If you’ve got a free hour, here’s video of HBS’s Michael Porter, McKinsey’s Byron Auguste, and me talking about competitiveness. Hosted by Matt McDonald of Hamilton Place Strategies.
It would be fair to say that Michael, Byron, and I agree a great deal.
On Friday I will be speaking at an event sponsored by Hamilton Place Strategies. It came together on short notice, so let me give it a plug:
Developing the Competitiveness Agenda
This week’s first meeting of the President’s Council on Jobs and Competitiveness kicked off a national debate on the economic policies encouraging greater job creation and economic growth in the United States. The Council’s mission is to focus on finding new ways to promote growth by investing in American business to encourage hiring, to educate and train our workers to compete globally, and to attract the best jobs and businesses to the United States.
To contribute to the ongoing debate, we are bringing together noted policy experts and economists to discuss the key policies that will be most effective in achieving America’s economic goals.
Featuring
Byron Auguste, Director, McKinsey & Company
Donald Marron, Director of the Urban-Brookings Tax Policy Center
Michael E. Porter, Professor, Harvard Business SchoolModerated by Matt McDonald, Partner, Hamilton Place Strategies
WHEN: 10:00 am – 11:00 am, Friday, February 25th, 2011
WHERE:
The National Press Club: Holeman Lounge
529 14th Street, NW
Washington, DC 20045RSVP here
My basic approach will be to emphasize the three key drivers of economic activity: a skilled workforce, capital, and ideas. I generally align myself with Paul Krugman on the idea of “competitiveness“, so if you hear me use the term, I probably mean it as shorthand for productivity. (Well, not shorthand exactly — “competitiveness” has more letters than “productivity” — but you know what I mean.)
A few months ago, I argued that housing was messing up inflation measures, in particular the core CPI. With last week’s release of fresh CPI data, I decided to check in to see if that’s still true.
Answer: Yes, but less so. The cost of housing is still rising slower than for other core goods and services, but the gap has narrowed.
In my earlier post, I found that year-over-year core inflation through October was a remarkably low 0.6% and that housing costs (as measured by the CPI for shelter) had fallen 0.4%. As a result, core inflation less shelter was 1.3% — low, but not remarkably so.
We now have data through January: core inflation has picked up a bit to 0.9% over the past 12 months. Shelter costs rose 0.6% over the same period, and core inflation less shelter is 1.2%.
As you can see, the big change is that shelter costs over the past year are now rising, not falling:
Bottom line: Housing costs have dragged the core CPI down over the past year, but not as much as was true a few months ago.
P.S. My earlier post provides details about the BLS measure of shelter prices.
Tim Kane at the Kauffman Foundation is out with his latest survey of economics bloggers (full disclosure: I am both an adviser to the survey and a participant in it).
My favorite feature is a word cloud of adjective that respondents offered to an open-ended question about the U.S. economy:
Uncertainty still reigns (as it should), but “recovering”, “improving”, and “growing” now hold some prime real estate. As do “fragile” and “precarious.”
In last quarter’s survey, “uncertain” was even larger, with “weak” and “sluggish” close behind:
Mini is apparently the new thing in popular economics. Tyler Cowen’s new mini-book is getting lots of attention from the blogosphere. And econ-crooner Merle Hazard has released a set of mini-songs about the European debt crisis.
Best so far is Ode to Germany:
For more, click on over to Paul Solman’s page at the PBS Newshour, where you can also find info about their lyric-writing contest.
Over the New York Times Magazine, Paul Krugman has today’s must-read economics article on the fate of Europe. (Today’s in the physical world; it’s been up electronically for several days.)
Krugman walks through various ways that struggling Eurozone members might adjust to their ongoing financial crisis.
Along the way, he emphasizes a key point: American housing and mortgage markets were not the only cause of the global crisis:
You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.
Here’s the simplest argument in favor of the Fed’s decision to restart quantitative easing:
In short, the economy is struggling, inflation appears tame, and the Fed is the only game in (Washington) town.
Items (1) and (3) are, I suspect, not controversial. Moderate economic growth is moving us in the right direction, but has done little to create jobs or reduce the yawning output gap. And given the Republican’s election gains, it’s hard to imagine a new round of fiscal stimulus (except an extension of the expiring tax cuts — a form of anti-anti-stimulus).
Item (2), however, is highly controversial. Some commentators argue, for example, that it’s not appropriate to focus on core measures of inflation, which exclude volatile food and energy prices. Others argue that the government systematically (and, perhaps, intentionally) understates inflation.
I will leave those old debates to the side today and focus on a third, more contemporary question: Is housing messing up inflation measures?
Although the housing bubble popped several years ago, America is still adjusting to its aftermath. Falling house prices don’t directly show up in the CPI, but over time they do result in lower rents and lower estimates of the rental equivalent for owning a home. My question is how big an effect those falling housing prices are having on measured inflation.
To start, note that the core CPI really is running at exceptionally low levels:
Indeed, core inflation is well below the levels that inspired the previous round of deflation worries back in 2003.
Now let’s look at what’s happening with the shelter component of the CPI, which tracks the cost of owning or renting a home:
The CPI for shelter has fallen off a cliff. Shelter price inflation averaged about 3% from 1995 through 2007. Over the past year, however, it’s negative.
Shelter makes up almost a third of overall consumer spending, so you might expect that weak shelter prices are having a big effect on measured inflation. They do:
If you strip out shelter from the core CPI, you find that the remaining consumer prices have risen at a moderate pace over the past year (1.3%) – low, but not exceptionally low. Indeed, the economy came much closer to deflation back in 2003, by this measure, than it has so far today.
In short, the ongoing weakness in housing is a key reason why measured inflation is so low. But — and this is an important but — inflation still appears quite moderate even when you adjust for this effect. At 1.3% over the past year, the core CPI less shelter certainly doesn’t inspire concern about inflationary pressures. And if you look more recently, you find that this measure of inflation has been falling (e.g., the pace of inflation was about 1% annually over the past six months).
Bottom line: Housing weakness has indeed pushed measured inflation down a great deal, but it’s not the only factor at work.
Note 1: BLS tracks four costs of shelter: rent of primary residence (for renters), owners’ equivalent rent of residences (for homeowners), lodging away from home, and tenants and household insurance. Lodging and insurance account for only 3.5% of shelter, so it didn’t seem worth the trouble to strip them out to get a housing-only measure. You will sometimes see analysts do this comparison using the BLS measure of housing costs. Housing is about one-third larger than shelter because it includes household energy and utilities purchases, furnishings, and other household operations. For that reason, I think shelter is a better measure for exploring the relationship between the housing market and measured inflation.
Note 2: According to BLS, food comprises about 14% of consumer expenditures, energy about 9%, and shelter about 32%. So the core CPI less shelter covers about 45% of consumer expenditures. So use it with care.
Today’s Census data show another decline in the number of single-family houses under construction:
In short, completions are still outrunning starts.
October was another solid month for America’s railroads, according to the Association for American Railroads. October traffic was 11% higher than the depressed levels of a year ago:
Intermodal traffic (think trailers and containers) is up 14% over 2009, thus returning to 2008 levels:
Carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos) are up almost 9%:
BEA released its first estimates for third-quarter GDP yesterday. Headline growth was a disappointing, if not surprising, 2.0%.
Here’s my usual graph of how various components of the economy contributed to overall growth:
Housing fell back into the red, while non-residential structures eked out a small gain. Consumers continued to spend at a moderate pace (consumer spending grew at a 2.6% rate, thus adding 1.8 percentage points to growth). But the big stories were the continued boost from inventories, and the continued drag (in GDP-accounting terms) from imports.
The pessimistic take on inventories (see, for example, this tweet from Nouriel Roubini) is that the third quarter build up was unintentional, and thus is bearish for fourth quarter growth. The optimistic take, I suppose, is that maybe businesses see stronger demand ahead. But that feels rather, er, speculative.
For my usual set of caveats about the import figures (and, therefore, all of these figures), see my last post on the GDP numbers.
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