Monday, August 31, 2009

AIG's Financial Crisis and Boeing's Biggest Customer

Boeing and Airbus's biggest commercial customer is not an airline but the fallen insurance giant, AIG (see my earlier  posting "Who's Boeing's and Airbus's Biggest Customer? Would You Believe AIG?") AIG's financial Götterdämmerung forced International Lease Finance Corporation (ILFC),which it owns, onto the Fed's life support system last October.  When AIG lost its investment grade rating, ILFC could no longer access the commercial paper market to roll over its short term debt.

AIG has been intent on paying off the $80 billion federal debt that keeps it in bondage to Washington.  The strategy has been to sell off assets.  The flaw in this strategy has been that you get Filene's Basement prices not Neiman Marcus prices when you dump assets at market bottoms when buyers know you have to sell and the few who have the cash bargain hard.  In the Wall Street Journal, Matthew Karnitschnig and Liam Pleven tell us AIG's new CEO, Robert Benmosche, is reconsidering its asset sales strategy

AIG has been trying to sell ILFC for a year.  Now Peter Sanders and Daniel Michaels also at the Wall Street Journal write that Steven F. Udvar-Hazy, chairman and chief executive of International Lease Finance Corp., is trying to work a deal whereby he and investors carve out a part of ILFC and go it alone.  The investors are supposed to be mostly from the Middle East and China.

The Hungarian born "Mr. Hazy is a co-founder of ILFC, which now owns about 1,000 aircraft, most of which are leased to commercial airlines world-wide. ILFC is the largest customer of Boeing Co.'s upcoming 787 Dreamliner, with 74 planes on order."

It is important to Spirit that a major support for the demand for commercial aircraft have the financing to buy planes and maintain its existing portfolio.  Boeing was more conservative expanding production in 2008 than its general aviation brethren seeking not to repeat the mistakes of the late 1990s.   So far Spirit has done a laudable job maintaining its workforce for the future.  We in Wichita where the unemployment rate is now 9.9 percent hope that continues. 

Steven F. Udvar-Hazy and General John R. "Jack" Dailey at the overlook of the new Center.
Photo by Carolyn Russo, National Air and Space Museum

Monday, August 24, 2009

Bernanke To Get a Second Term as Chair

President Obama is scheduled to announce that Princeton Professor Ben Bernanke will be renominated to a second term as Chairman of the Federal Reserve 's Board of Governors. It is not official. The ritual requires that the Fed Chairman fly from Jackson Hole to Martha's Vineyard: two of the least connected places in the U.S. of A. by commercial aircraft. (You thought flying from Wichita was wearisome.) Maybe he will fly one of those chartered planes they use to clear checks faster. Or (Scandal! Scandal!) a corporate jet!

I have said before that it is virtually Providential that this particular economist (Ben Bernanke) should be Fed Chairman at this point in America's history. As a young economist, Ben Benanke demonstrated that it was the financial collapse of intermediaries that transformed an ordinary economic downturn in 1929 into a world wide depression.

Right now, the peculiar world of macroeconomics is not centered in New York, Washington, London, or Frankfort, but in a tiny resort in the Grand Tetons: Jackson Hole. Having dragged a popup trailer over the 7,000 foot Grand Teton Pass, I can testify to the rugged beauty of this very isolated part of Wyoming. Malcolm, Jr. when we went cross country noticed that we had not in the whole state of Wyoming seen a town where the population was greater than the elevation.

The Wall Street Journal reports that the economists meeting in the Federal Reserve Bank of Kansas City's economic conference were rooting for Ben Bernanke to be reappointed. According to Jon Hilsenrath, "The economists and officials from around the world who met in the Grand Tetons are a naturally sympathetic audience.

"The group largely admires the aggressive, outside-of-the-textbook steps Mr. Bernanke took last fall after Lehman Brothers Holdings Inc. collapsed. "

Hilsenrath quotes Martin Feldstein"This is a group of people who like the Fed....Ben came to the Fed as an expert's expert on fundamental monetary policy and went far beyond that with all of his creative policies."

Unfortunately, I am not confident that Professor Bernanke has learned the lesson of the early 2000s. Unemployment was high after the 2001 recession not due to a lack of aggregate demand, but because many suffered the unpleasant effects of mal-investment.

If he believes that monetary policy is not responsible for bubbles and that the only short term worry is deflation of consumer prices, we are all in trouble.

Friday, August 21, 2009

Wichita's Unemployment Rate Jumps from 8.5% to 9.9%

The Kansas Department of Labor reported today that Wichita's economy lost 4,671 jobs in July and the unemployment rate hit 9.9 percent.

Seasonality plays a big part of it. In the Eagle, Dan Voorhis rightly points out that "The Wichita unemployment rate typically peaks in the summer months because some workers are laid off temporarily and claim unemployment. That may be exaggerated this year by employee furloughs." The summer labor force also reflects school leavers and youngsters looking for summer work. Some of this month's high unemployment rate reflects this.

Wichita's labor force participation rates have run about seven tenths of a percent higher than average in July, although the seasonal increase is greater when employment is scarcer. Comparing July this year with July two years ago, the labor force has grown about 21,300. A little over a third of that is population growth and a bit less than half is the increase in the labor force participation rate. So more people are looking for work either to supplement the lost income of families hit by the recession or to take advantage of the increases in the minimum wage. The federal minimum wage rose in the second of three steps in July. A seasonal reduction in the work force in August may keep us below 10%, but it is a touch and go proposition at this point.

The Kansas unemployment rate rose from 7% to 7.7 percent while Kansas payrolls shed 48,500 jobs. Labor Economist Tyler Tenbrink comments, "The amount of over-the-year job losses dropped from 54,800 jobs in June to 48,500 jobs in July. Although this is still a significant loss, it indicates that the rate of job loss did slow from last month. It remains to be seen if July will begin a new trend of slowing job loss or if we will return to the more rapid pace of job loss we were experiencing in the months prior to July."

Friday, August 14, 2009

China Is #2 In the GDP Tables

Wikipedia summarizes the rankings of the world's economies measured by GDP at Purchasing Power Parity (PPP) prices. The U.S. is #1 still, but China is now #2.

Tuesday, August 11, 2009

Where There Is a Way, Is there a Will?

Not too long ago George Melloan asked on the Opinion pages of the Wall street asked a troubling question:

"Federal Reserve Chairman Ben Bernanke assured readers of this page (“The Fed’s Exit Strategy,” July 21) that he has the tools to prevent the huge reserves he’s pumped into the banks from generating an inflation that would abort an economic recovery.

"But does the Fed have the guts to use those tools?"

There You Go Again, Mr President!

The editors of Wall Street Journal wonder if Ginnie Mae is "The Next Fannie Mae?" Specifically they worry, "Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages." They explain, "Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration [the FHA], which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee."

In August, 2008, I deplored the Financial Industrial Complex, the lobbyists and investment bankers that have Congress wrapped around their fingers, in "Fannie Mae and Freddie Mac: Look Past the Jargon, and You Find a $5 Billion Scandal." The federal government's takeover of Fannie and Freddie effectively transferred private sector and foreign government losses to the American taxpayer. Now the Administration is continuing that practice on what promises to be a grand scale using Ginnie Mae. The lobbyists, their congressional clients, and the administration are happily portraying this fiscal folly as "feeling the homeowners' pain" and "dealing with the foreclosure problem."

No doubt the administration's complicity in the renewed supply of dodgy debt will keep the Chinese happy (they have a huge exposure to American mortgage backed securities) and it indirectly bails out the Fed (have you looked at the Federal Reserve Bank of New York's balance sheet lately?) The Financial Industrial Complex, which you think would be hiding in disgrace, is riding high. I past a car yesterday, and it was not a Mercedes or an SUV, which had written on its window in soup: "Honk, if I am paying your mortgage."

Mark Twain once boasted, "We have the best Congress money can buy."

Saturday, August 08, 2009

China May Be the World Economy's Engine of Growth, But Are Mr, Han's Gauges Accurate?

Earlier this week, Jamil Anderlini wrote in the Financial Times that "China’s gross domestic product figures" do not add up: "the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.

"GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.

"All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year. [read more]"

Since China is becoming such an important economy, what its economy does moves world stock markets. Given commentators' cult of GDP as a metric, the shakiness of China's national income accounts drives prudent investors to their worry beads.

Friday, August 07, 2009

Good News (Or Less Bad Bad News) From Labor Markets

The Bureau of Labor Statistics issued its employment report this morning. The unemployment rate fell from 9.5 percent to 9.4 percent. While the fall is not significant–month the month sampling variation can move it that much–it is a far cry from the large increases we have grown accustomed.

Jobs fell by 237,000 according to the payroll survey. This was less than half the monthly decline earlier this year and over 200,000 less than the average monthly job loss over the last twelve months.

A seeming bright note for Wichita: a first look at the payroll data indicates that jobs in the aerospace industry stopped their declines and may actually have risen. But I do not trust it. To get a rough estimate of what happened in the aerospace industry, you have to back into a number by subtracting out motor vehicles employment from transportation equipment employment. The bulk, but not all, of the rest is our own dear industry. For July when you make that estimate it shows a small increase in jobs on a seasonally adjusted basis. However, when I cross checked it against the unadjusted data, there was a 12,000+ decline. Unfortunately for us, the "good news" is simply an artifact of the seasonal adjustment process. Expect Wichita's unemployment rate in July to rise, not fall.

Wednesday, August 05, 2009

The decline in the Euro-zone's output is close to an end.

Why the Euro-zone's industrial output looks like it may decline for the fourteenth month, it looks like it is hitting bottom. Paul Hannon and Nicholas Winning at the Wall street Journal report "Markit Economics said Wednesday that its final euro-zone composite output index - a key gauge of private sector activity based on a survey of some 4,500 manufacturing and services firms - rose to 47.0 in July from 44.6 in June."

Japan's industrial output is up for four straight months in the biggest four month sure in fifty years.