Real Gross Domestic Product expanded in the third quarter, but the rate of expansion slowed. GDP rose at an annual rate of 3.5% in the third quarter, according to the advanced estimate from the Commerce Department. This qualifies as a deceleration, since the last revised estimate for growth in the second quarter came in at 4.5%. The Bureau of Economic Analysis report points to inventory investment as the chief reason: it went up in the second quarter and came back down in the third quarter. Consumer spending and exports of goods and services also decelerated.
Here is an updated look at the trend:
Read the BEA release here.
Marc Andreessen looks at the valuation figures attached to a lot of tech companies, and some of them look a bit high. And yet he doesn't seem so worried about another tech bubble. In fact, as he told the WSJ.DLive conference, he expects to see more billion-dollar tech companies to come to a virtual neighborhood near you soon.
Home prices continued to gain in most markets across the country in August. But the rate of gain continued to slow, according to the Case-Shiller Home Price Indices. The 10 and 20-city composites gained 0.2% in August. The year-over-year gains came in at 5.5% and 5.6% respectively, "both down from the 6.7% reported for July."
From the release:
“The deceleration in home prices continues,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The Sun Belt region reported its worst annual returns since 2012, led by weakness in all three California cities -- Los Angeles, San Francisco and San Diego. Despite the weaker year-over-year numbers, home prices are still showing an overall increase, as the National Index increased for its eighth consecutive month.
“The large extent of slower increases is seen in the annual figures with all 20 cities; the two composites and the national index all revealing lower numbers than last month. The 10- and 20-City Composites gained 5.5% and 5.6% annually with prices nationally rising at a slower pace of 5.1%. Las Vegas continues to see a sharp deceleration in their annual home prices with a 10.1% annual return, down just below three percent from last month. Miami is now leading the cities with a 10.5% year-over-year return. San Francisco, which has shown double-digit annual gains since November 2012, posted an annual return of 9.0% in August.
“Despite softer price data, other housing data perked up. September figures for housing starts, permits and sales of existing homes were all up. New home sales and builders’ confidence were weaker. Continued labor market gains, low interest rates and slower increases in home prices should support further improvements in housing."
Read the full release here.
Early next month Europe will mark the 25th anniversary of the Berlin Wall coming down. For economists, the anniversary is an excuse to look at how the opening of markets in Eastern Europe has affected the global economy and, more importantly, the markets in Eastern Europe themselves. Last week, the IMF convened meetings on "Building Market Economies in Europe" in Warsaw. Warsaw has turned out to be a poster-city of sorts for how to build economic dynamism. As IMF Deputy Managing Director David Lipton noted, "Warsaw continues to show the kind of dynamism that we can only dream of in cities of the US or Western Europe."
The IMF put together this short video for the meetings.
Japan prime minister Shinzo Abe has received a lot of kudos for his efforts to rethink and restructure economic policy. Japan's economy needed a jump-start of some sort, and "Abenomics" has been getting a lot of attention worldwide, with many looking at it as a possible model. Stephen Roach is not so impressed. Or at least he is not yet impressed. Writing at Project Syndicate, Roach says there is a lot to be done in Japan, and that Abes next policy moves will be critical.
Abenomics, one might conclude, is basically a Japanese version of the failed policy combination deployed in the United States and Europe: massive unconventional liquidity injections by central banks (with the European Central Bank apparently now poised to follow the Fed), but little in the way of fundamental fiscal and structural reforms. The political expedience of the short-term monetary fix has triumphed once again.
Such a gamble is especially problematic for Japan. With an aging – and now declining – working-age population, it has limited scope for reviving growth. Japan must either squeeze more out of its existing workforce by boosting productivity, or uncover new sources of demand at home or abroad.
At home, that could mean adding workers, either by boosting female participation in the work force, which, at 63%, is among the lowest in the developed world, or relaxing immigration restrictions. Unfortunately, there has been little progress on either front. Moreover, even if the political will to launch third-arrow structural reforms were suddenly to strengthen – a dubious proposition – any productivity payback would most likely take a long time to materialize.
That leaves external demand, which underscores what is perhaps Abenomics’ most serious strategic flaw: It does not take into consideration some of the biggest changes that are likely to occur in the global economy. That is a great pity, because Japan is well positioned to take advantage of one of the most powerful global trends – the coming rebalancing of the Chinese and US economies.
Read Last Chance for Japan? here.
"There are about 232 million international migrants in the world," Dilip Ratha tells us in the Ted Talk below. And the vast majority of them send money home. The total sum of these remittances each year exceeds 400 billion dollars. That's quite a chunk of change, and not an insignificant piece of the global economy. And yet it is something we don't often think about. Ratha argues that remittances can have a much greater influence on those people living in developing economies than other forms of commerce and foreign aid. But only when it is not blocked by government policy, or hampered by expensive exchange costs.
In a piece for the McKinsey Quarterly, James Manyika, Jaana Remes, and Jonathan Woetzel take a look at prospects for future growth, globally. They point to demographic data as a reason to be concerned. But they quickly shift the focus to what they argue is the real key to global gdp: productivity. Here is an excerpt:
The past 50 years have seen unusually rapid growth in GDP and GDP per capita (Exhibit 1). How likely is this growth to continue? Given the demographic drag that’s already coming into play, prospects for future growth—and the related implications for debt levels and future pension liabilities—will depend very heavily on sustained productivity growth. But arriving at useful forecasts of the productivity of future workers can be difficult.
It may be helpful to look back at lessons from the research of the McKinsey Global Institute (MGI), which during the last 25 years has analyzed the causes of differences in labor productivity between industries, sectors, and countries. These lessons help explain why some have thrived while others have fallen behind. To help celebrate McKinsey Quarterly’s 50th anniversary—and to examine the future prospects for economic growth around the globe—MGI looked forward and backward in time at productivity performance and economic growth.
We found that a simple extrapolation from the past does indeed suggest an impending decline in global growth—the result of a sharp decline in the number of available workers. A closer look, however, reveals substantial opportunities to maintain relatively high GDP growth rates through continued growth in labor productivity. Whether these opportunities are realized will depend on the reforms of policy makers and the ingenuity of managers and engineers, particularly in sectors with big productivity gaps. Can companies harness machine learning and artificial intelligence to raise the productivity of knowledge workers? What potential remains for shop-floor productivity gains as telematics and other advanced technologies pave the way for major process improvements? How far will we be able to expand the talent pool through the fuller economic engagement of women?
The bottom line is this: while half-century forecasts are hazardous—particularly for the forecaster!—a productivity-based perspective on the future of growth suggests that a demographic slowdown today need not lead to economic stagnation tomorrow.
Read the full article here.
Kip Tindell, CEO of The Container Store, has shared his company's secrets to success in a book: Uncontainable: How Passion, Commitment, and Conscious Capitalism Built a Business Where Everyone Thrives. The title tells it all. Or at least the subtitle does. In this short interview for Big Think, Tindell makes the case that the not-so-secret to success is hiring the best people, and paying them well. And he explains The Container Store's "one equals three" philosophy, That is, one good employee ends up producing as much as three average employees. Take a look:
The boys (and girls) of Wall Street got a lecture yesterday and told to clean up their act. Speaking at a workshop on "Reforming Culture and Behavior in the Financial Services Industry," New York Fed president William Dudley connected the dots between the overall state of the financial sector, and the behavior of those working in it.
I reject the narrative that the current state of affairs is simply the result of the actions of isolated rogue traders or a few bad actors within these firms. As James O’Toole and Warren Bennis observed in their Harvard Business Review article about corporate culture: “Ethical problems in organizations originate not with ‘a few bad apples’ but with the ‘barrel makers’.”3 That is, the problems originate from the culture of the firms, and this culture is largely shaped by the firms’ leadership. This means that the solution needs to originate from within the firms, from their leaders.
What do I mean by the culture within a firm? Culture relates to the implicit norms that guide behavior in the absence of regulations or compliance rules—and sometimes despite those explicit restraints. Culture exists within every firm whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed. Culture reflects the prevailing attitudes and behaviors within a firm. It is how people react not only to black and white, but to all of the shades of grey. Like a gentle breeze, culture may be hard to see, but you can feel it. Culture relates to what “should” I do, and not to what “can” I do.
A number of factors have contributed to the cultural failures that we have seen. An important question is whether the sheer size, complexity and global scope of large financial firms today have left them “too big to manage.” Large problems can originate in small corners of these firms, as illustrated by the Financial Products Group experience at AIG, and the “London Whale” episode at JPMorgan. Differences in attitudes and business practices across countries can also be difficult to reconcile within a firm’s overall compliance function. Recent fines against BNP Paribas for violating U.S. sanctions programs and providing dollar funding to a country engaged in genocide and against Credit Suisse for facilitating tax evasion by U.S. citizens, point to these challenges. Another important element affecting culture has been the shift in the prevailing business model away from traditional commercial and investment banking activities to trading; that is, from client-oriented to transaction-oriented activities. Clients became counterparties—the other side of a trade—rather than partners in a long-term business relationship. In general, interactions became more depersonalized, making it easier to rationalize away bad behavior, and more difficult to identify who would be harmed by any unethical actions.
High-powered pay incentives linked to short-term profits, combined with a flexible and fluid job market, have also contributed to a lessening of firm loyalty—and, sometimes, to a disregard for the law—in an effort to generate larger bonuses. Often allegiance to an external network of traders has been more important than the ties the trader has to his or her particular employer. This is particularly evident in the illegal manipulations of the London Interbank Offered Rate (LIBOR), and with respect to reference rates in the foreign exchange markets.
Read the full speech here.
For at least a couple thousand years, India and China were the big kids on the block. That is, their economies were significantly larger than any others. And then the Industrial Revolution happened and European economies rose. And the the upstart U.S. stepped in. Now? India and China are back. This Economist live chart illustrates the ups and downs:
Over at the OECD's Insight blog, Brian Keeley suggests we look at global inequality in two ways. There is inequality between nations, and inequality between people And if you look out over a period of centuries, it is striking how much inequality between nations/economies has grown. Just a couple of centuries back, rich nations "had only about double the income of the rest of the world." The industrial revolution changed all that.
There are reasons to think that the long period of de-globalisation in the 20th century was reflected in global income inequality, and, in particular, in an unusual pattern in global income distribution. Typically, we’d expect to see a “bell curve” – lots of people with incomes around the average and, at either end of the curve, some people with extremely low incomes and a few with extremely high incomes. But in the mid-20th century, we see the emergence of a curve with two “bumps”.
It seems likely that these two bumps reflect the divisions of the post-World War II economy: On one side is the “rest of the world,” which included many communist states that actively pursued narrow income gaps; on the other is the “wealthy West,” which enjoyed increasing prosperity while also pursuing policies to narrow inequality.
Beginning in the 1980s, the bumps begin to fade. In a globalising economy, the wealth gap between countries began to narrow as places like China entered the global economy. By contrast, the wealth gap within countries began to rise. In part, that was a result of the collapse of the Soviet Union and the Eastern bloc. But it also reflects rising inequality in OECD countries. Since the 1980s, they, like many other countries, have faced tough choices over how to prosper in an increasingly global economy. In some cases, policies that have been good for competitiveness have not been all that great for equality.
Read the full post here.
Gas prices are down. And they are down significantly, because the price of oil is down significantly. Why is the price of oil down? As Jason Bellini explains in this brief video from the Wall Street Journal, it has something to do with supply and demand. And shocking as it may seem, politics:
Retail sales dipped in September, but are still well above where they were a year ago. Sales came in at $442.7 billion for the month, a 0.3 percent decrease from August sales, according to the Commerce Department. Overall sales were up 4.3% over September 2013. Auto sales alone are up over 10% compared to a year ago. From the Census Bureau:
Reuters' Jason Lange called the sales report a "worrisome economic signal." Read the release here.
"Employers are loosening the purse strings, ever so slightly," according to Mercer MThink. The results of a Mercer survey on employee compensation give hope that firms are increasing pay and overall compensation in order to keep top talent. Here is a look at some of the topline findings (full-size graphic available here):
VoxEU has re-posted a 2007 column by newly minted Nobel Economics Prize laureate Jean Tirole. In the column, Tirole outlines reforms that the government of France needed to make--and still needs to make, he would argue--in order to best serve its population. Here is an excerpt:
High quality public services, infrastructure that facilitates “economic dynamism”, a reduction in the debt left to our children. These expectations of the French people cannot be met unless the state becomes effective. Reforms are urgent, but difficult. To achieve them, a four-pronged approach is required: restructuring, competition, evaluation and accountability.
Many countries have undertaken fundamental governmental reforms based on a consensus between political parties and unions. In the 1990s, the Swedish Social Democrats government made large cuts in the civil service. Ministers, who formulate overall strategy and make decisions on resource allocation, have to rely on a small number of civil servants. Operational details must therefore be delegated to a large number of independent agencies, each of which can recruit and remunerate their employees as they choose. These independent agencies operate under strict budgetary limits that ensure the sustained delivery of public services.
Around the same time, Canada cut government expenditure by 18.9% without social turmoil – and without greatly reducing health, justice, or housing programmes. They did this while maintaining tax levies, so the result was a reduced public deficit and falling public debt. Spending that could not be clearly justified in terms of the resulting service to the public was pruned. Subsidies for entrepreneurial projects and privatisation facilitated the elimination of one in six positions in the civil service. Indeed the sort of government reorganisation undertaken in Canada could only be dreamed of in France with its often nightmarish collection of laws and fiscal regulations. The Canadians have a single service for the calculation and collection of taxes and a one-stop-shop for government-business relations.
Read Four principles for an effective state here.
The 2014 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to French economist Jean Tirole, "fr his analysis of market power and regulation." From the press release:
From the mid-1980s and onwards, Jean Tirole has breathed new life into research on such market failures. His analysis of firms with market power provides a unified theory with a strong bearing on central policy questions: how should the government deal with mergers or cartels, and how should it regulate monopolies?
Before Tirole, researchers and policymakers sought general principles for all industries. They advocated simple policy rules, such as capping prices for monopolists and prohibiting cooperation between competitors, while permitting cooperation between firms with different positions in the value chain. Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others. Price caps can provide dominant firms with strong motives to reduce costs – a good thing for society – but may also permit excessive profits – a bad thing for society. Cooperation on price setting within a market is usually harmful, but cooperation regarding patent pools can benefit everyone. The merger of a firm and its supplier may encourage innovation, but may also distort competition.
Here is video of the announcement at the Royal Swedish Academy of Sciences:
Nevada and Washington, DC should be proud. According to the result of a new survey from Interest.com, people in those states are saving enough for retirement. The rest of us need to step up. Or at least consider the consequences. Marketplace's Sarah Gardner reports:
As Princeton professor Harold James ears perked up when US Treasury Secretary Jack Lew talked about "philosophical differences" between US and European policymakers during the recent G20 summit. The choice of words lead James to consider just how hard it really is to shift gears in Europe. From Project Syndicate:
Canada’s finance minister, Joe Oliver, joined the call for fiscal expansion in Europe – a position for which there seems to be some support within the European Central Bank. Indeed, ECB President Mario Draghi has advocated higher spending by more fiscally strong countries like Germany. And ECB Executive Board member Benoit Coeure, together with his former colleague Jörg Asmussen, currently Germany’s deputy labor minister, recently suggested that Germany should “use its available room for maneuver to promote investments and reduce the tax burden of workers.”
In fact, most of the world believes that Germany should adopt a more expansive fiscal policy. According to this view, austerity is counter-productive, because it induces slowdowns and recessions that make long-term fiscal consolidation more difficult. But Germans – as well as some other Northern Europeans, and perhaps some Chinese economists – remain reticent. They believe that responding to calls for stimulus would simply lead to more such calls, creating a log-rolling, pork-barrel dynamic in which any hope for fiscal consolidation is ruled out.
The stimulus-versus-austerity debate is an old one. In the 1970s and 1980s, the United States regularly called on Germany and Japan to act as locomotives for the global economy. But, until recently, the divergences were viewed in terms of interests, not “philosophies.” Americans wanted additional demand for their goods and higher prices, while the Germans and Japanese defended their export industries.
The problem today, as Lew’s recent statement highlighted, stems from deeply entrenched differences between the opposing sides’ belief systems, with ideological questions about fairness and responsibility trumping pragmatic discussion of the best way forward for everyone. As the historian Robert Kagan argued in 2002, Americans and Europeans do not only have different worldviews; they occupy entirely different worlds.
Read The New Philosophers here.
Peter Thiel has a new book out. His co-author is Blake Masters, a former student who, with Thiel, turned notes from Thiel's Stanford lectures into a text on startups, competition, and the role of digital technology in reshaping global business. Thiel recently sat down with Wharton's Adam Grant to talk about he book:
IMF researchers are projecting a "weak and uneven global recovery" to continue in the latest World Economic Outlook. The IMF is now projecting 3.3 percent global growth for 2014. Growth in advanced economies is projected to come in at 1.8 percent for the year, rising to 2.3 percent in 2015. Growth in emerging economies has been estimated downward from 6 months ago, but at 4.4 percent is still ahead of advanced economies.
IMF researchers note that there are "considerable downside risks":
• Heightened geopolitical risks could prove more persistent, and they could also worsen. The result could be sharply higher fuel prices, trade disruptions, and further economic distress.
• Easy financial conditions, and the resulting search for yield, could fuel financial excess. Markets may have underpriced risks by not fully internalizing the uncertainties around the global outlook. A larger-than-expected increase in U.S. long-term interest rates, geopolitical events, or major growth disappointments could trigger widespread disruption.
• In advanced economies, secular stagnation (a situation of a persistent shortfall of investment relative to saving, even with near-zero interest rates) and low potential growth continue to be important medium-term risks—despite continued very low interest rates and increased risk appetite in financial markets. Protracted low inflation or outright deflation, particularly in the euro area, could pose a risk to activity and debt sustainability in some countries.
• For emerging markets, potential growth could be even lower than projected, if supply-side constraints prove more protracted.
Read more about the report here.
And watch the following summary featuring lead Olivier Blanchard, Economic Counsellor at IMF:
Forget about robots taking jobs. This Economist goes beyond robots. The real question is what automation is doing to jobs that once were available to mere humans. And automation goes way beyond robots.
It is beginning to look like the threat to jobs from automation primarily hits one level of jobs: mid-level jobs.
The unemployment rate has dropped below 6% after the U.S. economy added nearly a quarter million jobs in September. To be precise, there were 248,000 new jobs, and the unemployment rate is now at 5.9%, according to the Department of Labor. The labor force participation did not change much, going from 62.8% to 62.7%. Here's a look at the unemployment trends from the Bureau of Labor Statistics:
Here are some of the key data from other areas we like to track in the monthly jobs report:
The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in September at 7.1 million. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.
In September, 2.2 million persons were marginally attached to the labor force, essentially unchanged from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Among the marginally attached, there were 698,000 discouraged workers in September, down by 154,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force in September had not searched for work for reasons such as school attendance or family responsibilities.
Read the full report from the BLS here.
At Vox, Matthew Yglesias shares some interesting charts about the current recovery. They get at what we guess is one reason that many Americans don't seem to know that, while it has been slow, there has been a recovery after the Great Recession. And a not insignificant recovery at that.