As expected, BEA’s second stab at GDP growth for the second quarter was even less inspiring than the first. Headline growth was a tepid 1.6%, down from the 2.4% previously reported. Consumer spending and business spending on equipment and software were actually stronger than earlier estimates, but business structures, inventories, and exports all weakened, while imports (which deduct from GDP the way BEA calculates it) grew faster than previously expected.
Last month I pointed out one, small silver lining in the original GDP report: every major category of demand had increased. That is still true in the revised data, although structures just squeaked by with a miniscule 0.01 percentage point contribution to overall growth:
Investment showed particular strength. Business investment in equipment and software (E&S) grew at a 25% pace, thus adding about 1.5 percentage points to overall GDP growth. Boosted by the end (hopefully permanent) of the new homebuyer tax credit, housing investment grew at a bubble-like 27% pace (adding about 0.6 percentage points to GDP).
Despite solid growth in disposable incomes–up 4.4% adjusted for inflation–consumer spending grew at only a 2.0% pace. As a result, the saving rate increased to 6.1%, compared with 5.5% in the first quarter.
And then there are imports. As I’ve discussed before, BEA calculates GDP by adding up all the components of demand for U.S. products–consumers, businesses, governments, and export markets–and then subtracting the portion of that demand that is supplied by imports. That means that any growth in imports appears as though it subtracts from overall economic growth.
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Worries about a double-dip recession have spawned much economic commentary … and a humorous country and western song. So how likely is a return to recession?
Researchers at the San Francisco Fed took a crack at this question a few weeks ago. Their answer? It depends.
When they used a traditional model based on the leading economic indicators, the probability of a second dip turned out to be about 25% over the next two years (the blue line). When they dropped one indicator from their model, that probability doubled to about 50% (the red line).
That important indicator is the yield spread–the difference between the 10-year Treasury interest rate and federal funds rate. In recent decades, the yield spread has done a terrific job at anticipating recessions. When the federal funds rate has risen above the 10-year rate, the economy has invariably fallen into recession.
As I noted briefly the other day, the relative steepness of today’s yield curve (10-year rate about 2.5 percentage points above the fed funds rate) thus suggests, by itself, that renewed recession is unlikely, despite recent weak economic data. On the other hand, there are reasons to believe that this time things are different (usually a scary phrase). After all, fed funds rate has been pushed down almost to zero and yet the economy no longer appears to be responding. That’s exactly the logic that inspired the SF Fed researchers to try their model without the yield spread.
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That’s the conclusion of a new report by Morgan Stanley analyst Arnaud Mares.
And what, you may ask, is financial oppression? Speaking from the perspective of investors in sovereign debt, Mares defines it as “imposing on creditors real rates of return that are negative or artificially low.” Which doesn’t require outright default. Instead, it
[C]an take other forms: repaying debt in devalued money (e.g., through unanticipated inflation), taxation or regulatory incentives on institutions to purchase government debt at uneconomic prices.
Mares sees sovereign creditors as tempting targets when over-indebted governments decide which of their many fiscal promises they can’t keep. After all, elderly pensioners cast more votes than coupon-clipping bond holders. And he thinks current low yields provide little protection against that threat.
His piece is definitely worth a read if you want to consider a bearish view on U.S. and European sovereign credit.
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Last week the Congressional Budget Office released updated budget projections — a treasure trove of information for budget wonks. For example, CBO released new estimates of the direct budget costs of the 2009 stimulus bill, officially known as the American Recovery and Reinvestment Act (ARRA).
CBO now estimates that ARRA will cost $814 billion from 2009 through 2019. That’s up from the original $787 billion estimate, but down from the revised, $862 billion estimate released in January.
Spending exceeded original expectations because both unemployment and food prices rose more than anticipated, driving up the cost of extended unemployment benefits and expanded food stamp benefits. On the other hand, spending estimates have come down because “recently enacted legislation rescinded some of the funds appropriated in ARRA and limited the period in which higher payments under the Supplemental Nutrition Assistance Program [formerly known as food stamps] will be available.” (CBO did not update estimates for the tax provisions in ARRA.)
For a discussion of why the $814 billion figure (formerly known as the $862 billion figure or the $787 billion figure) is not really the right measure of stimulus, see this post.
On a related note: Earlier today, CBO released an updated analysis of the economic effects of ARRA. It estimates that ARRA reduced unemployment in the current quarter by 0.8 to 2.0 percentage points. In other words, without that stimulus CBO believes that the unemployment rate today would be between 10.3 percent and 11.5 percent, not the 9.5 percent reported in July.
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Wired’s cover story this month, “The Web is Dead,” features the following chart showing the portion of internet traffic in different uses:
Over the past few years, peer-to-peer services and video have gobbled up an increasing share of traffic, while he “traditional” web — you know, surfing from site to site, reading your favorite blog about economics, finance, and life, etc. — has been declining.
Chris Anderson cites this as evidence of the pending death of the web. To which there is only one thing to say: wait a minute buster. Just because the web’s share of total bits and bytes is falling doesn’t mean it’s dying. Maybe it’s just that the other services are growing more rapidly.
One of the benefits of being off the grid for a week-plus is that other commentators have already had the same thought and have tracked down the relevant data. Kudos to Rob Beschizza at BoingBoing for charting the data in absolute terms.
Full post here
Back on August 5, I gave a speech at the Retirement Research Consortium’s annual conference “Retirement, Planning, and Social Security in Interesting Times.” I’ve been saving up the link to the C-Span video to share during my vacation.
Here it is. (I hope the link still works; if not, I will fix it once I get back on the grid.)
Keeping with the spirit of the event, I spoke about “Fiscal Policy in Interesting Times.” And with that title, I simply had to mention the famous curse, “May you live in interesting times.”
As the helpful folks at Wikipedia point out, chances are good that this curse originated in England or the United States not, as often alleged, China. Regardless of its origin, it’s still an excellent curse, which I remember my mom invoking often in my childhood (rhetorically, I should note, not at me). For an audience of policy researchers, however, it’s a curse with a silver lining. We may not want interesting things to happen (financial crises, trillion-dollar deficits, 9.5% unemployment, etc.), but they do increase the odds that policymakers, journalists, and the public will pay attention to what we are saying (whether they should is a separate question …).
What makes today particularly interesting is that we face lots of uncertainty and major challenges. That a potent mix. We know less about what’s going on than usual, but we are playing for bigger stakes. Case in point: Fed Chairman Ben Bernanke’s recent statement about the outlook being “unusually uncertain” while the economy still struggles to heal from the financial crisis. Is it a rebound or a relapse? I fear it may be the latter, but we just don’t know.
Full post here
According to an article over at the Huffington Post (ht Natalie), students at 36 colleges will have a new option when they start classes this fall. Thanks to an outfit named Ultrinsic, students can now bet on whether they will get good grades. Students put up money at the start of the semester and then get payoffs at the end depending on how they do.
Calling it a bet isn’t completely fair, however, since the payoff creates an extra incentive for students to do well. So think of it as a combination of betting (if you think your odds of doing well are better than Ultrinsic thinks) and using a financial incentive to get your future self to study a bit harder. Naturally, Ultrinsic emphasizes the incentive perspective in describing its “Reward” product:
Do you like getting good grades? The right amount of cash should provide you with the needed motivation to pull all-nighters and stay awake during the lectures of your most boring professors. At Ultrinsic.com, you will be able to earn cash while working to achieve your academic goals.
Obligatory note to my new crop of students: all-nighters are generally not an optimal learning strategy.
Like a race track, the company offers packages that pay off not only if you do well on a single course, but also if you perform well in multiple courses or over an entire semester. If a new freshman is really feeling motivated, he or she can also put down $20 up front for the opportunity to win (earn?) $2,000 for maintaining a 4.0 GPA throughout college.
Full post here
Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:
[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline.
Takats tests this theory on international data on house prices and finds a significant link with population age. He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:
He concludes that demographic trends boosted U.S. house prices by almost 40% over the past four decades. Given current population trends, however, his model predicts that aging will trim about 30% off of house prices over the next forty years.
I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices. But house prices will now face a demographic headwind–blowing at about 80 basis points per year–rather than a demographic tailwind.
Full post here
The other day I noted that Amazon has been tussling with book publishers over the pricing of electronic books. Amazon would prefer a wholesale pricing model, in which it sets retail prices, rather than an agency pricing model, in which the publishers set the prices. One reason that Amazon would prefer the wholesale model is because it would allow it to sell e-books for less than publishers would prefer.
A similar pricing kerfuffle has arisen in the pricing of Chevy’s new plug-in hybrid, the Volt. Auto dealers operate under a wholesale pricing model–they buy the cars and then decide what to charge for them. In this case, however, early demand is so strong that auto retailers are charging more than Chevy (a unit of GM) would prefer. As noted on the Wheels blog over at the New York Times, some dealers are apparently charging $12,000 above the sticker price–$53,000 vs. $41,000–for scarce Volts.
This has miffed GM executives:
By law, General Motors cannot dictate vehicle pricing to its dealers. But Rob Peterson, a G.M. spokesman, noted in a telephone conversation that the company had impressed on sales managers to keep prices in line with the company’s suggested retail price.
“The dealers are independent, for better and, in very rare cases, for worse,” he said. “There are some who have moved in the opposite direction of our request. In response, what we’ve done is to urge customers who have contacted us about pricing discrepancies to shop around, because there are dealerships in their area that are honoring M.S.R.P.”
Bottom line: wholesalers are like Goldilocks, they want retail prices to be neither too hot nor too cold.
Post published here
A few months ago, I noted that Amazon and book publishers were tussling over the pricing of electronic books. Amazon had originally acquired e-books using awholesale pricing model. It paid publishers a fixed price for each e-book it sold, and then decided what retail price to charge customers. Retailers usually sell products at a mark-up above the wholesale price–that’s how they cover their other costs and, if possible, make a profit. Amazon, however, often offered books at promotional prices below its costs. For example, it priced many new e-books at $9.99 even if it had to pay publishers $13.00 or more for them (often about half of the list price of a new hardback).
Several large publishers hated Amazon’s pricing strategy, fearing that it would ultimately reduce the perceived value of their product. They thus pressured Amazon to accept an agency pricing model for e-books. Under this approach, the publishers would retain ownership of the e-books and, most importantly, would set their retail prices. Amazon would then be compensated as an agent for providing the opportunity for the publishers to sell at retail. Under this approach, Amazon would receive 30% of each sale, and publishers would receive 70%.
The strange thing about these negotiations is that their initial effect appears to be lower publisher profits. As I noted in my earlier post:
Under the original system, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers would receive 70% of the retail price of an e-book. To net $13.00 per book, the publishers would thus have to set a price of about $18.50 per e-book, well above the norm for electronic books. Indeed, so far above the norm that it generally doesn’t happen. … [In addition] publishers will sell fewer e-books because of the increase in retail prices. Through keen negotiating, the publishers have thus forced Amazon to (a) pay them less per book and (b) sell fewer of their books. Not something you see everyday.
Full post here
