Mammon Among Friends

Fannie Mae and Freddie Mac: Look past the jargon, and you'll find a $5 trillion scandal

2008-08-07T03:37:00.001-07:00

My recent Perspective column in the Wichita Eagle.

The Good the Bad and the Ugly: The Weak Dollar, CIT's Bankrupcy, Aircraft Leasing

2009-11-05T12:32:00.000-08:00

1) The economic recovery: Real GDP grew at a 3.5 percent seasonally adjusted annual rate in the third quarter after falling five of the previous six quarters. Jeff Bator in the Wall Street Journal writes, "[A]fter a bullish report on manufacturing suggested the smokestack sector is in a hiring mood., ...U.S. factory goods orders rose in September...0.9%, the Commerce Department said Tuesday, the fifth increase in six months. Orders fell an unrevised 0.8% in August."
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World trade bottomed out in April and our national economy's recovery started in June according to my best estimate.

2) The main opportunities and threats to recovery here in Wichita: the weak dollar is helping make American aircraft more competitive vis-à-vis Airbus and Embraer. In the Wall Street Journal, Mike Spector Vanessa O'Connell and Kate Haywood reported that CIT filed for bankruptcy "in New York, listing assets about $71 billion and nearly $65 billion in liabilities." CIT's bankruptcy shows the fragile financial shape of the aircraft leasing business. CIT Aerospace is a major aircraft lessor with aircraft worth something in the vicinity of $10 billion.

Seven aircraft leasing companies (GE Capital Aviation Services, AIG's International Lease Finance Corporation, CIT Aerospace, Royal Bank of Scotland Group PLC's RBS Aviation Capital, Bank of China's BOC Aviation, Pacific LifeCorp Inc.'s Aviation Capital Group, and Pembroke Group, a unit of Britain's Standard Chartered PLC) are big customers of the aircraft manufacturers. Last fall, we were shocked to discover that AIG was Boeing's and Airbus' biggest customer. Daniel Michaels at the Wall Street Journal estimates that approximately 35% of the world's jetliners are owned by these lessors. Thus these lessors' own $147 billion of the world's $417 billion worth of jets. The larger lessors are all in shaky financial shape. This means the biggest set of customers for Airbus and Boeing (Spirit's customers) face severe financial constraints to their buying planes.

Earlier we wrote, " AIG has been trying to sell ILFC for a year. 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 commercial side of the aircraft industry has held steady so far. With Wichita's unemployment rate at 8.6 percent, let us pray this is not the other shoe ready to drop.

AIG's Financial Crisis and Boeing's Biggest Customer

2009-08-31T06:45:00.000-07:00

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

Henrique de Campos Meirelle On Brazil's Success Through the Financial Crisis

2009-10-20T07:18:00.000-07:00

Henrique de Campos Meirelles is the Governor of Banco Central do Brasil. Maybe Ben Bernanke could learn a thing or two from this interview with the economist:

Maybe You Prefer Pisner Urquell or Budweiser (from České Budějovice!) or Klášter, But István Szoke Thinks Staropramen Is a "Hidden Gem."

2009-10-15T18:27:00.000-07:00

The MoneyMeisters (I can not call them breumeisters) at Anheuser Busch InBev are shuffling their portfolio. They are selling to private equity investors, CVC, their eastern and central European operations and distribution system for $2.2 billion. Matthew Curtin judges "CVC is paying around nine times last year's Ebitda assuming it hits its return targets, triggering another $800 million payment to ABI. CVC will fund the deal with $1 billion in debt raised from a variety of banks. The three times debt to Ebitda is well below the six times-plus multiples typical during the boom." EBITDA is earnings before interest, taxes, depreciation, and amortization. It is an operating cash flow approximation that is often used in valuations. Lex in the Financial Times adds, "Evolution Securities estimates $2.23bn represents about eight times 2009 earnings before interest, tax, depreciation and amortisation. That is some way below the 10 times-plus of big boom-era beer deals but for AB InBev it is respectable enough, given the potential extra $800m payments."

Matthew Dalton fills out the price: "AB InBev will receive $1.62 billion in cash for the Central and Eastern Europe assets. AB InBev will also receive a $448 million unsecured deferred payment obligation from CVC with a six-year maturity that can be extended 2 years, paying interest at between 8% and 15%. Finally, AB InBev will get $165 million in minority interests."

He tells us "The operations being sold are located in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia." CVC gets to "brew and/or distribute Stella Artois, Beck's, Löwenbräu, Hoegaarden, Spaten and Leffe -- AB InBev's main brands in Europe" in those countries. They acquire, among other brands, Staropramen.

InBev wants to focus on big brands in big countries.

But how good a deal is it for the buyers? Yes they are paying less than the heady multiples of the bubble years. It looks like they have been clever in structuring it. Interestingly, according to Martin Arnold and Philip Stafford, "István Szoke, head of CVC’s new central and east European buy-out team, told the Financial Times that Staropramen was 'the hidden gem' among the assets."

The deal turns financially on buying at the bottom and an eventual recovery in revenues as the local economies recover. Mr Szoke told FT, "We think we are buying this business at somewhat of a trough, as we expect the [east European] region to recover and grow, which will benefit the top line of the company." The Czech Republic, a world leader in beer consumption, is like the caboose on a train in the globalized economy. “We were surprised by how hard beer consumption has been hit in the region,” said Mr Szoke. “But beer consumption is driven by disposable income and that will recover once this crisis ends in a year or so.” Since world trade started turning around in early spring, maybe the caboose will make back to the pub by next year.

The Rise of the Loonie

2009-10-15T16:25:00.000-07:00

The Canadian dollar is so strong, the Bank of Canada may intervene lest a too strong Loonie stifle the recovery north of the border.

The State of General Aviation and the Consequences for Wichita

2009-10-15T13:13:00.000-07:00

The National Business Aviation Association conference is opening in Orlando, Florida next week. It and surrounding events will provide focus the business world's attention on general aviation and the economic hammering it has taken. The Wichita Eagle's Molly Mullins in a big Business Section feature surveys the damage, "The state of Kansas' business aviation industry."

She writes:

"Nobody saw this coming.

"Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program.

"The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall.

"A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow."

Back in March, 2008, I argued that the national economy had been in a recession for six months or more ("What is Good for Wichita Is Hemlock for Wall Street.") The National Bureau of Economic Research eventually dated the recession to have started in December, 2007. Few fully appreciated the extent of the general aviation bubble ("2007 Increasingly Looks like It was a Bubble Year for the Aircraft Industry.") The bursting, when it came in the fourth quarter of 2008 was dramatic.

Peter Sanders at the Wall Street Journal reports on the effect of the aviation downturn on Wichita's economy noting that "more than a quarter of the area's aviation work force has been let go, not including thousands more layoffs among parts suppliers and support businesses."

Cessna's New Orders "Nosedived" In the Fourth Quarter of 2008

To amplify Sanders' report, Cessna's new orders, net of cancellations, averaged about $2.4 billion a quarter in the first three quarters of 2008. They fell over 80 percent to $400 million in the last quarter. (These are my estimates based on Textron financial reports.)

Outsourcing

Sanders also reports on a "recent push to manufacture offshore that many Wichita aerospace companies have embarked on. Some companies have opened operations in Mexico. During the boom times in late 2007, Cessna announced it would build a new, small propeller plane in China. That plane would be shipped to Wichita for reassembly and delivery to U.S. customers.

"While the companies are guarded about their plans in light of the downturn, officials concede that it is unlikely that they would expand their Wichita operations beyond today's level. Any future growth would probably happen abroad."

Commentary

A few points:

1) 2007 was a bubble year for general aviation. Look at the new orders data.

2) The bubble was fueled by the same over expansion of credit that fueled the housing bubble.

3) The negative short term interest rates of 2002-2004 enabled (should I say caused?) the credit over expansion.

4) The general aviation industry over expanded in 2008.

Fun Question: Would Cessna have expanded production as much in 2008 had it been independent rather than owned by Textron?

5) On the commercial front, Boeing expanded much more cautiously. Compare Boeing's production in the run-up to this recession with its production in the run-up to the 2001 recession. This has allowed Spirit to hang tight and manage for the longer run.

Fun Question: Do you attribute that to good management, conservatism, or technical delays?

6) Hypocrisy in Washington about corporate jets is business as usual. Congress votes to appropriate for themselves a more elaborate fleet of planes than the Air Force requested. Simultaneously, it pillories corporate executives. (For the Journal, Brody Mullins and August Cole reported in August, "the House more than doubled the [Air Force's] request to $550 million for a total of eight new passenger planes for use by government VIPs.")

7) Outsourcing has its drawbacks as the yo yo economy of 2008 demonstrates.

8) Outsourcing means having less control. Boeing has had to buy back three of its suppliers to get the Dreamliner back on path.

9) The administration's fiscal policy and the Fed's monetary policy represent more than the benign neglect of the 1980s. This may be Washington's real industrial policy. Let the dollar get so worthless that manufacturing will find it cheaper to come home. We can debate whether that is a plan.

In the long view of things, Wichita's current 8.9% unemployment rate (10% in July) is collateral damage from Alan Greenspan's and Ben Bernanke's misjudgment that preventing bubbles was not their job. As in the refrain from the old Pete Seeger song goes, "When will they ever learn?"

Elinor Ostrom and Oliver E. Williamson Win the Nobel Prize In Economics

2009-10-12T06:49:00.000-07:00

"Governance" is the key word in this year's economics announcement. How do people come up with organizational solutions to problems other than individulalistic market transactions or centrally imposed solutions? How do they solve issues of collective rights?

The Committee tells us "Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

"Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes."

Understanding why the firm exists is one of the crucial questions of economics and not one extensively explored in mainstream economics.

I am fascinated by Ostrom's award. How people work out collective rights with neither a simple market solution nor government imposing one is a great area of inquiry. Here we get to the nexus between law and spontaneous order. What is the relationship between economic regulation and property rights? When does positive law harm collective decision making? I have some reading to do!

One issue from the financial crisis to which Ostrom and Williamson's work is directly relevant is whether investment banks behave more responsibly as partnerships rather corporations. Their excessive risktaking seems directly related to their going public.

Speaking of the financial crisis and organizational forms, maybe the committee should give George Benston the Nobel prize posthumously for demonstrating empirically that banks with investment affiliates performed better than those without. In other words, Glass Steagall's separation of investment from commercial banking was more about Senator Glass's Anglophilia than economic sense. Glass Steagall left investment banks outside prudential regulation. If the SEC had that responsibility, it is hard to see it in its history. Thanks to the structure set up by Graham Leach Bliley, all the major investment banks are either owned by a commercial bank or have become bank holding companies and are now under the Fed's prudential regulation.

Moral Hazard

2008-01-28T22:52:00.000-08:00

Moral hazard is the prospect that a party entering a contract becomes insulated from a risk and that insulation causes him or her to behave differently to the other party's peril. The contract changes incentives and the changed incentives causes one party to behave differently. A few examples will clarify this.

If you rent a car or your residence to someone, you, as the owner, run the risk that your renter will not treat it the way you would treat your own property. By entering into the rental agreement, you, the lessor, incur moral hazard. If you doubt moral hazard exists in rental contracts, ask yourself why landlords require deposits, and why you as a used car buyer worry more about a rental car than one you buy from the sole owner.

Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore acts less carefully than he or it otherwise would. This leaves another party bearing some responsibility for the consequences of those actions.

Insurance is rife with moral hazard: Why? An insured party's behavior will be riskier than it would have been without the insurance.

In life insurance, moral hazard can arise when the insured can self select. A life insurance company bases its rates on the actuary tables for the average person. If I know everyone in my family has died young, it make sense for me to buy more insurance than normal. This adverse selection will cause the life insurance company to undercharge me for the true risk of my living less the actuarial tables predict.

In banking, deposit insurance creates moral hazard. Consider a hypothetical bank we could call Loan Prone Savings and Loan. The FDIC insures Loan Prone's deposits. The bank gets in trouble. Loan Prone's loans are not sufficient to pay off its depositors. Perhaps its books do not yet show its true condition. They comply with banking regulations, but they do not show the true value of the loans. What can Loan Prone's managers do?

They note that if the bank can get more funds (by taking in more deposits), it could make some new loans. So Loan Prone offers an above market interest rate to attract more deposits. There is no risk for the depositors, their deposits are insured. Note: without deposit insurance, depositors would have a strong incentive to investigate a bank's soundness. With deposit insurance, that incentive is gone.

The bank does not care if its losses grow, Lone Prone is already "in the soup." Maybe it can recover enough from the new loans to get back in the black. Thus Loan Prone hopes that it can find some profitable investments to recoup its loses. It goes for higher interest, but riskier loans. It is gambling to get back into the game. The depositors do not care: the FDIC is going to get stuck paying off them off even if the loans go sour.

Neither the the bank nor the depositors are behaving the way they would in the absence of deposit insurance. That is the essence of moral hazard.

The Unemployment Rate Goes to 9.7% and Payrolls Drop "Only" 216,000

2009-09-04T06:44:00.000-07:00

The Bureau of Labor Statistics reported on the August employment situation this morning.

The Nation

The national unemployment rate rose to 9.7 percent in August from 9.4 percent in July and 9.5 percent in June. The size of the labor force still reflects the upsurge we saw at the beginning of the summer. The month to month variation in th employment rate mostly reflects the sampling variation in the proportion of respondents who say they have jobs.

Non-farm payrolls fell by 216,000 in August.

April Is the Cruelest Month

The Bureau of Labor Statistics survey of households shows a drop of 1,351,000 employed since April, while the payroll survey shows a fall of 1,258,000 jobs. The good news is that new unemployment claims peaked in April. Historically this has been a reliable indicator of a recession's end.

Wichita

Although BLS did not report job losses for the aerospace industry, transportation equipment other than autos and auto parts fell by another twelve hundred for a total loss of 17,100 since April.

Bernanke To Get a Second Term as Chair

2009-08-24T20:46:00.001-07:00

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.

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

2009-08-21T10:12:00.000-07:00

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."

The BRIC Rally Is Based On Fundamentals

2009-08-13T14:57:00.000-07:00

Dominic Elliot told us in the July 27th Wall Street Journal that "the 'BRIC' acronym [was] created in 2001 by a team led by Jim O'Neill, Goldman Sachs Group's chief economist to mean Brazil, Russia, India and China. The bank fashioned the acronym while making a prediction about the speed of growth of the four biggest emerging markets."

In his interview with Mr. O'Neill, you will find his case that their recent spectacular stock market performance is based on fundamentals.

China Is #2 In the GDP Tables

2009-08-14T14:04:00.001-07:00

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.

Where There Is a Way, Is there a Will?

2009-08-11T10:43:00.000-07:00

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!

2009-08-11T06:34:00.000-07:00

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."

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

2009-08-08T20:47:00.000-07:00

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.

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

2009-08-07T06:38:00.000-07:00

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.

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

2009-08-05T10:16:00.000-07:00

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.

Second Quarter U.S. GDP Down I

2009-07-31T07:08:00.000-07:00

How much America produces as measured by its Gross Domestic Product fell again in the second quarter which ended June 30th, 2009. The decline of about one percent was in line with consensus estimates. No surprise to the stock market which rallied yesterday in anticipation. You could say the increase in pain is slowing down or as economists would put it the economic decline is decelerating.

Analysis

How did we get to a -1 percent seasonally adjusted annual rate of decline in total spending from a 6.4 percent decline in the first quarter? The huge declines in investment spending turned into more modest declines in the second quarter. This improvement would have gotten us back to zero but the rest of the accounts deteriorated by about one percent.

Government spending went from a net drag on the economy to a net addition to aggregate demand. Consumption spending fell however. While bad for contributing to domestic demand, it is a step toward correcting the fundamental imbalances that enabled the Great Financial Bust.

Exports contributed less and imports contributed more the growth in spending than in the previous quarter. For four straight quarters, import reductions have offset export losses to make a net positive contribution to the demand for American products and services. You could say we have helped ourselves by exporting part of the recession.

Has the Recovery Begun?

While my initial call that the U.S. economy toughed in March looks a tad optimistic, it now seems most likely that the turning point was in second quarter.

Revisions

The scorekeepers in the Commerce department's Bureau of Economic Analysis revised the history, so do not be surprised to find out that what you thought you knew about past cycles has been thrown down the memory tube (if you do not catch the allusion to 1984, add Orwell's book to your "Must Read List.") I do see that the BEA now shows one negative growth for 2008 quarter.

If You Think Wichita's Unemployment Is Bad, Look At Detroit's!

2009-07-29T09:49:00.000-07:00

The Bureau of Labor Statistics summarized the employment situation for the country's states and metropolitan areas. As announced earlier by the Kansas Department of Labor, Wichita's unemployment rate is 8.5 percent. That is up from 8.3 percent in May and is a lot worse than a year ago when 4.2 percent of Wichita's workforce was out of work.

While the number of unemployed has more than doubled in a year, the actual number of people saying they have jobs is down less than a half percent. Some of this discrepancy may reflect the inevitable variation arising from any statistical sampling of households. It could also mean more people are looking or saying they are looking for work as secondary wage earners seek to help out when the primary bread winner is laid off. The increased labor force participation may also come from an increase in the federal minimum wage. Firms may also be reacting to the new minimum wage by hiring more experienced, more productive, higher paid workers to replace less experienced workers.

Wichita looks good in comparison to the rest of America. Fifteen states have double digit unemployment rates. The Detroit-Livonia MSA has the dubious distinction of "achieving" more than double our our unemployment rate at 17.1 percent.

Yes, Virginia, the Fed Does Have An Exit Strategy

2009-07-21T07:21:00.000-07:00

Xinjiang Is more Important than a New International Moneary System for China's Hu Jintao

2009-07-10T14:05:00.000-07:00

The drama at the G-8 meeting in Italy came when China's Hu Jintao deserted the conference before it began.

Richard McGregor and Kathrin Hille explain Mr. "Hu, the president and communist party head, convened an emergency meeting of the leadership, the nine-member inner-circle of the Politburo, hours after arriving home on Wednesday from his truncated G8 trip to Italy.

The management of the crisis is a high-profile test for Mr Hu, who must satisfy the demands of hardliners within the party for a tough response, with an eye on the sensitivities of Muslim countries offshore.

China has blamed Sunday’s violence in Urumqi, which left 156 people dead and more than a thousand injured, on Xinjiang’s indigenous Muslim population, the Uighurs."

Thus it was Mr. Hu's surrogate that delivered China's call for a less dollar dependent international monetary system.

As George Parker, Guy Dinmore, Krishna Guha, and Justine Lau tell it "China attacks dollar’s dominance:" (FT: July 9 2009)

"China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world’s biggest economies.

"Dai Bingguo, Chinese state councillor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialised nations – including US President Barack Obama."

China has already taken concrete moves toward a reduced reliance on the greenback:

"China moves to cut reliance on dollar"

By Richard McGregor in the Financial Times, July 3 2009, Page 19

China has taken another step towards internationalising its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi.

The regulations released by the People's Bank of China, the country's central bank, will allow approved companies to settle transactions through financial institutions in Shanghai and other cities in southern China.

Offshore, the trial scheme will allow transactions to be settled in renminbi in Hong Kong and Macao, the two self-governing territories on China's southern borders, and later in a limited fashion in south-east Asia as well.

Importers and exporters will be able to place orders with authorised Chinese companies, and settle payment for them, in renminbi.

Although it has no short-term implications for the full convertibility of the renminbi, the announcement adds to the volley of political signals Beijing has sent recently over its dissatisfaction with the US dollar.

"To many minds in China the US dollar's time is almost up, the eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours," said Stephen Green, of Standard Chartered, in Shanghai.

"For them, the renminbi is an obvious, and imminent, replacement."

Far from being a replacement for the dollar as a freely-traded reserve currency, the move has been justified by the PBoC initially as assisting exporters buffeted by the greenback's fluctuating value.

"Companies in China and neighbouring countries are facing relatively large risks of exchange-rate fluctuations because of big swings in the US dollar, the euro and other major currencies used for settlements," the PBoC statement said.

The rules have also been expressly drafted to ensure that the new regime is not used to circumvent China's capital controls, by requiring supporting documentation for transactions.

"Domestic settlement banks should take effective measures to know the nature and purpose of their clients' trading," the central bank said.

The announcement of an offshore role for the renminbi chimes with China's call earlier this year for a new reserve currency.

He Yafei, a vice-foreign minister, said in Beijing yesterday that China supported reserve currency diversification in the future and that it would be "normal" for the issue to be raised at the G8 talks.

The volume of trade conducted under the new rules is expected to be small initially, but over time it should increase demand for the renminbi.

Copyright The Financial Times Limited 2009

It's Abut Time Someone Did: Asian Officials Push Back Against Savings Glut Theory

2009-07-09T14:06:00.000-07:00

On July 3rd, Andrew Batson at the Wall Street Journal reported: "Asian officials and scholars are pushing back against the notion that their countries' high savings helped cause the financial crisis by flooding the world with money, arguing that lax U.S. financial regulation bears the brunt of the blame."

Alan Greenspan and then Governor Bernanke made these arguments when the Fed was keeping the federal funds rate negative.

European Air Traffic Down

2009-07-07T20:04:00.000-07:00

The Wall Street Journal's Kaveri Niththyananthan reports, "Several European carriers Tuesday reported falls in traffic for June, historically the month when travel starts to pick for the peak summer months."