Comments on economics, mystery fiction, drama, and art.

Friday, October 31, 2008

Two Obituaries

Two of my favorite writers, who both epitomized what it means to be a public advocate for what they strongly believed, have died this week. While they wrote very differently, and in very different fields, their work has moved and informed me in more ways than I can count.

Tony Hillerman, who wrote mysteries set in the American southwest, died a few days ago at age 83. His obituary in the New York Times is here. (My brother told me about this; I was amazed I had not already heard.)

Addendum: I decided to re-read Hillerman's first book, The Blessing Way, in which the main character is a tribal policeman named Joe Leaphorn. I'd forgotten that this exchange is in The Blessing Way, but it's something that I have remembered since I first read the book. Leaphorn is talking to an older Navajo, a singer/healer, who asks Leaphorn if he believes in witches. Leaphorn's answer is: "My grandfather, I have learned to believe in evil." It is, unfortunately, a lesson the world still forces us to learn.

Studs Terkel, whose first name was really Louis (the "Studs" was adopted, apparently, from James T. Farrell's Studs Lonigan character), and who listened better and recorded more eloquently the lives of "ordinary" (many of whom turned out to be truly extraordinary) died today at age 96. Hard Times and Working remain among the most profound books I have ever read. His obituary in the Chicago Tribume is here. (Living, as I do, just outside Chicago, this was not something that it was possible to miss.)

I knew them only through their works, and that was enough, really, to have been profoundly influenced by them.

Thursday, October 30, 2008

Preliminary GDP, Third Quarter

You can read the Bureau of Economic Analysis press release here. Let's look at what's happening.

The bottom line is that real GDP declined in the third quarter (July - September) at an annual rate of 0.3%. This is the first quarterly decline since the third quarter of 2001, when real GDP fell somewhat at a somewhat faster annual rate..

The BEA presents data on changes at an annual rate, but it can be instructive to look at the changes from the a year ago as well.

Compared with the third quarter of 2007, here's what we find:

Real GDP:.............................................+0.81%
(Real GDP has not grown this slowly since the second, third, and fourth quarters of 2001.)

Real Consumption Spending:.............-0.04%
(This is the first time since 1991 that personal consumption spending has declined on a year-to-year basis. Spending on motor vehicles is down 14.7% from a year ago. Gasoline and other motor fuel purchases are also down, by 5.39%; much of this is a result of the recent dramatic declines in fuel prices.)

Real Investment Spending:...............-7.89%
(This is the 8th straight quarter that Investment spending has declined from a year earlier. Investment spending is now down 13% from its peak in the first quarter of 2006. The declines from a year ago are particularly large, one might almost say huge, in business purchases of transportation equipment--down 33%--and in residential construction--down 22%. Overall, spending on motor vehicles, for consumption and investment purposes, is down more than 19%.)

Real Government purchases:.............+3.11%
(This is lead by a 7.75% increase in defense purchases; state and local government purchases have increased by onlly 1.29%.)

Real Exports.:.......................................+6.87%
Real Imports:........................................-3.09%

Any day now, we should hear from the national Bureau for Economic Research that, yes, this is a recession. As if there are any remaining doubters.

Monday, October 27, 2008

The Federal Reserve's Index of Capacity Utilization

One more piece of bad news. I'm getting tired of this.

The Fed tracks capacity utilization in the private sector, and in September, the Index of Capacity Utilization reached its lowest level since Oceober 2003 (76.42 this year, 76.40 then). The Index is down over the past year by 6%. As year-over-year declines go this is nothing special, but it's not trivial either (the last time we had this large a year-over-year decline was in February 2002). This is 8th consecutive month of year-over-year declines (in the 2000-2002 period, we had 23 consecutive year-over-year declines; in the 1989-1992 period, 32 out of 33 months; in the deep 1980-1983 decline, we had 46 out of 50 months with a decline), so based on the recent past, another year-to-year-and-a-half of declining capacity utilization is not outside the realm of possibility.

Saturday, October 25, 2008

"Redefining" Small Business

Over at the Washington Monthly's web site, Steven Benen makes the following comments this morning:

"This week, "small business" no longer means what most of us think it means...The McCain campaign ta[k]es a comically expansive view of what constitutes a "small business." "

He then comments somewhat sarcastically on the introduction of the CEO of Marine Concepts (a firm with $67 million in nanual revenues) as a small business owner.

One would think that someone covering politics in Washington might know about the Small Business Administration, and that it might occur to him that the SBA might have a definition, or a set of definitions, of what a small business is. And that would be correct. The Small Business Administration defines a "small business" differently, depending on the industry (a table is here).

In general, a small business in agriculture has annual revenues (not net income) of $750,000 or less. In manufacturing, a small business generally employs 500 (sometimes 1,000) workers or less (which would mean, generally something like $15 million to $150 million or less in, again, revenues (not net income). The limit in boat building, which I would assume is Wellcraft Marine's classification, is 500 employees (maximum) to be considered a small business. That's $134,000 in revenues per worker (if Wellcraft marine is at the 500-employee limit), which is not implausible.

I don't expect anyone toknow this without looking it up. But if you're going to comment disparaginly about how someone is using the term "small business," then you should look it up; that's what I did, and it took me less than 5 minutes to find the information Bash McCain, I'm with you on that, but don't misuse facts.

Friday, October 24, 2008

Spending on "Apparel and Accessories"

For those of you who have been looking for an in-depth analysis of the Republican National Committee's intriguing expenditures on clothing for Sarah Palin, well, here it is.

The US Bureau of Labor Statistics does an annual Survey of Consumer Expenditures, which provided a great deal of detail on, well, consumer expenditures; the most recent data are from 2006. Way back then, the highest income group on which data are reported is the 20% of the families with the highest income, families earning more than $149,963 per year before taxes. Those families spent, in 2006, $3,548 on "Apparel and Accessories," or 2.36% of their income. For the Palin's, with a 2007 income of about $250,000, this would be, roughly $6,000. So an expenditure of $150,000 in a very short time period would be far above our expectations for such a family. Call it 25 times the average annual expenditures on clothing for a family in that income bracket.

Thursday, October 16, 2008

Just In Case the Retail Sales Numbers Didn't Convince You

The Federal Reserve released the industrial production numbers for September earlier today. Compared with August, industrial production is down 2.8%. This is the largest monthly decline in industrial production since December 1974. So far this year, industrial production has declined, compared with the previous month, in February, March, April, May, August, and September. While the earlier declines were modest, the combined August and September declines total 3.83%. The level of industrial production in September is 4.5% below the September 2007 level. This is the largest annual decline since December 2001, which came at the end of a string of 13 monthly declines.

A commenter at Paul Krugman's blog asks whether the September decline can be attributed to Hurricane Ike. I would judge that it cannot. In 2005, Katrina made landfall on August 23, and industrial production fell by 1.8% in September (compared with August; IP rose in August, by 0.17%, compared with July, not out of line with previous months in the year), and then rose by 1.17% in October (compared with September). This year, IP fell by 1.14% in August. And Ike did not make landfall until September 13, so only the second half of the month could have been affected. And--Ike was not as severe a hurricane as Katrina.

In any event--more evidence, if we needed it, that we are in a recession.

Wednesday, October 15, 2008

The Good News Continues to Roll In

The US Department of Commerce released its advance report on retail sales in September earlier today. Sales were down 1% from September 2007, and down 1.2% from August 2008. Sales for the third quarter 2008 (July - September) were up 0.8% from the third quarter 2007.

Not bad, right? Wrong. Commerce reports nominal sales, sales unadjusted for inflation.

I'm expecting consumer prices to be roughly unchanged from August to September, so the 1.2% drop month-to-month sounds plausible. But contine that for a year (which won't happen) and sales would be down 14% or so.

Adjusted for inflation (5% from September 2007 to September 2008; 5.3% from third quarter 2007 to third quarter 2008), retail sales are down something like 6% year-to-year. And consumption currently accounts for about 70% of GDP. With export growth slacking off, construction in a full-bore recession, and businesses starting or continuing to scale back on investment spending, the real likelihood is a substantial--1%, probably more--decline in real GDP from a year ago.

The recession is upon us.

Monday, October 13, 2008

Paul Krugman

Paul Krugman has won the Royal Bank of Sweden's Nobel Memorial Prize in Economics. A couple of nice summaries of his work by Alex Tabarrok and Tyler Cowen. I'll update this as more things pop up.

Menzie Chinn at Econbrowser adds some thoughts.

Ed Glaeser comments in the New York Times.

Bill Polley as well.

Sunday, October 12, 2008

Paul Volcker on the economic situation

Paul Volker appeared on the Charlie Rose Show; nearly an hour long, but worth every minute.

Thursday, October 09, 2008

Here's some good news--a growth sector

That heading is snark, by the way.

From the Times of London:

Sales of household safes have surged as wealthy savers concerned about the health of banks opt to keep cash at home.

Leading safe manufacturers contacted by The Times said that they had seen a big increase in demand. Many predicted that fears of meltdown in the banking sector would mean a further rush before Christmas.

One company said that sales had increased by a quarter, while another said that its staff had received calls from panicking investors who now wanted to keep their savings locked away at home.

Brought to you, via me, by the fine folks at Marginal Revolution.

Annals of Corporate Collapse

In 2000, shares in the Ford Motor Company, Inc., were selling for about $30. Ford closed today at $2.08. I’m starting a pool—when do you think
a) Ford will go broke or be absorbed?
b) Ford will be delisted from the NYSE?

Tuesday, October 07, 2008

A fine rant on the causes of the crisis--which do not include the Community Reinvestment Act

Dan Gross goes ballistic:

"On the other hand, lending money recklessly to obscenely rich white guys, such as Richard Fuld of Lehman Brothers, or Jimmy Cayne of Bear Stearns, can be really risky. In fact, it's even more risky, since they have a lot more borrowing capacity. And, here, again, it's difficult to imagine how Jimmy Carter could be responsible for the supremely poor decision-making seen in the financial system. I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33:1, that instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients money, and that required its septuagenarian CEO to play bridgewhile his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Brothers to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can't find it. Did AIG plunge into the credit-default swaps business with abandon because ACORN members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton's fault?"

Read the whole thing. (Found at Barry Ritholtz's Big Picture.)

Flight from Risk

Over at Management R&D, Luke Froeb asks why the yield spread between 5-year Treasury Bonds and 5-year TIPS (inflation-protectred bonds) has declined. In normal times, this spread reflects people's expectations about inflation over the next five years. But these are not normal times. I posted this over there, and thought it belonged here as well:

I think the real story is the dramatic decline in yields on 5-year Treasuries--just in the past MONTH. Given the apparent fear right now of any debt instruments being sold by the private sector, the only place to stash one's cash is in treasuries of one sort or another. And, so

4-week T-bills are down from 1.6% at the end of August to 0.13% today.

1-month T-bills, down from 1.63% to 0.15%.

6-month T-bills, down from 1.92% to 1.12%.

1-year T-bonds down from 2.17% to 1.41%.

2-year: 2.36% to 1.60%.

3-year: 2.6% to 1.86%.

5-year: 3.10% to 2.64%.

7-year: 3.45% to 3.09%.

10-year: 3.83% to 3.63%.

20-year: 4.47% to 4.26%.

30-year: 4.43% to 4.11%.

In general, the shorter the maturity, the greater the (percentage) decline in yield. I read this as a flight from risk, not really as a change in inflation expectations.

Sunday, October 05, 2008

Asset Bubbles, Relative Performance, and Individual Incentives

Robert Frank makes a lot of sense:

"Asset bubbles...have been occurring with increasing frequency. If we want to prevent them, we must first understand their cause.

"It isn’t simply “Wall Street greed"...a puzzling attribution, squarely at odds with the cherished belief of free-market enthusiasts everywhere that unbridled pursuit of self-interest promotes the common good....Greed underlies every market outcome, good or bad....The forces that produced the current crisis actually reflect a powerful dynamic that afflicts all kinds of competitive endeavors. This may be seen clearly in the world of sports.

"Consider a sprinter’s decision about whether to take anabolic steroids. The sprinter’s reward depends not on how fast he runs in absolute terms, but on how his times compare with those of others. Imagine a new drug that enhances performance by three-tenths of a second in the 100-meter dash...The sums at stake ensure that many competitors will take the drug, making it all but impossible for a drug-free competitor to win. The net effect is increased health risks for all athletes, with no real gain for society.

"This particular type of market failure occurs when two conditions are met. First, people confront a gamble that offers a highly probable small gain with only a very small chance of a significant loss. Second, the rewards received by market participants depend strongly on relative performance.

"These conditions have caused the invisible hand to break down in multiple domains. In unregulated housing markets, for example, there are invariably too many dwellings built on flood plains and in earthquake zones. Similarly, in unregulated labor markets, workers typically face greater health and safety risks.

"It is no different in unregulated financial markets, where easy credit terms almost always produce an asset bubble. The problem occurs investment fund’s success depends less on its absolute rate of return than on how that rate compares with those of rivals.
If one fund posts higher earnings than others, money immediately flows into it. And because managers’ pay depends primarily on how much money a fund oversees, managers want to post relatively high returns at every moment.

"One way to bolster a fund’s return is to invest in slightly riskier assets. (Such investments generally pay higher returns because risk-averse investors would otherwise be unwilling to hold them.) Before the current crisis, once some fund managers started offering higher-paying mortgage-backed securities, others felt growing pressure to follow suit, lest their customers desert them..."

As they say, read the whole thing.

Satire is Dead

This is the text of a card I received on Friday, October 3, from AIG. You all remember AIG, don't you?

Some Insurance Companies Respond to the
Financial Consequences of a Disaster

We Help You Avoid Disaster Altogether

Friday, October 03, 2008

Another depressing employment report

The Bureau of Labor Statistics released the report on employment and unemployment for September this morning. These are the key facts:

*The data come from the first half of September, so any contraction since the financial crisis really hit will show up next month.

*Payroll employment fell by 159,000. This is the 9th straight month of declining employment, and the decline in September is the largest decline in ths stretch. Total employment is now down by more than 500,000 since last September, and down nearly 700,000 since January.

*Employment in construction is down about 465,000 since last September (more than 6%). Employment in residential construction is down about 13% since last September.

*Manufacturing employment is down by about 340,000 (about 2.5%). Almost all of that (326,000) is in durable goods employment

*Health care continues to be a bright spot, with employment rising by about 365,000 (nearly 3%).

*The unemployment rate is unchanged from August, but up 1.4 percentage points from September 2007.

*Even the unchanged unemployment rate masks continued weakness, however. Employment, measured using the household survey, fell slightly from August and is about 1 million below September 2007. The employment-population ratio fell by o.1 percentage point, and is 0.9 specentage points below September 2007.

Let me reiterate that the second half of the month was much weaker than the beginning of the month. I think we can expect, if anything, a larger employment decline in the October report, and almost certainly a rising unemployment rate.

Wednesday, October 01, 2008

Round 2, Part 1

Well, the Senate passed a bill. Why, though, did anyone think this was a necessary part of a bill designed to deal with financial chaos?

SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.(a) IN GENERAL.—Paragraph (2) of section 4161(b) is amended by redesignating subparagraph (B) as sub301 paragraph (C) and by inserting after subparagraph (A) the following new subparagraph:

‘‘(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.—Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly—

‘‘(i) measures 5⁄16 of an inch or less in diameter, and
‘‘(ii) is not suitable for use with a bow described in paragraph (1)(A).’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to shafts first sold after the date of enactment of this Act.

(Found at Calculated Risk. Thos guys have been doing an amazing job covering and analyzng the mortgage market and financial situation.)

UPDATE: Calculated Risk explains:

My understanding is the bailout bill was attached to another bill for procedural reasons, and that that other bill had all the weird provisions (Senators weren't trying to add them to the bailout bill specifically). Oh well ... now you know.

William Polley says, no, it's a Christmas tree:

That's not how I read what shows up on THOMAS when you look up the bill.
That link should give you the summary of the bill as it was passed in the House (H.R. 1424). A spending bill has to originate in the House, so they had to take a bill that had passed the House and been reported to the Senate. This bill had been read twice and placed on the legislative calendar under General Orders, which meant it was eligible for floor consideration. If you look at the version that passed the House and the version that passed the Senate, you will see that they are completely different. The intersection of the two is the empty set.
Nothing is by accident.

So, back to the original question...WTF???

Not Just "Wall Street"

Lest anyone think that the financial crisis has so far affected, and will continue to affect, only "Wall Street," this should come as sobering news:

"[B]usinesses big and small said borrowing was getting harder as the cost of funds rose...Corporate-bond issuance in the quarter plunged to $76.7 billion from $337.3 billion in the second quarter ... Companies overall were forced to reduce their borrowings on the short-term commercial paper market by $212 billion between the end of February and last Wednesday, as investors continued to back away from the corporate IOUs."

this is also not very encouraging:

"Ford ... on Wednesday reported a 34.6% drop in September U.S. sales to 120,788 vehicles from 184,612 in September 2007. September marked the lowest sales month so far this year for Ford and the industry, the automaker said."

UPDATE: This goes beyond Ford:

Honda: DOWN 24%
Toyota: DOWN 32%
Lexus: DOWN 37%
Chrysler: DOWN 33%
Volvo: DOWN 52%
Porsche: DOWN 45%
GM: DOWN only 15%
Nissan: DOWN 37%
BMW US sales: DOWN 26%
Mercedes-Benz: DOWN 15%
Volkswagen: down, but only 9%
Hyundai US: DOWN 25%
Kia US: DOWN 28%

And September, we should remember, is usually a very good month for auto sales. This is really not good.

And this will not make you feel any better:

"It now appears that private non-residential construction has peaked, and I expect non-residential investment will decline sharply over the next year."

Cleaning up the mess will be difficult, and it will involve doing some things that we might prefer not to have to do. But not cleaning up the mess will almost certainly make things worse.