Latest US GDP Data Show Economy Weak at Year’s End but Corporate Profits Near Record High

The latest data from the Bureau of Economic Analysis confirm that the U.S. economy barely grew in Q4 2012. However, despite the weak economy, corporate profits as a share of GDP hit their second highest level ever.

Based on the latest data, the BEA revised Q4 real GDP growth upward from an annual rate of 0.1 percent to 0.4 percent, still the second-slowest quarterly growth since the recovery began in 2009. The following table compares the latest revision to the second estimate released last month.


Consumer spending was weaker than previously reported, with durable goods accounting for most of the growth that did take place. Fixed investment was a relative bright spot, led by business equipment and computers. However, growth of fixed investment was almost wholly offset by a decrease in nonfarm inventories. The BEA data provides no direct indication of the motive for inventory change, but it is easy to imagine that at least some businesses were showing caution about restocking, in view of anticipated tax increases and cuts in government spending for early 2013. >>>Read more

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

Follow-up: Further Program Notes for the Cyprus Banking Drama

Last Friday I sketched out some program notes for the Cyprus banking crisis. The notes explained the origin of the banks’ losses (Act 1) and the tools that regulators could choose from to resolve the crisis (Act 2). Now the curtain has gone up on Act 3. The government of Cyprus and the EU-ECB-IMF “Troika” have agreed on a resolution plan. By and large, it uses the familiar building blocks of past systemic bank restructurings, but it puts them together in some unusual ways. Here is a brief outline, based on numerous press reports circulating this morning:

Act 3, Scene 1: Liquidation of Laiki Bank

The country’s second largest bank, Laiki Bank, will be liquidated. Deposits over €100,000 will be transferred to a “bad bank” along with the bank’s portfolio of toxic assets, which include large amounts of Greek government bonds and nonperforming real estate loans. Shareholders of the bank will be wiped out, along with both senior and junior unsecured creditors. The large deposits will be frozen for the time being.>>>Read more

Bailouts, Bail-ins, Haircuts and All That: Program Notes for the Cyprus Banking Drama

Ireland, Iceland, now Cyprus—the story of small countries with oversized banking systems is all too familiar. There is never a shortage of commentary when a crisis erupts, but much of it assumes a working knowledge of financial terms and concepts. General readers are left wondering—What is a haircut? What is the difference between a bailout and a bail-in? Who wins and who loses when the government steps in to rescue a failed bank?

I know the feeling behind these questions. It is the same as I get when I go to an opera sung in an unfamiliar language. If you are among those who ask such questions, what you need are some program notes to help you understand the Cyprus drama, and by extension, other banking crises like it. (If you want still more detail, check out this slideshow that complements these program notes.)

Act 1, Scene 1. How can we tell if a bank has failed?

System-wide banking crises like that in Cyprus always begin with the failure of individual banks. In principle, it ought to be easy to tell when a bank has failed. In practice, that is not always the case. >>>Read more

For more, follow this link to view or download a classroom-ready tutorial on bank failures and bank rescues

Ten Years on, New Estimates of the Economic Cost of the Wars in Iraq and Afghanistan

This week marks the tenth anniversary of the American invasion of Iraq. What have the wars in Iraq and Afghanistan cost the United States to date? What additional bills will come due in the future? Economists and budget analysts have made many estimates since the early 2000s. Only one regularity has emerged from their work: Each new round of estimates is higher than those before.

Last week the Watson Institute for International Studies at Brown University released a new set of estimates. The numbers are summarized on the web site of the institute’s Cost of War project and detailed in a paper by Professor Neta C. Crawford. The institute’s estimate of the total cost of the two wars now comes to just under $4 trillion.

It wasn’t supposed to cost so much

The wars were not supposed to cost so much. As the administration of President George W. Bush was building a case for the Iraq war in 2002, with some 5,000 American troops already deployed in Afghanistan, the question of cost naturally came up. In September of that year, Lawrence B. Lindsey, then Chairman of the President’s Council of Economic Advisers, estimated that a new Iraq war would cost $100 billion, maybe $200 billion at a maximum. >>>Read more

New Slideshow: CPI Spikes in February but Inflation Expectations Remain Well Anchored

The all-items U.S. Consumer Price Index rose by 0.68 percent in February, equivalent to an annual rate of 8.47 percent. That was the fastest since a similar one-month spike in June 2009. The uptick in the rate was attributable almost entirely to an increase in gasoline prices. When the effect of volatile food an energy prices are removed, the core inflation rate rose at an annual rate of just 2.06 percent, down almost a full percentage point from January.

Meanwhile, inflation expectations, based on data from the market for Treasury Inflation Protected Securities (TIPS), were little changed. Expected inflation for 5- and 10-years ahead remained around 1.5 percent.

Follow this link to view or download a classroom-ready slideshow with charts of all the latest inflation data from the Bureau of Labor Statistics.

For a more complete discussion of the latest data, read more here.

Fareed Zakaria is Wrong (Mostly) About the Keystone Pipeline

Watching the Sunday talk shows this week, I learned that the influential journalist Fareed Zakaria has now joined the chorus urging construction of Keystone pipeline. If built, that pipeline would carry bitumen, a form of asphalt that can be used as a substitute for conventional crude oil, from Canadian oil sands to refineries on the Gulf of Mexico. The pipeline has been opposed by environmental groups and championed by many in the energy industry. After much waffling, the Obama administration appears ready to let it go forward. In a Time Magazine editorial this week and a segment on CNN, Zakaria maintains that is the right decision. I find his arguments unconvincing.

His first argument is that the oil derived from Canadian tar sands will be developed at about the same pace whether or not there is a pipeline to the U.S. Stopping it might make us feel good, but it wouldn’t do much about climate change.

It is very likely true that blocking Keystone would not stop the development of Canadian oil sands in its tracks. Whether or not it proceeds at “about the same pace” is another question.>>>Read more

New Slideshow: US Unemployment Rate Falls to 7.7 Percent in February, Economy Adds 236,000 Jobs

The Bureau of Labor Statistics reported Friday that the U.S. unemployment rate fell to 7.7 percent. For the first time that puts it at a level below where it was when President Barack Obama was inaugurated. Once before, in November, the BLS had reported a rate of 7.7 percent, but that was later revised upward as part of a year-end rebenchmarking. The broad unemployment rate, U-6, also fell to its lowest level since 2008.

The economy added 246,000 payroll jobs in the month, for a net gain of 236,000, taking into account a decrease of 10,000 jobs in federal, state, and local government. The increase in payroll jobs was broadly based, with both goods-producing and service sectors contributing.

Not all the news was good, however. The number of people working part-time for economic reasons increased, as did the percentage of unemployed workers who had been out of a job for 27 weeks or more. Both indicators have been stubbornly high throughout the recovery.

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

Are Banks Safe? Do we Really Know? Thoughts on Risk Weighting and Regulatory Arbitrage

During the global financial crisis, people in the United States, Ireland, Iceland, and many other countries learned that undercapitalized banks can spell trouble for the whole economy. The Basel II rules that were supposed to prevent widespread bank failures proved inadequate. In response to the crisis, the world’s central bankers and bank regulators started work on a new set of rules, Basel III, that they have promised will make us safer.

Now Basel III has reached the crucial phase of writing the technical rules to implement the agreed principles. Many observers are worried that each round of rule-making will provide an opportunity for watering down the regulations until what is left is no more effective than Basel II was. This post looks at one key aspect of the new rules, the regulation of bank capital, as an illustration of the broader difficulties facing the effort to regulate banking risk more effectively. >>>Read more

If you liked this post, be sure to check out these related slideshows, both newly updated:
What is Basel III and Why Should we Regulate Bank Capital?
More on Financial Regulation and Basel III: Regulating Bank Liquidity

Quantitative Easing: A Tutorial (Updated)

One of the most popular slideshows from Ed Dolan's Econ Blog has been a tutorial on quantitative easing. The sideshow, first published two years ago, has now been updated with new charts, new data, new sources, and a discussion of the Fed's latest program of massive asset purchases. Econ instructors throughout the country have incorporated this slideshow in their lectures or assigned it as a reading for their students (more than 5,000 student views to date).

Follow this link to view or download the latest version of Quantitative Easing: A Tutorial

What May Be Good About the Sequester

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.

Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.

The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not? >>>Read more

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf.

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf