I try to keep this blog focused on national and global discussions, but I know many readers are my friends here in Oregon who will benefit from a new web site: Oregon Biz Report. They will be republishing some of my blog posts, but they have lots of other good news, too.
Four months ago I wrote a post entitled "End of the China Price" which noted that China's inflation rate, plus the depreciation of the yuan, was making it harder for Chinese companies to undercut American manufacturers' prices. Today the Wall Street Journal is saying the same thing (subscription required).
In addition to rising inflation and the falling yuan, the Journal mentions tighter labor regulations. I've also heard that middle managers are in short supply. Entrepreneurs can still find plenty of cheap labor (especially in rural areas), but they have trouble finding folks to delegate management responsibilities to. Taxes are on the rise as well, more through enforcement than through rising tax rates. And don't forget new costs (which always should have been spent) to monitor product quality.
China is not going away. It's not a flash in the pan. But the great shift of manufacturing from America to China will slow significantly in the coming years.
Business strategy for China: it's still a major competitive threat, but here's what's new:
Consumer confidence (the term used by the Conference Board) and consumer sentiment (the label used by the University of Michigan) are not quite at their all-time lows, but they are very close to them.
This seems a little odd because two of the biggest elements of consumer attitudes, unemployment and inflation, are quite benign.Unemployment, at 5.5 percent, is a hair below its long-run average (5.6 percent). Inflation (all items) is 4.1 percent, only a little above its long-run average of 3.7 percent.
Why the doom and gloom?
Maybe home prices (see the previous post).
Maybe gasoline, but that's not as obvious as it sounds. The gas price hikes are incorporated (except for the very last month) in the inflation rate. But perhaps consumers are giving gas a higher weight than the folks who compile the Consumer Price Index. Do consumers realize that apparel prices are down from a year ago? I just bought a new suit, but its hard for me to know if the price was lower because prices of comparable suits are lower, or perhaps I picked a suit that's not quite as nice as the last one I bought. I know what I pay for gas, but I'm not sure what I pay for underwear. So I think that maybe consumers are giving a disproportionate weight to gasoline prices.
Maybe its election year rhetoric making people gloomy, or lousy weather, or the President's low approval rating. All things considered, though, attitudes are worse than the fundamentals dictate. Look for consumers to decide sometime soon that the sky is not falling after all.
If you bought a long time ago, your house has probably appreciated in value, despite the recent decline. If you bought a year ago, your house is probably worth less than what you paid for it. Where is the dividing line between gains and losses? Using the Case Schiller indexes, I found the dividing line for the 20 largest metropolitan areas. (Remember, this is an average. You may have overpaid terribly, or failed to maintain your house, or be just plain unlucky.)
| Detroit | April-99 |
| Cleveland | May-02 |
| Minneapolis | March-03 |
| San Diego | October-03 |
| Boston | January-04 |
| San Francisco | April-04 |
| Denver | April-04 |
| Las Vegas | April-04 |
| Los Angeles | May-04 |
| Washington | October-04 |
| Miami | November-04 |
| Tampa | December-04 |
| Atlanta | January-05 |
| Chicago | January-05 |
| Phoenix | March-05 |
| New York | March-05 |
| Dallas | June-05 |
| Portland | April-06 |
| Seattle | June-06 |
| Charlotte | March-07 |
Fed Vice Chairman Donald Kohn gave a speech that was actually intelligible--must have been some big blunder among the PR staff. The general thrust was that the economy was not doing too badly, and the economic outlook was mildly positive, which is a lot like my forecast. Here are a couple of interesting points from Kohn:
"The pace of activity should continue to improve next year, with an important part of the gains coming from the abatement of the forces currently restraining activity."
This is an important insight into the economy. It normally grows, all by itself (that is, without governmental stimulus). Just removing the negatives is enough to get it re-accelerating, in all but the most extreme cases.
Kohn also mentioned that there was a lot of stimulus in the pipeline. The public could use regular reminders of the time lags involved, which mean that after the Fed eases, it takes six to twelve months to feel the effect. Finally, on a different subject,
"Securitized assets need to be simpler, more transparent, and less reliant on the imprimatur of a credit rating agency."
I made this point in part 5 of my Why Did the Mortgage Crisis Happen series. Always nice to see a smart person agreeing with me.
Here's a cute YouTube video by a "model" working in the sex industry talking about how she is preparing for recession. Good point: book as much work as you can now, saving as much as you can.
She quotes a friend who says that in a recession, people will stay in more, watching TV and using the computer, which means more paid porn. I say "no," (though not from personal experience). People will cut back by meeting their desires with free porn. I know, I know. If you're an Internet "model" you cannot imagine anyone satisfying themselves with free porn, but I'm guessing that it happens a lot.
That's contrarian, of course. Barry Ritholtz over at The Big Picture has a good explanation. Here's the nutshell: the "Recession Buy Indicator" looks at the four indicators in the Index of Coincident Indicators, and signals when each of these has declined over the past six months. That's a rough measure of whether the economy is in recession, and the signal says buy stocks.
Right now the signal says BUY.
Why would it do that? The stock market tends to be a leading indicator of the economy. By the time it's obvious that we are a recession, we're stocks are already down. Once everyone realizes we are in recession, the market is ready to look forward to the recovery. As Ritholtz notes, there are some exceptions that would clobber an investor who mindlessly followed the rule. Nonetheless, it's another bull signal.
I've suspected for a while that we were in a speculative bubble with respect to oil prices. Paul Krugman offers a good insight into the question. (When he's not preoccupied with left-wing rants, he's a pretty good economist.) He says (full article here):
... there are only two things you can do with the world’s oil production: consume it, or store it.
If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.
So I looked into oil inventories:
We don't seem to have much increase in inventories. Maybe it's building up outside of OECD countries, where we don't have good data, but if I were going to store millions of dollars of oil in some tank farm, I'd want it in a stable country with secure property rights. So the oil is probably not hidden in Somalia or Zimbabwe.
What about futures markets? Let's say that we are in equilibrium (current supply equals current demand) and then speculators bid up the price of oil in futures markets. If today's spot price does not rise, then I can buy a barrel of oil today, store it for a few months, and deliver it to fulfill my futures contract. This arbitrage will bid up today's price. But if today's price is bid up by speculators in the futures market, we end up with more supply and less demand--which means inventories have to build up.
Think about past bubbles. In the housing bubble, the inventory of vacant houses, condos and apartments rose (as I've noted frequently in this blog). In the tech bubble, the inventory of shares of stock mushroomed. In the tulip bubble, people hoarded tulips for investment purposes (I think).
Tyler Cowen over at Marginal Revolution notes that inventories could be building up underground, as producers choose to not maximize their current pumping. Seems unlikely, though possible, to me.
So the high prices are most likely due to strong demand and long time lags in exploration and development.
Housing starts rebounded last month, according to the headlines. However, you need to look at the data to put this "rebound" in context.
The housing starts rebound is that little blue uptick at the end of the chart. This is not the beginning of the upturn, nor even the end of the downturn. This is a a little sawtooth in the downward trend. Expect it to continue, given the large overhang of inventory I've discussed in the past.
The Survey of Professional Forecasters compiled by the Philadelphia Fed (more details here) shows another downward revision to the forecast.
The survey occurs quarterly, so we're looking at early May forecasts compared to early February forecasts.
I like looking at the consensus economic forecast. It tends to be more accurate than the projections of any one forecaster. There's also valuable content in the direction of forecast revisions. So we learn:
I'm still more optimistic than the consensus, but there is certainly grounds for worry.
