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Tuesday, March 2, 2010

Transcript: 362 The demand side way out

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Today, the Demand Side checklist, a few words on John Maynard Keynes from Lance Taylor of the New School, an introduction to the Sarkozy Report, and the temperature of the water taken in association with Calculated Risk.

First, is it heating up or cooling down?

The February employment report will be released on Friday. The consensus is for a net loss of 50 to 80 thousand payroll jobs, and the unemployment rate to increase slightly to 9.8% (from 9.7%).

There is considerable debate on the impact of the snow storms on the employment report. The BLS will disclose and adjust for any snow related data collection issues, but some hiring might have been delayed because of the storms. It is important to remember that the weekly unemployment claims were moving higher before the storms arrived.

On Monday, the BEA will release the Personal Income and Outlays report for January. Personal Income is, in Demand Side's view, better for judging the performance of the economy, being based on citizen well-being rather than production.

Personal income increased $11.4 billion, or 0.1 percent, and disposable personal income (DPI) decreased $47.6 billion, or 0.4 percent, in January, according to the Bureau of Economic Analysis. ... Personal consumption expenditures (PCE) increased $52.4 billion, or 0.5 percent.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in January, compared with an increase of 0.1 percent in December.

Going up on Monday was the ISM Manufacturing index, at 56.5, worse than the consensus estimate and a decrease from January's 58.4%, but still expanding since it's above 50.

Also anticipated to expand is ... the ... well ... maybe Wednesday's ISM Non-Manufacturing Index, though it would be barely out of statistical stagnation. Today's personal bankruptcy filings will also likely expand.

Today's light vehicle sales report for February will decline. January's Construction Spending report from the Census Bureau should drop. When we get to Thursday and the closely watched initial weekly unemployment claims, productivity report, factory orders, and pending home sales, we will get more bad news, drifting down.

Finally on Friday the BLS employment report, and Consumer Credit and significantly more contraction. Also announced on Friday will be another round of bank failures.

Last week? CR's summary (Weekly Summary and a Look Ahead)

New Home Sales fall to Record Low in January. The Census Bureau reported that New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the revised rate of 348 thousand in December. The chart is a fall off a cliff beginning in January '06 and interrupted only by a hiccup in 2009 as the collapsing housing market digested the Fed's trillion dollars of MBS -- or we might say, the banks digested it -- and the only bump we'll see from the first time homebuyers credit. They are now 6 percent below the previous record low from January 2009.

Existing Home Sales Declined Sharply in January

The NAR reported existing home sales were at a seasonally adjusted annual rate of 5.05 million units in January, down from a revised 5.44 million in December. Here you saw a much softer hillside into 2009 and a much sharper impact from the government's program. That impact is now virtually wiped out, though sales volume is still 11.5 percent higher than in 2009, seasonally adjusted

The American Institute of Architects’ Architecture Billings Index decreased to 42.5 in January from 43.4 in December.

Note: This index is a leading indicator for Commercial Real Estate (CRE) investment.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further significant declines in CRE investment through this year, and probably longer.

FDIC Q4 Banking Profile: 702 Problem Banks

The FDIC listed 702 banks with $403 billion in assets as “problem” banks in Q4, up from 552 banks with $346 billion in assets in Q3, and more than twice the level of Q4 2008.

Case Shiller House Prices increased in December

S&P/Case-Shiller released the monthly Home Price Indices for December (actually a 3 month average). This is prices, previous were quantities. Fewer homes sold, slightly higher prices.

The Composite 10 index is off 30.3% from the peak, and up about 0.3% in December.

The Composite 20 index is off 29.4% from the peak, and up 0.3% in December.

We suspect once the averaging comes forward, prices will be going down.

Calculated Risk links to some sobering assessments


San Francisco Fed President Janet Yellen,

also from Cleveland Fed President Sandra Pianalto, who says it "may take years to get back to 2007 level of output." Weekly initial unemployment claims continued their increase. Fannie Mae reported a $15.2 billion loss, Freddie Mac says delinquencies increased sharply in January.

However truck tonnage was up, commercial real estate prices were up, restaurant performance declined,
and of course the Q4 GDP was revised to 5.9 percent. Making the president happy and making anybody who thinks we are still in recession look very fringist. Oops. That's us.

So thanks to Calculated Risk, get him online at calculatedrisk.com.

Now, listen here to a Google talk we'll get up on the relay on Saturday. It's Lance Taylor introducing John Maynard Keynes. May NARD, I guess, is the correct way. So long as you say KANES, not KEENES, we'll be happy.


So how do you increase demand?

Notice there are two types. Consumption and Investment. We have stabilized consumption demand somewhat with the automatic and discretionary stabilizers of social security, unemployment insurance and some parts of the stimulus. But let's abort any discussion early for the sake of time, any discussion of trying to replicate the consumer society of the past decade or two. First, we see how we ran off the cliff with it. Second, replacing that demand is not going to stimulate what our form of capitalism needs:


Productive investment, not housing. Besides which we have enough housing for awhile.

Well, instead, let's go back to the checklist of demand:

Demand from jobs. The President's jobs bill which we panned last week won't create significant jobs. A full-scale, minimum wage job for everybody, such as was proposed by Yeva Nersysian and reproduced on the blog this week, will generate two dollars for every one spent, will reverse the destruction of human capital, and will stabilize demand further, but it will never lead out of the woods.

Demand from stabilizers, we spoke of already.

Demand from exports. Here again we get into it with the President and the no tax crowd. Our economy benefits on one hand from sending pieces of paper overseas in exchange for goods. It creates global imbalances, true, but there is real demand for our pieces of paper. Unfortunately, as Joseph Stiglitz pointed out last week in Seattle, if we are sending them pieces of paper, we are not sending them goods and services that employ people. Unless we change that around, getting out from exports is not realistic. Stiglitz identifies the appetite of Asian countries for American pieces of paper as a major obstacle in rebalancing the global economy.

Moving quickly onward.

There will be demand to care for the one in two Iraq-Afghanistan veterans returning with a disability. Not factored into the deficit so far, but ...

There will be demand for helping aging baby boomers, if it can be funded. For this reason, we ought to have an open door policy for immigrants so they can pay social security taxes as they change our bed pans.

We can have significant demand if we wake up and help the developing countries in real, fundamental ways. Not factories on the edge of slums. Roads. Schools. And so on.

We spoke of the Marshall plan a couple of weeks ago as being the best foreign aid package ever for allowing the natives to identify, design and implement the projects. It rebuilt the fabric of the society as it rebuilt the country. Then what happened? We got two decades of strong demand for our machine tools and industrial products from a nation on its feet. It's a model that has only one major drawback: It doesn't make some multinational rich.

Demand from economically efficient changes. Last week we were distracted into a complete description of the Cantwell-Collins cap and dividend program which we noted would shift spending and investment away from the tar pit of oil into sustainable alternatives, sparking investment by everyone from households to giant companies for the benefit of the survival of the planet, plus give every man, woman and child in the country the equivalent of the oil royalties check that Alaskans now get.

Another example of shifting technologies to the immense benefit of investment would be in transportation. Moving to rail, for example. Extricating our rail system from the high-profit, low investment model it is stuck in by way of Mega Rail Corporation, and putting it into low-profit, high investment mode like the rest of the world. Moving off the roads with the freight. The roads will last longer. The planet will last longer. It doesn't have to go a million miles an hour. It just has to beat the motorized vehicle.

And we can generate demand for specific technology with procurement policies. A decade ago the drones that now number in the thousands that we have deployed over Iraq and Afghanistan were a science fiction fantasy. Now they are multiplying like rabbits. The price has come down, I think I heard to $3,000. Look for one over a city near you.

But the point is, these were identified as a desirable technology and targeted for development. The same thing can be done through the free market system by RFPs for desirable technology. We will contract to buy the thing if you build it. If you don't build it to specs, we don't buy it. All the private sector needs is this visible market. They will begin to invest in big numbers.

I suppose we should talk about health care demand here. If, as we need, a rational system gets put in place.... I know, don't hold your breath. We'll talk about it on Friday. By popular demand ... Will it mean that the 17 percent of GDP going to health care collapses and hordes of medical coders are walking the streets? No. First of all, we transition out of the current system. Second we extend the coverage. Third, the money lost to Big Insurance is money gained by everybody else. Of course, if the rational system is not put in place and it comes out looking something like the proposal on the table in Washington, we will have no significant change.

And by way of our introduction to our belated coverage of the Sarkozy report on economic metrics, we note here that that report correctly identifies this health care proportion of GDP as being measured by inputs, not outcomes. If we had a way of measuring the output of the health care sector, it is unlikely that the U.S., which ranks next to the Third World in health care outcomes, would get such a chunk allocated to its product. Let's leave that for, hopefully, Friday and the beginning of a series on the subject.

One of the more absurd notes coming out last week, and a demonstration of the intellectual vacuity of the Chicago School, was a recent report that the University of Chicago's Casey Mulligan says the crisis is the result of financial markets correctly anticipating the adverse labour market impacts of possible legislation under Obama, such as a health plan that might include means tests. Struggling to make zombie economics walk again.

We won't talk about that again, not Friday, not ever.

But we do need to note here two things:


these kinds of recovery plans depending on investment and on the demand side also depend on the public sector getting its act together. We hope it will happen before widespread civil disorder. That might even go another way.



It will mean price increases. Yes. Inflation. On one side you have labor moving into non-consumption goods and providing demand that competes with the consumption goods producers. On the other, you have investment that needs to pay for itself. The financial structures need to be ratified. This means profits built in. If the government is the financier, it needs to collect the productive benefits to pay for its financing. If the private sector is the financier, it needs to see its investment returned with interest.

Higher prices, inflation, is not the end of the world. It reduces the cost of the investment by reducing the real value of the returns. But it also reduces the real cost of the onerous debt service that is now lying on the shoulders of the real economy. I for one would not be unhappy to see Wall Street frozen out of such real, productive investments.

We can always dream.

1 comment:

  1. I doubt that increased demand from exports is likely. The US consumer is reliant on cheap Chinese goods to maintain their lifestyle. What could change the whole picture for America is import substitution. This would reduce the dependance on China and reduce the trade deficit. The end result is the same.