Tuesday, December 16, 2008

Will China's Economic Slowdown Bring Political Unrest?

Conventional wisdom has it that China's economy must grow at least 8% to absorb the new workers pouring into its cities. Geoff Dyer in Beijing reports that the World Bank forecasts it will fall short of that next year "as it sharply cut its outlook for the country’s economy." As its economic growth falls from from recent double digit, the People's Republic faces danger as it approaches the thirtieth anniversary of Deng Xiaoping's opening to market forces. Also in the Financial Times, Gideon Rachman comments, "the only recent examples of social unrest in one of the world’s main economies have come there, not in the west. Laid-off workers in factories in southern China have staged protests that had to be contained by riot police. There have also been strikes and violent protests by taxi drivers in some cities across the country. The notion that the Chinese economy has so much momentum that it has 'decoupled' from the US looks like a myth."

Sunday, December 14, 2008

Deconstructing Fed Speak

Brian Sack of Washington-based Macroeconomic Advisors and a former senior Fed staffer discusses how the Fed explains itself:

Thursday, December 11, 2008

If China Sneezes, Will Wichita Catch a Cold?

China is very much in the news and that news is worrisome for Wichita's economy.

The conventional wisdom among world economy watchers has been that while the U.S., the Eurozone, and Japan contract, the BRIC countries, Brazil, Russia, India, and China, will make significant contributions to global economic growth. The conventional wisdom took a blow this week. There were shocking reports that the Chinese economy is faltering.

Andrew Batson and Gordon Fairclough report, "Steep and sudden declines in China's imports and exports show the country's economic slowdown is entering a new and more serious phase -- exacerbating the global slump while challenging a generation of Chinese companies and workers used to steady double-digit gains in sales and salaries." David Winning provides more evidence: "China's monthly crude oil imports in November hit their lowest level this year, providing more evidence that a weakening domestic economy is translating into sharply reduced oil demand." Furthermore, he tells us, "Preliminary customs data Wednesday showed China imported 13.36 million metric tons of crude in November, equivalent to 3.26 million barrels a day. That's down 17.3% from October, despite a fall in crude oil prices over the month." Winning quotes "Paul Ting, an oil analyst who tracks oil trends in China, [who] said in a recent report that demand in China is now declining more swiftly than in the U.S., where oil use is falling at a pace not seen since the 1980s."

External demand has been driving the aircraft industry's prosperity. New orders made 2007 a boom year. Now things look quite different. Lex in The Financial Times reports:

"While all eyes were on Washington, Beijing was patching up gas-guzzlers of its own. On Wednesday night, China Eastern and China Southern, two of the big three state-owned airlines, announced equity injections from their parents. Both surged when they resumed trading yesterday after a fortnight's suspension. Air China was up too, in their slipstream.

"Fate has been dealing from the bottom of the deck for a while. This year alone, natural disasters and forced groundings during the Olympics have been compounded by a depreciating renminbi and huge wrong-way bets on fuel prices. China Eastern, the weakest of the three, admitted last month that fair-value losses from hedging surged six-fold in October, to almost $300m.

But while the help is welcome, it will not offset the airlines' main problem: flagging passenger and cargo revenues. Aggregate losses could top $800m this year. Admitting overcapacity for the first time, Beijing has banned new entrants to the industry until 2012 and is urging existing carriers to cancel orders. About 180 new planes are on order for 2009. This will expand the total fleet by one-seventh. At least 40 per cent of deposits on those orders have been paid, and penalties are probably too high for them to default on the remainder. Delaying delivery and letting aircraft moulder in manufacturers' hangars may not delight Boeing or Airbus but seems the smartest way to address falling loads and slashed fares.

"Textbooks say consolidation is the answer. But synergies from combining carriers across vast geographical areas with big cultural differences have never added up - Southern and Eastern, after all, are still integrating airlines they merged with six years ago. And Beijing, like Detroit, is still wedded to a vision of three big national champions bestriding the mainland - even if they are sustained by the drip-drip of state aid." -copyright, The Financial Times Limited 2008

Tuesday, December 09, 2008

The GSEs Knew They Were Taking On Higher Risks

The Wall Street Journal's James R. Hagerty tells us that the brass at Fannie Mae and Freddie Mac knew they were taking on risks. He writes, "The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets."

Fannie went through three chief risk officers between 2004 and 2008. As the financial crisis approached they cut their spending on risk control.

Did Freddie fire David Andrukonis for opposing their getting into NINA (no income, no assets) mortgages?

It was not just about market share. They were trying to please their congressional allies, or should I call them their unindicted conspirators.

Central Banks Slash Rates

Last week, Joellen Perry in the Wall Street Journal announced: "Central Banks Deliver Sweeping Global Rate Cuts." But Perry warned, "However, Reductions May Be Losing Impact as Turmoil Continues."

The Financial Times' Dave Shellock reported "A series of aggressive interest rate cuts by European central banks failed to lift the mood in financial markets yesterday as investors continued to fret about the global economic and corporate outlook.

"Government bond yields on both sides of the Atlantic touched historic lows, credit spreads remained at distressed levels and oil prices fell, leaving equities struggling to gain traction."

Tuesday, December 02, 2008

Stock Rally?

Is this the start of the rally that is a harbinger of an economic recovery? The Associated Press's Tim Paradis reported that the stock market scored "gains of 16.9 percent for the Dow since the rally began Nov. 21, 19.1 percent for the S&P 500; and 16.7 percent for the Nasdaq." For the S&P 500 that represented "the largest five-day percentage gain since March 16, 1933." True half of that was regaining what the market lost in the first two days after the election. Yesterday, we gave some of that back.

Monday, December 01, 2008

The NBER Votes for December, 2007 as the Cyclical Peak

It is now official. A recession began in 2007. The National Bureau of Economic Research's Dating Committee met by phone Friday and made that decision. Looking at monthly indicators and cross checking them against various ways of aggregating quarterly GDP, they judged the recession started in December of last year.

But the Dating Committee should beware. Its analysis is vulnerable to revisions. The data as currently reported shows payroll employment peaked in December, 2008. The Committee looked at various other significant indicators peaked between November, 2007 and June, 2008. Our experience from the 2001 recession was that the payroll employment data got revised down dramatically well after the fact. Since the Bureau of Labor Statistics (BLS) adjusts the data each month for firm births and deaths, it overestimates job growth during recessions. I expect the same will happen again. That would move the payroll employment peak back. A downward revision in payroll employment would also cause personal income minus transfers and GDP to be revised downward.

I agree the economy turned down in 2007. I would argue for an earlier date than December: perhaps one of the summer months. The household survey data indicate an earlier downturn. Employment divided by population peaked in December, 2006 (i.e. a year earlier) and the unemployment rate bottomed out in March, 2007 (nine months earlier.) I rely on the ratios because they avoid difficulties associated with the time series of the household employment aggregates. The household data should do a better job of picking up employment weakness tied to the sectors at the center of the drama: mortgage brokers, real estate agents, and construction workers. Housing starts peaked in January, 2006 (a month or two earlier if you look at the moving averages) and had fallen about 40 percent by summer, 2007.