Once a quarter, Federal Reserve Chair Janet Yellen and her colleagues on the Federal Open Market Committee take a thorough look at where the U.S. economy has been and then make projections for where they think it’s going. The next batch of those predictions—for unemployment, inflation, growth and interest rates—will be released on June 18. Ms. Yellen will discuss them at her quarterly press conference. (Brookings link)
David Ruggles
Here are notes from my weekly radio show on WREL Lexington, Virginia. The actual show seldom covers all of the topics I prepare, as what I discuss depends in part on questions from the host, Jim Bresnahan. What follows is thus expands on what I said or prepared to say.
The Economy
The Fed released its January minutes that suggests a pragmatic approach to policy targets. As I've discussed in previous shows, you can't capture the dynamics of the US labor market in a single number. The economists at the Fed of course know that, and so the headline item is that the Fed is revising its guidance that it will keep interest rates low unless inflation picks up or unemployment falls below 6.5%. That latter item is what is more flexible because jobs growth is not moving in parallel with the drop in unemployment.
First, the latest CPI (Consumer Price Index) report came out just after the show, and indicates no uptick inflation; prices are up a mere 1.6% over the past year once volatile food and energy prices are excluded (and as it happens, when they are included). That is consistent with the PPI (Producer Price Index) report released yesterday, with a 1.2% rise over the previous year. Both are far below historic levels, and the CPI remains well below the 2% target level with no indication that the rate is rising.
Back to employment. At present we have 145 million people employed in the US, below the 154 million level consist with population growth – a gap of 8.5 million. Worse, while my population growth number incorporates baby boomer retirement, in fact the baby boomers are not retiring at the same rate as in the past. For people aged 60-64, today 52% are employed, in 2005 only 50% were. For the older 65-69 bracket, in 2005 only 30% were working but today it's 35%. That's bad news for those at the younger end of the age bracket. In 2005 some 68% of those age 20-24 were working, but today only 62% have jobs. So the Fed is sensibly treating the unemployment number as just one more indicator, and not tying policy to a single number.
Other indicators likewise suggest muted growth. Housing starts were 880,000 in January, seasonally adjusted to reflect normal winter weather. Obviously this year's not been normal. So perhaps we'll see things pick up in Spring, but the pre-bubble level was more like 1.6 million starts (the bubble level peaked at over 2 million). But the level remains far below what we need for robust growth, and of course bad weather means that construction workers and the stores that sell to them are having a very bad start in 2014.
Finally, there's a Bloomberg story on divorce rates rising from a 40-year low in 2009. The story claims that's good news, but I'm not so sure. Yes, hard times make it more challenging for spouses to find the jobs that enable survival after a break-up. But long-term unemployment is a destroyer of families, something observed in the Great Depression of the 1930s, which left many mothers single when their men hit the road in search of work and didn't come back. But more consistent of the "economy is better" interpretation is that new household formation is rising.
That's consistent with what I've seen of my son and his friends. None of them have girlfriends, and the reason they give is that without stable jobs, it's just not a responsible thing to do. For all the decrying by their elders of today's youth, other indicators suggest the same, including a drop in children born to single mothers and in abortions.
United Way of Rockbridge update
Let me close with an update on the local United Way of Rockbridge annual campaign. While the website calendar isn't yet updated, and the thermometer outside Walmart remains on its side with the new sign blown off, we are now just shy of $220,000 or 88% of our $250,000 goal with results from Mohawk, one major employer workplace campaign, still pending. We still very much need those in our residential campaign who have procrastinated to contribute – a check to UWR at 218 S Main in Lexington (zip 24450) would be very much appreciated, and we should have a "click and contribute" button added to our web site within the next week, as we no longer want to be given credit card numbers. [Next week I will talk about our Community Leaders program, recognizing small businesses who support us.]
We also held our Annual Meeting yesterday, with reports from 16 agencies. It was both heartening and sobering to hear their reports, heartening because of the dedication of the volunteers and staff of these local community-oriented non-profits, and sobering because they too report slower contributions amidst increased demands for their services. Since we want to keep pushing ahead with our Community Impact program, Rockbridge Reads!, without cutting back on our assistance to these agencies, we really need to hit our fundraising goal.
Over the next weeks I will introduce the groups to which we contribute. One is RAOC, the Rockbridge Area Occupation Center headquartered in Buena Vista, which provides jobs to physically able but mentally challenged individuals. Now others in the area do this, Kroger and Food Lion for example employ individuals as do others, working in conjunction with the Community Services Board. So RAOC complements other efforts, running yard care and cleaning services, providing supervised work environments for individuals referred to them by the Virginia Department of Rehabilitative Services. Some of their workers are capable of using chainsaws, others are good at mowing. If you might be able to use their skills, please contact RAOC! – I provided their website link above.
Mike Smitka
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| http://www.tapirs.org/ |
| Go to the URL to contribute to preserving tapirs in the wild! |
...bond markets reacted to the taper with a yawn...
The "taper" in practice started with a whimper not a bang. Instead of purchasing a $1.02 trillion SAAR the Fed reduced its purchases to $0.90 trillion – that is, $900 billion. Yes, the announcement suggested additional reductions at each FOMC meetings in 2014, but cutting purchases by $10 per month in several steps means the Fed is still poised to purchase another $500 billion in bonds, while promising to keep short-term interest rates at 0% until we get substantially lower unemployment or higher inflation, which in practice means well into 2015 if not beyond. In reaction, bond markets reacted to the taper with a yawn – rates at all ends of the maturity spectrum, from 1 month to 30 years, shifted 2-4 basis points at long maturities and actually fell out to 3 years. There's no sign that the markets whose entire focus is interest rates expect any effective change in monetary policy. (Indeed, I read it as saying that bond markets don't think taper or its lack matter – while stock prices are driven by the story of the hour and not by data.)
...the US is becoming an export base...
So what's with "global" and "Honda"? First, the dollar has appreciated relative to the yen – Japanese are looking at their domestic interest rates and judge that parking their money in dollars is the better choice. But if Abenomics works, their interest rates will rise. (And if it doesn't, the decline of Japan's domestic auto market will accelerate; see an older post here on the interaction of a falling and aging population on the demand for cars.) But even if the yen stays at its current level, Honda will find it increasingly hard to recruit workers in Japan, and will find little reason to bet on the yen's exchange rate for deciding where to make global models. In that context, it is important to note that Honda has adopted English as its global language, replacing Japanese. Quietly, Honda has also reached the point where it develops market-specific products (for "market-specific" read "North America") in Ohio.
But the dollar has depreciated relative to the Euro and the Chinese RMB, and has strengthened (or at least not weakened) against the Canadian dollar and Mexico peso. The yen exchange rate is an outlier. In that context (Takanobu) Ito, Honda's CEO, notes that the company is expecting its North American operations to export 30%, up from the current 6%-7%. BMW already exports 70% of the output at its Spartanburg SC plant; I expect others to gradually shift in the same direction. Toyota noted that it will export 7,500 Corollas to the Caribbean and Latin America from Mississippi in its initial year of production there, hardly an impressive number but meaning that these vehicles won't be exported from Japan. If you Google firm by firm you'll find similar stories for Ford, Nissan and others. So the word on the street matches US International Trade Administration's analysis of Trends in Motor Vehicle Exports.
Given the lead times in building capacity and making sourcing decisions, such plans could slow if the yen remains sufficiently weak. At the same time, VW's construction of North American capacity means fewer imports from the EU. And in my visits to suppliers – I will visit 5 firms for the 2014 PACE supplier innovation award – I am hearing of plans to add engineers in Southeast Michigan and Northern Ohio.
Now to be honest this has yet to show up in the automotive sector trade deficit. Yet what I would normally expect to see in the data is that a recovery in the US would lead to a sharp upturn in imports without a corresponding shift in exports. We don't see that, either. I don't expect the US to ever turn into the export powerhouse that Japan once was; global growth means that global vehicles will be made in multiple markets. Tariffs in the BRICs reinforce that tendency. We also need to remember that productivity is up, and that manufacturing employment in the US auto and auto parts sector will therefore increase by less than output. Despite these provisos, it's clear that the US is becoming an automotive export base, and continuing to be an engineering center. It's a nice note on which to end the year.
For background, compare US Treasury Yields and European Bond Rates. When the EU begins growing properly – which as with the US may require several years – then interest rates should rise relative to those in the US and make Euro assets more attractive relative to US dollar assets. I thus expect that over time the Euro will appreciate / the dollar depreciate. However, the timing is sufficiently uncertain that investing on this basis is not likely to pay. If it would, then big money would already be doing so and the Euro would already have appreciated ... whatever the weaknesses of the efficient market hypothesis, there is plenty of evidence that such predictable movements get arbitraged away, leaving markets sufficiently unpredictable as to not offer consistently prfitable strategies.
| US$-Mexican Peso | US$-Chinese Yuan |
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| US$-Japanese Yen | US$-EU Euro |
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| Auto Sector Imports & Exports, 1965-date | Auto Sector Imports, Exports and Sectoral Trade Balance, 1980-date |
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Ruggles, Auto Finance News
Or did we just get President Obama’s Second Choice?
Now that Larry Summers has taken himself out of the running for the position of Chairman of the Federal Reserve Bank of the United States, President Obama has appointed the current Fed Vice Chairman, Janet Yellen, to the post. If confirmed, it would make Yellen one of the most powerful woman in the world, with her hands on the controls of the globe’s largest and most powerful economy.
From the Federal Reserve website:
“The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
Today, the Federal Reserve's duties fall into four general areas:
Why might we have “dodged a bullet?” Larry Summers has a LOT of baggage. Many say he is brilliant. According to Car Czar Steve Rattner, “No one is perfect, but I score Larry’s batting average and qualifications at the top of the heap. There’s that extraordinary intelligence: the most brilliant, most analytical and most surgical brain of anyone I’ve ever encountered.”
But Summers laid an egg in his stint as President of Harvard University. He resigned after a “no confidence” vote by the Harvard faculty after he made some less than complimentary statements about women, among other issues. Many think Summers, along with Steve Girsky, engineered the dealer terminations during the GM and Chrysler bankruptcies. In addition, it is well known that Summers participated in the ouster of Brooksley Born, then Chairman of the Commodities and Futures Trading Commission. It seems Summers, Robert Rubin, Clinton era Treasury Secretary, Alan Greenspan, then Fed Chairman, and others didn’t think it was necessary to regulate derivatives, including the credit default swaps which led to the bubble, the mortgage crisis, and the economic collapse of 2008. They thought the derivatives market would “self regulate.” Only the most extreme ideologues still believe that. It was looking like the President was going to have problems from his own party in any Summers confirmation hearings. So Summers withdrew his name from consideration
So what about Janet Yellen? Who better to carry on Ben Bernanke’s policies, which have not been perfect, but have been the best available under the circumstances. After all, the Fed tool box was empty when Bernanke inherited the Great Recession. Interest rates were already so low there was no place to cut them to goose the economy. Congress was handcuffed by obstructionism leaving the Fed with no best choices. We ended up with "quantitative easing," the best of the imperfect choices remaining. The new Fed Chairman will have to navigate difficult waters to ease off the Fed stimulus without cratering the economy or waiting too long, taking the risk fueling rampant inflation. Yellen has been Vice Chairman of the Fed through it all and understands the challenges.
Yellen is immensely qualified. Even though partisanship and obstructionism will make her confirmation an adventure, she is universally respected. She graduated summa cum laude from Brown University with a degree in economics in 1967, and received her PhD. in economics from Yale University in 1971. She has no history to indicate she would be a patsy to Wall Street. Her predictions are the envy of the Fed. She has more Fed experience than anyone in history leading up to her appointment. An added bonus is the fact that she is married to a Nobel winning economist, George Akerlof. Akerlof won his Nobel for his work on “asymmetric information.” As Bill Clinton famously said about his wife Hillary, “You get two for the price of one.”
I think the “second choice” is the “best choice.” Let’s hope Janet Yellen’s confirmation is as smooth as possible so she can get about the business at hand.
