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February 4, 2013

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Latest Posts from Economist's View


Posted: 31 Jan 2013 12:24 AM PST
Tim Duy:
Unsurprisingly, the Fed Stands Pat, by Tim Duy: I fell off the grid a couple of weeks ago, as seems to happen each time the teaching schedule ramps up. All those projects and papers seem like such a good idea until they show up on my desk needing to be graded. Between that and travel up and down I5 from one end of the state to the other, blogging suffered, to say the least.
There, however, is nothing like a Fed meeting to prod me back to the keyboard. Alas, the outcome of this meeting was not entirely unexpected. Policy remains unchanged, with only minimal changes to the FOMC statement. The Fed followed the path of all analysts not of the Zero Hedge variety and largely dismissed the unexpected decline in 4Q12 GDP:
Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.
"Transitory" = "don't panic." We can try to read something in the change of this sentence:
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.
to:
The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.
It sounds a little more optimistic, as though they are more comfortable they have policy about right. This, in turn, would suggest that no one at the FOMC is really thinking about accelerating the pace of asset purchases. Of course, I don't think anyone was expecting that anyway.
There was no indication of setting thresholds for the end of large scale asset purchases. Such discussions are likely in their infancy; for now, all we know is that the end will come before the unemployment rate hits the 6.5% threshold. 7.25%, as suggested by Boston Federal Reserve President Eric Rosengren? Or a sustained period of substantial nonfarm payroll growth, as suggested by Chicago Federal Reserve President Charles Evans? Of course, these two thresholds may be effectively equivalent.
Kansas City Fed President Esther George (was she invited to the bloggers conference?) revealed herself as a true hawk with her dissent. To be sure, not entirely surprising. Still, I had wanted a little more confirmation before I labeled her a "hawk" rather than just having "hawkish leanings." I got it. Her reason:
Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
The potential imbalances reason seems like the primary reason for her dissent, and falls in-line with her recent speech. Such views are not uncommon - see A. Gary Shilling in Bloomberg, for example:
In desperation, monetary policies have become highly experimental. Huge government deficits are limiting the possibility of additional fiscal stimulus so policy makers are moving toward competitive devaluations. Meanwhile, low interest rates have spawned distortions as well as zeal for yield, regardless of risks.
I can't say that I am completely immune to such fears. Indeed, it is difficult to ignore the reality that the last two expansions were correlated with what I would argue were asset price bubbles. Moreover, I am somewhat interested in learning if the Federal Reserve could in fact stoke the fires of another asset bubble. But I think all of this speculation might be just a bit premature. We have an increasingly better idea of what an asset bubble looks like, and I don't think we are quite there:
Networth
Yes, premature. Another 25% of GDP and I will likely start getting a little more nervous. Speaks to my concern that we are leaning a little too hard of monetary policy and not enough on fiscal policy. But that train has left the station.
Bottom Line: Like the Fed, I think it best to discount the GDP data. I didn't really think the economy was growing over 3 percent in the third quarter, and I don't below it was really shrinking in the fourth quarter. The underlying rate of growth is somewhere in between. More slow and steady for the time being. Slow and steady, though, has been enough to push the unemployment rate lower. As 6.5 percent comes closer - or if we see a handful of 200k+ nfp numbers - the Fed will begin easing back on the asset purchases. But I have trouble see that until mid-year at the earliest. For now, policy is on hold.
Posted: 31 Jan 2013 12:06 AM PST
Posted: 30 Jan 2013 03:55 PM PST
I'm sympathetic to the argument that excess leverage was a problem in the financial crisis, but I don't see it the primal cause of the recession. Instead, leverage iss a magnifier that makes things much, much worse when problems occur:
The Real, and Simple, Equation That Killed Wall Street, by Chris Arnade, Scientific American: ...It ... is the overly simple narrative that many in the media have spun about the last financial crisis. Smart meddling kids armed with math hoodwinked us all.
One article, from the March 2009 Wired magazine, even pinpointed an equation and a mathematician. The article "Recipe for Disaster: The Formula That Killed Wall Street," accused the Gaussian Copula Function.
It was not the first piece that made this type of argument, but it was the most aggressive. ...
This theme plays on the fallacy that danger always comes from complexity. ...
The reality is much simpler and less sexy. Wall Street killed itself in a time-honored fashion: Cheap money, excessive borrowing, and greed. And yes, there is an equation one can point to and blame. This equation, however, requires nothing more than middle school algebra to understand and is taught to every new Wall Street employee. It is leveraged return. ...
The Gaussian Copula Function, opaque to most, is convenient to blame. It allows us to shake off our collective sense of guilt. It obscures the real crime...
I'm willing to blame leverage for contributing to the magnitude of the crisis, and I've long-called for limits on leverage to mute the negative effects of the next financial recession, which will come no matter how hard we try to avoid it. But I don't think it's correct to blame leverage itself for our problems, i.e. that "there is an equation one can point to and blame."
[The article actually notes many other factors, e.g. bad incentives for ratings agencies, failures of regulation, easy moneary policy by the Fed, and so on, but still ends up focusing on the leverage component as the key factor. In any case, the article is directed squarely at Felix Salmon, and I'm posting this in the hope that it will help prod him into responding.]
Posted: 30 Jan 2013 12:46 PM PST
My quick reaction at MoneyWatch to today's GDP report and the Press Release from the Fed's FOMC meeting:
No Change in Fed Policy Despite Negative GDP Growth
Posted: 30 Jan 2013 09:22 AM PST
Dean Baker on todays' news the GDP shrank in the 4th quarer of last year:
Falling Government Spending and Inventories Push Growth Negative in Quarter, by Dean Baker: A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter.
Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters. Consumption grew at a 2.2 percent annual rate, driven mostly by 13.9 percent growth in durable goods purchases, primarily cars. This number was inflated due to the effects of Sandy, which destroyed many cars, forcing people to buy new ones. Growth in this category will be substantially weaker and possibly negative in the next quarter. On the other side, housing and utilities subtracted 0.47 percentage points from growth in the quarter. This is likely a global warming effect with warmer than normal weather leading to less use of heating in the quarter. (There was a comparable falloff in the 4th quarter of 2011 when we also had unusually warm weather.)
One especially noteworthy item is the continuing slow pace in the growth of spending on health care services, which accounts for almost three quarters of all health care spending. Nominal spending grew at a just a 2.3 percent annual rate in the quarter. Over the last year, nominal spending is up by just 1.8 percent, far less than the rate of growth of GDP, and well below the projections from the Congressional Budget Office (CBO). It seems increasingly likely that we are on a slower health care cost trajectory. The deficit picture will look very different when CBO incorporates this slower growth trend into its projections.
year-over-year percent change in personal consumption of health care 1980-2012
Investment rebounded from a weak third quarter in which non-residential investment actually shrank. This quarter it added 0.83 percentage points to growth, with investment in equipment and software growing at a 12.4 percent rate. Housing continued to be a big positive in the quarter, adding 0.36 percentage points to growth.
Net exports were a modest drag on growth. While both exports and imports fell in the quarter, the 5.7 percent drop in exports more than offset the positive impact of a 3.2 percent decline in imports. The state and local sector government sector shrank at a 0.7 percent annual rate, knocking 0.08 percentage points off growth. Non-defense federal spending rose at a 1.4 percent annual rate.
The inflation hawks will be disappointed in this report with the overall price index rising at just a 0.6 percent annual rate. The core CPE rose at a 0.9 percent rate. Insofar as there is any trend in these data it is toward lower inflation.
One interesting item in the report was a $122.90 jump (85.2 percent at an annual rate) in dividend payouts. This was the result of companies deciding to pay out dividends to shareholders in 2012 when a lower tax rate was in effect on high-income taxpayers.
There is little evidence in this report to believe that the economy will diverge sharply from a 2.5- 3.0 percent growth path, except for the impact of the deficit reductions that Congress is considering or already put in place. Higher tax collections from the ending of the payroll tax holiday are likely to knock around 0.5 percentage points from growth. The sequester, or whatever cuts are put in place in lieu of the sequester, are likely to have an even larger impact on growth beginning in the second quarter.
One item worth noting is the GDP report provides zero evidence that "fiscal cliff" concerns had any impact on growth in the quarter. Consumer durable purchases and investment in equipment and software were the two strongest components of GDP. If worries over the fiscal cliff were supposed to cause people to put off purchases, consumers and businesses apparently did not get the memo.
Nevertheless, with the slow recovery of output and employment all is not well no matter how we spin the numbers. We need more spnding on infrastructure to help with the recovery.

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