Author: Bonddad

[From the diaries by susanhu. Imus this morning asked, “Where’s Bush’s neck?” I ask, “Where’s his head, and what’s in it?”]

One my greatest concerns is the lack of attention most people pay to economics – especially national level economic policy.  I realize it is not the sexiest of topics.  It is dry, full of statistics and often talked about by people whose speaking style is less than dramatic.  As an example of the last item, listen to Greenspan talk before Congress; he alone could help cure insomnia.  More galling to me personally is the way the Republicans run national finances.  Perhaps no one calls them on their ways because the topic is boring or too detailed to fall into convenient 30-second sound bites.  Maybe it’s because it is difficult to connect the effects of national economic policy with day-to-day living.  Or maybe it’s because it’s gotten so bad under Republican leadership that it’s simply easier to not deal with it.

Last night, Bush once again decided the best thing to do to gain popularity was to buy people’s affection without asking for any sacrifice. …

Continued BELOW:
 While I am sympathetic to the after-affects of Katrina and also believe something should be done, I also understand it will require sacrifice.  The US cannot go through its fiscal life without recognizing it can’t afford everything it wants.  It cannot give money away to the well off, fight a voluntary war, spend recklessly on non-prioritized domestic needs and rebuild an area destroyed by a hurricane.  By believing it can, Bush has placed the United States – a country I love and hold very dear for all it stands for – in a position to fall into economic ruin.

Bush started his first term with a massive tax-curt for the rich, arguing that tax cuts in fact pay for themselves.  While this didn’t work when Reagan tried it in 1981, Bush gave it a second try.  First, tax cuts don’t increase receipts.  In fact they decrease them.  According to the Congressional Budget Office, in 2000 individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars.  Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively.  For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively.  When you cut taxes, revenues decrease, in this case by 18% from 2001 – 2004.  Also note that Bush’s tax receipts for 2004 were lower than Clinton’s in 1998.  As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.

At the same time, Bush decided to engage in a voluntary war.  According to a report titled The Iraq Quagmire, Congress has already authorized total spending of 249.7 billion.  According to the Congressional Budget Office, prosecuting the war at current levels would double the federal budget deficit in 10 years.  At a time when revenue was decreasing, Bush increased spending on something he didn’t need to spend money on.

But the Iraq war was not the only item of spending on Bush’s table.  Again, according to the CBO, total outlays in 2001 were 1,863.0 trillion.  This number increased to 2,292.2 in 2004.  Over the same period, total revenues decreased from 1,991.2 in 2001 to 1,880.1 in 2004.  In other words, spending increased and revenue decreased.  If we take the Iraq figures from above out of the total increases, we still get a net increase of 179.5 billion dollars.  

As of this writing, the 2005 deficit is projected to be a little over 300 billion dollars.  However, this was before Katrina.  Although estimates of proposed government spending vary in size, one private estimate of total damage started at 100 billion and was later revised upward to 125 billion.  Several news reports have placed final government spending between 150 – 200 billion dollars.  This will once again place the budget deficit over 400 billion – deep in deficit with no end in sight.

At 400 billion, the US budget deficit is about 3.6% of total US GDP.  And this is where the problem begins.  At some time in the near future, the US will experience a recession.  Why?  Because all economies move in cycles.  Typically, national governments increase spending during a recession to stimulate the economy, hoping to either limit the recession’s impact or bring the country out of the recession into expansion.  

This is where the real problem comes.  Assuming federal expenditures remain the same for the foreseeable future – tax cuts remain, Iraq continues and the Federal government spends opulently on rebuilding – there is little the Federal government can do to get the US out of the next recession.  Assuming things stay the same, an increase in federal spending would increase the national debt to near 5% of GDP.  At this level, the currency markets will notice the US is not taking care of its fiscal house and start to sell the dollar.  To protect the dollar, the Federal Reserve will increase interest rates, further slowing the economy.  You get the idea.

Currently, the US Congress lives in economic fantasy land, where they can be all things to all people.  They can cut taxes, fight a war, spend lavishly on campaign contributors and rebuild an entire region devastated by natural disaster without asking for any sacrifice.  This mentality is placing US fiscal matters near the cliff.  We’re not over it yet.  But we’re damn close.

[From the diaries by susanhu. A wise person pointed out this diary’s brilliant plan to me.]

President Bush will call tonight for an unprecedented federal commitment to rebuild New Orleans and other areas obliterated by Hurricane Katrina, putting the United States on pace to spend more in the next year on the storm’s aftermath than it has over three years on the Iraq war, according to White House and congressional officials.

The president will call on Washington to resist spending money unwisely, but some in his own party are already starting to recoil at a price tag expected to exceed $200 billion — about the cost of the Iraq war and reconstruction efforts. As emergency expenditures soar — with new commitments as high as $2 billion a day — some budget analysts and conservative groups are warning that the Katrina spending has combined with earlier fiscal decisions in ways that will wreak havoc on the government’s finances for years to come.

Bush and Republican congressional leaders, by contrast, are calculating that the U.S. economy can safely absorb a sharp spike in spending and budget deficits, and that the only way to regain public confidence after the stumbling early response to the disaster is to spend whatever it takes to rebuild the region and help Katrina’s victims get back on their feet.

I don’t want to sound unsympathetic to the situation in states hit by Katrina.  This is a horrible disaster that begs relief.  However, at some point the bill from Republican mismanagement before Katrina will come due.  And it is my fear this will be sooner rather than later.

Let’s look at the actual history of treasury receipts under Bush, with information from the Congressional budget Office.  First, tax cuts don’t increase receipts.  In fact they decrease them.  In 2000, individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars.  Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively.  For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively.  Does anybody see a pattern here?  When you cut taxes, revenues decrease, in this case by 18% from 2001 – 2004.  Well, call me a liberal, but it looks like the laugher curve is wrong.  Also note that Bush’s tax receipts for 2004 were lower than Clinton’s in 1998.  As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.

In 2001, Bush had a surplus of 128 billion.  At the end of 2004, he had a deficit of 412 billion.  Fiscal conservatism at its finest.

And the recent surge in Federal Revenues in 2005 is not the result of the laugher curve.  As Krugman noted in his colum Unspin the Budget Numbers:  

It turns out that all of the upside surprise in tax receipts is coming from two sources. One is tax payments from corporations, up both because last year corporate profits grew much more rapidly than the rest of the economy and because the effective tax rate on corporations went up when a temporary tax break, introduced in 2002, expired. Both are one-time events.

The other source of increased revenue is nonwithheld income taxes – taxes that aren’t deducted from paychecks but are instead paid by people receiving additional, nonsalary income. The bounce in nonwithheld taxes probably reflects mainly capital gains on stocks and real estate, together with bonuses paid in the finance and real estate industries. Again, this revenue boost looks like a temporary blip driven by rising stocks and the housing bubble.”

So, Bush’s little experiment in the laugher curve is a failure.  Even though he could have learned that lesson from Reagan’s experience he had to try it again.  Fine.  It’s done and it’s over.

For those of you who missed the news for the last 3 years, the US has engaged in a voluntary war.  This war has cost 200 billion+ with no end in sight.  As a result, the budget deficit has once again ballooned.

Simply off the top of my head, Katrina’s cost will increase the Federal deficit to between 400-500 billion.  The US cannot afford this amount of debt.

Simply from a fiscal perspective, the US cannot afford to pay for a natural disaster and fight a voluntary war at the same time without bankrupting the US.  As a result, the US must choose what to do.  We can either fight the war, or rebuild after Katrina.

I think the answer is obvious.
  Link

[From the diaries by susanhu.]

The cost of health insurance for working Americans climbed 9.2 percent this year, the lowest rate of increase since 2000 but still far ahead of both general inflation and workers’ pay increases, according to a nationwide survey by the Kaiser Family Foundation.

On average, health insurance for a family cost $10,880 this year, with the employer paying $8,167 and the worker $2,713, the survey found. The total cost almost exactly matches the total annual earnings of a person working full time at the minimum wage, the survey noted.

At the same time, the proportion of employers providing health insurance continued its steady decline, falling to 60 percent this year from 69 percent five years ago. Most of the decline was among very small companies, the survey found, noting that less than half — 47 percent — of firms with three to nine workers now offer medical coverage to their employees.

This year is the second in a row with a slower rise in premiums, slipping from 11.2 percent last year and 13.9 percent in 2003. That 2003 rise capped an unbroken string of progressively higher increases dating back to 1996.

The current “next big thing” is what has been dubbed “consumer-driven” health care, which combines high-deductible insurance with a fund that the individual can use to cover routine costs. In these arrangements, consumers are allowed to accumulate unspent money in the fund, giving them, theorists argue, an incentive to shop and eliminate unnecessary spending.

First, let’s place these premium increases in perspective.  According to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005.  Over the same time, inflation increased 11.59%, making inflation adjusted wage growth 1.6% over a five and a half year period.  

So, health insurance increased 13.9% in 2003, 11.2% in 2004 and 9.2% this year.  Over the same time, wages have been near stagnant after inflation.  In other words, premiums are taking a larger percentage of a consumer budget that is essentially stagnant.

But that’s not the end of this situation.  Employers are using higher deductible policies.  So not only is the average American family paying more for insurance, they are also paying more in the form of deductible payments.  This hidden cost further eats into the near stagnant wages.

More importantly, fewer small companies – which employ most Americans – are providing heath insurance.  So, assuming a person has a job, it’s less likely they will be able to get insurance through their employer.

Is anybody listening?  Americans are still losing out in this situation.  

Link

For some reason, the Republicans still hold to the mantra they know how to deal with federal finances.  However, the record clearly states otherwise.  Starting with Reagan, the Republicans have engaged in a shell game.  They cut taxes for the wealthy, replace revenues lost from the tax cuts with debt, increase spending on defense to appear hawkish, and pray the international currency markets won’t punish the dollar while the Republicans are in office.  Katrina stands the possibility of throwing a wrench into a rigged fiscal game that could eventually punish the US because of this mismanagement.
All the figures are from the Congressional Budget Office and the Bureau of the Public Debt.

Reagan started this madness. He cut taxes in 1981.  As a result, revenue from individual income taxes was stagnant from 1981-1893, with total revenue for 1981, 1981, and 1982 at 285 billion, 297 billion and 288 billion respectively.  During the same years, the Republicans increased spending on their favorite department — the Pentagon.  From 1981-1983, spending increased from 158 billion to 209 billion.  During the same time, general spending (which includes defense spending) increased from 678 billion to 808 billion.  While the Democrats controlled Congress during these years, it should be noted that Reagan had veto power over these spending measures that he obviously didn’t use.  As a result of this policy, the federal deficit ballooned from 73 billion to 207 billion.  As a result of this policy, the total amount of public debt increased from 930 million in 1980 to 2.6 trillion in 1988.  

20 years later, cutting taxes still does not increase revenue from individual taxpayers.  In 2000, individual tax receipts (receipts from individual tax payers) totaled 1.004 trillion dollars.  Many on the right will scream that I am using a boom year for comparison, so in 1997 and 1998 tax receipts were 737.5 billion and 828.6 billion respectively.  For the years 2001-2004, individual receipts were 994 billion, 858 billion, 794 billion and 809 billion, respectively.  Does anybody see a pattern here?  When you cut taxes, revenues decrease, in this case by 18% from 2001 – 2004.  Well, call me a liberal, but it looks like the laugher curve is wrong.  Also note that Bush’s tax receipts for 2004 were lower than Clinton’s in 1998.  As another comparison, individual income taxes as a percentage of GDP decreased over the same time from 9.9% to 7%.

Why bring this up now?  A sane fiscal policy does not expose the country to the risks inherent from unforeseen disasters.  While total federal spending on Katrina is still unknown, the figures are increasing:

Senate finance committee chairman Charles Grassley believes that federal spending after Katrina could hit 150 billion dollars. Republican Senator Jeff Sessions said a figure of 200 billion dollars was possible.

Merrill Lynch economist David Rosenberg bid “goodbye to the 2006 deficit projection” of 314 billion dollars, predicting it would shoot to a new record high to beat last year’s figure of 412 billion dollars.

“Katrina has now become a great valve for Congress to spend gobs of dough, keep the economy alive and save their re-election prospects in November 2006,” he said.

So, an unforeseen natural disaster – which in fact was foreseen for decades — will place the US federal budget deficit on the path to financial ruin, AGAIN.

What would have happened if this happened during the Clinton presidency?  Well, although he raised individual income taxes on the upper class, the economy grew for 8 years and created 22 million jobs.  The federal deficit decreased from 340 billion to a surplus of 86 billion in 2000.  In other words, if Katrina had hit during Clinton’s term, the federal government would have had the ability to increase spending (as it should in this situation) without creating a possible federal fiscal crisis.

As the federal situation currently stands, Katrina will place the US federal budget in the hole – again.    The international forex markets will probably start to look at the US as incapable of handling its internal finances and start to sell the dollar — again.  And the threat of interest rate increases to prop-up to the dollar will become far more likely — again.

Sound national fiscal management is the way we as a country plan for a rainy day.  If we plan well (balance budgets), the disaster’s long-term fiscal effects are diminished.  If we plan poorly (not balancing budgets), the disaster’s long-term fiscal impact runs far deeper causing far more problems.

Thanks to Republican fiscal mismanagement (again), Katrina’s overall fiscal effects will run deeper than they should.

Republicans – we can’t afford them anymore.

Katrina’s ripples will spread far and wide through the economy.  While the initial damage phase is over, there are several Katrina caused major forces at play that could cause serious damage possibly leading to a recession. The worst part about this “perfect economic storm” is there is little the country can do for it from a policy perspective.  In essence, the country made its bed and now may be forced to sleep in it.
First, let’s start with a general, documented observation:  Natural disasters are essentially an economiczero-sum game.  The Bureau of  Economic Analysis analyzed the sum total of all 2004 hurricanes.  They did roughly 115 billion in total damage and created about 117 billion in benefits.  Look at it this way: if natural disasters were so economically wonderful, we would try to duplicate their effects all the time.

Some people will attempt to argue the post reconstruction boom will be so large it will stimulate the economy, creating economic growth.  However, the historical record is clear: the rebuilding process after a natural disaster simply replaces total losses.

Total Damage

The total damage estimates vary.  I have seen figures from 25 billion to 125 billion.  However, given the size of the area involved (three states) and 1 major US city underwater, I tend to think high estimates are more probable.  The most widely sited source of damage assessments is from Risk Management Associates

Risk Management Solutions on Friday raised its estimate of total damages caused by the hurricane to $125 billion and said it expects insured losses of $40 billion to $60 billion.

Previous estimates of economic costs of Katrina by federal and state agencies had hovered around $100 billion, while expectations for the costs borne by private insurers had been in the range of $25 billion. Previously, the most expensive hurricane had been Andrew, with $21 billion of insured losses in 1992.

RMS, based in Newark, California, assesses disasters for more than 400 insurance firms, trading companies and financial institutions. It now has the highest estimate of any of the major catastrophe modeling firms. It had expected $20 billion to $35 billion of insured damages just last week.

“We did a lot of reconnaissance since then and the big variable is how bad it’s been in Louisiana,” said Brian Owens, a director with RMS.

However, there are some people within the government arguing the cost will be higher:

One storm could end up costing almost as much as two wars. Although estimates of Hurricane Katrina’s staggering toll on the treasury are highly imprecise, costs are certain to climb to $200 billion in the coming weeks. The final accounting could approach the more than $300 billion spent in four years to fight in Afghanistan and Iraq.

Analysts inside and outside government agree that the $62 billion that Washington has spent so far was merely the first installment of perhaps an unparalleled sum.

As for the overall toll, G. William Hoagland, the top budget adviser to Senate Majority Leader Bill Frist, R-Tenn., said: “We’re obviously over $100 billion. I just don’t know how much over.”

The cost projections are important because they will add to the Federal deficit which currently totals just under 8 trillion dollars.  Katrina’s total cost will most likely send the total debt amount over 8 trillion.  As some point, the total US debt will require interest rate increases to compensate borrowers for the increased risks inherent in lending to an already heavily indebted borrower. There is no guarantee increasing interest rates will happen as a result of the federal government’s spending on Katrina.  However, it is a possibility.

In addition, the Republican’s reckless fiscal mismanagement will hamper the Federal governments ability to stimulate the economy through federal spending.  If the economy needs a federal fiscal stimulus, the money simply won’t be there.

Oil, Gas and Energy

Let me tie together several economic threads.

 

First, wages haven’t increased in the last 5½ years.  According to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005.  Over the same time, inflation increased 11.59%, making inflation adjusted wage growth a paltry 1.6% over a five and a half year period.  Therefore, US consumers are spending from a stagnant pool of money.  

Secondly, consumer spending represents 2/3 of US GDP.  For the economy to grow, the consumer has to spend.  Therefore, if a necessary expenditure increases at a rapid rate, consumers will be forced to allocate their stagnant income to the necessary resource at the expense of other consumer items.

Third, retailers derive at least 50% of their total revenue from seasonal sales.

So far we have this equation: the US economy depends on consumer purchases to grow.  Consumer purchases spike during the holiday season.

Enter energy prices.

As of this writing, the latest release from the Mineral’s Management Service notes at least a third of overall refining capacity is still off line:

Today’s shut-in oil production is 897,605 BOPD. This shut-in oil production is equivalent to 59.84% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 3.821 BCFPD. This shut-in gas production is equivalent to 38.21% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-9/10/05 is 17,121,430 bbls, which is equivalent to 3.127 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).

 

The cumulative shut-in gas production 8/26/05-9/10/05 is 84.232 BCF, which is equivalent to 2.308% of the yearly production of gas in the GOM (approximately 3.65 TCF).

The lost production will continue through 2006 for some oil facilities.

Crude oil rose after Royal Dutch Shell Plc and the International Energy Agency said U.S. production will be slow to recover from damage Hurricane Katrina caused to rigs and refineries along the Gulf coast.

Shell said today output may not resume from its Mars field, which accounts for as much as 15 percent of Gulf output, until 2006. Production statistics show the industry will take longer to recover from the storm than from Hurricane Ivan a year ago, the IEA said today. About 30 percent of U.S. oil production comes from the Gulf of Mexico.

U.S. oil production in the Gulf of Mexico yesterday was 40 percent of pre-Katrina output of 1.5 million barrels a day, according to data from the Minerals Management Service. Four refineries may take three months or more to resume operations, Energy Secretary Samuel Bodman said yesterday.

Refineries are already operating near capacity.  That means refiners cannot simply move operations to another refinery because all other refineries are already operating at peak production.  Therefore, any lost production lowers overall refining operations.  This limits energy supply.  Lower supply = higher cost.

The U.S. economy will face a tough winter due to high energy prices caused partly by a disruption in oil and natural gas supplies from Hurricane Katrina, U.S. Energy Secretary Sam Bodman warned on Thursday.

“There is no doubt that this is going to be a very tough winter season for the American economy (and) for American homeowners,” Bodman said in an interview on the “Fox & Friends” television news program.

The Energy Information Administration said on Wednesday Americans who warm their homes with natural gas could see their fuel costs jump by as much as 71 percent this winter in some parts of the country.

Consumers can’t simply borrow for Christmas.  Consumer debt payments are already at record levels.  Consumers won’t chose Christmas gifts over heating and transportation needs.  As a result, consumers will cut back on Christmas purchases.  If they cut back excessively, retailers profits will decline.  This will lower GDP growth, decreasing consumer sentiment… you get the idea.

Let’s sum up:

1.) Natural disasters are a zero sum game.  Communities essentially rebuild what was lost.  Claims the rebuilding effort will help to grow the economy are counter to the historical record.

2.) The Federal government – which is already in a record amount of debt – will increase its total debt to pay for Katrina’s damage.  At some point, lenders will demand a higher interest rate because of total US debt.

3.) An already tapped-out, heavily indebted consumer now faces spiking energy prices going into the economically important Christmas season.

Should all the events play out, Katrina will indeed be the perfect storm.

The stock market rallied this week, largely as a result of lower oil prices, the possibility of a pause in the Fed’s recent rate hikes and expectations of a rebuilding boom for the Katrina affected areas.  In addition, there were some indications of a strong economy before Katrina.  The Fed released the Beige Book, which basically stated that the economy was on firm footing.  The ISM number (see below) indicated the service sector of the economy was poised to grow.  In addition, Texas Instruments gave a very upbeat earnings call late in the week, boosting tech shares.  Technically, all three markets were a key reversal levels at the beginning of the week and were technically oversold.  This implies that program trading most likely contributed to the gains.  Finally, the S&P 500 closed at a three year high.  

The Treasury market spent the week worrying about inflation and the possibility of a pause in the Fed’ rate increases.  The market sold-off on Tuesday and Wednesday because of the rising employment costs (see below) and concern economic growth would lead in inflationary pressures.  Two Fed governors gave speeches indicating inflation was still a concern.  However, as various economists cut their GDP growth forecasts, traders started to bid-up Treasuries on Friday, as this is an indication of lower inflationary pressures in the economy.  There were two treasury auctions this week.  The Treasury sold 13 billion in 5 year notes on Wednesday.  Foreign Central Banks (Indirect Bidders) purchased 55% of the issues.  The Treasury auctioned 8 billion 10-year notes on Thursday.  Indirect bidders purchased 22.1%.  This number should not raise much concern, as most investors will shorten their maturities in a rising interest rate environment.

To understand the oil market’s reaction to Katrina, it is important to remember the market was technically very overbought for the previous week.  There was also a fair amount of panic buying, especially as reports of refinery shut-ins came out daily from the Minerals Management Service.  As a result, this week’s sell-off was the result of some technical sales based purely on price and reaction to the international communities pledge of 60 million barrels of oil to the US.  In addition, as more production came on line, traders’ tension about a possible gasoline shortage eased somewhat.  However, the refinery situation is far from over.  Yesterday, a commentator on Bloomberg television stated some refineries would be down for at least a month and possibly longer.  The Department of Energy issued a statement that winter heating prices could increase 71% in some areas.  In short, the situation is very fluid.  

The currency markets spent the week debating whether or not the Fed would pause its recent interest rate hikes.  Since the beginning of the year, forex traders have focused on the interest rate and growth rate differentials between various economies, bidding up currencies with higher interest and growth rates.  As a result, the dollar has rallied since the first of the year.   There was concern among traders the Fed would halt its recent interest rate hikes, largely as a political gesture to Katrina.  However, the CBO issued a report stating Katrina would hurt, but would not be devastating and several Fed governors gave hawkish speeches this week leading traders to believe rate hikes would continue with no pause.  

Tuesday: ISM Non-Manufacturing Survey

The report was issued today by Ralph G. Kauffman, Ph.D., C.P.M., chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee and coordinator of the Supply Chain Management Program, University of Houston-Downtown. “Non-manufacturing business activity increased for the 29th consecutive month in August,” Kauffman said. He added, “Business Activity increased at a faster rate in August than in July. New Orders, Employment and Inventories also increased at faster rates. Many members’ comments expressed concern about the continuing increase in oil and gas prices and its impact on the prices of other items and on budgets. The overall indication is continued economic growth in the non-manufacturing sector in August at a faster rate of increase than in July.”

The best news in the survey was the large +10 export orders increase, which bodes well for the trade deficit figures.  Business activity increased 4.5 and employment increased 3.9 – again, more good news.  In full, this is a very positive report.  There is an inexplicable situation contained within the report.  Overall, reported prices paid decreased.  Bur, over 25 commodities categories increased in price compared to under less than 10 that decreased.  This is an odd contradiction that has no explanation.  In addition, from a reconstruction of storm damage, steel and concrete are in short supply, implying price spikes are more likely with these commodities.

Wednesday: Productivity and Labor Costs

The seasonally adjusted annual rates of productivity change in the second quarter were:

               0.7 percent in the business sector and
               1.8 percent in the nonfarm business sector.

Productivity is the amount of goods produced per a unit of time, usually by the hour.  The US productivity rate has increased a great deal since 2001.  There are some economists who argue the increase is due to the use of technology from the late 1990s expansion.  Whatever the reason, an increase in productivity allows a business to produce the same amount of goods with fewer resources.  This lowers the overall cost of the product to the business, allowing them to make larger profits.  A sustained productivity increase also slows hiring practices because a business does not need as many employees to perform a specific task.

Productivity increases have been slowing for the last few quarters.  This is one reason some economists have argued for a better employment picture, as lower productivity would force companies to increase payrolls.

Unit labor costs rose 2.6 percent in the second quarter of 2005.

This number is very important; it is one of Greenspan’s key indicators.  It indicates the amount of inflation occurring at the business level.  This was the largest increase since 2000.  The size of the increase harmed the argument the Fed would pause its interest rate hikes at the next meeting as a result of Katrina, as the Fed would probably place fighting inflation over a temporary pause.

Thursday: Wholesale Inventories and Sales

The U.S. Census Bureau announced today that July 2005 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $298.7 billion, up 0.5 percent (+-0.7%)* from the revised June level and were up 7.5 percent (+-1.2%) from the July 2004 level.

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $352.0 billion at the end of July, down 0.1 percent (+-0.3%)* from last month, but were up 8.2 percent (+-1.0%) from a year ago.

The July inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.18.  The July 2004 ratio was 1.17.

Wholesalers stand between manufacturers and retailers in the supply chain.  Manufacturers sell to wholesalers who in turn sell to retailers.  Therefore, keeping track of their inventories and sales is a way to gauge the health of the economy.  

An increase in their overall sales is positive because it indicates their customers – retailers – are purchasing goods, anticipating sales.  

Wholesaler’s inventories indicate how bullish they are on the economy.  If they start to stock up on goods, it indicates they are bullish about the next few months.  However, it is important to note the overall economy has become more fluid as a result of the just-in-time inventory system.  Businesses as a whole does not need to keep their inventories nearly as high as past years because information technology (computers and the like) and rapid transport such as Fed Ex and UPS.  Therefore, a drop in inventories and a decreasing inventory/sales ratio is not as bearish as previous years.

The largest increases from June occurred in motor vehicle and related parts (1.9%), lumber (1%), apparel (1.9%) and petroleum (7.6).  Apparel increases are the result of back-to-school sales and auto sales are the result of the automakers employee pricing discount sales promotion.  The latter may have positively skewed the results making them larger than they should be.

Friday: Import Prices Index

The price index for U.S. imports increased 1.3 percent in August, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  Rising petroleum prices led the increase for the third consecutive month.  U.S. export prices declined 0.1 percent in August after a modest 0.1 percent upturn in July.

Import prices continued a steady upward trend in August, increasing 1.3 percent following advances of 1.2 percent and 0.8 percent in June and July, respectively.  The August increase was the largest monthly gain since a 2.2 percent increase in March, and import prices rose 7.6 percent over the past year.  Following the pattern of the prior two months, the August increase was driven by higher petroleum prices, which rose 7.1 percent.  August marked the third consecutive month that the price index for petroleum imports recorded its highest level since the index was first published in 1982.  Petroleum prices rose 42.5 percent over the past 12 months.  Nonpetroleum prices were unchanged in August after decreasing 0.2 percent in each of the three preceding months.  Despite those recent declines, nonpetroleum prices increased 1.8 percent for the year ended in August.

Outside of oil, prices are tame.  However, oil’s increasing prices combined with US dependence on oil is creating a policy problem for the Federal Reserve.  Because of oil’s dominance in the economy, the Fed must pay attention to price increases.  However, raising rates based solely on a single commodities price performance is difficult, even if the commodity is vitally important to the economy.  The markets were pleased with the tameness of the “core” number, essentially discounting the policy implications of the spike in oil prices.

Cross-Posted at My Left Wing

On one hand, the US economy’s overall statistics are great.  GDO has grown over 3% for the last 8 quarters.  Unemployment stands at 5%.  Inflation is contained.  The economy seems to have adjusted to oil’s price increases.  The recent earnings season has been a roaring success, with most companies in the S & P 500 meeting or beating expectations. In short, things look good.

However, something is restraining the financial markets.  While the overall charts aren’t bad, they aren’t good either.  Instead of strong uptrending patterns and movement, there is almost an almost daily fight with the bulls winning – barely.  Instead of long candles, the charts are full of up 20 one day, down 12 the next candle patterns.  Clearly there is some reservation on behalf of traders.  So, what gives?

There are two overall macro reasons. First is oil, which is the source of energy for the economy, is rising.  It currently trades in a 57-62 range.  In his recent Congressional testimony, Greenspan noted the economy so far has accepted this increase well.  The problem is the at some point, the economy may have problems absorbing these costs.  We know this point exists; we just don’t know where.

Secondly, interest rates are rising.  There is an old Wall Street adage: Don’t fight the Fed.  Buy stocks when interest rates are decreasing and sell them when interest rates are decreasing.  The cost of money dictates business behavior.  This rule has been around for ages and still holds today.

However, these two trends do not explain the whole picture.  The US economy is experiencing a fundamental shift in employment not captured by a single statistic, but which is evident from a reading of a group of statistics.  Hence, it is beyond the realm of our 30-second sound bite news reporting or most “deny-side” economists.  Thankfully, several adept researchers at several Federal Reserve banks have caught the change.

First, according to the Bureau of Economic Analysis, the US has lost 3.4 million high-paying jobs between 2000-2003 (the last year they have statistics).  Comprising that total are:
100,000 Information and data processing jobs
200,000 Broadcast and telecommunications jobs,
205,000 Computer System Designer jobs,
2.8 million manufacturing jobs and
121,000 publishing jobs which include software.

The US economy has yet to create a sufficient number of jobs to replace those lost.  While the unemployment number is 5%, this number does not capture the whole picture. The unemployment rate only counts people who have looked for work in the last 4 weeks.  The number does not count disaffected workers and people who have given-up looking for a job.  As a result, the labor participation rate – which measures the percentage of people employed out of the total labor force working – is still low.  The labor force  participation rate was 67.1% in January 2000.  It currently stands at 66%.

Wage growth statistics solves this apparent contradiction in the employment numbers.  If unemployment were as low as the unemployment numbers indicated, then wages would be increasing.  This is simple supply and demand.  Lower or constricted supply increases a commodity’s price. However, wages are not growing.  According to the Bureau of Labor Statistics, the average earnings increase from 2000-2004 was 3.86%, 3.22%, 3.12%, 1.71% and 2.39% respectively.  However wages have to be compared to inflation to determine the real rate of wage growth.  For the same years, annual inflation was 3.4%, 2.8%, 1.6%, 2.3% and 2.7% respectively. When inflation is subtracted from wages, overall wage growth becomes .46%, .42%, 1.52%, -.59% and-.31% respectively for 2000-2004.  The fact that wages have not grown indicates the labor participation rate is the correct measure of employment.

Why this drop?  Back in 2003, there were several people at the Federal Reserve who wrote and/or talked about the idea of a jobless recovery.  Two people – Erica L. Groshen and Simon Potter wrote a paper called Has structural Change Contributed to a Jobless Recovery?  This paper provides the missing pieces explaining the overall labor situation.

The paper’s fundamental hypothesis is simple and derives from the basic concept of the business cycle.  During a recession, companies lay-off workers.  When the economy starts to expand, the business will hire workers to fill demand, but only if the industry is still economically viable.  If however the industry is in overall decline, it won’t hire workers, and instead continue to lay-off workers.  As an example, suppose we are looking at a company that makes horse carriages at a time when the auto is just starting.  During a recession, both companies will lay-off workers.  However, when the economy picks-up, the auto manufactures will start hiring because of increased demand, while the carriage company — which is in decline — will not hire workers.

The report concludes that several industry’s have experienced a net decline in employees during the 2001 recession and subsequent expansion.  Some of these industries are electronic equipment, securities and commodities brokers, communications and air transportation and transportation services.  However, there are fewer distinct winners – industries that hired employees in both the recession and expansion.  The largest clear winner is nondepository institutions.  However, they are a small percentage of the economy.  In addition, several industries that are clear winners have not been hiring en mass.  Instead, they are adding workers as needed, most likely extracting as much production from their existing workforce before adding new employees.
While the report was published in August 2003, it’s premise still holds as the labor participation rate has yet to meaningfully increase.

In summation, the US economy is in the process of restructuring.  We don’t know yet who the clear winners and losers are.  There is no clear dynamic new industry emerging on the horizon.  However, this gives the Democrats a great opportunity.  We can offer ideas for creating the industries of the 21st century.  Several examples would be alternate energy, stem cell research and applications and US infrastructure upgrades.  However, he have to act and start to talk about these issues.
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I am really excited about the Hackett race.  First, I was born in Cincinnati and my parents still live there.  I visit a few times every year where I remember what it was like to see the 1975 Reds play baseball (a great time to be a kid) and eat Skyline Chili.  

But, more importantly, the Hackett race represents an incredibly important fundamental shift in the way Democrats view elections.  Below, I will show the difference from an economic perspective using hypothetical numbers. The new strategy is economically superior.

First, let’s say there are 2 brands: D and R.  R is the dominant brand and D is the minority brand.  Each company has 1 million dollars for marketing its product, and the companies are attempting to gain market share in all 50 states.  Further, each company’s current market share corresponds to the results of the 2004 election.  In other words, brand D is the dominant brand on the West Coast, Upper Midwest and NE, and the R brand is the dominant brand everywhere else.  To see the exact states, go to this link.  Finally, each brand gets its marketing resources from the states where each respective brand dominates.

Here is an analysis of the previous brand D marketing strategy.  They would allocate their 1 million dollars to states where they were already the dominant brand and states where they were within a few percentage points of becoming the dominant brand.  They would not allocate any money to states where brand R was already dominant.  This would solidify brand D’s position in the states where it was already dominant and hopefully pick-off a few states where brand R was vulnerable.

Let’s look at brand D’s plan from brand R’s perspective.  Brand R is already dominant in a majority of states.  Furthermore, brand D is not effectively cultivating brand R states, nor are they even trying to cultivate these states.  As a result, brand R can draw resources from the states where brand R is already dominant without doing much to strengthen their brand name.  This allows brand R to divert a majority of their resources to furthering their dominant status by making inroads into brand D’s market.  In other words, brand D’s strategy will insure their minority status in the long run.

Let’s use some hypothetical numbers to make this illustration concrete.  Using the 2004 electoral map, brand D is dominant in 19 states and brand R is dominant in 31 states.  Brand R’s resource base – drawn from 31 states – is essentially unchallenged.  Therefore, brand R takes resources from these states and allocates them to states where it is a close competitor.  Because brand R does not have to allocate a large amount of money to cultivate their resource markets, brand R can divert a larger percentage of its marketing resources to expanding its brand name in brand D states.  For example, under the old brand D plan, brand R would divert say 100,000 to its resource base and 900,000 to cultivate new markets.  As a result, brand R will likely retain its dominant position because they can more efficiently and effectively allocate their resources.

Now, let’s look at the new brand D strategy where brand D starts to develop markets in states where brand R is already dominant.  Under the old strategy, brand R allocated 100,000 to maintaining their resource base.  Under the new brand D strategy, brand R must allocate a larger percentage of their marketing budget to maintaining its dominant position in markets where it is already dominant.  In addition, brand D will start to lower the amount of resources brand R use to get from the states where brand R was dominant.  As a result, brand R has less money to allocate to develop new markets.  In other words, brand D’s new strategy puts brand R on more of a defensive posture, preventing brand R from expanding its product base.  

This is why the Hackett race is so important.  Before, the Dems would have done nothing, and the Republicans would throw some spare change at the race.  However, now the Republicans have to send in more money and their best hired guns to insure victory.  Imagine if the Hackett situation occurred in 2006, when the Republicans were already spending their money.  Hackett would stand a better chance of winning because the Republicans might have less time and manpower to send to Ohio.

This is why the new 50 state strategy is so important.  Economically, it puts the Republicans on the defensive.  This will allow the Democrats to start increasing their gains at the municipal, state and national level.  

And the Republicans say the Democrats don’t know economics.

Hackett has benefited from a surge of online support in the last week that has brought in, as of Thursday, an estimated $303,000 from more than 5,000 small campaign contributors through a Democratic group called ActBlue.com.
The online buzz for Hackett started last week when Democracy for America, the group founded by Democratic Party Chairman Howard Dean endorsed Hackett’s campaign in an e-mail to supporters, calling on them to contribute.

Several other liberal-leaning political Web logs, called blogs, urged their readers to contribute to Hackett on July 19, in honor or Blogosphere Day. On that date in 2004, online campaign contributions for Ginny Schrader, a Democratic congressional candidate in Pennsylvania, raised $25,000.

Hackett’s online contributions, which increase each minute, surpassed the money raised for Schrader in the first day and continue to grow.

I was born in Cincinnati (and still crave Skyline Chili and miss the 1975-1976 Reds) and my parents still live there, so I have a great deal of interest in this race.  As a previously, my Dad the lifelong Republican is voting or Hackett and may actually contribute.

This is great news.  First, Dean sends out an email asking for contributions.  Then, a few other blogs make requests.  As a result 5000 people contribute on average $60.60/person.  And a Democratic Candidate has a good chance of pulling out an upset.

Before Dean, this would have been a yawner.  The Democrats would have found a sacrificial lamb who would make a few token speeches and then get 30% of the vote.

After Dean, we fight and we fight hard for every race.

Let’s look forward to 2006 for a minute.  Imagine a large number of Democrats contributing $30-$50/per person at their local level.  Let’s add in some money from the Central office and various other committees and PACS, and we have a race.  IN EVERY DISTRICT.

LINK

Cross-Posted at My Left Wing

U.S. banks, faced with rising mortgage competition as home sales advance, eased lending standards for the first time in 11 years, the Office of the Comptroller of the Currency said.

“We see an increase in the easing of underwriting for both real-estate and commercial products,” said Barbara Grunkemeyer, the agency’s deputy comptroller for credit risk. “The banks can take on a little more risk because their portfolios are in good condition.”

The regulator, which oversees nationally chartered banks, surveyed the largest 71 institutions, including Bank of America, Wells Fargo and Citigroup, whose $2.9 trillion of loans represent 90 percent of outstanding national bank loans.

“Ambitious growth goals in a highly competitive market can create an environment that fosters imprudent credit decisions,” Grunkemeyer said in a statement. “Higher credit limits and loan- to-value ratios, lower credit scores, lower minimum payments, more revolving debt, less documentation and verification, and lengthening amortizations have introduced more risk to retail portfolios.”

There has been a great deal of debate about the existence of a housing bubble.  Some argue that low interest rates unlocked pent-up demand, while others argue that low interest rates created an asset-bubble.

There are several anecdotal signs of bubbles, with two of the more prominent being increased used of non-traditional or exotic financing methods and a lowering of credit standards for purchasers.

Over the last year and a half, the financial press has spotlighted the increased use of ARMs and Interest-Only Loans.  While ARMs are less exotic, interest-only loans in the residential market are definitely non-traditional for most purchasers.

However, there has been little written about the effects of these standards on banks balance sheets. Currently, banks are in good shape, with charge-offs at delinquent loans at manageable levels.  According to data at the Federal Reserve, banks look pretty good.

But, at some point as yet undetermined, a system assumes too much risk.  Consider that household debt as a percentage of assets is at its highest level in over 20 years and the real wages after inflation have only increased at a .29% compound rate for the last 5 years.  In other words, banks may be lowering their standards to people who are already highly leveraged by historical standards.

I do not know if this is the straw that will break the camels back.  However, it is another straw to consider.

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