Calafia Beach 4th of July

The beach is really packed today, and the weather is glorious. Here's a shot looking northwest, with the San Clemente pier in the upper right, and Dana Point at the top of the photo.

Federal Reserve's balance sheet shrinks modestly

The Wall St. Journal is doing a great public service by publishing an interactive graph of the evolution of the Fed's balance sheet (above), which you can find here, updated every Thursday night. The graph shows the breakdown of all the things the Fed has effectively bought in order to expand the amount of money available to the banking system. The size of the Fed's balance sheet is roughly comparable to the monetary base (the sum of currency and bank reserves), which are the only two components of the money supply that the Fed has direct control of.

The chart shows that recently there has been a modest reduction in the Fed's balance sheet, and that same reduction shows up in a $200 billion shrinkage in the monetary base since mid-May. That's not really a tightening, however, since most of the money the Fed has created (in the form of bank reserves) is still sitting idle in banks' accounts at the Fed. Those same excess reserves have not been used to create new deposits. We know that because M2, which includes money created by banks using their reserves, has not increased by an exceptional amount in the past six months, even though reserves have almost doubled since last September.

The chart also shows how the Fed has been steadily purchasing Treasuries and mortgage-backed securities in recent months. The Fed still owns fewer Treasury bonds today than it did before the crisis, however. It unloaded lots of Treasury bonds in the early stages of the crisis in order to help satisfy the world's insatiable demand for Treasuries.

So, although the Fed has purchased an extraordinary amount of assets in recent months, that has not resulted in an expansion of the money supply of similar magnitude. Yet. That can change in coming months, of course, but we have no choice but to wait and see what exactly happens. Whatever the case, the modest contraction in the Fed's balance sheet over the past month or so is not by any means an indication that they have tightened monetary policy. Fed policy remains extremely accommodative, but the system's desire to utilize abundant bank reserves to expand the supply of money remains muted. This is an uncomfortable but very significant standoff that will not last much longer before being resolved one way or the other.

"Stimulus" projects reveal how rich we are

I'm watching Fox News' review of 101 wasteful stimulus projects across the country (e.g., a million bucks to determine how many deer live in Pennsylvania; covered garages for the bicycles of Microsoft employees) that total over $1.2 billion. (Which is actually chump change considering the $3.5 billion that was given to Ohio for a new federal power authority, in exchange for the vote of Democratic Rep. Marcy Kaptur of Toledo for the Waxman-Markey bill.)

Apart from the obvious disgust, what struck me the most was this is a very rich country, if the only way we can spend an extra billion dollars is on ridiculous and unnecessary stuff like this.

Another look at job losses

I've showed this chart before, in an attempt to put job losses in perspective. The chart shows the ratio of weekly unemployment claims to the number of people working (according to the establishment survey). Since the ratio has been falling since March, while total jobs are still shrinking, the chart tells us that the number of people being laid off every week is declining at a faster rate than the shrinkage in jobs. That's part of the healing process, and it is also characteristic of the end of all the recessions shown on this chart. The chart also shows that job losses have not been nearly so traumatic relative to the size of the workforce as they were in the recessions of 1975 and 1980-82.

Job losses don't rule out recession end

The market is disappointed today, presumably because job losses were reported to be about 100,000 more than expected. But today's jobs number (-467K) was almost exactly what you would have expected given the ADP employment report (-473K) released yesterday. These are all pretty minor things, actually, since the payroll number that everyone focuses on can be and most likely will be changed by hundreds of thousands several times over the next few years, as better data come in. In other words, a "miss" relative to expectations of 100K is nothing to get excited about.

The thing to focus on instead is the context of the number and the trends in other numbers. Unemployment claims haven't risen for the past 5 months, so we know that the job situation is not deteriorating. The Challenger data (see yesterday's post) shows tremendous improvement in one segment of the jobs market. Job losses have clearly decelerated no matter what number you look at—we've seen the worst, and now the issue is how fast things will improve.

As this chart shows, jobs don't usually turn positive until well after the end of a recession. So today's numbers are not at all inconsistent with the end of the recession having been in, say, May. In any event, given the non-stimulating nature of the Obama "stimulus" plan (which explicitly rejected the stimulus most likely to stimulate the economy, i.e., tax cuts), this recovery is likely to be quite modest. It's going to be another "jobless recovery" for awhile. But I still think the economy is on the mend. It will probably take a year or so before we start seeing meaningful gains in employment.

Interesting factoid: based on the household survey, 95.4% of the jobs that existed at the peak of the business cycle in early 2008 are still around today. There's been a lot of shuffling going on beneath the surface, but on net, job losses have been less than 5%.

Auto sales have bottomed

Auto sales most likely hit bottom last February, when they came in at a 9.1 million annual (seasonally adjusted) rate. In June they were 9.7, and they averaged 9.6 in the January-June period. How fast they increase is now the question, but there is a lot of pent-up demand out there, given the degree to which sales have plunged in the past two years.

Construction spending update

Residential construction was still declining in May, but it has shrunk so much relative to GDP (it's now down to about 2.5% of GDP, the lowest reading on record) that a small decline hardly matters to the overall economy at this point. Nonresidential construction activity has held up better than most (including me) expected, however. Indeed, the fact that it is up 4% from the January low is rather impressive considering all the bad news that has been out there since last September.

Baltic update: still very strong

This index of shipping costs for bulk commodities has moved up solidly for the past seven months. Many people dismiss it as an indicator of global growth, however, arguing that the ships are being monopolized by Chinese demand for things like iron ore, and all they are doing is stockpiling the stuff. I prefer to think that the Chinese have a reason for buying commodities, and that it has to do with the fact that their economy is growing at multiples of most other economies in the world. What's good for China is good for the world; the more they produce the more they must consume.

Purchasing managers' index points to recession end

The purchasing manager's index of manufacturing activity has improved dramatically this year. As this chart suggests, it is now very close to the level which is consistent with a flat economy (i.e., the recession is all but over). Another undeniable green shoot. The prices paid index has risen to 50 (which means half of those reporting are seeing rising prices and half are seeing falling prices), and I think that reflects not only the widespread rise in commodity prices, but also the fact that conditions are not so weak that they are leading to destructive or widespread price-cutting. When the prices paid index rises to 50 that has typically signalled an economy in recovery mode.

Corporate layoffs have all but vanished

This chart is another of those undeniable green shoots. The chart tracks the number of corporate layoff announcements, and they have plunged from a high of 242K in January to 74K last month. That's a drop of almost 70%! Indeed, they are essentially back to levels that prevailed during the the growth years of 2004-2007. Corporate America saw the problem in late 2008, took action, and has now largely completed its downsizing. Businesses are now leaner and meaner and ready to grow. This is a tremendous development that suggests the economy is now in recovery mode.