Category: Macroeconomics

Free Brookings Papers on Economic Activity

Earlier today the fine folks at Brookings announced that they have made all past and current issues of Brookings Papers on Economic Activity free. You can find them here.

Some specific papers that readers of this blog might enjoy (all from the Spring 2009 volume):

Jim Hamilton on the “Causes and Consequences of the Oil Shock of 2007-2008”

Christina D. Romer and David H. Romer on “Do Tax Cuts Starve the Beast? The Effects of Tax Changes on Government Spending”

Phill Swagel on “The Financial Crisis: An Inside View“

Homes Under Construction – Still Falling

Wednesday’s housing data showed that the number of single-family homes under construction fell again in February:

Ten years ago, America’s home builders were in the midst of constructing 672,000 single-family homes. Five years ago, they were building 990,000 homes. Last year, they were building 304,000. And now that figure is down to 252,000.

Underemployment (U-6) Down to 15.9%

Nice jobs report on Friday. Let’s hope we get twenty or thirty more.

One good sign is that the broad U-6 measure of underemployment continues to fall. It peaked at 17.4% in October 2009 and was still as high as 17.0% last November.

In February it was down to 15.9%:

(As you may recall, the U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work.)

How is Housing Affecting Inflation? An Update

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.

How’s the U.S. Economy Doing? A Blogger Word Cloud

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:

Europe and the Financial Crisis

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.

 

Federal Reserve Earned $81 Billion in 2010

The Federal Reserve system is doing its part to cut the budget deficit. The central bank earned $81 billion in fiscal 2010, of which a bit more than $78 billion will be remitted to the Treasury. That’s $31 billion more than last year.

According to the Fed’s news release yesterday, the following items drove profits:

$76.2 billion in income on securities acquired through open market operations (federal agency and government-sponsored enterprise (GSE) mortgage-backed securities, U.S. Treasury securities, and GSE debt securities) [In short, the Fed is making money on its “quantitative easing” / “credit easing” activities. At least for now.];

$7.1 billion in net income from consolidated limited liability companies (LLCs), which were created in response to the financial crisis [Profits on the Maiden Lane partnerships, etc.];

$2.1 billion in interest income from credit extended to American International Group, Inc.;

$1.3 billion of dividends on preferred interests in AIA Aurora LLC and ALICO Holdings LLC [also related to AIG]; and

$0.8 billion in interest income on loans extended under the Term Asset-Backed Securities Loan Facility (TALF) and loans to depository institutions.

Additional earnings were derived primarily from revenue of $0.6 billion from the provision of priced services to depository institutions.

Those $88 billion in gross earnings were slightly offset by the following expenses:

$2.7 billion [of interest expense] on depository institutions’ reserve balances and term deposits;

[$4.3 billion] of operating expenses of the Reserve Banks, including $1.0 billion for Board expenditures and the cost of new currency.

The resulting $81 billion in net profits were then distributed as follows: $78.4 billion to the Treasury, $1.6 billion as dividends to member banks, and $0.6 billion retained to “equate surplus with paid-in capital.”

Is Housing Messing Up Inflation Measures? Yes, But …

Here’s the simplest argument in favor of the Fed’s decision to restart quantitative easing:

  1. The economy remains very weak. Unemployment, for example, is still almost 10%, and the underemployment rate is close to 17%.
  2. Key inflation measures are exceptionally low. The core consumer price index (CPI), for example, is up only 0.6% over the past year.
  3. It’s unlikely that Congress and the White House will do anything to stimulate the economy.

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.

Quantitative Easing, Trading, and the Viral Bunnies

When Ben Bernanke and his colleagues at the Federal Reserve announced their plan for $600 billion in new quantitative easing, I am sure they expected criticism. Angela Merkel? No surprise. Hu Jintao? Ditto. Domestic inflation hawks? Ditto again.

But could the Fed have anticipated that its most vocal critics would be a pair of talking bunnies?

If your email, Facebook, and Twitter feeds are anything like mine, you know the video: two bunny-like creatures (I’ve also heard them called smurfs and dogs) discussing “the quantitative easing” of “the Ben Bernank.” It’s hilariously effective but, as Jim Hamilton helpfully points out, also quite wrong in places.

In case you’ve missed it, here’s the video:

The folks at Xtranormal have been offering the ability to make such movies for a couple of years now, but the idea appears to have gone viral in the economics and finance space in the last week. Indeed, YouTube already has a bunch of rebuttal videos to the quantitative easing one.

So far, the funniest video I have seen (ht: Jack B) features a bunny interviewing for a Wall Street trading job. I usually keep things G-rated here, but I’ll make an exception today. Be forewarned, some of the language may be NSFW — unless, of course, you are a trader: