Browse by Tags

KnowNOW!

Global Economic Watch

Syndication

Recent Posts

Tags

Archives

  • EU GDP Drops Again

    We have some disappointing numbers out of Eurostat this morning. GDP across the Euro Area declined 0.2% in the first quarter. The year over year drop was 1.0%. France, the euro zone's second largest economy, saw its GDP drop for the second quarter in a row. The data for each country is available here .
  • Pew Social Trends: Uneven Recovery for U.S. Households

    The slow pace of the recovery in the U.S. has felt a lot less slow in some households. According to a new Pew report, those households in the top 7% saw their mean net worth rise 28% from 2009 to 2011. Net worth for the remaining 93% dropped 4%. And the key seems to have been the rise of the value of financial assets as opposed to property values: From Pew's Richard Fry and Paul Taylor : The different performance of financial asset and housing markets from 2009 to 2011 explains virtually all of the variances in the trajectories of wealth holdings among affluent and less affluent households during this period. Among households with net worth of $500,000 or more, 65% of their wealth comes from financial holdings, such as stocks, bonds and 401(k) accounts, and 17% comes from their home. Among households with net worth of less than $500,000, just 33% of their wealth comes from financial assets and 50% comes from their home. The Census Bureau data also indicate that among less affluent households, fewer directly owned stocks and mutual fund shares in 2011 (13%) than in 2009 (16%), meaning a smaller share enjoyed the fruits of the stock market rally. Likewise, fewer had individual retirement accounts (IRAs) or Keogh accounts (22% in 2011 versus 24% in 2009) and the same share had 401(k) or Thrift Savings Plan accounts (39% in both years). Among affluent households, there was also a decline in the share directly owning stock and mutual fund shares during this period (59% in 2011 versus 62% in 2009), but a slight increase in the share with IRAs or Keogh accounts (70% versus 68%) and a larger increase in the share with 401(k) or Thrift Savings Plan accounts (65% versus 61%). Overall, net worth per household in the U.S. in 2011 made up nearly all the ground it had lost since 2005—$338,950 versus $340,252 in 2005, the latest pre-recession data published by the Census Bureau. (Total household wealth doubtless rose for a period after 2005 before falling precipitously during the Great Recession of 2007-2009 and rebounding since then. However, no household wealth data are available from the Census Bureau for the years between 2005 and 2009, so it is not possible to pinpoint when, or at what level, the peak in wealth per household occurred.) Looking at the period from 2005 to 2009, Census Bureau data show that mean net worth declined by 12% for households as a whole but remained unchanged for households with a net worth of $500,000 and over. Households in that top wealth category had a mean of $1,590,075 in wealth in 2005, $1,585,441 in 2009 and $1,920,956 in 2011. Read the report here .
  • Tim Duy: 'The Recovery is Real'

    Tim Duy doesn't want to be labeled "overly optimistic," but when he looks at the data, he can't help but conclude that the U.S. economy's recovery "is here to stay." The key indicators for Duy include industrial production trending back up, stronger and stronger retail sales, an improving housing market, and falling unemployment (though he does think this is still a problem). Duy: To be sure, I think that fiscal policy will weigh on growth in the first part of 2013. And I think that the European crisis is far from solved (note today's PMI release, not to mention Cyprus). And maybe China will slow further, undermining exports. But as far as the implications for the US economy, I tend to see these events as bumps in the road. They might cause air pockets for equity markets, but are of second or third order importance in the evolution of US activity. Indeed, it seems to me that betting on a recession when the Fed is not tightening is clearly betting against history. Moreover, historically the Fed has inverted the yield curve prior to a recession: And yes, I realize this seems to imply that the US economy cannot have a recession because the yield curve is upward sloping - which of course it has to be when short rates are constrained by the lower bound. But that still doesn't resolve the issue that recessions tend to occur only after a period of tighter policy. As long as the Fed is able and willing to ease in the face of negative shocks - and they have seemed to be willing to do so and have found a solution to the zero bound problem in quantitative easing - I would expect that monetary policy would largely offset most problems that comes down the pipeline. Case is point is the Asian Financial Crisis. I remember predictions of US recession due to the trade shock, but that never occurred. The Fed eased into the crisis, mitigating its impact. The recession only occurred after the Fed revered course and tightened sufficiently to invert the yield curve. Arguably last summer's European shock was the same. The Fed met fire with fire, and recession fears faded. Read The Recovery is Real here .
  • OECD Commends Member Nations for Structural Reforms as Response to Recession

    Every year the OECD lays out five key areas for structural reform necessary for each member country (and the BRIICS nations) to spur growth. In this year's Going for Growth report, many countries get high marks for making key reforms that the OECD expects to provide more stable long term growth. The authors chalk up the changes as a response to "market pressures in the context of the euro area crisis and by discussions and co-ordinated efforts in multilateral settings such as the G20." Market pressures appear to have played an important role in the intensification of reforms, as indicated by the significant correlation between reform responsiveness and changes in government bond yields over the 2011-12 period: ● Euro area countries under financial assistance programmes or direct market pressures (e.g. Greece, Ireland, Italy, Portugal and Spain), are among the OECD countries whose responsiveness was highest (Figure 1.2, Panel A), and also where it increased most compared with the previous period (Figure 1.2, Panel B). Accession to the Euro area in 2011 – in concomitance with a steep recession – may have acted as reform catalyst for Estonia, who also ranks among the most responsive countries. ● Furthermore, as reflected in the comparison between simple and adjusted responsiveness rates, the crisis led most countries under financial markets pressure to enact reforms in traditionally politically-sensitive areas, e.g. labour market regulation and social welfare systems. ● In contrast, less progress has been achieved in other euro area countries, in particular those with a current account surplus (e.g. Germany, Luxembourg and the Netherlands). Yet, reforms are also needed in these countries, in particular in areas that may help intra-euro area rebalancing, such as boosting competition in non-tradable sectors. ● Despite exposure to financial market scrutiny, Iceland and Slovenia have made no or very little reform progress in the areas identified in 2011. While market pressures have played a catalyst role, allowing for long-overdue reforms to be undertaken, some concerns may arise over the effects of reforms in a context of strong budgetary retrenchment and weak activity. Yet, it can be argued that some of the measures taken have already helped by boosting confidence and bringing some market relief. This may have been particularly the case of policy changes, such as pension reforms, that directly contributed to restore medium-term public debt sustainability, though reforms aimed at restoring competitiveness over time will also help to underpin confidence. Still, it is clear that the broader benefits from reforms may take more time than usual to materialize in the current environment, in part due to possible delaying effects from remaining dysfunctions in financial markets. It is important to avoid such delays eroding popular support and to ensure that legislated changes be effectively implemented in order to reap the long-term gains and preserve the positive initial confidence effects. Read the full report here .
  • James Hamilton on 'Long Term Fundamentals Underlying Equity Values'

    With stocks hitting some post global economic meltdown highs last week , James Hamilton took a look at the "long term fundamentals" that seem to be driving the rise. And it while it appears there are a lot of reasons to be bullish about the US economy for later this year, that does not necessarily mean that the market will continue to rise. From EconBrowser : On the one hand, I'm expecting the real economy to be doing better in the second half of the year than it is right now, and inflation and interest rates to remain low through the end of the year. All of that should be bullish for stocks. But the question is, how much of that good news is already priced in? Below is an update of one of the graphs from Yale Professor Robert Shiller's very long-term data set to which I've often referred. The green line is a price-earnings ratio on the S&P500 or earlier counterparts. So as not to overstate the impact of temporary spikes up or down in earnings, Shiller relates the current inflation-adjusted stock price to the previous ten-year-average of inflation-adjusted earnings. That backward-looking P/E currently stands at 22.8, well above its average value of 16.5 in data going back to 1880. If the ratio of prices to historical dividends is unusually high right now, and if you expect the ratio to revert to more typical values, it suggests that you should expect a lower capital gain on stocks you buy today compared to what you would have earned if you bought at a time when the P/E was at or below its historical average. The blue line in the graph below shows the annual rate of return you would have earned by buying stocks at any indicated date and holding on to them for the next decade. That line stops in January 2003, because we don't yet know what the 10-year return of a stock purchased in February 2003 will turn out to be, and we certainly don't know what the 10-year return on a stock purchased in February 2013 is going to be. But what we do know is that in the historical record, you did indeed tend to earn a lower return on stocks if you bought them at a time like today when the P/E is relatively high. Read the full post here .
  • McKinsey Global Institute: 'How to save $1 trillion a year

    How would you like to save a trillion dollars a year? One thing, you have to spend a bunch of money on a bunch of projects you have been putting off. That's the opportunity and challenge global policy leaders are facing when it comes to infrastructure, according to a report from the McKinsey Global Institute . In order to just keep up with global economic growth, government spending has to reach new highs at a time when politics is pushing many key economies toward cuts. From the report: The McKinsey Global Institute (MGI) estimates $57 trillion in infrastructure investment will be required between now and 2030—simply to keep up with projected global GDP growth. This figure includes the infrastructure investment required for transport (road, rail, ports, and airports), power, water, and telecommunications. It is, admittedly, a rough estimate, but its scale is significant—nearly 60 percent more than the $36 trillion spent globally on infrastructure over the past 18 years. The $57 trillion required investment is more than the estimated value of today’s worldwide infrastructure.1 Even then, this amount would not be sufficient to address major backlogs and deficiencies in infrastructure maintenance and renewal or meet the broader development goals of emerging economies. Moreover, the task of funding the world’s infrastructure needs is more difficult because of constraints on public-sector budgets and commercial debt in the wake of the financial crisis, higher and more volatile resource costs, and the additional costs of making infrastructure resilient to climate change and less harmful to the environment. The size of the infrastructure “gap” and the undoubted challenges there are in finding the financing necessary to close it dominate political and public discussion on this topic. Yet this focus diverts attention from what we believe is just as compelling and urgent an issue—how the world can get more, better-quality infrastructure for less. This report focuses on rethinking how governments, together with the private sector, select, design, deliver, and manage infrastructure projects, and make more out of the infrastructure already in place. We argue that there is an emerging opportunity to raise the productivity of infrastructure investment by a substantial margin. Based on McKinsey & Company’s work with governments and private-sector infrastructure players around the world, an extensive literature review, and drawing on insights from more than 400 case examples, we project that if infrastructure owners around the world were to adopt proven best practice, theycould increase the productivity of infrastructure investment to achieve savings of 40 percent. Put another way, scaling up best practice could save an average of $1 trillion a year in infrastructure costs over the next 18 years. While a 40 percent saving is an extrapolation that uses several simplifying assumptions, we believe a productivity boost of this magnitude is achievable in many countries if they are willing to invest in a systematic approach to infrastructure that drives improvement across agencies and private-sector owners and contractors. The measures that we discuss are not about inventing a completely new approach to infrastructure— what we propose is simply rolling out proven best practice on a global scale. Here is a breakdown of the key sectors where the report argues infrastructure is needed: Read the full report here .
  • Mark Thoma On Infrastructure Investment as Economic Fix-it

    Mark Thoma has a good conversation starter at the Fiscal Times . Thoma puts forward the case that now is the right time for infrastructure investment--precisely because the federal government needs to work down its debt long term. And instead of looking at it through the lens of Washington, he wants us to consider this sort of investment from the point of view of a business or home owner. We are in a situation where the costs of infrastructure construction are very, very low. Interest rates are near zero, a sign that the financial community has no worries about loaning us the money, so borrowing long-term has very little interest expense associated with it. In addition, high unemployment has reduced wage costs, and low demand for raw materials due to economic troubles in developed economies has reduced the price of the other inputs that are needed for infrastructure construction. We are also in a situation where the benefits from new infrastructure are very large. The construction of new infrastructure has not kept up with our needs – roads, bridges, water systems, electrical systems, ports, and so on are all in need of attention – and we have not taken full advantage of the latest technological advances that will ensure we are competitive in a global economy. High benefit projects are not hard to find. And there are additional long-run benefits from infrastructure spending as well. Long-term unemployment, which is abnormally high right now, imposes long-term costs on the economy in the form of higher social costs and lower economic growth. Infrastructure spending moves people off of couches and into productive employment so that we avoid these costs – growth is higher and social costs are lower – and that makes us all better off. The low costs and high benefits of infrastructure spending in the present economic environment give us an abundance of projects that would easily pass a cost-benefit test. Our failure to take advantage of these opportunities is, in essence, leaving money on the table. That wouldn’t happen in the private sector, and there’s no reason for government to do this either. Read One Investment that Can Reduce Our Long-Term Debt here .
  • Testing Okun's Law--Are Jobs and Growth Still Linked?

    In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .
  • British Economy and the Dreaded Triple Dip

    Britain's economy shrank again in the fourth quarter of 2012, according to the United Kingdom's Office of National Statistics , sparking concerns there of a triple-dip recession. Here are some of the key takeaways from the release: • GDP was estimated to have decreased by 0.3% in Q4 2012 compared with Q3 2012. • Output of the production industries was estimated to have decreased by 1.8% in Q4 2012 compared with Q3 2012, following an increase of 0.7% between Q2 2012 and Q3 2012. • Construction sector output was estimated to have increased by 0.3% in Q4 2012 compared with Q3 2012, following a decrease of 2.5% between Q2 2012 and Q3 2012. • Output of the service industries was estimated to have been flat in Q4 2012 compared with Q3 2012, following an increase of 1.2% between Q2 2012 and Q3 2012. • GDP was estimated to have been flat in Q4 2012, when compared with Q4 2011. Not a pretty picture. Here's a look at GDP and main components since 2000: Read the full release here . And at the Mirror , Graham Hiscott says Britain might have already been in the third dip of the triple dip recession had London not hosted a pretty big party this past summer: Does the Chancellor have a Jessica Ennis poster on his wall at the Treasury? If not, he should, because if it weren’t for Team GB’s heroics and the big boost from the Olympics, it’s likely the UK would already be stuck in a triple dip recession. The Games - and the surge in spending - were a fig leaf for problems plaguing our economy. Today’s figures showing the economy shrank 0.3% in the fourth quarter of 2012 were a case of business as usual for battered Britain. Take out the Olympic bounce, and the economy has shrunk for four of the past five quarters. Hardly a gold medal winning performance. Read the full article here .
  • Signs of Recovery in American Manufacturing

    Earlier this week, Brookings gathered business leaders and policy makers to discuss "fiscal challenges, U.S. manufacturing and government performance." Bruce Katz , VP of the Brookings Metropolitan Policy Program , addressed the good and the bad of American manufacturing. Katz pointed out the manufacturing sector lost the most jobs during the great recession. When you lose manufacturing jobs, other jobs, like design and engineering jobs, leave the country as well. But some manufacturing jobs have come back (see Katz's handout on jobs recovered, by sector, here ). And Katz sees some trends that suggest continuing recovery in American manufacturing is possible. The key to continued growth, Katz says, is collaboration: You can watch other excerpts from the Brookings panel discussion on American manufacturing here .
  • In Praise of the American Consumer

    Brookings has compiled a series of articles and talks from its Economic Studies experts that address what the top economic issues of the year. You can access them all at this page . Among the top stories: the resilience of the American consumer. Karen Dynan , co-director of the Brookings Economic Studies Program, says American consumers were the key to the positive trending of the economy.
  • The British Economy and Challenging the Austerity Narrative

    Fantastic storytelling from Adam Davidson in the New York Times about visiting the Bank of England and meeting with Monetary Policy Committee member Adam Posen. But Davidson's story is also about, well, storytelling and how it is applied to decision making at one of the most influential global financial institutions. It seems Posen has been fighting against the tide within the BofE and losing because his math hasn't squared with the narratives his fellow committee members have bought into: Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England’s economic staff. The staff members take the most recent economic data — G.D.P. growth, the unemployment rate and more subtle details gathered from interviews with businesspeople throughout the country — and try to fashion it into a narrative. Does a sudden spike in new factory orders represent a fundamental shift, or is it just a preholiday blip? Do anecdotal reports of rising food prices herald a period of inflation, or is it the result of a cold snap? Which story feels truer? A few days later, each of the nine members of the M.P.C. puts forth his or her own interpretation. Over two days, the members debate these competing narratives and discuss what the Bank of England should do. Then the committee votes, and the winning policies are implemented. Soon after Cameron was elected, Posen argued that the committee should endorse a more radical, expansionary approach of economic recovery. He believed that the data indicated the sputtering would end and the economy would grow only if the Bank of England began buying many billions of pounds’ more worth of bonds. This added stimulus would flood the banking system with new cash and indirectly push banks to lend to businesses and citizens. (Banks don’t make money by sitting on cash.) Some of Posen’s colleagues warned that this would lead to inflation. He countered that the economy was operating below its capacity, so there was no reason to fear inflation. Each month, the committee heard Posen’s advice. Each month, it voted 8 to 1 against him. The bank eschewed his more expansionary suggestions and stuck to a more conservative approach of keeping interest rates low and modest bond-buying. Soon Posen became a famously divisive figure in London’s financial community, alternatively the enlightened genius trying to save the country and the mad Yank who wanted to inflate the pound out of existence. “There was this period,” he remembers, “when I would lie awake at night and think: Am I just crazy? Maybe I’m nuts. It’s like the scene in ‘12 Angry Men.’ I almost wavered. But then I decided: No, no, no. I was convinced: They’re nuts and I’m right.” Read God Save the British Economy here .
  • Tim Duy: Signs Do Not Indicate the US is in Recession

    Last week, ECRI --the Economic Cycle Research Institute-- made the case that the U.S. hit recession in July, showing this chart to illustrate the claim: From ECRI: So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising. But TIm Duy isn't buying it. At Fed Watch , Duy breaks out a series of charts to reveal a more complete picture: ECRI Co-Founder Lakshman Achuthan insists that the US is already in recession, apparently as of July. I would be very skeptical that this was in fact the case. I think the preponderance of evidence weighs in favor of ongoing expansion, disappointing as the pace of that expansion may be. Actually, Achuthan loses credibility quite quickly by claiming there is a strict definition of recession based upon peaks of production (Achuthan apparently views "production" as "industrial production"), income, jobs, and sales. In contrast, according to the NBER business cycle dating committee: "The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP). The Committee's use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs." Dating a recession, it would seem, is something of an art. And note that Achuthan appears to ignore the role of GDP and GDI in the determination of a recession. Taking a quick look at those two series: Read Is The US Already in Recession? here .
  • UK Austerity Measures to Continue

    The economic situation in Britain has mirrored a London winter day: gray and bleak. And it may be worse than a lot of us have realized. Chancellor of the Exchequer George Osborne addressed Parliament earlier this week and reported that the government is anticipating an extension of austerity measures beyond 2015. The Economist 's John Prideaux and Jeremy Cliffe discuss the impact of Osborne's address on the British economy and beyond:
  • Rogoff: 'Innovation crisis or financial crisis?'

    In a post for the World Economic Forum , Kenneth Rogoff weighs in on the argument by Peter Thiel, Gary Kasparov, and others that the global economic slowdown is the result of an innovation crisis in advanced economies. Rogoff seems to see some validity in exploring the question of whether there is a need to encourage more rapid, life-changing technological advancement (even in the age of iPhones and cloud computing), but he writes that "the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis." There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen. Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem. No, the main cause of the recent recession is surely a global credit boom and its subsequent meltdown. The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative. The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation. It is no accident that the current era looks so much like what followed dozens of deep financial crises in the past. Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalization and new technologies. As Carmen Reinhart and I emphasize in our book This Time is Different, such fugues of optimism often accompany credit run-ups, and this is hardly the first time that globalization and technological innovation have played a central role. Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. Credit contractions almost invariably hit small businesses and start-ups the hardest. Since many of the best ideas and innovations come from small companies rather than large, established firms, the ongoing credit contraction will inevitably have long-term growth costs. At the same time, unemployed and underemployed workers’ skill sets are deteriorating. Many recent college graduates are losing as well, because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earnings. Read the full post here .
1 2 3 4 5 Next > ... Last »