Showing posts with label Economy. Show all posts
Showing posts with label Economy. Show all posts

Friday, April 17, 2009

U.S. Retail Sales Resume Falling After January Uptick

After showing an uptick in January, retail sales dropped in both February and March from year-ago levels, dashing hopes that the recession in the US was bottoming out. Consumer spending accounts for 70% of US economic activity, so it is widely watched as a harbinger of things to come in the broader economy. With joblessness hitting record highs, consumer uncertainty rising, and admonitions that individuals as well as banks were over-leveraged, it's hard to imagine consumer spending roaring back any time soon.


U.S. Retail Sales Activity: March 2008 - March 2009

Source: WSJ

Retail sales fell 1.1% in March, according to the Commerce Department. Auto sales fell by 2.3% in March from the prior month; furniture sales fell 1.7% while electronics and appliances fell 5.9% in March from the previous month. Restaurants showed a decline of 1.4% as con
sumers cut back on eating out.

Also on Wednesday (4/15/09) the Labor Depratment reported that in March the consumer-price index (CPI) fell 0.4% below its year-earlier level, the first decline in over 50 years. Although the Fed continues to print money to refloat credit markets, inflation remains not only in check but the risk of deflation is in the air as consumers cut back on spending, increase savings, and manufacturers and retailers cut prices to entice them back into stores.

Consumer Price Index (CPI) Year-Over-Year Change 2000-2009
Source: WSJ

Wednesday, February 25, 2009

The Depression-Recession: How We Got Here

In a negative feedback loop, job loses and falling corporate profits are creating new loan defaults, hurting banks beyond the original damage caused by the home mortgage crisis. The banks' falling stock prices together with the loan defaults make it harder for them to raise capital and more reluctant to lend. All of this saps spending by consumers (which makes up 70% of the US economy) and business which results in more job cuts, more loan and mortgage defaults, ... and so the negative feedback loop spirals down. The government keeps threatening to step in to save the failing banks, which raises the specter of nationalization which would wipe-out bank stock holders, who become even more reluctant to buy bank stocks and makes it harder again for the banks to raise capital for loans... And so it goes.

Tuesday, October 28, 2008

Defense Spending as a Percent of GDP, 1940-2009

After reaching 38% of GDP during World War II, defense spending dropped below 5% of GDP in the years immediately following the war, rose to nearly 15% at the start of the cold war as the US rearmed and built up its stock pile of atomic weapons, declined through the late '50s and early '60s to 7%, jumped again during the Vietnam War to 10%, declined throughout the '70s and early '80s, headed up again during the Reagan era of rearmament as we spent the Russians into state failure, droped again in the late '80s and early '90s until Desert Storm, declined until the beginning of the millennium until 9/11 when it rose steadily to almost 5% of GDP in 2008.

Defense Spending as a Percentage of GDP, 1940-2009

India Gets Caught up in Whirlwind of Credit Card Debt

It looks like credit woes are pretty much the same around the world. The Indian middle-class, enjoying rising prosperity, has gotten caught up in fast-rising revolving credit card debt that they seem to little understand and have difficulty managing.

Unsecured loans and credit card receivables more than three months overdue: 7%-9% of total loans outstanding this year; expected to rise to 15% according to ratings agency Crisil Ltd. in Mumbai.

Number of credit cards in India: 30 million, up 3x in the last 5 years.

At the end of FY '08 (ended March 31) Indians charged more than $14 billion on their credit cards, over 3x the amount charged four years ago.

Indians have little experience with handling revolving credit and more people are turning up desperate for help with their credit card payments, according to V.N. Kulkami, chief counselor at Mumbai's Abhay Credit Counseling Center, which advises borrowers.

Credit Card Payments in India 2004 - 2008


Source: WSJ

What a Real Bear Market Looks Like

The nominal definition of a bear market is one in which securities prices drop 20% over a period of time. In today's Wall Street Journal Arthur B. Laffer reminds us what a real bear market is:
I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!


Laffer has a new book out on the subject: "The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen"


Laffer says we are making the same mistakes as previous generations of politicians, whether Republican or Democtratic, with hasty solutions cooked up under panic conditions that will set the stage for "the end of prosperity".


Tuesday, October 7, 2008

Credit Derivatives and the Modern Financial System

University of Chicago Economist and Nobel Laureate Gary Becker on the state of the economy:

U.S. unemployment 1931-1941: 25 percent
U.S. unemployment September 2008: 6.1 percent

The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have little understanding of how the whole incredibly complex financial system operates when exposed to various types of stress.

William Engdahl on Credit Default Swaps (CDS), (June 6, 2008):

Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.

Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.

No regulation

A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb. The US Federal Reserve under the ultra-permissive chairman, Alan Greenspan and the US Government’s financial regulators allowed the CDS market to develop entirely without any supervision. Greenspan repeatedly testified to skeptical Congressmen that banks are better risk regulators than government bureaucrats.


Alan Greenspan, former Chairman of the Federal Reserve, on the use of credit derivatives (e.g., CDOs) to transfer risk outside the banking system (May 5, 2005):

Use of Credit Derivatives to Transfer Risk outside the Banking System
Perhaps the most significant development in financial markets over the past ten years has been the rapid development of credit derivatives. Although the first credit derivatives transactions occurred in the early 1990s, a liquid market did not emerge until the International Swaps and Derivatives Association succeeded in standardizing documentation of these transactions in 1999. According to the BIS, the notional value of credit derivatives outstanding increased sixfold between 2001 and 2004, reaching $4.5 trillion in June of last year. Moreover, this growth has been accompanied by significant product innovation, notably the development of synthetic collateralized debt obligations (CDOs), which allow the credit risk of a portfolio of underlying exposures to be divided or "tranched" into different segments, each with different risk and return characteristics. Recent growth of credit derivatives has been concentrated in these more-complex structured products.

As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books while allowing them to meet the needs of their largest corporate customers. But some observers argue that what is good for the banking system may not be good for the financial system as a whole. They are concerned that banks' efforts to lay off risk using credit derivatives may be creating concentrations of risk outside the banking system that could prove a threat to financial stability. A particular concern has been that, as credit spreads widen appreciably at some point from the extraordinarily low levels that have prevailed in recent years, losses to nonbank risk-takers could force them to liquidate their positions in credit markets and thereby magnify and accelerate the widening of credit spreads.2

A definitive evaluation of these concerns about nonbank risk-takers would require information on the extent of credit risk transfer outside the banking system and on the identities and risk-management capabilities of the entities to which the risk has been transferred. Unfortunately, available data do not provide this information.

Credit Default Swaps (CDS) Growth 2001-2007
Notional Amount in Trillions of Dollars

Thursday, October 2, 2008

U.S. Auto Sales and Automobile Manufacturer Market Share

U.S. auto sales reached a 15-year low with a double digit decline in September as sales of cars and light trucks fell 27% to 964,873 units in September (2008), down from 1.31 million a year earlier, according to Autodata Corp. Tightening credit, a financial system in shambles, and consumer fear all contributed to a seasonally adjusted annualized rate of 12.5 million units, down from 16.19 million units in September 2007.

US Auto Sales and Market Share

Sunday, September 28, 2008

Interest Rates & Consumer Price Infaltion - US & EU

Interest rates in the US remain 2 1/4 points lower than those in the EU, despite greater consumer price inflation in the US. The Federal Reserve in the US is charged with both keeping inflation under control and stimulating the economy, while the EU central bank's mandate is only to keep inflation in check.

Interest Rate and Consumer Price Inflation Trends - US & EU


Source: WSJ

Bank Failures - Then and Now

Over 3000 banks failed during the savings and loan crises, and the run up to it, in the '80s and '90s. By comparison, bank failures post the S&L crisis of the '80s have been minuscule by comparison. But the ones of late have been gigantic in size.

Bank Failures during the S&L Crises of the '80s and Now


Source: WSJ

Tuesday, September 23, 2008

Housing Woes Grows

At the core of the Wall Street crisis lies unresolved issues with the housing market in the US. This is the rot at the core of investment banks' holdings. Unfortunately, the data still does not paint a pretty picture about the housing market. The inventory of unsold, previously owned homes stands at a high approaching 12 months. This means there is a pipeline of 12 month's worth of sales in currnt back inventory of unsold homes. Since large numbers of people are probably postponing their home sales if they can, due to the lousy housing market, this backlog is probably a dam behind which lie many more months of unsold inventory just waiting for a sign of improvement before it gets dumped onto the market, depressing housing prices once again.

There was a brief uptick in the median price of homes in the first quarter of '08, but the trend resumed its downward course in the second quarter of '08. Meanwhile, the delinquency rate shot up in the second quarter of '08, now above 5 percent on first mortgages, and the default rate on first mortgages approached 2% in the second quarter of '08.

None of this reflects added woes that may come from the loss of jobs on a related to the Wall Street melt down. For example, economist James Hughes, dean of Rutgers' Edward J. Bloustein School of of Planning and Public Policy, said that he expects New Jersey to suffer economic difficulties and job losses well in excess of the 16,000 that the state has already lost since the beginning of the year. In a worst case scenario, 100,000 jobs could be lost, he fears.

Inventory of Unsold Homes; Median Home Sales Price Trend; Delinquencies & Defaults Trend

Monday, September 22, 2008

"It Was Leverage Killed the Beast"

Police Lieutenant: Well, Denham, the airplanes got him.
Carl Denham: Oh no, it wasn't the airplanes. It was beauty killed the beast.


Morgan Stanley and Goldman Sachs Group, the remaining independent Wall Street brokerages, threw in the towel today and converted to traditional bank holding companies, placing themselves under the regulatory supervision of numerous federal regulatory agencies. Instead of being overseen just by the Securities and Exchange Commission, Goldman Sachs and Morgan Stanley will now face much stricter oversight from numerous federal agencies. The Federal Reserve will regulate the parent companies, the Comptroller of the Currency will oversee the national bank charters, and the Federal Deposit Insurance Corp. will likely play a bigger role because the companies are expected to seek much higher volumes of federally backed deposits, and the entities may seek to take customer deposits, instead of depending on short-term borrowing to finance their investments.

The firms will reduce their leverage ratios -- a measure of a firm's risk in relation to the equity on its balance sheet -- over the next two years from current levels to something more in line with that at commercial banks. Investment bank ratios now stand above 20, with commercial banks closer to 10. The combination of easy money, interest rates kept lower than the real inflation rate by the Fed after the dot com bust, Fannie Mae and Freddie Mac incentives to make housing affordable to more Americans, and finally the housing bubble burst, at the core of the problems, that all contributed to the rapid deleveraging of investment banks as their underlying assets crashed in value.

Quarterly Leverage Ratios Trend for Morgan Stanley, Goldman Sachs, Lehman Brothers


Morgan Stanley and Lehman Brothers had leverage ratios above 30 in Q1 2008, while Goldman Sachs had a leverage ratio of 27. For comparison purposes, Bank of America has a leverage ratio of 11, giving it far more assets to back up any troubled investments it makes. Having more assets on their balance sheets allowed the commercial banks to ride out the storm, since they had more resources to fall back on, without having to raise more capital, as their investments declined in value. Much of the investments banks out-sized profits came from this leverage - investing borrowed money in the hopes of getting a great return before having to pay it back. This fueled the out-sized returns of the investment banks during their salad day, and fuled their death pyres during the housing crash. They will be safer in the future, but also have smaller returns, as their ability to bet large amounts of someone else's money has now come a'cropper.

Wednesday, September 17, 2008

Total Retail and E-Commerce Sales Q1 2000 - Q2 2008

Total retail sales and total e-commerce sales have been leveling off, since Q2 2006 for straight retail and since Q4 2007 for e-commerce. So, the e-commerce slow down has lagged the retail sales slow down by six quarters, but it is finally here. Q1 2008 e-commerce retail sales were up only .3% from the previous quarter and retail sales were up only .2% quarter over quarter. In Q2 2008 total retail sales were up just .9% from Q1 2008, but e-commerce sales did better, up 2.9% from Q1 2008. Still, e-commerce sales growth has sunk to its lowest level since the recession of 2001 when sales fell .5% in Q2 2001.

Total Retail E-Commerce Sales Change, Quarter-over-Quarter

Source: US Census Bureau


Total e-Commerce Sales by Quarter

Source: US Census Bureau



Total Retail Sales by Quarter

Source: US Census Bureau

The Commerce Department reported that retail sales in August were weak across the board, falling .3% from July. This despite lower gas prices which left more discretionary income in consumers' pockets. The continued crisis in financial markets, the housing bust, disappearing credit, and higher unemployment with attendant uncertainties continue to be a drag on consumers' spirits.

Tuesday, September 16, 2008

Mortgage Foreclosures in the US, April 2007 - August 2008

Total home foreclosures in the US have grown 105.7 percent from April 2007 to August 2008, growing to 303,879 from 147,708.

Mortgage Foreclosures in the US, April 2007 - August 2008

Source: Thomson Financial; RealtyTrac

Wednesday, September 10, 2008

A Brief History of the Federal Budget Deficit and Surplus (Such as it Was)

The Congressional Budget Office (CBO) has issued its September 2008 budget and economic update. The CBO estimates that the deficit in 2008 will be over twice the shortfall of 2007, rising from $161 billion in 2007 (or 1.2% of GDP) to $407 billion in 2008 (about 2.9 percent of GDP). The CBO says:

The significant expansion in the deficit is the result of a
substantial increase in spending and a halt in revenue
growth. In 2008, CBO estimates, federal spending will be
8.3 percent higher than it was in 2007; at the same time,
total revenues will be less than they were in 2007.

Total Federal Budget Deficit (Surplus) 1967 - 2008 (actual) - 2018 (projected)

Source: CBO


The only time in recent history the Federal budget has run a surplus was for four years (1996 - 2001) of the Clinton administration. Although the economy has soured due to stagnating wages, layoffs, the credit crunch, and the housing debacle, the Federal deficit is in no where near as bad shape as it was during the stagflation era of the '70s and early '80s.

We will have to wait and see about the CBO's prognostications. As Yogi Berra said, "Prediction is very hard, especially about the future."

Defense outlays comprise nearly 66 percent of Federal discretionary outlays. It costs alot to be the policeman of the world:

Federal Discretionary Budget Authority: 2002 - 2008

Source: CBO


Contributing to the run-up in the record price of oil, the CBO report shows that demand for oil has far outpaced the supply since 2005, and year-over year demand growth has also outstripped supply growth since 2005.

World Oil Supply and Demand: 2002 - 2008

Source: CBO

Data shows that the great oil price run-up of the '00s, not seen since the early 1980s, dates from the beginning of this mismatch in oil supplies and oil demand. Tell me again why Congress needed to hold hearings on this issue? Couldn't they just have read their own report?

Oil Price Trend: 1976 - 2008

Source: WSJ

Tuesday, September 9, 2008

US Unemployment Levels and Rate: 1998 - 2008

The US unemployment rate among those 16 and older rose in August 2008 to 9.376 million unemployed, a nearly 30% year-over-year increase and the highest number in over 10 years.

US Unemployment Level: 1998 - August 2008 (Millions)


In August 2008 the US unemployment rate stood at 6.1%, only .2% short of the level reached during the 1991 recession.

US Unemployment Rate: 1998 - August 2008

Friday, September 5, 2008

Newspaper Advertising Expenditures Continue Falling

The Newspaper Association of America (NAA) today reported Q2 2008 advertising expenditures for newspapers. The results were not good. Total print expenditures were down 16.07% to $8.8 billion from $10.5 B in Q2 2007. Total online expenditures, showing declining growth for the past 5 quarters, shrunk for the first time quarter over quarter from $795 million in Q2 2007 to $776 million in Q2 2008, a growth rate of -2.4 percent. The combined quarter-over-quarter growth rate for newspaper advertising expenditures is now -18.47%.

Newspaper Advertising Trend: Total Print and Total Online 2000 - Q2 2008



Classified advertising expenditures continued showing the greatest loss, down 27% from Q2 2007. Classified advertising has shown the deepest losses for newspapers starting in Q2 2006. Retial and national advertising expenditures were down 9.56% and 13.90%, respectively. The Internet has done a job on classified newspaper advertising with sites like eBay (revenue model: auction) and Craig's List (revenue model: free) having taken a big bite out of this important newspaper advertising category. The undeclared recession of 2007-2008 has also not been kind to advertising expenditures.

Newspaper Advertising Trend: Classified, Retail and National 2000 - Q2 2008



Wednesday, September 3, 2008

A Brief History of the Minimum Wage

The best time to have been on the minimum wage was the mid-'60s, when the minimum wage had the greatest buying power - $10.11 in 2008 inflation adjusted dollars. Since the mid-60s, the inflation adjusted value of the minimum wage has been dropping steadily, with an uptick in 2008 from its adjusted increase to $6.55. Another increase to $7.25 is scheduled for 2009, but that still keeps its buying power far below historical amounts.

Minimum Wage

1938 $0.25
2008 $6.55
2009 $7.25
Highest value of the minimum wage in 2008 inflation adjusted dollars was in 1968 $10.11
Number of US workers paid hourly 75.9 million
Percentage of workforce paid hourly 58.50%
Percent making minimum wage 2.30%
Number of workers making minimum wage 1,748,000


Minimum Wage Adjusted for Inflation 1938 - 2008


Thursday, August 28, 2008

Growth of Productivity in the US Economy 1870 - 1995

This graph was used by Louis Uchitelle of the New York Times to illustrate the "missing productivity" that the information revolution was supposed to bring to business. It cleverly shows the increase in productivity in the US economy from 1870 to the mid-'90s with major technological revolutions highlighted along the way. The Internet Revolution was just getting underway when Mr. Uchitelle first penned his thoughts and would later make visible the pent-up productivity that the computer was about to unleash.


Growth of the US economy 1870 - 1995 tied to major industrial innovations


Here is one of Mr. Uchitelle's essays on the subject from December 1996.



December 8, 1996

Measured in Productivity Gains,
The Computer Is a Disappointment

By LOUIS UCHITELLE

A

t the end of the 19th century, railroads and electric motors were expected to transform America, making a young industrial economy far more productive than any seen before. And they did.

At the end of the 20th century, computers were supposed to perform the same miracle. They haven't.

Computers do wonderful things. But in purely economic terms, their contribution has been less than a transforming force: they have failed to bring back the strong growth that characterized so many decades of the American Century. By that standard, they have been a disappointment.

"It is a pipe dream to think that computers will lead us back to a promised land," said Alan Krueger, a Princeton University economist.

The issue is productivity. Those who look to computers for economic miracles, and there are many, insist that measuring their contribution only in dollars misses the less tangible improvement in quality that computers have made possible. But quality is often in the eyes of the beholders rather than in their wallets.

Through decades of invention and change, productivity has been measured as the amount of "output," in dollars, that comes from an hour of labor.

A worker who makes 100 pencils in an hour, each valued at 50 cents, produces $50 of output. And the more output from each of the nation's workers, the greater the national wealth.

Or, put more broadly, productivity is the amount of output in dollars that comes from various "inputs," not only a worker's labor, but the tools he or she uses to carry out that labor: a machine or a computer or a wrench or an air conditioner that makes work more comfortable in summer.

People work faster or concentrate better, and that shows up quickly in tangible output.

By this definition, the output resulting from the computer revolution of the last 25 years has been disappointing.

Computers have, of course, contributed to productivity and economic growth. But that contribution has failed to register in government statistics as the kind of robust catalyst that made the 1950s and 1960s such prosperous years.

If computers have fallen short of expectations, that would help explain an apparent paradox that has puzzled economists and policy makers for two decades: how rapid technological progress and a booming stock market took place during a period of sluggish economic performance -- sluggish, that is, relative to earlier decades.

One possibility is that the statistics are wrong. A panel of economists came to this conclusion in a report to Congress last week, suggesting that growth has actually been quite robust but that this fact has been obscured by overstating the amount of output lost to inflation.

This happened, the panel hinted, partly because the beneficial economic role of computers was not correctly taken into account. Some price increases that registered as inflation should really have registered as increases in output from computers.

But there is another explanation. Perhaps the computer is one of those inventions, like the light bulb early in the century, that makes life much better without adding as much to tangible national wealth as appearances might suggest.

That is because, while the light bulb allowed factories to operate night shifts and students to study more easily, the measurable result was less impressive than the great improvement in the quality of life that the electric light bulb made possible.

Given the computer's ubiquity and convenience, should the calculation of productivity and wealth be changed to give more dollar value to the conveniences the computer has wrought?

That kind of recalculation has not been done over generations of technological change, largely because convenience is too hard to quantify and translate into dollars. Too often, convenience increases consumption more than production. With computers, "most of the recent use has been on the consumption side," said Zvi Griliches, a Harvard economist. "The time you waste surfing the Internet is not an output."

Others take a broader view. Children using home computers for schoolwork -- gathering data from the Internet, for example -- become better students, they say.

In time, that will translate into rising workplace skills and greater measurable output. But it hasn't yet, and standard practice dictates that the nation wait until it shows up in the numbers before proclaiming the computer's great contribution to productivity.

"People have high expectations of this happening overnight," said Nathan Rosenberg, an economic historian at Stanford University. "Computers are a major innovation, but absorbing so great an innovation involves many changes in work practices and behavior."

Right now, much of a personal computer's power goes untapped, or is employed in low-output tasks like sending and sorting through junk E-mail, compiling electronic Rolodexes and playing solitaire in the office.

Harnessing a computer's spectacular ability to deliver and manipulate information is not easy. Edward McKelvey, a senior economist at Goldman Sachs, offers a hypothetical illustration:

A consultant who charged $50 an hour 10 years ago to forecast trends in the economy now has a powerful desktop computer at his fingertips, feeding him information that in theory should make his forecasts more accurate. But he still charges clients $50 an hour because the forecasts, despite the computer, are not more accurate.

Perhaps the consultant might never get that good at forecasting, even with a computer, or perhaps he will become so adept at extracting data from its depths that his forecasts will begin to hit the bull's eye. And that accuracy would allow him to raise his hourly fee, or "output," to $70 an hour, a handsome improvement in his productivity.

There are other problems. The automated teller machine, for example, illustrates how measurable productivity has failed to respond fully to computer investment. A half-dozen machines installed in a bank's lobby permit the bank to cut its teller staff by half. That is clearly measurable productivity.

The bank's income, or output, from bank transactions remains unchanged, but the input in teller hours goes down. The idled tellers can shift to other income-producing activities, perhaps becoming loan officers.

To make the productivity rate continue rising, however, the bank must continue cutting teller hours as it installs more ATMs. Instead, the next machines go to a dozen outlying neighborhoods, so that customers can bank at odd hours, almost at their doorsteps, or verify the balances in their checking accounts, something they did not bother to do very often before ATMs.

That is convenience. Most banks don't charge extra fees for this convenience. If they had no neighborhood ATMs, then customers would have found themselves forced to use the machines already installed in the lobbies of their banks.

"The question is, how much would you have been willing to pay in fees for the convenience of having that neighborhood ATM if the banks refused to furnish them otherwise?" said Erich Brynjolfsson, an economist at the Massachusetts Institute of Technology's Sloan School of Business. "That would then enter into measurable output."

Through a survey, Brynjolfsson tried to calculate what additional amounts Americans would pay for hundreds of conveniences that computers make possible. He came up with a total of $70 billion in additional output.

That would add only one-tenth of one percent to the national wealth, which is the value of all the goods and services produced in the United States in a year -- hardly enough to get economic growth back to the rates (at least 3 percent a year) that were characteristic of the 1950s and 1960s.

Still, computers and software in all their various forms make an important contribution. The national wealth -- also known as the gross domestic product -- has risen at an annual rate of less than 2.5 percent, on average, in recent years.

That includes a contribution of roughly four-tenths of a percentage point from computers and their trappings, according to the calculations of two Federal Reserve economists, Stephen D. Oliner and Daniel E. Sichel. Manufacturing and the telecommunications industry have benefited especially from computerization.

But why haven't computers lifted the overall economy the rest of the way back to 3 percent growth? One reason is that they represent only 2 percent of the nation's capital stock, which is all the existing machinery, equipment, factories and buildings that business uses to produce goods and services.

By comparison, railroads in their heyday represented more than 12 percent. And they became the tool for opening up frontier lands to agriculture, and to new cities and industries.

At the same time, electric motors, replacing steam, gave the nation a much more flexible and efficient source of power, and made possible the assembly line. The output resulting from railroads and electric motors became enormous.

Perhaps there is some set of conditions, having no direct connection to computers, that must develop before American productivity and economic growth can return to the old levels -- conditions like greater demand for the potential output from computers, or hegemony again in the global economy.

Or perhaps, as some economists say, we should lower our expectations.

Wednesday, August 27, 2008

The Housing Story, cont.

Housing is still in a dismal state with mixed messages on where the market is heading, although I think most analysts are far too optimistic in their assessment. The S&P/Case-Shiller home price index hit record lows for June 2008, posting a record 15.4% decline in home prices over the second quarter of last year, worse than the 14.2% drop posted in the first quarter. (Composite-10) The monthly numbers issued showed home prices in 10 major metropolitan areas fell a record 17% in June from the prior year and 0.6% from May, according to the indexes. The month-to-month drop improved from 1% in May over April.


In 20 major metropolitan areas, home prices dropped a record 15.9% from a year earlier, and just 0.5% from the prior month. That’s better than the 0.9% drop recorded in May over April.

S&P/Case-Shiller Index for June 2008

20-City Index: -15.9%
N.Y. Metro: -7.3%
Las Vegas: -28.6%
Los Angeles: -25.3%
Miami: - 28.3%
Phoenix: -27.9%
Washington: -15.7%


S&P/Case-Shiller Composite-20 Trend Line
Source: S&P

The only good news here is that the declines are starting to moderate, as seen in the slope of the graphs for May and June 2008.

Adding to the dismal news the supply of pre-owned houses on the market now stands at an 11 month backlog, normally that number is 6 months.

Supply of Pre-Owned Homes on the Market Stands at 11 Months


Home prices in areas where prices had been pretty much stable, such as Bergen County, NJ, have started to crack with a drop in median home prices of 2.3 percent in the first half of 2008, compared to the first half of 2007. Additional trouble can be seen in the foreclosure rate with 2,800 North Jersey homes in some stage of foreclosure, about one in 135, compared with 1,000 homes, or one in 385, a year ago. Foreclosed homes add an additional drag to housing prices, as foreclosed homes usually sell at a steep discount to their market value when sold by banks.

Foreclosure Actions in North Jersey



Add to all this that roughly $1.9 trillion in available credit has dried up, largely due to bank losses in the home mortgage industry, then the housing industry is in for a continued rough ride. While some analysts forecast an upturn in 2009 or at the latest 2010, I don't see much good happening to housing until 2011 or perhaps even 2012. There is just still too much pain in the system that still needs to be worked out. And remember, when the Japanese mishandled their housing burst-bubble and banking crisis in the '90s by shoring up insolvent banks, their recession lasted ten years as a result.

Further adding to bank woes is the hundreds of billions of dollars of floating-rate notes the banks took out to finance their housing bubble lending binge. The crunch will begin next month when banks have to pay off $95 billion in floating rate loans that come due. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009, about 43% more than they had to redeem in the previous 16 months. The pain of the credit crunch will not end soon with for lenders or borrowers.


Banks will have to redeem $787 billion in floating rate notes over the next 16 months that were sold to finance their lending binge


Tuesday, August 26, 2008

Price of Nickel Down 30% January - August 2008

The price of nickel continues to fall, down 30% so far in 2008. Falling prices together with rising costs are making many nickel operations unprofitable. Russia's Industrial Metallurgical Holding has shut down 30% to 40% of its production capacity because falling nickel prices made its operations unprofitable.

Despite the lower prices, demand from the stainless-steel industry, the main consumer of the anticorrosive metal, hasn't picked up. Instead, buyers appear to be hoping for even lower prices.

Nickel producers are being squeezed by energy prices and the rising costs of sulfuric acid, a key component to extract nickel laterite ores. Sulfur prices have rocketed from an average of just more than $100 a ton last year to more than $800 a ton.


The Price of Nickel is Down 30% January - August 2008