If we recall the middle of 2009, one of the hottest debates among traders and economists was revolving around the subject of US economy experiencing inflationary or deflationary pressure. Many experts expected that, following the unprecedented central banks’ expansionary money supply policies, the G7 countries would witness a rapid increase in the level of prices. Exactly like the first half of 2009, the US CPI during the 1H10 has hovered near the flat line. Moreover, the all-item inflation numbers shifted into negative territory when oil went through a price correction. The annualized core inflation rate from December 2009 to May 2010 stands at only 0.3%, the tamest five-month annualized rate since early 1960s. If things remain status quo, is US in danger of turning into a Japanese non-inflationary experience? Continue reading ‘Back To Safe Heaven’
Archive for the 'Macroeconomics' Category
China took the entire world by surprise in the pre-crisis world economy, recording gigantic exports, consistently gigantic capital inflows, and imbalances in both stocks and real assets that could prove to be extremely harmful to the international economic stability in the short term and devastating to China in the long term. Some voices that called for restructuring were never heard in Beijing, simply because of the apparent success of high growth and low inflation economic dichotomy. However, China might have a very difficult time keeping inflation at its 2010 target of about 3 percent, after banks flooded the Chinese financial system with money in 2009. According to the median forecast of 14 economists, inflation may reach 4.4 percent this year. China’s GDP growth quickened to 10.7 percent in the fourth quarter, the fastest pace since 2007. The Chinese authorities affirmed a target of 8 percent growth for 2010, the same goal that the government has set and surpassed in each of the past five years. Nouriel Roubini said “this strong economic recovery implies that the super-loose monetary, fiscal and credit policy followed by China has to reverse itself or otherwise there is a risk of overheating and inflation”. Continue reading ‘China – The Wonderland’
Last Friday, President Barack Obama proposed massive tax credits estimated at $33 billion to encourage small businesses to hire workers and raise current employees’ wages. According to the plan, employers would receive a payroll tax credit of up to $5,000 for every net new employee they hire in 2010. The proposal also allows businesses to claim tax credits for pay raises, such that they will receive a bonus 6.2 percent tax credits on aggregate wage increases in excess of inflation. Via the new plan, the Obama administration is simultaneously seeking to stimulate employment by reducing payroll taxes and to regain some political capital after recent Democrats’ mishaps. The new initiative came hours after the authorities announced that the real gross domestic product in the United States increased at an annual rate of 5.7 percent in the fourth quarter of 2009. Continue reading ‘Growth Without Jobs’
Starting with the Thanksgiving Day, consumers have focused mostly on promotional deals and have made fewer impulse purchases as they are still concerned about the state of the economy. Retailers are in fact driving traffic to their stores through much targeted promotions that ultimately will lead to reduced profit margins. This year, it appears that the Black Friday and Cyber Monday surveys could not provide a clear picture about the retail sales numbers for the entire holiday season. In part, that could be attributed to a warm November weather, which kept consumers from buying winter clothes. US retailers have decided to extend discounts on computers, toys and clothes beyond Christmas to attract consumers who held out for lower prices and have gift cards to redeem. Continue reading ‘Shop Till You Drop’
First Friday of every month at 8:30 a.m., the whole financial world is watching the release of the most important indicator: the US employment report. The official unemployment number is the U-3 rate, which is defined as “total unemployed, as a percent of the civilian labor force“. This number was 9.8% in September of 2009. There are three different types of people who are not included in the U-3 rate:
a) People that hold a part-time job, look for full-time work, but simply cannot find any (a.k.a. the underemployed)
b) People that have not had a job for a long period of time, look for full-time work, but simply cannot find any (a.k.a. the unemployed)
c) People that have not had a job for a long period of time, gave up looking for full time work, but would work if they could find a full-time job (a.k.a. labor force reserve) Continue reading ‘The Real Unemployment Picture’
One of the weirdest questions we hear these days is: “where can I buy the alarm clock that is going to wake me up when the recession is over?” Though there is no one-formula-fits-all type economic indicator that can accurately forecast the movement of the economy as the business cycle enters different phases, I would bring up for discussion an interesting composite index released in US by the Conference Board: the Leading Economic Indicator (LEI). The index increased 0.7% in June versus a revised 1.3% gain in May and a 1.2% jump in April. The June increase puts the year-to-year decline at 1.18%. The trough for the year-to-year change appears to have occurred in December 2008 (-3.98%). Continue reading ‘Magic Crystal Ball’
Traders, economists, strategists, central bankers are all exposed to a new dilemma: is the US economy experiencing an inflationary or a deflationary pressure? On one side, under a global turmoil environment where most economies are shrinking considerably, prices tend to fall and subsequently the aggregate demand for goods and services subsides. On the other side, due to unprecedented central banks’ expansionary money supply policies many analysts expect a rapid increase in the level of prices. The solution to the problem still represents a challenge for many investors since the near-term investment strategy is very much correlated with the tendency of the price index. Continue reading ‘Inflation vs. Deflation’
These days, all over across the Wall Street and academia, many economists touch an extremely hot topic days: the quantitative easing policy. The world economy is facing the toughest recessionary pressure since the Great Depression and that calls for an unprecedented monetary policy from the central banks. Since June 29th 2006, when the federal target rate reached 5.25 percent, Federal Reserve has engaged into a monetary easing policy that took the benchmark interest rates in the vicinity of zero. Similarly, Bank of England has reduced the benchmark rate to half a percentage point, and European Central Bank adopted a dovish stance with interest rates down to historical low levels of 1 percentage point. On top of that, Fed has injected massive amount of liquidity into the financial system through the discount window loans, term-credit loans to banks and currency swaps to foreign central banks. As an extraordinary set of measures, from the beginning of the year Federal Reserve has announced two special programs: a program to purchase up to $300 billion of longer-dated Treasury securities and a program to purchase $1.25 trillion of agency mortgage-backed securities. Continue reading ‘FED’s Quantitative Easing’
Three Strikes – A Strikeout
In baseball, the player that is supposed to bat is declared out when he misses three strikes. Switching to economics now, let’s have a walk together on the economic forecasting road. According to Professor Thomas Kida from the University of Massachusetts “… economics typically does not use the scientific method, where hypotheses are tested by observing what goes on in the economy. Instead, economists often develop elaborate theories that may be logically consistent, but are often based upon unrealistic concepts.” To me, there is nothing wrong with being off-the-chart once or twice. However, persisting in statistical outliers should strike you out from the economists’ table. As we all remember from the Latin lessons “errare humanum est perseverare diabolicum”. Then, let the case reveal itself.
Continue reading ‘Three Strikes – A Strikeout’