Wednesday, November 16, 2011

Charts and thoughts

There's nothing particularly noteworthy in the economic news today, so what follows is a quick recap of major releases, with some observations along the way.

October Industrial and Manufacturing Production came in stronger than expected, but the bigger picture is that industrial output is rising at a moderate 4% rate: nothing to get excited about, but nothing to worry about either.

A survey of home builders' sentiment ticked up—surprisingly—this month, and this adds some weight to the case that we have seen the worst in the housing market and may be on the cusp of some improvement. The second chart, showing an index of homebuilders' stocks, also suggests we have seen the worse and are seeing some gradual improvement on the margin. Painfully slow, to be sure, but the trend appears to be heading up. The home vacancy rate also suggests that we have seen the worst and things are improving, although of course there needs to be a whole lot of improvement before we can get back to "normal" conditions. Even though we are still a long way from seeing what might be termed "strength" in the housing market, simply ruling out further weakness is nevertheless quite comforting. As excess housing inventories are worked off and the economy continues to grow and as household formations continue to exceed new construction starts, the case for a rebound in residential construction and a rebound in prices gets stronger.

As was the case with yesterday's PPI release, October consumer price inflation showed some moderation. On a year-over-year basis, there is nothing alarming going on here. However, declining energy prices have played a big role in moderating overall inflation in recent months, and that is almost surely going to reverse in coming months, since crude oil has now broken above $100/bbl. (up almost 35% from the early October low).

This chart compares the yields on 30-yr Treasuries to core inflation. In an ideal world, bond yields would be at least 2 percentage points higher than inflation, and this chart is set up to show that is the case when the two lines are on top of each other. Reality rarely matches the ideal, of course, but the chart is nevertheless helpful in gauging the valuation of bonds on a real return basis. On that score, in the past several decades, bonds have only been less unattractive at the end of 2008 (not to mention several times back in the rising-inflation 1970s). And considering that core inflation has been trending up while bond yields have declined to very low levels, the real-yield-valuation case for owning long Treasuries is very weak. Long bonds are only attractive as an antidote to fear: fear of an implosion in European financial markets that will rock the global economy and deliver us into years of recession or even a global depression. You have to be extremely worried about the future to want to own long Treasuries these days.

This chart compares the year over year growth rate of the consumer and producer price inflation. Both are trending higher, and the PPI seems to be leading the CPI in recent years, suggesting that the rise in the core CPI is likely to continue.

I add this chart to show some long-term perspective on core inflation. Note the extremely low levels of inflation in the early 1960s, when monetary policy was constrained by the gold standard, the dollar was the king of the hill, and the economy enjoyed very strong growth. Note also how this measure of inflation has crept higher since 2002-3, which was when the Fed first started to ease aggressively and the dollar began to decline. I don't think it's a coincidence that growth has been very disappointing in the past four years. With a weak dollar and very low real interest rates, speculative activity becomes more appealing than investing in the real economy. Business investment is rising, but it is lagging woefully behind the growth in corporate profits.

If there is a theme that ties this altogether it is one of growth inhibited by fear and uncertainty. The economy is growing, but only moderately. The value of the dollar is up in the air. The risks of a Eurozone implosion are palpable. Bloated government spending has suffocated economies everywhere, making debt burdens intolerable. Fiscal policies need to change radically, but the political will to do so seems lacking, and crony capitalism is on vulgar display too often. Accommodative monetary policy—which seeks to encourage more borrowing—is not a good solution to a situation made bad by an excess of borrowing, and it only weakens confidence in the future value of currencies. Gold at $1800; wild gyrations in oil prices; high-frequency trading; widening spreads on Italian and French bonds—all are symptomatic of a market that believes that there is more profit to be made in speculation than in new business investment. Speculation is what you get when you weaken the incentives to invest in productive activities for the long haul.


Benjamin Cole said...

Nixon went off the gold standard in 1971; CPI in that year was about 6 percent.

That's double to triple the current rate. Genuflecting to gold should be left to extremists.

Tight money in a debt-crushing recession is a very bad policy. See Japan.

Beating inflation is easy. Tight money will do it. But that is only the facade of a monetary policy. Japan proves that, for 20 years and running.

Promoting real growth should be the real goal of monetary and tax policy.

Is the world more speculative today and less interested in real investment? Possibly, but Scott Grannis' own charts show healthy business investment in plant and equipment in USA.

I suspect we have a globe glut of capital, and trillions of dollars seeking a home, real or speculative.

Tax workers and investment less, and tax consumption more, if you want real growth.

Bill said...

Just came back from a fundraiser for Mitt Romeny. He gave a great speech about how to get the economy moving again. He understands business and pointed out, correctly I believe, that Obama does not and that he still believes Europe is the correct model for the US. I came away hopeful that we might just be able to turn things around.

Benjamin Cole said...

I like Mitt Romney, wonder if the Christian vote will ditch him, as he is a Mormon, and also Obama is an avowed Christian.

Obama can throw a few "Come to Jesus" moments into his campaign and visit publicly with a few evangelists. Many evangelists will not stand on the same stage with Romney.

BTW, Scott Grannis says no news out there today, but we have seen recently unit labor costs, the PPI and CPI all come in deflation mode.

Inflation is not a concern.

Scott Grannis said...

I am really warming up to Newt Gingrich, and I suspect the race will come down to Newt and Mitt. I could live with either, but would prefer Newt since I think he has a more solid grounding in history and a better vision of the future.

McKibbinUSA said...

Newt Gingrich has too much baggage from the Reagan era be taken seriously by anyone except baby-boomers and older generations -- Mitt Romney will eventually be the Republican candidate in my opinion -- however, I'm not sure Romney, Gingrich, or Obama have the moxy to fix the US economy during the next presidential term -- as a Libertarian myself, I was hoping for Ron Paul, but Paul is not going to be chosen for many reasons -- Main Street USA has essentially been abandoned by essentially all candidates with a chance of winning the next presidential election -- that's very sad...

brodero said...

Y-o-Y change in Industrial Production of Business equipment
is still a strong 10%...this rate
of change jhas to be a lot weaker
to portend a recession.

Bill said...

I understand why people think Newt is very capable but I agree with those who say he's got too much baggage to beat Obama. We know him well here in Georgia and the general consensus, even among my friends who were early supporters, is that Newt is a pompous ass who doesn't treat people very well and that this would derail him in a general election. I think Obama would be thrilled if he were the nominee.

Benjamin Cole said...


I savvy what you say, but elections are won in the margins. That is, if 5 percent of the Christians vote for Obama and not the Mormon-cult-guy, then Obama wins. Or the evangelists just stay home to teach the GOP a lesson.

The GOP is tied up in knots by the defense-homeland security megaplax, the Christian Right and the rural subsidies pinkos.

Hard to see either Romney or Newt denting that much. Newt has IQ to the moon, but he makes Clinton's love life look tame. Newt also strikes me as unreliable.

Ron Paul is interesting.

Junkyard_hawg1985 said...
This comment has been removed by the author.
Junkyard_hawg1985 said...

My plan is to vote for a brokered convention. I want no candidate to get a majority of delegates. This has two advantages. First, the convention could choose a more popular candidate than the current crop. They could chose someone like David Petraeus, Mitch Daniels, Mike Huckabee or Chris Christie. The second advantage is that if the Republican nonminee is decided by April, there will be a steady beating from negative campaign ads from the Obama campaign and the news media. The last thing Obama wants to do is run on his record. He will want to bring up the nagatives of his opponent. If the convention picks the candidate (even if it is one of the existing candidates), then the candidate avoids the constant attacks during the Summer months. Warren Harding won the presidency by this route.

The odds of such an outcome is greater this year than in the past for two reasons. First, until April 1st, the delegates will be allotted on a proportional basis (28 states). There are no winner-take-all states until after 4/1/12. The second reason is that the candidates on the ballot are more likely to spread delegates. Ron Paul will consistently get around 15% of the votes (and delegates) from his avid supporters. Mitt Romney has his 35% support. The "not Mitt Romney Candidate" (currently Newt) at the time may be taking about 35% of the vote as well. The smaller candidate can keep running because they can recognize that their delegates may be valuable (Secretary of Commerce Herman Cain?).

I have until March 6 to decide in Tennessee. I'll vote for gridlock!

L.A. said...

@ Dr:

I disagree that Newt cannot/will not be taken seriously by younger generations. (if I am interpreting your statement correctly, you are saying that only older generation will consider Newt)

I am myself of a younger generation. I did not follow politics in the 90s. Many in my age group are fed up and disgusted, just like most of the rest of America, though some are fed up for all the wrong reasons. I, too, have often been concerned that the younger generations are out of touch and IF voting Republican, will only vote for a centrist like Romney.

However, I am becoming increasingly convinced that the current admin has awoken a sleeping giant.

I, for one, hope that Romney doesn't get elected simply because I think he would get decisively beaten by Obama. Newt's baggage would, IMO, be an easier fight than Romneycare vs. Obamacare. Especially when you consider Obama's baggage. And Newt is not afraid to do what 99.9% of other Republicans are afraid to do --- speak up and challenge Obama.

Got off on a tangent main point was that hope is not lost for younger generations.

Public Library said...

The current batch of red candidates is abysmal. Same with the last election cycle. Nobody really liked McCain and while Palin was humorous, she was more fit for reality TV.

Pretty sad state of the union on the right.

William said...

I often think how different the world would be if Ralph Nader had not run as the Green Party candidate in 2000.

Benjamin Cole said...


Or even if we had a true democracy. Forgotten today is that Gore beat Bush jr. in the popular vote, by 400,000 votes.

Bush jr. then got us entangled in the $4 trillion Iraqistan mess, and Medicare supplements.

Gore? Maybe worse, but probably not.

I am looking for a Third Party to vote for.

Public Library said...

Ben is correct, the 2000 election pretty much marked the day our Democracy was overthrown...

djakel said...

Newt has less chance than Romney of beating Obama. They have both been for big government solutions until now. Newt will not get many tea party votes. The independents dislike him and the left hates him. That leaves establishment Republicans who might vote for him. Romney would at least pick up some independents, but not enough to win after the left spends $1 bil trashing him.

Cain will recover from the harassment hit job and his long pause on the Libya question. Obama has had a lot more worse gaffes than Cain has had. (has visited 57 states; a 17 minute totally incoherent rambling explanation of taxes in Obamacare; Bowls like a Special Olympian; Navy Corpse Man; many others)

John said...

I don't think America will elect a man president who:
1)is a pompous twit,
2)is a high-priced K Street "historian,"
3)married his 8th grade math teacher,
4)though in his mid-sixties still keeps a collection of rubber dinosaurs in his office.

They might elect him Vice President, though. He could be Romney's brain, like Cheney was Bush's brain.

One more time...set'm up...knock'm down.

William said...

The worst part of the Cheney / Bush gang was that Cheney lead the search for Secretaries, Assistant Secretaries and administrators of many executive branch departments and divisions. Once installed they pushed to decrease those department's supervisory activites: EPA, SEC, Office of Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Department of Housing and Urban Development (HUD), Federal Trade Commission, etc. ,etc.

They turned a "blind eye" to all the mortgage / credit / derivative excesses as did Alan Greenspan's (aka Ayn Rand) Federal Reserve.