It's Still The Economy, Stupid

Saturday, November 08, 2003  

Corporate balance sheets not improving

While many companies in the private sector have been able to boost profits by cutting costs, this isn't translating into the reduction of debt levels. And while debt spreads have narrowed thanks to profit improvement and a recovery in demand, this may be giving a misleading picture of corporate financial health.

...a number of banks are using the methodology to help determine whether they're earning enough on corporate credit, and using that to figure out how much more fee income they may need from providing other services to a company to make the relationship worthwhile. The methodology is also being used by an increasing number of institutional investors, he adds. Given that, MKMV's most recent findings suggest that the cost of capital supplied by banks and the public debt markets for many large issuers of debt may be higher than credit ratings alone may lead their finance executives to expect.

The study does confirm the impression that corporate credit quality is improving—though, again, the main reason is rising stock prices, not falling debt.

Earlier, interviews Philip Arestis. Snippets:

"The [recent] economic downturn is not typical. It's not the kind of downturn we had in the '70s, for example. This is because of overinvestment in the late '90s, and that's very important. Most people would agree that there was New Economy thinking, in IT in particular, though we overinvested not just in telecommunications but in other areas as well."

"In terms of the personal and corporate sectors, we see these problems becoming reality, especially if unemployment increases further and disposable income goes down. In that case, the current huge increase in property prices becomes unsustainable. So we could very well have a property bubble as well. And if the corporate sector does not invest, its current imbalance of debt to income may very well continue."

"A much better way to conduct fiscal policy is to enable U.S. state governments to avoid tackling their deficits through expenditure cuts. State after state recently initiated cuts in expenditures to avoid deficits, which they have to do, of course. They just have to balance their books. If the federal government came forward and honored the shortfalls so that states wouldn't have to cut back on schools, infrastructure, et cetera, then we'd have the same deficit, but all these cutbacks would be avoided. This would produce an environment where the corporate sector revises expectations and would begin to be more optimistic about future levels and speed of economic activity."

Clearly, to the extent that the imbalances we have talked about disappear, or are mitigated significantly, this would give us great confidence that the recovery is sustainable. But two further indicators would also be very important. The first is substantial recovery in investment activity. But recovery in the rest of the world also, especially Europe, is paramount. Monetary and fiscal policies in the European Economic and Monetary Union can and should do a great deal more than they have been providing. Alongside these initiatives, a concerted action globally would be an excellent [step] forward, and a significant pointer in the [right] direction. In other words, international coordination of economic policies would produce a global climate of sustainable recovery. The U.S. economy would benefit a great deal from such coordination of policies.

posted by Teddy | 8:55 AM |


There is the kindness of strangers, and then there is this...

For now, it is worth noting that China's foreign-exchange reserves jumped $17.1 billion during October to $401 billion. Year-to-date, largely dollar reserve holdings have surged $114.6 billion, or an annualized 48%. Chinese reserves increased $74.2 billion during 2002. For further perspective, Chins's reserves expanded $5.0 billion during 1998, $9.7 billion during 1999, $10.9 billion during 2000, and $46.6 billion during 2001. Through September, Bank of Japan foreign-exchange reserves have surged $132.6 billion, or 39% annualized. Bank of Japan reserves increased $63.7 billion for all of 2002. Combined Chinese and Japanese foreign-exchange reserves are on pace to balloon $314 billion this year (43%), compared to last year’s $138 billion. Gone Parabolic.


posted by Teddy | 8:12 AM |

Friday, November 07, 2003  

Here's where all the spending comes from

Consumer credit for September rose at a 9.7% annual rate for September and at a 6.4% annual rate for the third quarter, up from 4.8% in the second quarter. Particularly striking was the growth in non-revolving credit, which rose at a 12.5% annual rate for the month and an 8.4% annual rate for the third quarter.

Well, here's the first indication as to how we grew 7.2% for the quarter. People are borrowing more. Where else can the money come from? We're still down a couple million jobs, raises are the smallest in years, but if you can't find a credit card, the store will always let you buy it with no payments until 2005. That should be George Bush's campaign slogan.

Consumer credit doesn't include auto leases, and does not include home mortgages, which are overwhelmingly the household sector's largest obligations. It's probably also one of the reasons why money supply money supply continues to decline, as households reduce cash balances swollen from past home equity extractions to finance more current spending.

I sure hope recent job gains are permanent, and interest rates don't go much higher, because otherwise the marginal borrower is going to be in a world of hurt.

posted by Teddy | 2:41 PM |

This post not seasonally adjusted

It is better news that only 348,000 people made new claims for unemployment insurance, and it is better news that nonfarm payroll employment rose 126,000 in October (and September was revised up to +125,000). But we need to see more than this. Treasury secretary Snow promised us 200,000 jobs a month (revised down from the 344,000 that Bush's economic team promised) - remember?

Looking at the unemployment claims data, unadjusted initial claims were down 13,153 to 339,563 while seasonally adjusted the number was down 43,000 to 348,000. This means that seasonal adjustment contributed 30,000 to the over-the-week change. Last week, the data was adjusted up around 39,000, this week it was adjusted up around 9,000.

Seasonal adjustment is done to smooth out the annual seasonal patterns in economic data. In employment (and unemployment), there is always a big surge in hiring of temporary workers for the Christmas season. Removing the "normal" seasonal pattern lets us know whether this Christmas is better than last Christmas (and when these workers are laid off in January, whether layoffs are better or worse than normal).

The problem is that seasonal patterns are not always stable. Just like Easter falls in different times each year, the seasonal hiring/firing patterns may not always begin or end at exactly the same time. The problem is worst in weekly data, like unadjusted claims, which is why most analysts use some type of smoothing, like a 4-week moving average.

But even quarterly data can have variability in the seasonal pattern. You can get a rough idea of what the pattern is by taking the last 10 years of data and computing the average change in the unadjusted data over-the-week, over-the-month, or over-the-quarter, then see how much the individual changes vary from the average.

From the claims data, it looks like Christmas hiring started earlier than usual. The employment data is the opposite (unadjusted employment was up 830,000 for October versus the usual gain of around 700,000). If the gains are due to the variability of the seasonal pattern, then we're going to be disappointed the next few months (or weeks). Certainly the Challenger data does not bode well for initial claims, but the employment data is at least encouraging, though with 7+% GDP growth, it is extremely disappointing. The last time GDP grew at a 7% rate was also a recovery period, and the economy added 3.8 million jobs that year. The rough equivalent today would be about 5 million, or 420,000 a month. We're not even close to that.

posted by Teddy | 8:14 AM |

Wednesday, November 05, 2003  

Don't hate me Trinity, I'm just a messenger

The administration suggests that if you have anything terribly important to say to Medicare, you should say it now.

posted by Teddy | 12:10 PM |

No troop for you!

For some reason, Turkey has decided they're not going to send troops to Iraq after all - even for $8.5 billion in aid.

posted by Teddy | 12:07 PM |


Cursor alludes to whether the company's current behavior is more shocking than the fact that it's happened before.

I was more impressed by the non-Wal-mart interview in the latter link. Just a couple snippets...

MOYERS: Is that what you mean by suicide?

SIMON SCHAMA: That's what I mean about, when you declare yourself to be an empire, you basically declare long-term suicide. It's the suicide of a thousand cuts.

But what...what then happened in Roman history was an intensely important dialogue between two definitions of patriotism, one of which looked back to the republic and said, first we must understand what we love about our home, first and foremost.

Then we must say, is what we love about our home — in our case, our democracy — best served by having this allegedly permanent presence, farflung presence, all over the world, or not?

The same debate took place in 19th century Britain. And the answer is always there is a dreadful ultimately tragic trade off between justice peace and prosperity at home and imperial arrogance abroad. And we're going to learn that lesson not necessarily in our generation but for sure in our grandchildren's.


What are the empires that have had a chance of prolonging what they know to be their mortal life actually in Britain, for example, is to start to actually be part of the culture that hates you, to actually in a sense put yourself in their mindframe.

The danger about actually the empire of the Big Mac really is that you ultimately think that all people behave in the same way and that therefore they can be...even though they seem to be peculiar in their hatred and their appetite for a mysterious form of salvation over Big Mac-ishness, they will come round to it when there are enough Big Macs to go around.

But guess what? They won't. So your first obligation when you're protecting yourself from people who actually can control pieces of your technology but none of your beliefs is to get very smart about the seriousness of those beliefs.

posted by Teddy | 11:05 AM |

Whee! Look at all them new jobs!

Can you tell I'm being sarcastic? The Challenger survey shows announced layoffs are highest in a year.

The third quarter GDP number will be revised twice more. Initial reports show this will be in the downward direction. The largest contributor to GDP growth, September consumer spending, fell, though September construction spending was a record and August spending was revised higher.

posted by Teddy | 6:38 AM |