To that end, here are some pictures of the Bonddad Pups. We'll be back on Monday in the early AM
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By April of this year, virtually every economic indicator pointed to recovery: not only had GDP regained nearly 3/4's of its 2008-09 loss, but industrial production, manufacturing, and consumer purchasing were on a roll. Beyond that, early indicators by way of temporary hiring had given way to strong hiring in the general economy. Even real income had picked up slightly. On Monday an article at CNBC's website confirmed my writing last week that:Despite all the gloom and doom about the US economy, the private sector actually created 620,000 jobs over the past seven months, far faster than in the previous two recessions. generating between 200,000 and 300,000 new jobs (excluding census workers) each month.Then, suddenly, it seemed like the bottom fell out. GDP in the second quarter is likely to ultimately be tallied well under 2%. Industrial production in June barely budged. Manufacturing cooled off. Retail sales fell over 1% in May and another 0.3% in June. Even worse, non-census hiring came to a screeching halt: about +20,000 in May, -21,000 in June, and again +12,000 in July. Talk of a "double-dip" second downturn, which had all but disappeared into the shadows in April, returned with a vengeance by July, with prominent bears like David Rosenburg proclaiming that there was better than a 50/50 chance that a second leg down was to ensue. Permabears like Mish crowed.
It wasn't as if some Doom Fairy had come along and waved her black magic wand over the economy -- there were real reasons for the downturn in some of the statistics. Oil briefly at almost $90 equated to 4% of the GDP, historically the tipping point between expansion and oil shock induced recession. The explosion and sinking of BP's well in the Gulf of Mexico was an economic disaster for the Gulf of Mexico secondarily to an environmental catastrophe. The expiration of the ill-conceived $8000 housing credit caused demand to crater, subtracting about 100,000 housing starts a month, and leading to more construction and real estate industry layoffs. The failure of Congress to pass adequate and timely relief for state and local budgets meant that nearly 100,000 layoffs that would have happened last year, and could have been averted again this year, in fact took place in June and July.
But the abrupt halt in private sector hiring and cliff-diving decline in consumer spending in May defy explanation based just on the above list. A whole host of indicators all pointed to more robust job growth -- ISM manufacturing, temporary help hiring, durable goods orders, real retail sales, and for good measure the Conference Board's (which publishes the LEI) Employment Trends Index.
Instead, something happened in late April and early May to make employers and consumers alike suddenly freeze in their tracks. That something was fear.
Nonfarm payroll employment increased by 151,000 in October, and theunemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Since December 2009, nonfarm payroll employment has risen by 874,000.
Job cuts announced by U.S. employers fell in October from a year earlier, signaling that a lack of hiring rather than an increase in firings is restraining the labor market.
Much like Spain, Ireland and the UK, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia’s economy shrinking by 18 per cent.
The region has since stabilised but, for many ordinary people it still feels like a depression. Wages have plummeted while unemployment has rocketed, with more than a fifth of the Latvian labour force out of work.
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.
Now, the Irish are being warned of more pain to come.
Countries that are implementing austerity measures are conceding their plans will lower growth:
U.K. Prime Minister David Cameron’s planned budget cuts increases the chance the economy will slip back into recession, said Geoffrey Dicks, who heads economic forecasting at Britain’s new fiscal watchdog.Responding to questions during a parliamentary hearing in London today, Dicks said measures proposed in the June 22 budget led his office to shave 0.5 percentage points from its growth forecast in the “near term.” His Office for Budget Responsibility predicts an expansion of 1.2 percent in 2010.
See also this article on the UK situation.
And Portugal -- which is also implementing austerity measures -- admits these measures will lower growth:
Austerity measures aimed at bringing down Portugal's towering budget deficit are crucial to regain creditor confidence, Finance Minister Fernando Teixeira dos Santos said Saturday, while also acknowledging that they will slow down economic growth next year.Measures contained in the government's 2011 budget proposal are intended to "not only reduce the deficit, but will also regain the confidence of those who lend to Portugal," Mr. Teixeira dos Santos said at a news conference explaining the proposal, which the minority government late Friday had presented to parliament amid continued uncertainty on its approval.
And the countries that spent massively are growing at strong rates.
China rebounded quickly from the global downturn, powered by a 4 trillion yuan ($586 billion) stimulus and a flood of bank lending. But communist leaders worry about surging home prices and a possible spike in bad loans at state-owned banks. They have imposed curbs on lending and investment, key drivers of growth and demand for raw materials.
So, here is the data. Austerity measures that have been tried and implemented in the current environment have failed. They have led to lower growth and a tremendous amount of pain. Countries that are looking at implementing austerity measures freely admit that these measures -- if implemented -- will lower growth. And the countries that spent massively are growing at strong rates.
Now, the question will be raised, can we afford this spending. I originally looked at this issue on June 18, 2009. I concluded the following:
So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.
Let's take a look at the current situation.
Total US debt outstanding currently stands at $13.7 trillion while total GDP is $14.7 trillion, meaning the debt/GDP ratio is at 93.19%. Obviously, this is not good, but it is not fatal either. Additionally, the 10-year Treasury is yielding 2.62%, indicating there isn't a risk premium in the US Treasury market regarding our current situation. Even if interest rates spike 200 basis points -- a tremendous amount over a year -- that means interest rates would be 4.62% -- still an incredibly low level. Hell, even a 300 basis point jump to 5.62% would not be as detrimental as some would argue. In other words, we're still pushing the envelope, but we're not going to kill ourselves by spending money right now.
And the rewards are tremendous. As I have written about before, the long-term benefits of a solid infrastructure program far outweighs the cost. First, there is the immediate impact of lower unemployment and increase consumer spending. Secondly, the long-term impact is truly amazing, as I explained in this article on my hometown, Houston, Texas. Houston is the fourth largest city in the country, and it would not have gotten to that point without its current infrastructure. You can also read about the economic importance of the US highway system in its forty year report. If you really want to see the benefit do a simply financial projection using the current 10 year interest rate. Make sure you include a monetary value for all the benefits such as land that is now developed that wasn't previously developed, new avenues of trade that have opened up, lower cost of transporting goods because there are fewer traffic jams and wrecks caused by poorly repaired streets, the increase in tax a tax base as new communities develop -- you get the idea.
At the macro level, overall growth is incredibly slow -- we're printing GDP growth around 2%. Unemployment is still at 9.6%. Simply put, the economy needs a stimulus right now. $500 - $750 billion of pure infrastructure spending -- that is, spending only on infrastructure -- would help tremendously right now. As I've outlined in far more detail before, this would lower construction unemployment (which comprises a large part of the current unemployment picture), fix a national infrastructure that is in terrible repair and provide the economy with a physical backbone that will help it grow in the future. Remember -- the original highway system was built is the 1950s and it is still paying dividends, meaning the benefits have far outweighed the cost.
In other words, the data indicates this is not the time to engage in austerity measures. Such measures will hurt an already fragile recovery. As previously indicated, this observation is based on plans that have already been implemented and failed. Those countries considering austerity concede it will hurt overall economic growth. And those countries that spent massively are now growing. The picture that is available from the available data is clear as a bell.
However, it will all probably be ignored.
Arkansas Congressman Marion Berry [discussed] a meeting he had recently with President Barack Obama. The subject of whether the 2010 midterms were going to be a repeat of 1994 came up. The Arkansas Democrat-Gazette account, quoted in the Politico, said about President Obama's view on 2010 vs. 1994, "The president himself, when that was brought up in one group, said, 'Well, the big difference here and in '94 was you've got me.'"Ouch.
Raw sugar may climb 19 percent by March if dry weather in Brazil, the world’s biggest producer, persists, amid growing demand from countries including China, according to broker Newedge USA.
The price may reach as high as 35 cents a pound, Michael McDougall, a senior vice president at Newedge, said in a phone interview from New York yesterday. A rally to that level will make the commodity the most expensive since November 1980.
Raw sugar in New York has more than doubled since reaching a 13-month low on May 7 on concern adverse weather will reduce output in Brazil, Russia, China and Pakistan. The market needs supplies from India, the second-biggest producer, to meet a deficit, McDougall said.
“If there’s less rain than normal in Brazil until March you could potentially see a reduction in the cane harvest and then you have a potentially big problem,” he said. McDougall in August correctly forecast that sugar will exceed 23 cents.
Futures rose for a fourth straight session yesterday amid speculation that India may curb exports as it builds stockpiles. Raw sugar for March delivery climbed 1.1 percent to settle at 29.45 cents ICE Futures U.S.
“Current prices show that the market needs Indian sugar,” McDougall said.
Here's a chart of monthly prices from Barchart.com. Notice that prices are near 10-year highs
As I've noted before, one thing I've learned from this recession is that it's not as easy to increase the money supply as I thought. It's easy to create additional bank reserves and increase the monetary base, but if the new reserves simply pile up in the banking system, then they don't have much of an effect on the supply of money:
More On Friedman/Japan, by Paul Krugman: ...So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted it as meaning that Friedman would favor quantitative easing now. I think that’s right. And just to be clear, I also favor QE — largely because it might help some, and seems to be just about the only policy lever still available in the face of political reality.But I think it’s also important to note that Friedman was all wrong about Japan — and that you can argue that he was also wrong about the Great Depression, for the same reason.
For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more — push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.
But the Bank of Japan tried that — and found that pushing more reserves into the banks didn’t even lead to rapid growth in the money supply, let alone end the problem of deflation. Here’s a chart of growth rates of the monetary base and of M2, Friedman’s preferred monetary aggregate:
Bank of JapanSo, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn’t even translate into a surge in the money supply! This is why I’m so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth — in liquidity trap conditions, the Fed doesn’t even control money, so how can you blithely assume that it controls GDP?
And this also calls very much into question Friedman’s famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?
Again, that doesn’t mean that I oppose having the Fed engage in unconventional asset purchases. I’m just trying to be realistic about the likely results. We really, really need expansionary fiscal policy along with Fed policy; and we’re not going to get it.
The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."
Of the 18 manufacturing industries, 14 are reporting growth in October, in the following order: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Machinery; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Paper Products; Printing & Related Support Activities; Transportation Equipment; Computer & Electronic Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.
First, several comments note the lower dollar is having a negative impact on commodities -- which is pretty obvious but important to keep in mind. Again, there is a mention of the auto sector making a contribution. Finally, it appears there still isn't alot of confidence in the overall environment, as people are making orders at the last minute.
- "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (Transportation Equipment)
- "Business slowing down but still double digit over last year." (Chemical Products)
- "Currency continues to wreak havoc with commodity pricing." (Food, Beverage & Tobacco Products)
- "Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (Machinery)
- "Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products)
ISM's New Orders Index registered 58.9 percent in October, which is an increase of 7.8 percentage points when compared to the 51.1 percent reported in September. This is the 16th consecutive month of growth in the New Orders Index and the largest month-over-month improvement since January 2009. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).
.....
ISM's Production Index registered 62.7 percent in October, which is an increase of 6.2 percentage points from the September reading of 56.5 percent. This is the largest month-over-month improvement since January 2010. An index above 51 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the 17th consecutive month the Production Index has registered above 50 percent.
Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says.
“China’s economy is growing and there’s no reason why the country will take any less food next week, next month, or next year,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. “We’ve been able to produce more food in the past 2,000 years, but can we do it fast enough to meet the demand from China and other emerging economies to stave off a crisis?”
Increasing wealth in Brazil, India and China is boosting demand for grains, dairy, meat and cooking oils. While Sime Darby Bhd., the world’s biggest listed palm-oil producer, is benefiting from rising prices, governments from Beijing to New Delhi are trying to curb food inflation by raising imports, limiting exports or selling stockpiles. Per-capita use of vegetable oils in China has more than doubled in a decade, said Bill Nelson, a senior economist at Doane Advisory Services Co., an agricultural research and advisory company in St. Louis.