bigger than that for the debt as originally issued (blue). However, since the start of 2008, that relation has been reversed-- the Fed has been buying a disproportionate share of the longer-maturity debt, and thus has been a factor in reducing the average maturity. But also since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it, so that the green line continues to rise over time. What we find in the latest data is that this trend has continued over the last 3 months, even with QE2. The graphs below highlight details of the last year. The top panel is the average maturity of publicly-held Treasury debt inclusive of all Fed operations, that is, it corresponds to the green line in the preceding figure. Although the average maturity in the second and third months of QE2 (December and January) fell a little below that for the first month (November), the average maturity in every one of these three months was bigger than in every month of the two years prior to QE2. The second panel shows the fraction of publicly-held Treasury debt (again, after netting out the Fed's operations) that is of 10 years or longer maturity. This has gone on to make new highs in both December and January. Our conclusion is that if QE2 made a positive contribution to the improving economic indicators since the program began, it could not have been through the mechanism of shortening the maturity of publicly-held Treasury debt. There are, to be sure, other places where the Fed's QE policies could have made some sort of impact, and Hamilton notes this in his post. Read Progress report on QE2 here .

  • James Hamilton: Inside the Numbers on Latest Unemployment Report

    According to the Bureau of Labor Statistics unemployment report for December , released on Friday, the US unemployment rate has dropped to 9.4%. Good news, right? Not so much, says James Hamilton , writing at Econbrowser : Unfortunately, the household numbers look much less rosy when you look at them a little more closely. For one thing, the impressive December gain comes right after an estimated loss according to the household survey of 175,000 jobs in November and a whopping loss of 294,000 in October. How can the household survey be signaling a falling unemployment rate over the last 3 months if its measure of the number of people working has actually gone down? Hamilton goes on to provide an answer to that question, and his approach is very instructive: Let me use an average over the last two months to smooth out some of the wild volatility in the household employment numbers and highlight what's changed in terms of people's employment status. In November and December, the civilian noninstitutional population over age 16 increased by 180,000 per month. The figure below illustrates what would have happened if these new people had entered into the respective employment categories at the same rate as the existing population. For example, if 58% of those 180,000 new potential workers found jobs, the number of employed individuals would have increased by 105,000 each month. If in December the number of employed had increased by 105,000, the number of unemployed increased by 11,000, and the number not in the labor force by 64,000, then measures such as the unemployment rate and the labor force participation rate would have been unchanged. Average additions (in thousands of people per month) that would have kept the unemployment rate, employment rate, and labor force participation rate unchanged between October and December. But we know that in reality, the unemployment rate was not unchanged, but fell from 9.7% in October to 9.4% in December. The figure below shows that this is attributable mathematically to the fact that almost 200,000 fewer workers were counted as being unemployed in December compared with October. Actual average monthly changes in November and December in the number of people in different employment categories, with the actual change minus the change predicted in the previous figure indicated in parentheses. Read Interpreting the employment numbers here .

  • James Hamilton Tries to Quiet Fears of a Double Dip Recession

    To those who are concerned the economy is headed toward a second recession, ( or the long slow depression that Paul Krugman fears ), James Hamilton lays out a series of reasons not to worry. Hamilton argues that the economy is still growing--albeit very slowly. His first piece of evidence: the PMI Composite Index for June. At first glance, this looks like an indication that things are getting worse in the manufacturing sector: Here´s why Hamilton thinks this is not a sign of a downturn: The ISM manufacturing PMI index for June was 56.2, the lowest value since December. But any value above 50 means that a plurality of managers reported that June was better than May. The uninterrupted string of above 50 readings we've seen going back to August of 2009 means that mangers have seen improvements month after month. A value of 56.2 is higher than that seen in 80% of the months over the last ten years. This is just one of many economic indicators Hamilton explains in defense of his measured optimism. Read his full post here .

  • Closer Look at GDP Numbers, Stimulus Effect, and Consumption Details

    The rise in GDP during the third quarter prompted the Room for Debate blog of the New York Times to ask whether the Obama Administration's $787 billion stimulus plan worked. MIT and Baseline Scenario 's Simon Johnson says the stimulus package worked on both an economic front and a political front (which then led to larger stimulus effects globally). Harvard University Economist Jeffrey Miron says no, look to monetary policy. Russell Roberts , economist at George Mason University, is sekptical of the stimulus plans power and suggests the growth might have occurred without it. And Mark Thoma says that "the stimulus programs in place now are probably too small." Read the full "debate" here . Meanwhile, James Hamilton had one of the most instructive pieces on the GDP numbers at the Econbrowser blog. Hamilton feels very positive about the GDP growth, and he neatly breaks down, and illustrates, the various contributors to the growth: Consumption spending is the biggest component of GDP and the main contributor to third quarter growth, accounting by itself for 2.4 percentage points out of the 3.5% total, and with consumer purchases of motor vehicles and parts alone 3/5 of the contribution of consumption. Next in importance was inventory rebuilding, which added 0.9 percentage points to the total and could make a significant further contribution in the quarters ahead. Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting. Imports grew faster than exports, though I'm relieved that trade overall is coming back. The government sector made a smaller contribution than one might have thought given the fiscal stimulus, in part because lower state and local spending offset some of the increased federal spending. For a healthier long-run growth path I'd prefer to see business fixed investment and net exports adding rather than subtracting. But, compared with what we've been seeing recently, this overall is a quite welcome report. Hamilton and Menzie Chin n track recessions through their Econbrowser Recession Indicator Index --a pattern recognition algorithm for identifying recessions that waits one quarter for data revisions and clear trend identification before making an assessment. With the third quarter GDP numbers out they looked at the revised second quarter figures. And they conclude that the recession did not end during the second quarter. Read the full GDP analysis here .

  • Prices, Inflation, and Unemployment

    The Producer Price Index for dropped 0.6 for finished goods and rose 0.2 percent for intermediate goods, according to the Bureau of Labor Statistics . Here's the monthly percent changes in the Producer Price Index for Finished Goods, seasonally adjusted: And here's the monthly percent changes in the Producer Price Index for Intermediate Goods, seasonally adjusted: You can read the full report here . Combine the PPI data with the Consumer Price Index data released earlier --the CPI rose 0.2 percent in September, and has fallen 1.3 percent over the last 12 months on a seasonally adjusted basis, according to the BLS--and it doesn't look like inflation is an issue at this point. James Hamilton suggests that we take a look at the price data in the context of high unemployment. And he concludes "the Federal Reserve is correct in thinking that high levels of unemployment are a factor that will put downward pressure on inflation over the next two years." He breaks down the relationship between unemployment and inflation at Econbrowser . Take a look here .

  • Listening Assignment: Authors of 'The Road Ahead for the Fed' on Bloomberg Radio

    Catching up on some missed radio programs (G-d bless the ease of online archives these days). Last week on Bloomberg Radio , Tom Keene had a 4-day series with four economists who were among a dozen authors of the new book The Road Ahead for the Fed . Timely book and timely conversations. Go to the On the Economy page and start with the August 17 program in which Allan Meltzer speaks with Keene about what he terms the "Fed's biggest mistake"--letting Lehman collapse. Then work your way through Myron Scholes , James Hamilton , and John Taylor . Click here for the archives for Tom Keene's program, and happy listening.

  • Cash for Clunkers: Short-Term Success, or Jump-Starting Rebound?

    The Senate appears poised to approve an additional $2 billion for the "Cash for Clunkers" program in which consumers can turn in their old cars and get a government rebated of $4,500 to put toward new, more fuel efficient vehicles. There is a fair bit of debate on The Hill over how much long term economic and environmental impact the program will have, but it seems to have made a significant difference in car sales over the last month. At Econbrowser , James Hamilton charts monthly light vehicle sales: Hamilton looks at the 20% monthly gain, and wonders "whether the auto figures signal the shift we've all been watching for, or sales stolen from September and October and delivered to July." Hamilton sees more promise in the Manufacturing ISM Report On Business , but says the real test this week will be the unemployment numbers. Read Hamilton's Current Economic Conditions here .

  • Grim Stats for Automakers on Domestic Auto Sales

    Last week was another tough one for US automakers. James Hamilton shows data at Econbrowser that suggests times are not getting better anytime soon, with sales continuing to stagger: There had been some notes of optimism when March sales improved over February, so the dropoff in April was disappointing. But it is the year over year numbers that are striking. Read Hamilton's analysis here .