US GDP Barely Grows in Q4 2012; Recovery on Life Support

Today’s second estimate of U.S. GDP for the fourth quarter of 2012 showed growth moving from the -0.1 percent of the preliminary estimate to +0.1. Positive is better than negative, but a look at the details shows that the recovery is extremely weak. The following table shows how much each of the economy’s main sectors contributed to GDP growth in Q4.



Consumption, which has been the main driver of growth throughout the recovery, contributed slightly less in Q4 than previously reported. The categories housing and utilities, gasoline and other energy goods, and clothing and footwear all experienced absolute declines. These figures refer to real expenditures, so they reflect more than just the recent decreases in energy prices. The news is perhaps good for environmentalists, who will be glad to see a continuation of the gradual trend toward lower energy-intensity of GDP. It is not so good for anyone who hopes for consumer-led growth to reduce the stubbornly high unemployment rate. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest GDP data

Today’s second estimate of U.S. GDP for the fourth quarter of 2012 showed growth moving from the -0.1 percent of the preliminary estimate to +0.1. Positive is better than negative, but a look at the details shows that the recovery is extremely weak. The following table shows how much each of the economy’s main sectors contributed to GDP growth in Q4.

Consumption, which has been the main driver of growth throughout the recovery, contributed slightly less in Q4 than previously reported. The categories housing and utilities, gasoline and other energy goods, and clothing and footwear all experienced absolute declines. These figures refer to real expenditures, so they reflect more than just the recent decreases in energy prices. The news is perhaps good for environmentalists, who will be glad to see a continuation of the gradual trend toward lower energy-intensity of GDP. It is not so good for anyone who hopes for consumer-led growth to reduce the stubbornly high unemployment rate.
- See more at: http://www.economonitor.com/dolanecon/2013/02/28/q4-gdp-moves-from-negative-to-positive-but-details-show-recovery-still-on-life-support/#sthash.n7KleCy2.dpuf

Understanding the Plutocrats: Talent vs. Capital, The Illusion of Skill, and the Winner’s Curse

In my spare time, I have been reading Chrystia Freeland’s The Plutocrats. A refreshingly nonjudgmental book, it seeks neither to condemn nor defend the super-rich, but simply to understand them. The author’s brisk, journalistic prose, with references hidden away at the end by page number, belies the fact that she has done her homework in the economic, sociological, and historical literature. The text is further enriched with material drawn from Freeland’s own interviews with many of the world’s wealthy. The result is both entertaining and full of real insights.

The Working Rich, Then and Now

One of Freeland’s central questions is why today’s super-rich have so much more money than the wealthy of old. She begins by noting that hereditary wealth has little to do with it. Our plutocrats are, by and large, the working rich. They not only show up at the office every day, but work longer hours than most of their subordinates.

Of course, working rich are not a new phenomenon, especially in America, land of the Carnegies and Rockefellers. Still, even the legendary Robber Barons were not all that wealthy by modern standards. Freeland borrows a yardstick proposed by Branko Milanovic that measures a person’s wealth according to the number of fellow citizens whose labor it could purchase. Andrew Carnegie, at his best, could command the labor of 48,000 Americans, and John D. Rockefeller 116,000. By comparison, before his arrest in 2003, Mikhail Khodorkovsky had wealth equivalent to a year’s labor of 250,000 Russians and Carlos Slim, now the world’s wealthiest person, is worth the annual income of 400,000 Mexicans.

Some plutocrats have become rich by feeding off modern states that are themselves richer than those of former times. Freeland devotes a long chapter to rent-seeking, corrupt privatization, and other forms of political parasitism. She traces at least some of the wealth of both Slim and Khodorkovsky to advantageous privatization deals, and notes that writers like Simon Johnson have rated the rent-seeking prowess of American bankers as equal to that of emerging-market oligarchs.
Without belittling political considerations, however, the parts of The Plutocrats that I found most interesting concern sources of super-wealth that arise from within the market system itself. >>>Read more

US Inflation Remains Near Zero as Sequester Looms

Friday's report from the Bureau of Labor Statistics showed U.S. inflation near zero for January. Stated as an annual rate using unrounded data, inflation was 0.36 percent, exactly the same as December. Increases in prices for apparel and transportation services helped to offset lower energy prices. Follow this link to view or download a classroom ready slideshow of the latest U.S. inflation data.

According to the textbook prescription, the ideal time to cut government spending and tighten monetary policy is when the economy begins to approach full employment and the first signs of excessive inflation appear. Economists call that kind of preemptive policy countercyclical  because it helps to keep an impending boom from running out of control. On the other hand, premature tightening when a recovery is still incomplete is procyclical. A procyclical policy makes slumps deeper, recoveries slower, and booms hotter than they would be if the economy were left to its own devices.

This week’s news from Washington suggests a turn from countercyclical to procyclical in macroeconomic policy, despite the fact that inflation is near zero, unemployment remains stubbornly high, and GDP is barely growing, if it is growing at all.

As far as fiscal policy is concerned, all eyes are focused on the package of across-the-board spending cuts known as the sequester, which will come into effect on March first if nothing is done. Yes, another midnight deal might modify the sequester, but fiscal policy will be tightened in any event, for the simple reason that both parties want it to be. The only difference between them is that the Republicans want tightening via spending cuts alone, while the Democrats would like the throw some tax increases into the mix.

Over at the Fed, the indications of a change in monetary policy are more subtle. Don’t expect a dramatic boost to interest rates any time soon. Still, the pendulum does seem to be swinging away from the strongly accommodative quantitative easing of the past few years.

Inflation, as measured by the CPI, is not the worry. According to the minutes of their January meeting, released this week, most members of the policy-setting Federal Open Market Committee expect inflation to run at or below the Fed’s target of 2 percent for the foreseeable future. Only a few members see any upside risk to prices in the medium or even the long term. However, several participants in the January meeting expressed concern that the Fed’s huge portfolio of securities could expose it to a risk of large capital losses in case of a future reversal of policy. A few others expressed concerns that the Fed’s program of large-scale asset purchases could lead to the disruption of financial markets.

What lies behind least some of these concerns is a fear of asset bubbles. Asset bubbles are sharp increases in the prices of securities, real estate, or global commodities that can occur even when consumer price inflation remains low. Usually, they pose the greatest risk when the economy is running at or above its level of potential GDP, as during the dot.com bubble in the 1990s and the housing bubble in the early 2000s. Today, at least as measured by the Congressional Budget Office, the U.S. economy is still well below potential GDP, but not everyone trusts those estimates. The FOMC minutes tell us that some members noted “uncertainties concerning both the level of, and the source of shifts in, potential output.” It is worth noting that the concern over asset bubbles is shared by some private observers, including Nouriel Roubini.

The recently-released FOMC minutes summarize the concerns of its members in this key sentence:

A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

In the Fed’s closely guarded language, “a number of participants” is more than “several” or “a few.” Market participants took that to indicate that the Fed’s determination to stick with aggressive accommodation until labor market conditions improve is weakening. In monetary policy these days, when actual changes in interest rates are unthinkable, subtle signals about what the Fed is likely to do in the future take on added importance. Monetary economists like Michael Woodford consider such “forward guidance” to be the main channel through which the Fed can affect the economy when interest rates are at or near zero, as they are now.

The bottom line: All of this week’s news put together—flat inflation, the looming sequester, and the increasing caution of forward guidance from the Fed—point to a distinct procyclical turn in macroeconomic policy. That may or may not mean an actual return to recession, but even if not, gains in output and employment are likely to come even more slowly this year than last.

An earlier version of this commentary, was posted to Economonitor.

Would Getting Rid of the U.S. Penny Cause Inflation? Three Reasons to Think it Would Not

Can we get along without the U.S. penny? Reportedly, a majority of Americans think we cannot. We’re just used to it. After all, the penny has been around in one form or another ever since George Washington signed An Act to Provide for a Copper Coinage in 1792.

What we have not always had is a coin as small in value as the current U.S. cent. In fact, we never have had a coin worth so little. Take a guess at how much a penny was worth, in today’s money, in the year you were born. Then check your answer against the following chart, which shows just how much that little sliver of copper and zinc has shrunk in value over time:



Look at it this way:

• If we got rid of the penny, our smallest coin would be the nickel. That would take us back to where we were in 1973.
• If we got rid of the penny and the nickel, our smallest coin would be the dime. That would take us back to 1947.
• If we got rid of the penny, the nickel, and the dime, our smallest coin would be the quarter. That would take us back approximately to where we were from 1857, when the last half-penny was minted, up to the First World War.

But would getting rid of the penny cause inflation? Read more >>>

What would the end of growth mean for the quality of life? Lessons from Japan

There is a growing concern that economic growth, as we know it, is coming to an end. Economists, who tend to view growth as good, are uneasy with that idea. Many environmentalists, who are more prone to focus on the downside of growth, view a steady-state economy more positively. Richard Heinberg, author of the book The End of Growth, sees a no-growth economy as an immanent reality to which we must adapt whether we want to or not. In his view, whether the no-growth future works out well or not depends on how well we manage the transition. If we manage it well, we can maintain and even improve our quality of life without an ever increasing GDP. If not, he sees a much less pleasant future.

But rather than speculate about what a no-growth future might look like for the United States, why not see what we can learn from Japan, where a no-growth economy, or something close to it, has been a reality a generation already. (The Japanese population peaked in 2008, but as of 2013, it is still about 2.5 percent higher than in 1992, so per capita GDP growth has averaged even less than shown in the chart.) What does the Japanese experience suggest about the linkage between economic growth and the quality of life?



Growth vs. quality of life 

To answer that question, we need to do two things. First, we need a way of measuring the quality of life. Second, we need to distinguish between the effect on quality of life of a country’s level of income and the effect of growth per se. Putting these two things together allows us to formulate the following hypothesis:

If growth of income, independently from the level of income, is a necessary condition for maintaining a high quality of life, then slow-growing Japan should have a lower quality of life than other countries with comparable incomes but more rapid growth.

>>>Read more

Too Much Flaring of Natural Gas? How a Carbon Tax Could Help

After a few years when the practice was declining, flaring of natural gas is back in the news. (See, for example, Flares take shine off fracking boom in the Financial Times for Jan. 27.) Estimates indicate that natural gas flaring accounts for more than 1 percent of all the CO2 that human activity releases into the atmosphere, about as much as the entire country of Spain. The focus of recent attention has been North Dakota, where some 29 percent of all gas that is produced is flared.

Why so much waste of this valuable resource, often touted as the bridge fuel to our clean-energy future, and what can be done about it?

Flaring: The photo

Natural gas flaring is serious problem, but not a new one. What has prompted the FT article and a flurry of similar pieces in newspapers, on blogs, and on television is the appearance of dramatic new photographs of the Earth at night, taken by NASA’s Suomi-NPP satellite. The one below zooms in on a pattern of bright lights in the Baaken hydrocarbon formation in North Dakota. In other versions that zoom out on the same view, the cluster of lights around Williston shows up almost as brightly as Chicago or Minneapolis.

Before discussing flaring directly, a few comments are in order regarding the photos themselves. Although they have been useful  in bringing public attention to the problem of flaring, they have sometimes been misinterpreted. >>>Read more

Weekend Reading: The Human Side of the Housing Crash

We’ve all read endlessly about the effects of the real estate bubble on the banking system, GDP, monetary policy, and all the rest. If you have had enough financial analysis, if you are ready to read something about the human side of the housing crash, try reading Tana French’s latest novel, Broken Harbor.

The story, like all the author’s mysteries, is set in Ireland, but it could just as well have been Las Vegas, Spain, or the UK. Things start out well for Jenny and Pat, the central characters. A high-school romance, a storybook wedding, good jobs, kids, an SUV—what more do they need? Obviously, to “get on the housing ladder.” Buy that first affordable place, maybe not their dream home, but flip it in a year or two for a big gain and look for something that is really ideal. Uh-oh.

Looking for a place that will fit the budget of a couple of twenty-somethings on the way up, Jenny and Pat sign up for a three-bedroom home in a new subdivision. Brianstown is under construction on the site of a bulldozed fishing village called Broken Harbor, a too-long commute north of Dublin. To get the best price, they put their money down on a yet-to-be built. The brochure is full of promises, not just about the house, but about the shopping center, day care, community center, exercise facility and other amenities. Uh-oh, again. >>>Read more

Case Study in Supply and Demand: Why Olive Oil, Good for the Body, is Becoming Hard on the Pocket Book

This case study is also available in sideshow format. You can paste it into your lectures, use it as an in-class quiz, or assign it to your students as an on-line exercise.

It seems there almost nothing bad about olive oil. It is delicious, of course, and if you are a connoisseur, you can get as much pleasure from a fine bottle of olive oil as from a premium Brunello di Montalcino. A  high content of monosaturated fats makes olive oil among the most heart-healthy of all cooking oils. It’s great for your skin, too. Wrangler has introduced a line of olive-oil infused jeans designed to moisturize the wearer’s legs. While researching this post, I learned that you can even shave with olive oil. No kidding.

In fact, the only bad thing about olive oil is that the price is going up, and fast. As the following chart shows, futures prices have risen 75 percent since mid-2012. Observers expect the increase to show up in retail prices soon. So what’s behind the spike in olive oil prices?


Supply

There is little doubt about what is happening on the supply side of the market: The weather in Spain, the world’s largest producer, was unusually bad last year. In the spring, an unexpected frost damaged the trees just as they were blossoming. Summer brought a prolonged drought. By December, which should be the height of the 2012/13 harvest, the Spanish crop was coming in at just 44 percent of the year before.

The harvest has been better elsewhere, but as the next chart shows, Spain so dominates the world market that no one else can really make up the loss. Tunisia is trying. The fifth largest producer and fourth largest exporter, its production is expected to rise by 27 percent in the 2012-13 season. California will also have a good year. Growers there hope to reach 3 percent of world output this year, up from the 1 percent or less reported by the FAO for 2011. But none of that is going to go far in replacing the hundreds of thousands of tons of lost Spanish production.



Demand

Homer called it “liquid gold.” Greeks are still the largest per-capita consumers, going through an astonishing two liters a month for every man, woman, and child. Italian and Spanish consumers each lap up about half of that. Lately, though, Southern Europeans are tightening their belts, and even staples like olive oil are taking a hit. Over all, European consumption is down.

Meanwhile, health consciousness and the growing popularity of European foods are boosting consumption elsewhere.  U.S. consumers are set to increase their olive oil purchases by 9 percent this year. Despite the best efforts of California producers to supply the domestic market, that will mean a big increase in imports.

China is becoming a factor in the market, too. Starting from a base of almost nothing, Chinese olive oil imports have been rising at a furious pace. They increased by 38 percent last year alone. One report out of China boldly predicts that country will soon become the world’s biggest consumer. The popularity of olive oil is on the rise in Brazil and Russia, too.
On balance, growth of new markets is expected at least to balance out depressed European demand. That means there will be no relief in sight from the demand side of the market.

The Bottom Line

If you’re an olive-oil lover, you’ll just have to dip into your savings this year if you want to keep dipping your focaccia in the good stuff. After that, the market may return to normal. If you look ever so closely at the first chart in this post, you can see that futures prices for March 2014 maturities are well below those for March of 2013. Also, the preceding 2011/12 harvest was very abundant, so the current spike in prices starts from an unusually low base. If this year’s Spanish frost and drought are aberrations, and not signs of some longer climate trend, output should bounce back for the world’s largest producer. Meanwhile, even one year of high prices will give a boost to hopeful growers in Tunisia, California, and other countries where production has not yet reached its potential. Consumers can hope that for oilive oil, as for most everything else, what goes up must come down.

Thanks to Sarunas Merkliopas, who served as research associate for this post. This analysis, without the sideshow, was originally posted to Ed Dolan's Econ Blog at Economonitor

US Adds 157,000 Jobs in January; 2012 Job Gains Revised Upward

The US economy added 157,000 payroll jobs in January. Job gains for 2012 were revised upward by 324,000. Follow this link to view or download a classroom-ready slideshow with charts of the latest jobs data

The following commentary on the jobs data was previously posted to Ed Dolan's Econ Blog at Economonitor.com
  
Strong Job Growth and Upward Revisions Contrast Sharply with Reported GDP Decrease

Wednesday’s data release from the Bureau of Economic Analysis surprised us with a reported decrease of 0.1 percent in GDP for Q4 2012. Now, just two days later, a report from the Bureau of Labor Statistics shows robust job growth throughout the last quarter and continuing into January. The two offer sharply contrasting indications of the strength of the economy in the last three months of the year.

The payroll jobs data from the survey of business establishments are subject to both monthly and annual revisions. Monthly revisions reflect the fact that when the numbers are first released, early in the following month, not all firms have submitted their payroll information. As more firms report in, data for the previous month and the month before that are revised. In addition, the data are subject to an annual benchmarking process based on unemployment insurance records. The BLS releases data based on the new benchmarks each January, including revisions of monthly jobs figures for the entire previous year. The following chart shows both the previously reported and the revised data. For all of 2012, the economy added 2,170,000 nonfarm payroll jobs, 324,000 more than previously reported. The revised job gain for Q4 was 603,000. That was more than the quarterly average for the year and 150,000 higher than previously reported. In short, the payroll jobs numbers suggest that the economy was strengthening, not weakening, in the last quarter. >>>Read the full commentary

 

US GDP Shrinks 0.1 % in Q4 2012

US GDP unexpectedly decreased by 0.1 percent in Q4 2012. Follow this link to view or download a classroom-ready slideshow with charts and explanations of the latest GDP numbers.

The following commentary on the GDP report was previously posted to Ed Dolan's Econ Blog at Economonitor.com 

US GDP Shrinks in Q4. How to Interpret the Bad News?

Wednesday’s data release from the Bureau of Economic Analysis surprised us with a reported decrease of 0.1 percent in GDP for Q4 2012. Now, just two days later, a report from the Bureau of Labor Statistics shows robust job growth throughout the last quarter and continuing into January. The two offer sharply contrasting indications of the strength of the economy in the last three months of the year.

The payroll jobs data from the survey of business establishments are subject to both monthly and annual revisions. Monthly revisions reflect the fact that when the numbers are first released, early in the following month, not all firms have submitted their payroll information. As more firms report in, data for the previous month and the month before that are revised. In addition, the data are subject to an annual benchmarking process based on unemployment insurance records. The BLS releases data based on the new benchmarks each January, including revisions of monthly jobs figures for the entire previous year. The following chart shows both the previously reported and the revised data. For all of 2012, the economy added 2,170,000 nonfarm payroll jobs, 324,000 more than previously reported. The revised job gain for Q4 was 603,000. That was more than the quarterly average for the year and 150,000 higher than previously reported. In short, the payroll jobs numbers suggest that the economy was strengthening, not weakening, in the last quarter. >>>Read More