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Update on the economy

I do a weekly radio segment on the economy on WREL, the local radio station. Here are my notes from the Aug 20th show. These are not necessarily the order in which I presented them, and I avoid numbers when I can – radio is not the medium for conveying data – but I like to have them in front of me. [See http://autosandeconomics.blogspot.com Autos and Economics on blogspot for subsequent weekly radio notes.]


Employment: I won’t talk details, but job growth has continued on trend somewhat above population growth, with no sign of acceleration. projecting out, we won’t return to normal levels of employment for at least 2 and likely 3 more years. I’ll return to that topic later in the fall.

New Residential Construction: out Tuesday. slow improvement, especially  of multifamily units. but still only level of Jan 1992 when the population was 20% smaller [321mil today vs 255mil]. so the adjusted rate is still below any point of the last 60 years – we’re at about the 1990 trough, but still below the level of the early 1980s housing bust. the recent peak was in Jan 2006, per capita starts are at 49% or less than half that level. times are good only relative to April 2009 – we’re now 2.4x that level.

the bottom line is that housing continues to be a big drag on the economy.

CPI:  headline CPI for July was 0.2%, and Jan-Jul [geometric avg of 0.09%] implies annual 1.0%. now there’s the drop in gas prices, while food prices are falling despite the California drought. those pull down the headline number; inflation less food & energy is higher at 2.3%, but past 3 months trend down. [query for students: how volatile are the data? do 3 months a trend make?]

the standout: services excluding energy-related rose at 2.8% and shelter at 3.5%. but “medical care commodities” rose only 1.9% and “medical care services” only 2.2% both below overall “core” rate and below the level for recent years, perhaps reflecting cost controls of medicare

too many numbers to discuss but: 16% trimmed-mean CPI and median CPI down a bit to 2%. sticky price CPI at 2.1%, up a bit. as noted, overall headline rate 0.2% from year ago, but headline inflation less food and energy at 1.8%. I calculate rates above using an annualized rate of a geometric average of 7 months data.

Energy: in California recently, gas prices over $4. now back here, approaching $2. huge impact – though CA has more taxes and due to smog issues a more expensive type of basic gasoline.

separately, drill rig count down 50% so far this year. now the 50% still drilling are the most productive, but well output drops quickly in places such as North Dakota and Oklahoma (falling by half over two years). so total output won’t keep rising, but neither will production collapse. meanwhile the weak global economy means demand isn’t strong.

is this collapse due to a Saudi conspiracy, to preserve their market share? that misses the arithmetic of what output changes do. the Saudis are now a smaller part of global market and have less impact. if they cut output 10% or about 1 mbd, it could – would! – drive up prices, but my back-of-the envelope calculations suggest by perhaps 5%, not by enough to increase their revenue. so their income would drop 5%. with a burgeoning population (and an ever-bigger royal family!) that has higher expectations, the Saudis need money to buy off their people. it’s made worse by Islamic fundamentalism that draws on the Wahhabi movement. but its the Wahhabis who helped the Saudis grab power, and the House of Saud supports them today, bankrolling Wahhabi schools around the world. the irony: our “good friends” the Saudis as a nation support the movement that feeds the ideology of terrorism (and some individual Saudis feed money to the terrorists). in contrast Iran’s Sunni fundamentalism is less violent, more nationalist than terrorist – indeed they are quite effective in fighting ISIS and el Qaida. why are they our enemies? that’s a topic for Mark Rush (W&L politics) and Pat Mayerchak (retired VMI Intl Studies) on their WREL radio segments, as both are more knowledgeable about the region than I am.

ACA:  In California I saw a video put together by a reporter who asked people on the street, most hated “socialist” Obamacare, but loved the Affordable Care Act. of course they are one in the same thing. so if the people on the street base what they say on experience they get it right, the policy has been a big success. but the average person is unable to translate that into what they hear on Fox news and the presumption that Obamacare can’t be very good that comes from “balanced” reporting that gives air to “the other side” (even when the facts show there is no other side!!)

This should serve as a caution as the Republican primary heats up. Most of what I’ve heard doesn’t make sense, and some of what is coherent is either wrong or would be bad policy. The primary is about putting together sound bites, not putting together policy. As we approach next year we’ll have platforms and position papers (speeches), but for the moment most of what is said on the hustings leaves me as an economist speechless, nothing to analyze.

Interest Rates: Fed already acting. Taper: $2.09 tril to $1.94 tril or -9%. most of the other special lending has been nil for 5 years. 30-year rates not as low as early this year, but have been falling since June and are under 3% so in fact didn’t lead to rising rates. now realistic expectations that the Fed will boost short-term rates by the end of the year. but remember rates are 0% and boosting will be to 0.5% at most, still low! in expectation 1-year rates have gradually risen to 0.4% and 3-year rates to 1%. the implication of a fairly flat yield curve is that a 1-year bond in 2018 will yield only 2.5%.

markets expect interest rates and inflation to remain very low.

China: lots of talk of depreciation, but it’s really a dollar appreciation, so overall the RMB (official name, yuan in common parlance) is stronger than a year ago given what’s happened in Europe, Japan, Korea and Southeast Asia as well as Canada and Mexico. the flip side is that it’s a great time to be an American tourist abroad. Japan is cheap – Airbnb at $50 a night – and Paris good. London less so, but they’re not on the Euro. anyway, to date the change is fairly small at 4% [update Thu afternoon: 5.6%], well within the range of volatility of major currencies.

that still leaves them with a strong yuan relative to a year ago, and certainly relative to 3 years ago.

furthermore China is doing what we’re asking, liberalizing their markets. Chinese savers (which includes lots of companies that can no longer find investments equal to their cash flow) don’t have diversified portfolios. all domestic, heavy on stocks and real estate and bank deposits that pay 0%. so foreign assets appear very, very attractive. now we’re poised to raise rates, while Chinese rates are falling. so if you were Chinese where would you park your savings? yes, in dollars!! so of course the dollar appreciates (the yuan falls) and that provides a trend that gives all the more encouragement for the large block of trend-driven Chinese investors to buy dollars while the getting is good.

[for students: Rudi Dornbush explored this in one of the early rational expectations macro models]