More of What Nouriel Roubini Won’t Tell You About the US Economy
More of what Nouriel Roubini won’t tell you about the US economy, from my associates at Action Economics:
Today’s U.S. data on sales, prices, the labor market, and inventories all suggest that the widely assumed slowdown in the U.S. economy through the second half of the year is proving more modest than some fear, with none of the periodic and clumsy downside adjustments that have thus far been contained entirely to the housing market.
For retail sales, the report revealed slightly stronger than expected total sales through August, but a shift in the mix of sales to vehicles from other goods that reduce prospects for consumption growth in Q3—given that the auto data in the retail sales report are not “source variables” for the GDP calculation.
Retail sales overall continue to post healthy growth, with a return in y/y growth to the 6.7% area that is just below the lofty 7% figures generally seen through the prior twelve high-growth quarters of this expansion. The August y/y pop in growth followed a temporary dip in July to 4.5% that entirely reflected the hard comparison to last year’s July vehicle sales binge.
We now expect a hearty 3.5% real growth clip in consumption in the Q3 GDP report, following a 2.6% clip in Q2 that might be bumped down to 2.5%, and 4.8% rate in Q1. The implied downward adjustment to Q2 consumption in the final GDP report for the quarter was $1.5 bln.
Nominal consumption growth is poised to slow somewhat in Q3, in keeping with a modest slowdown in growth, despite the bounce in real growth. We project a stabilization of the savings rate around -0.7% in Q3 and Q4. The high 6.8%-7% nominal growth rates for consumption in Q1 and Q2 will be followed by a solid though lower 6% rate in Q3, and a projected 5%-6% rate in Q4 and beyond that is in line with the assumed economic slodown.
In total, the variations in consumer spending as gauged by this report through August are right in line with normal monthly and quarterly volatility, and are showing no sign that the economy is undergoing any sizable slowdown, as some fear. Though we continue to expect the downtrend in the savings rate through this expansion to transition to a sideways pattern through the second half of the year, and the monthly data are cooperating with this assumption, the transition is proving gradual.
posted on 15 September 2006 by skirchner in Economics
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Putting Central Bankers to the Flesch-Kincaid Test: Greenspan Beats Bernanke
ICAP economist Michael Thomas runs the speeches of leading central bankers through the Flesch-Kincaid test:
Australia’s central bank chiefs are easier to understand than their U.S. peers, though both lose out to straight-talking Bank of England Governor Mervyn King, according to a study by stockbroker ICAP Australia.
U.S. Federal Reserve Chairman Ben Bernanke’s speeches require listeners to hold a bachelors degree with honors, said Michael Thomas, ICAP Australia’s head of economics. By contrast, high-school leavers could understand the speeches of incoming Reserve Bank of Australia Governor Glenn Stevens, and ``on a good day, King could hold court at his local primary school,’’ Thomas said.
The study of recent speeches by central bankers used the Flesch-Kincaid test, which measures syllables per word and words per sentence, to assess how clearly a person speaks, and the education level a listener would need to understand the speaker. Former Fed chairman Alan Greenspan was famous for his sometimes obscure language—or, as Thomas put it, ``in his heyday, Greenspan could make a grocery list indecipherable.’’
Still, Greenspan outperformed Bernanke in the Flesch-Kincaid test, while both lagged Australia’s Stevens and the outgoing Reserve Bank Governor Ian Macfarlane.
posted on 14 September 2006 by skirchner in Economics
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Fundamentals of House Price Inflation
Another installment in our continuing series, dismissing the notion of house price inflation as a monetary policy-driven ‘bubble,’ this time from the Chicago Fed:
the housing boom has not been driven by unusually loose monetary policy. This is not to say that monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on housing are largely explained by the wealth created by dramatic technological progress over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for only one-half of the increase in homeownership. ... The last finding is that substitution away from rental housing made possible by technology-driven developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership. The current spending boom thus may be a temporary transition toward an era with higher homeownership rates and a share of spending on housing that is nearer historical norms.
(HT: Mark Thoma)
posted on 14 September 2006 by skirchner in Economics
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Carlton’s Lone Classical Liberal
Andrew Norton now has his own blog.
posted on 13 September 2006 by skirchner in Misc
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The Sleeper Awakes! (with apologies to H G Wells)
At least someone thinks Doomsday Cult Central is worth getting out of bed for:
I’ve taken a job at RGE Monitor, where I’m going to be setting up a new economics blog which I’m rather excited about. Launching soon – all ideas and suggestions gratefully received! (Not just on economics: any tips for how to get up every morning? I haven’t done it since December 2000, and I was woefully bad at it then…)
posted on 13 September 2006 by skirchner in Economics, Financial Markets
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The political health of the Medibank Private sale
Despite its name, Medibank Private is owned by the Australian government, which wants to sell it - though there seems to be some confusion within the Cabinet as to whether or not this year is the right time to do so.
One thing we can be sure of, though, is that public opinion won’t support it. In the 1980s, there was some popular support for privatisation, but it went into decline after major privatisations began in the early 1990s. Asked at an abstract level in 2005 (in the Australian Survey of Social Attitudes) whether privatisation brought more benefits than costs, 53% disagreed and 17.5% agreed. On more specific privatisations, some of the ‘don’t know’ respondents say ‘no’, with about two-thirds typically against the two main recent sale proposals, Telstra and Medibank Private. This was seen again in an ACNielsen poll published in this morning’s Fairfax broadsheets, with 63% against selling Medibank Private off and 17% in favour. Newspoll recorded almost the same result back in April.
Politically, I believe that marketisation and privatisation are contrary agendas - though in a policy sense they are synergistic agendas. The pragmatic Australian electorate wants reliable, cheap services, and as I argued last year in Telstra’s case if things are broadly ok people will stick with the safe status quo. Telstra’s service levels have improved significantly since the telecommunications market was opened up, and so removed the ‘do something, anything’ frustrations that were probably driving pro-privatisation opinion. Similarly, Medibank Private operates in a competitive market already so it is hard to see how privatisation will create any significant consumer benefits, and indeed as the Newspoll found most people think premiums would rise if it was privatised (though in reality competitive conditions in the industry will be the main determinant of prices).
The government isn’t likely to win this debate, but far more significant privatisations than Medibank Private have proceeded without obvious political cost, so they may as well take the cash from a sale if and when they can.
posted on 12 September 2006 by Andrew Norton in Politics
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Yet More Friends the ‘Austrian School’ Could Do Without
We have previously noted the increased prominence that bowlderised versions of Austrian business cycle theory (ABCT) have assumed in popular discourse on macroeconomics and financial markets. Much of the appeal in ABCT rests in its seeming ability to provide a causal mechanism for what many people like to label as ‘bubbles’ in financial markets. Without this underlying causal mechanism, the notion of a ‘bubble’ is little more than a tautology invoked by people who can’t understand why economies and financial markets fail to adhere to their preconceived and often mistaken notions of appropriate behaviour
An article in the FT provides further evidence of the growing reliance on ABCT as a device to make sense of the economy and financial markets:
The investment theme of the autumn will instead be the vindication of the Austrian economists and their theories about the nature of the business cycle…
The aspect of Austrian economics that will be central to investment decision-making this autumn is the role of central banking in generating unsustainable investment booms and subsequent busts.
Yet there is little evidence to support ABCT as even a stylised account of business cycle and financial market dynamics, at least under current central bank operating procedures in the major industrialised countries, which have been dominated by interest rate and inflation targeting for at least the last 10 years.
The Taylor rule and related literature shows that it is much easier to explain monetary policy with reference to the economy than it is to explain the economy with reference to monetary policy. This is just another way of saying that monetary policy for the most part responds endogenously to economic developments and the exogenous component of monetary policy is very small. Anyone who has tried to motivate a role for official interest rates in standard economic models (the sort of empirical work that few Austrians are prepared to undertake) knows what a problematic exercise this can be.
This makes the claim that, but for the supposed monetary policy errors of central banks, the amplitude of business and asset price cycles would be greatly reduced extremely implausible, at least under contemporary interest rate/inflation targeting regimes. Indeed, we know that under the gold standard, the preferred monetary regime for many Austrians, volatility was more pronounced, with inflexibility in prices and exchange rates simply forcing any adjustment on to the real side of the economy.
The increased prominence of ABCT in popular discourse actually has profoundly anti-market implications, because it leads people to believe that there is something wrong with macroeconomic and financial market outcomes that are in fact largely market-determined and have very little to do with either monetary policy or ‘bubbles.’
posted on 06 September 2006 by skirchner in Economics, Financial Markets
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Students to fund research
Australian higher education policy insists that all universities do research and that university education be as cheap as possible for students. Obviously, these two goals are in tension, with many costly aspects of the higher education system - such as teaching for less than half the year or libraries full of books of little use to undergraduates - designed entirely with research in mind. The policy structure has exacerbated this further by favouring research rather than student interests. For example, Commonwealth-supported student places are allocated to universities by a rigid quota system, with universities penalised for taking too many or too few students. This solves the bums on seats problem for most universities without them having to try very hard to do well by their students, since prospective students have few alternatives outside the state-sponsored system. By contrast, various incentive schemes encourage universities to increase the quantity and quality of their research output.
What this means in practice can be seen in amazingly frank comments from new Macquarie University Vice-Chancellor Steven Schwartz about what his university will do with the 25% increase in student charges that they intend to impose:
Macquarie vice-chancellor Steven Schwartz said about 20 per cent of the extra money would fund $1 million to $2million in new scholarships for needy students, especially those keen on science, maths or technology. ...
More fee income also would help Macquarie fund 40 new research positions advertised as part of a campaign to make the university more research intensive.
So it seems that the vast majority of Macquarie students will get exactly nothing in return for a major price hike. Since all Macquarie’s competitors have already done exactly the same thing and they are all protected by quotas Schwartz doesn’t even need to pretend that students could benefit from increasing their investment in higher education. Schwartz is actually one of the more pro-market VCs, and his own actions and comments show yet again why we need stronger market mechanisms in the higher education sector.
posted on 06 September 2006 by Andrew Norton in Higher Education
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RBA Governor Macfarlane: ‘Shamefully Misquoted’
RBA Governor Macfarlane presides over his final RBA Board meeting today. Macfarlane has given more newspaper interviews in the last few weeks than in the last 10 year combined. In the latest interview, he complains about being verballed on the issue of tax cuts:
On the eve of his departure, Mr Macfarlane told The Australian Financial Review he saw little need to amass large budget surpluses just because the economy was growing solidly.
“I have heard people* say, `Oh, we should let the fiscal stabilisers work,’” Mr Macfarlane told the newspaper.
“I think they are working. I think if you have an economy that is growing at 3 per cent, as we have, there’s no reason why you would need bigger and bigger surpluses, in other words, why you would need to restrain it with some sort of fiscal restraint.
“What we have got is a tax system which is unintentionally much more income-elastic than anyone designed it to be or even thought it was, and so that even with the economy going at trend growth, we are pulling in a huge amount of taxes and pushing ourselves into surplus.”
Mr Macfarlane also endorsed Treasurer Peter Costello’s decision to deliver income tax cuts in his budget worth $36.7 billion over four years.
He said his comments on fiscal policy had been “shamefully misquoted” all year.
“I had no problem with what the Treasurer did in the May budget,” Mr Macfarlane said.
“The great irony - and I feel sorry for him in this respect - is that the same people who are urging him to make huge tax cuts have now turned around and said that what he did is pushing up interest rates.”
* [That would be you Ross Gittins! - ed]
posted on 05 September 2006 by skirchner in Economics
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Guest Blogger: Andrew Norton
Andrew Norton will be guest posting temporarily at Institutional Economics. Andrew will already be known to most of you. He is a Research Fellow at the Centre for Independent Studies and an acting editor of its journal Policy. Andrew is a political theorist by training rather than an economist. This is something we actually have in common. I started out as a political scientist before re-training an economist, so we are both refugees from academic political science. His first post is below this one.
This is a good time to remind people about procedures for commenting at Institutional Economics. Access to comments requires completion of a one-time registration and log-in process (click here to register). You must use a valid email address to register, but this need not be displayed in comments. If you access this site from more than one computer, you may need to log-in again to comment (if you are asked to enter an alpha-numeric character string with your comment, it means you are not logged on. Click ‘log-in’ in the black bar at the top right hand side of this page to log-in again. Andrew will be responsible for editorial decisions in relation to comments on his posts.
posted on 05 September 2006 by skirchner in Misc
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Will Universities Australia be more effective than the AVCC?
At a meeting yesterday, the Australian Vice-Chancellors’ Committee agreed to change their structure and rebrand themselves as ‘Universities Australia’. This followed a highly critical review released last month.
From a public choice perspective, higher education interest groups have always been rather unusual. As I argued some years ago, they are among very few interest groups to campaign against their own financial interests by supporting restrictions on their fee-charging capacity. That’s a less common view today than when I wrote - somewhat reluctantly, they did agree to 25% increases in student charges back in 2003 - but it is still widely held. This is only partly conventional egalitarian concerns about student access. Rather, it is concern about inequality in Australian society as a whole, which they believe would be exacerbated by some universities becoming more ‘elite’ than they are today on the strength of high student fees. That’s why every public university is quite happy to enrol thousands of full-fee overseas students, but in many cases refuse to offer full-fee places to local students and suffer ideological angst when they do. The overseas students go home without changing Australia’s social structures.
Because these ideological hang-ups are still so prevalent, Universities Australia probably won’t be much more successful than the Australian Vice-Chancellors’ Committee. The central agencies wonder why they should spend taxpayer dollars on institutions that are so reluctant to take financial responsibility for themselves. Politicians wonder why they should spend money on institutions that rank lowly in the public’s spending priorities, and where the highest praise they are likely to get for spending initiatives is ‘a good start’. A new name, a new structure, and more effective lobbying methods are all part of what universities need in Canberra, but until they change their message they are never likely to remedy their serious financial problems.
posted on 05 September 2006 by Andrew Norton in Higher Education
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Endogenous Fed Policy: Why You Can’t Profit from Nouriel Roubini
Those who have argued that rising commodity prices, particularly gold, are symptomatic of easy Fed policy face the embarrassment of explaining why commodity prices have fallen rather than surged in response to the recent Fed pause. As usual, James Hamilton has already said what I wanted to say on this:
What brought commodity prices and long-term nominal yields down is the same thing that induced the Fed to pause, namely, the recognition that the magnitude of the incipient economic slowdown is more significant than many were anticipating a few months ago. To be sure, many other factors influence the price of any given commodity, and some commodities, such as silver, lead, and nickel, are up rather than down over the last two months. But other things equal, slower growth of real economic activity is bearish for any commodity, and as the reality of the slowdown has sunk in, commodity prices have responded, one by one.
This reinforces a point we have made on many occasions previously, that monetary policy is more often than not an endogenous response to economic developments rather than a driver of them.
It is worth noting that the CRB index is now at risk of breaking its multi-year uptrend from the 2001 lows. If you think this sounds bearish, you’re right. But what commodity prices and Treasury yields are telling us is that an economic slowdown is already largely discounted. It’s the slowdowns that are not priced in that you have to worry about. While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, the reality is that the market already largely agrees with him. Or to invert Glenn Reynolds, the permabears are a herd, not a pack.
posted on 31 August 2006 by skirchner in Economics, Financial Markets
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Shiller Runs with the Housing Herd
Robert Shiller and Karl Case argue that:
Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today.
Yet in the same op-ed, Shiller and Case provide evidence from trading in their own house price indices on the Chicago Merc that suggests a downturn in house prices is already discounted:
The U.S. now has a futures market based on home prices. The market that opened in May at the Chicago Mercantile Exchange is now showing backwardation in all 10 metropolitan areas trading. The backwardation can be expressed as implying a rate of decline of 5% a year for the S&P/Case-Shiller Composite Index by May 2007. Since the margin requirement is only about 2.5%, an investor who is sure that prices cannot actually fall by next May has, on that assumption, a sure return of at least 200% from buying a futures contract, and even more if prices rise at all. But there can’t really be so much “money on the table.” It must be that people really no longer see it as a sure thing that prices won’t start falling across the metro areas.
Not much uncertainty there. Shiller and Case also can’t help but invoke these notorious contrarian indicators:
the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America has heralded the bursting of the “housing bubble.”
While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, both he and Shiller are just running with the herd in calling for a recession on the back of a housing sector downturn. Yet recessions are rarely caused by events that are well anticipated, which is why they are almost never heralded on the front pages of newspapers until they are already well underway. Based on the NBER business cycle reference dates, the 2001 recession in the US was all but over by the time it hit the front page. The expansion began in November 2001, yet as late as the September terrorist attacks, there was still debate about whether or not the US was in recession.
posted on 30 August 2006 by skirchner in Economics, Financial Markets
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What China Really Does with its Foreign Exchange Reserves
SHANGHAI, Aug 29 (Reuters) - Beijing is expected to inject a large amount of capital into China Reinsurance (Group) Co., the country’s biggest reinsurer, to help it compete with foreign rivals, sources close to the situation said on Tuesday.
Central Huijin, the investment arm of the central bank, has submitted a proposal for the capital injection to the State Council, China’s cabinet. The plan could win approval before the end of this year, the sources said.
After approval, the central bank and China’s foreign exchange regulator would authorise Central Huijin to use part of the country’s more than $940 billion in foreign exchange reserves as capital for China Reinsurance, the sources said.
The size of the proposed injection is unclear, but one financial source close to the State Council said it was unlikely to exceed 10 billion yuan ($1.25 billion).
posted on 29 August 2006 by skirchner in Economics, Financial Markets
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Eeyore or Jack Ass? Bears of Very Little Brain
Nouriel Roubini pronounces himself a member of the ‘Shrill Order of the Reality-Based Reputable Eeyores.’
As I recall my Pooh, Eeyore’s pessimism was rarely validated and had a lot to do with having a pin stuck in his butt, which I guess might also explain the shrill tone.
posted on 28 August 2006 by skirchner in Economics, Financial Markets
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