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February 4, 2013

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Latest Posts from Economist's View


Posted: 04 Dec 2012 12:33 AM PST
The Bush tax cuts have not delivered the economic growth and widely shared prosperity that were promised, and if the Republican Party was really the party of business it would end our bad investment in supply-side economics:
    Why the GOP Won't Admit That Supply-Side Economics Has Failed - Mark Thoma
But maybe the tax cuts were about something else?
Posted: 04 Dec 2012 12:06 AM PST
Posted: 03 Dec 2012 09:36 PM PST
One more from Tim Duy:
Apples and Oranges in the Manufacturing Data?, by Tim Duy: Reporting on today's spate of manufacturing numbers, Neil Irwin at the Washington Post writes:
Just a few months ago, the global economy seemed to be stuck in a precarious state. Huge swaths of the world economy were either slowing down or contracting outright, and it wasn't at all clear whether global economic policymakers would have enough gas left in their stimulus tanks to stop things from spiraling into a bad place.
But the latest data in a wave of reports on the manufacturing sectors in nations around the world overnight and Monday morning suggest that the world has avoided that fate. The same cannot be said of the United States, however.
I appreciate Irwin's point - many of the global manufacturing reports were better than expected, although I would say only marginally so. And I think this is accurate:
But put it all together, and the portrait painted by the manufacturing reports is of a world economy that isn't going off the rails. China's slowdown over the summer was not, so far at least, the start of any broader economic collapse. Europe's recession is bad, but major European economies aren't in free-fall. Mario Draghi, president of the European Central Bank, said in an interview with Europe 1 radio Friday that a euro-zone recovery "would start probably in the second half of 2013." The new numbers Monday seem to fit that forecast; contraction remains underway for now, but the pace of that contraction is slowing.
The European Central Bank has so far prevented a free fall on the continent; whether or not recovery is at hand or the region is faced with a long, grinding period of zero growth remains a subject of debate. Europe's fate will be decided, I suspect, by a lack of fiscal stimulus. As far as the persistence of the recent uptick is concerned, take quick look at the Markit Eurozone PMI:
Europmi
Notice the upswing in 2011 that was subsequently reversed. Perhaps the same dynamic will happen this time as well?
Where Irwin trips me up is here:
All of which brings us to the United States. The Institute for Supply Management's purchasing managers' index fell sharply, to 49.5, from 51.7 in October. The details of the number were simply terrible. The actual level of production activity at American factories actually rose, but new orders fell 3.9 percent, which bodes ill for the future. The employment component of the survey fell to its lowest level since September 2009, which is hardly an optimistic sign for the November jobs numbers due out on Friday.
This is all true, in my opinion, but I am wondering if this is an apples to oranges comparison? Irwin shifts from the Markit PMIs to the ISM PMI data. What was the Markit PMI for US manufacturing? Up, not down as the ISM reported:
Uspmi
What about the underlying details?
Uspmi2
In many ways this is almost the mirror image of the ISM report! What's down is up! Headline, new orders, new export orders, and employment all move in opposite directions. Which leads one to wonder which is correct, the ISM or Markit PMI? If ISM is correct, then is Markit also overestimating the strength of manufacturing elsewhere? Honestly, I don't know, but it makes me hesitant to compare the Eurozone Markit PMI to the ISM US PMI to argue that the US is deteriorating relative to Europe.
Bottom Line: The ISM report on manufacturing is widely followed in the US. It is a natural starting point to understand current trends in US manufacturing. It's what I would do. But should we compare it to the Markit PMI reports of other nations? Yes, but with an important caveat - we shouldn't ignore the Markit US PMI data when making such comparisons, especially when it stands at odds with the ISM data.
Posted: 03 Dec 2012 05:31 PM PST
Tim Duy:
Struggling to Gain Traction in Manufacturing, by Tim Duy: The US manufacturing sector is not collapsing. But it is struggling to gain traction, and in doing so throwing up a number of signals that, in the past, have been consistent with recession. I don't think they are telling that story this time, at least not yet. But the end of the year is looking a little more fragile than we would like it to be - and while a good part of that fragility is a consequence of the international sector, it is hard to ignore the role of fiscal policy uncertainty as a depressing force on economic activity.
Last week's advanced manufacturing report was hardly inspiring despite the ever so slight rise in core manufacturing orders:
Man5
Compared to a year ago, this data still has a recessionary feeling:
Man6
The same holds for shipments as well, although to a lesser extent:
Man7
Today's ISM release confirms the softness across the manufacturing sector, with the headline number dipping below the expansion/contraction line:
Man1
While the production component rose, new orders fell, only part of which can be attributed to the international situation:
Man2
Somewhat disconcerting is the ongoing weakness in import orders, a sign of weak domestic demand:
Man4
And, of course, the employment component was soft as well:
Man3
Let's hope the employment weakness is not spreading far beyond manufacturing. Note also that the softness in recent manufacturing data is carrying forward from broader third quarter trends, notably the decline in the equipment and software component of GDP:
Man8
So while the international sector is clearly a drag, the same is increasingly true of the domestic side of the equation. This seems to be confirmed by some of the anecdotal evidence in the ISM survey, for example:
"The principle business conditions that will affect the company over the next three or four quarters will be the U.S. federal government tax and budgetary policies; the impact of those policies is not yet clear." (Petroleum & Coal Products)
"The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed; if the program that is put in place is more taxes and big spending cuts — which will push us toward recession — forget it." (Fabricated Metal Products)
The fiscal drama playing out in Washington is clearly impacting decision makers. When will this uncertainty be lifted? Calculated Risk is looking for a deal early next year, but that still leaves firms sitting on the sidelines for at least another six weeks. And note that "compromise" certainly means additional austerity. We are talking about the degree of austerity. In other words, fiscal policy will continue to be a drag into 2013. Also, Bruce Bartlett points out that the fiscal cliff is a fake problem while the real threat is the debt ceiling - read his latest on the topic and some thoughts about the implications for the president. Recall that it was the debt ceiling debate that roiled markets in the summer of 2011.
Altogether, the US economy is ending the year on a weak note, with the externally-derived weakness being compounded by expectations of further fiscal austerity and fears of severe fiscal austerity. These factors are taking the wind out of the sails of the momentum provided by improvement in the housing market:
Houst
Also note that car sales bounced back strongly in November (See Calculated Risk), a sign that the negative household spending impact of Hurricane Sandy was temporary. Unlike businesses, households have been resilient to the fiscal cliff drama; I doubt that will change unless the fears became reality and the job market turns south.
Bottom Line: 2013 is shaping up to be another slow year for the US economy. The manufacturing slowdown is real, and is being compounded by fiscal policy concerns, both real and imagined. This, of course, should be no surprise. When at the zero bound, austerity is always and everywhere an economic drag. However, it would be unusual for the US economy to slip into a recession in the midst of a housing recovery. I think the path to recession in 2013 is through the unlikely event that the worst fiscal cliff nightmares are indeed realized. That said, continuing slow growth itself would make 2013 yet another disappointing year in the recovery.
Posted: 03 Dec 2012 11:10 AM PST
Owen Zidar:
... I find that heterogeneity is quite important, that almost all of the stimulative effect of tax cuts results from tax cuts for the bottom 90%, and that there is no substantial link between tax cuts for the top 10% and subsequent job creation. The notion that raising top rates slightly leads to substantially lower job creation and economic growth has no empirical support from the last half century...
If only evidence mattered. He also has an interesting chart:
Taxburden[1]Negative entries are tax cuts, and positive entries are tax increases (as he notes, this is federal income tax only, payroll tax changes follow a different pattern). The light blue line is the top 20%.
Posted: 03 Dec 2012 10:13 AM PST
Michael Froomkin on debt negotiations:
both sides have taken the Pentagon's budget off the table even though that is where most cuts should be coming from
Robert Reich:
You want to cut, cut spending on the military — which now exceeds the military spending of the next 13 largest military spenders in the world combined.
Works for me.

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