Thursday, October 29, 2009

Q3 GDP +3.5% breakdown

Figure 1. Source:

Hallelujah? The consumer has come back with a bang? It kind of seems that way. However, all components of GDP are up. Even the "decline" in net exports can be read as a good sign since it's driven by the fact that imports have increased faster than exports which have increased for the first time in a year. However, proportionately inventory and residential investment--yeah, thats right, housing went positive--did a lot of heavy lifting.

Consumption, which is almost 71% of GDP contributed roughly proportionally to the increase in GDP. Investment as a whole which has fallen to just about 11% of GDP gave us almost 35% of third quarter growth.

Last quarter government spending played a big role in softening the recession. it seems to have contributed relatively little in Q3.

A closer look at the different components of GDP

Figure 2. Source:

I wish there was more to report here. The one thing I'm interested in is what cash-for-clunkers did. According to the BEA press release auto sales added 1.66 of the 3.5% (about 40%). Of the $44 billion increase in durable goods consumption $40 billion of it was auto (and auto parts). However, it should be noted that imported autos, engines and parts amounted to $43 billion dollars. I'm not entirely sure what that says about the stimulus effects of cash-for-clunkers. Did it stimulate the US auto industry or that Japanese auto industry? The only thing that can be said for certain is that almost the entire increase in sales of durable goods was from the sale of autos.

Figure 3. Source:

Obviously the big news in investment is the increase in residential housing construction. Residential investment has been falling since 2006Q1. How it is possible that it is growing is beyond me, but I suppose it is good if not weak news. A regional breakdown of where construction activity is taking place would be interesting.

The other thing worth talking about is the "change in inventories". It should be pointed out what what is being shown in the graph is "the change in the change in inventories". They are still allowing their inventories to sell off but at a slower rate. It is important to note that in 2009Q2 inventories were $176 billion less than they were in 2009Q1. In 2009Q3 inventories were $147 less than in 2009Q3. Essentially, the inventory liquidation is slowing down a little bit which implies an increase in production.

Figure 4 Source:

I'm putting up this graph to make it clear what exactly it is that is measured by GDP. GDP measures final goods and services bought and sold by consumers, firms and the government. What we want from GDP is an estimate of the production (and income) of the country over the quarter (or year). GDP accounting is also referred to as NIPA (National Income and Product Accounting). There are two "leaks" out of this system, imports and exports that need to be accounted for if we are to get a proper estimate of production and income. Since no one in the US buys exports we need to adjust for the extra income (and production) created by exports when they are sold abroad. We also need to account for imports, which are final goods and services that American consumers, firms and governments buy but are not produced in this country and do not produce income for Americans.

I just want to point out this is neither "good" nor "bad" from a NIPA perspective. It is just an adjustment that needs to be made for an accurate calculation of GDP. That calculation is already done for the overall GDP estimates in Figure 1, but the individual categories are not adjusted for what comes from imports.

Anyway, Exports - Imports = Net Exports. There are a couple of things worth highlighting. First, in 2008iv andd 2009i on balance it would look like we had an increase in net exports. It is important to notice that exports to the rest of the world were falling from previous periods, its just that what we imported from abroad fell by a much larger amount. While for 2009iii we had negative net exports but we had positive exports for the first time in a year. Those exports were income for Americans. However, we also increased our imports for the first time in a year.

That $117 billion in imports has to be taken out of the estimates of consumption, investment and government spending. As far as I can tell, we increased petroleum imports by $15 billion. As well, we imported about $18 billion in capital goods and as I mentioned above we also imported about $43 billion dollars in automobile supplies. The rest of the increase in imports is spread out over other categories of goods and services.

Figure 5. Source:

The interesting thing about the change in government spending is that it is half of what it was in the second quarter. That seems to suggest that the stimulus attempt has waned considerably. Although Federal spending is growing at a constant rate state and local spending increased by a tiny $2.6 billion dollars. Given the financial problems facing many state and my hunch that most of the stimulus spending should be showing up as state spending after the federal government transfers them the money it is almost kind of shocking to see the growth of state and local spending so low.

It should be noted though that the cash-for-clunkers program counts as stimulus spending though it wouldn't really show up as government spending.

Thursday, October 15, 2009

Bloomberg: U.S. Foreclosure Filings Jump 23% to Record in Third Quarter nnnn

U.S. Foreclosure Filings Jump 23% to Record in Third Quarter

By Dan Levy

Oct. 15 (Bloomberg) -- U.S. foreclosure filings climbed to a record in the third quarter as lenders seized more properties from delinquent borrowers, according to RealtyTrac Inc.

A total of 937,840 homes received a default or auction notice or were repossessed by banks, a 23 percent increase from a year earlier, the Irvine, California-based seller of default data said today in a report. One out of every 136 U.S. households received a filing, the highest quarterly rate in records dating to January 2005.

“The problem is prime loans going into foreclosure and people being underwater and losing their jobs,” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, said in an interview. “It’s a really bad number.”

Mounting foreclosures mean U.S. home prices probably will resume falling, analysts from Amherst Securities Group LP in New York said Sept. 23. A “shadow inventory” of 7 million properties are in the foreclosure process or likely to be seized, up from 1.27 million in 2005, they said.

The pace of prime and so-called alt-A loan defaults is accelerating as subprime defaults slow, Standard & Poor’s analysts led by Diane Westerback said yesterday in a report. Prime loans are those made to borrowers with the best credit records while alt-A loans are considered riskier because they were often granted without documenting the borrower’s income.

Securities Losses

More than $400 billion in U.S. home mortgages that were packaged into securities and sold by companies other than government-supported Fannie Mae and Freddie Mac are in default and may be foreclosed on, S&P said. Those defaults may depress home prices for years, the analysts said.

The delinquency rate for prime loans rose to 6.41 percent in the second quarter from 6.06 percent, the Washington-based Mortgage Bankers Association said Aug. 20. The share of prime loans in foreclosure increased to 3 percent from 2.49 percent, the MBA said.

“The number of people who can’t pay their mortgages, we haven’t seen the peak of that,” David Lowman, head of JPMorgan Chase & Co.’s mortgage unit, said this week. “That’s going to weigh on us for some time to come.”

Home foreclosures will climb through late 2010, peaking after the unemployment rate reaches 10.2 percent in the second quarter, the mortgage bankers said in an Oct. 13 forecast.

RealtyTrac reported that 343,638 properties received foreclosure filings in September alone, the third-highest monthly total behind July and August of this year. The September number fell 4 percent from the previous month, though it climbed 29 percent from a year earlier.

Few Exceptions

Bank seizures rose 21 percent from the previous quarter and increased in every state except two and the District of Columbia, RealtyTrac said.

Nevada had the highest foreclosure rate: one in every 23 households, or almost six times the national average. A total of 47,925 Nevada homes got filings, up 10 percent from the previous quarter and 59 percent from a year earlier, RealtyTrac said.

In both Arizona and California, one in 53 households received filings. They were followed by Florida, at one in 56, and Idaho, at one in 97. Utah, Georgia, Michigan, Colorado and Illinois rounded out the top 10 highest rates.

New Jersey had the 15th highest rate. Connecticut was 25th and New York was 39th.

Six states accounted for more than 60 percent of total filings in the U.S., led by California’s 250,054. Filings in the most populous state rose 19 percent from the third quarter of 2008. Bank seizures jumped 12 percent from the previous quarter.

Florida Repossessions

Florida had the next highest total, with 156,924 filings, up 23 percent from a year earlier. Bank seizures rose 16 percent from the previous quarter.

Arizona had 50,342 filings, up 25 percent from the same period a year earlier. Nevada had 47,925, up 59 percent. Illinois had 37,270, a gain of 30 percent; and Michigan had 37,026, an increase of 22 percent.

Georgia, Texas, Ohio and New Jersey rounded out the top 10 states with the most filings, RealtyTrac said.

The company collects data from more than 2,200 counties representing 90 percent of the U.S. population.

Sunday, October 11, 2009

Federal Reserve Bank of Cleveland: The Yield Curve, December 2008

I've posted the article here without graphs, click on the link below for the complete article

The Yield Curve, December 2008

The Yield Curve, December 2008
Joseph G. Haubrich and Kent Cherny

In the midst of the horrendous economic news of the last month, the yield curve might provide a slice of optimism. Though the yield curve has flattened since November, with long rates falling more than short rates, the difference between the rates remained strongly positive.

This difference, the slope of the yield curve, has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year. Yield curve inversions have preceded each of the last seven recessions (as defined by the NBER), the current recession being a case in point. The yield curve inverted in August 2006, a bit more than a year before the recession started in December 2007. Two notable false positives include an inversion in late 1966 and a very flat curve in late 1998. More generally, a flat curve indicates weak growth, and conversely, a steep curve indicates strong growth. One measure of slope, the spread between 10-year Treasury bonds and 3-month Treasury bills, bears out this relation, particularly when real GDP growth is lagged a year to line up growth with the spread that predicts it.

The financial crisis showed up in the yield curve, with rates falling since last month as investors fled to quality. The 3-month rate dropped from an already tiny 0.07 percent down to a miniscule 0.02 percent (for the week ending December 12), the lowest level since the Treasury constant maturity series started in 1982.

The 10-year rate dropped from 3.38 percent to 2.67 percent. Consequently, the slope decreased by 66 basis points to 265 basis points, down from November’s 331, and October’s 360. The flight to quality and the turmoil in the financial markets may affect the reliability of the yield curve as an indicator, but projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 3.0 percent rate over the next year. This remains on the high side of other forecasts, many of which are predicting reductions in real GDP.

While such an approach predicts when growth is above or below average, it does not do so well in predicting the actual number, especially in the case of recessions. Thus, it is sometimes preferable to focus on using the yield curve to predict a discrete event: whether or not the economy is in recession. Looking at that relationship, the expected chance of the economy being in a recession next December stands at a low 0.5 percent, up a bit from November’s miniscule 0.05 percent.

Loyal readers may note the chart above looks a bit different this month; with the NBER declaring a recession, the model now has additional recession points to work with.

The probability of recession coming out of the yield curve is very low and may seem strange in the midst of recent financial news, but one aspect of those concerns has been a flight to quality, which lowers Treasury yields. Furthermore, both the federal funds target rate and the discount rate have remained low, which tends to result in a steep yield curve. Remember also that the forecast is for where the economy will be next December, not earlier in the year. Again, though, in the spring of 2007, the yield curve was predicting a 40 percent chance of a recession in 2008, something that looked out of step with other forecasters at the time.

To compare the 0.5 percent to some other probabilities, and learn more about different techniques of predicting recessions, head on over to the Econbrowser blog.

Of course, it might not be advisable to take this number quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution.

For more detail on these and other issues related to using the yield curve to predict recessions, see the Commentary, “Does the Yield Curve Signal Recession? ”

Thursday, October 1, 2009

Brad DeLong: Economic History and Modern Macro: What Happened?

Economic History and Modern Macro: What Happened?

Economic History and the Recession

If you ask a modern economic historian—like, say, me—if I know why the world is currently in the grips of a financial crisis and a deep downturn, I will say that I do know and I will give you this answer:

This is the latest episode in a long history of similar episodes of bubble—crash—crisis—recession, episodes that date back at least to the canal bubble of the early 1820s, the 1825-6 failure of Pole, Thornton, and company, and the subsequent first industrial recession in Britain. We have seen this process at work in many other historical episodes as well—1870, 1890, 1929, and 2000, for example. For some reason asset prices get way out of whack and rise to unsustainable levels. Sometimes the culprit is lousy internal controls in financial firms that overreward subordinates for taking risk; sometimes it is government guarantees; sometimes it is the selection of the market as a long run of good fortune leaves the financial market dominated by cockeyed unrealistic overoptimists.

Then the crash comes. And when the crash comes the risk tolerance of the market collapses: everybody knows that there are immense unrealized losses in financial assets and nobody is sure that they know where they are. The crash is followed by a flight to safety. The flight to safety is followed by a steep fall in the velocity of money as investors everywhere hoard cash. And the fall in monetary velocity brings on a recession.

I will not say that this is the pattern of all recessions: it isn’t. But I will say that this is the pattern of this recessions—that we have been here before.

Macroeconomic Theory and the Recession

If you ask the same question of a modern macroeconomist—like, say, the extremely sharp Narayana Kocherlakota of the University of Minnesota—you will find that he says that he does not know:

Why do we have business cycles? Why do asset prices move around so much?... [M]acroeconomics has little to offer by way of answer to these questions...

He will say that there are models that attribute economic downturns to various causes:

[M]ost models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities)...

That is, downturns are either the result of a great forgetting of technological and organizational knowledge, a great vacation as workers develop a sudden extra taste for leisure, or a great rusting as the speed with which oxygen in the air corrodes speeds up and so reduces the value of large things made out of metal.

But he will say that all these strike him as implausible just-so stories that do not illuminate: not to be taken seriously:

The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic.... None of these disturbances seem compelling, to put it mildly...

And so nobody really believes them:

Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables...

Just What Is Going on Here?

This leads me to ask two questions:

First, it does not seem to me that it is the case that nobody really believes these just-so stories. Ed Prescott of Arizona State University really does believe that large-scale recessions are caused by economy-wide episodes of the forgetting of the technological and organizational knowledge that underpins total factor productivity—with the exception of episodes like the Great Depression, which Prescott says was caused by the extraordinary pro-labor pro-union policies of Herbert Hoover that pushed real wages far above equilibrium values. Casey Mulligan of the University of Chicago really does appear to believe that large falls in the employment-to- population ratio are best seen as “great vacations”—and as the side-effects of destructive government policies like those in place today, which are leading workers to quit their jobs so they can get higher government subsidies to refinance their mortgages. (I know; I find it incredible too.) Things that strike Kocherlakota as “patently unrealistic” are not viewed as such by many of his modern macroeconomic peers and colleagues. Why not? Why do they find these just-so stories satisfactory?

Second, whether modern macroeconomics attributes our current difficulties either to causes that I agree with Kocherlakota are “patently unrealistic” or simply confesses ignorance, why do they have such a different view than we economic historians do? Whether they have rejected our interpretations and understandings or simply have built up or failed to build up their own in ignorance of what we have done, why have they not taken and used our work?

The second question is particularly disturbing to me. There is, after all, no place for economic theory of any flavor to come from than from economic history. Someone observes some instructive case or some anecdotal or empirical regularity, says “this is interesting; let's build a model of this,” and economic theory is off and running. Theory is crystalized history—it can be nothing more. After the initial crystalization it does develop on its own according to its own intellectual imperatives and processes, true, but the seed is still there. What happened to the seed?

This situation is personally and professionally dismaying. I do not say that the macroeconomic model-building of the past generation has been pointless. I don’t think that it has been pointless. But I do think that the assembled modern macroeconomists need to be rounded up, on pain of loss of tenure, and sent to a year-long boot camp with the assembled monetary historians of the world as their drill sergeants. They need to listen to and learn from Dick Sylla about Cornelius Buller’s bank rescue of 1825 and Charlie Calomiris about the Overend, Gurney crisis and Michael Bordo about the first bankruptcy of Baring brothers and Barry Eichengreen and Christy Romer and Ben Bernanke about the Great Depression.

If modern macreconomics does not reconnect—if they do not realize just what their theories are crystallized out of, and what the point of the enterprise is—then they will indeed wither and die.

Financial Times Blog: Why the Lehman failure did change everythin

Why the Lehman failure did change everything
September 21, 2009 5:28pm
by FT

By Richard Robb

For anyone who was engaged in the financial markets during the week of September 15, 2008, Lehman changed everything. It was obvious. So what could be more tempting to finance professors than to overturn this conventional wisdom? Descartes described the man of letters who takes more pride in his speculations “the more they are removed from common sense,” and so showing that the Lehman collapse was inconsequential has spawned a minor literature.
The latest contribution by John Cochrane and Luigi Zingales, like others before them, rests partly on misunderstanding of the data. The authors deduce that Lehman wasn’t the main cause of last autumn’s turmoil by inspecting the daily movements in the spread between Overnight Interest Rate Swaps and three-month Libor, which they define as “the rate at which banks can borrow unsecured for three months.”

But a better definition of Libor under the circumstances was “the rate at which banks said they can borrow”. Libor is the result of a survey, not a measure of actual transactions. In the week of September 15 last year, big banks refused to settle foreign exchange with each other. They were not lending interbank for three month terms, so Libor during that week tells us little.

We could say the same thing for OIS. Volume was light to nonexistent in the week of September 15 last year. What we do know is that three-month T-bills traded at 0.04 per cent on September 17, down from 1.47 per cent on Friday September 12. These are real data that ought to impress the professors that the market was breaking down as fast as it knows how.

John Taylor, the father of the Lehman-was-no-big-deal thesis, wrote in a Wall Street Journal op-ed last year that spreads between T-bills and Libor “remained in that range [of the previous year] through the rest of the week” after Lehman’s demise. In fact, in the year prior to Lehman’s collapse, the peak spread was 2.05 per cent; on September 17, 2009 it reached 3.00 per cent. (Of course, any conclusions based on Libor that week are equally unreliable.)

The other principal mistake of the Lehman deniers is their assumption that the incident unfolded entirely on September 15, 2008 and any effect had to be observable by that morning. But during the final two weeks of September, the market still had to absorb the news that the Securities and Exchange Commission had no plan for an orderly transfer of client assets in the US, while Lehman Brothers International Europe would be handed over to an administration process designed for liquidating grocery stores.

Getting the story right on Lehman matters for two reasons. The first is that, if we convince ourselves that no damage results when the government plants the belief that it will rescue a huge financial firm, and then suddenly lets it fail, it is more likely this will happen again.

The second reason is the Lehman estate itself. Lehman affiliates are locked in legal combat across borders with no obvious way for existing laws to resolve the problem for many years to come. For example, at the time of its administration, Lehman Brothers International Europe had about $26bn of client securities deposited. So far, $13bn has been returned, but almost all of this was from Chinalco’s stake in Rio Tinto.

There is plenty of room to debate the larger counterfactual: if the government had never bailed out Bear Stearns and other too-big-to-fail firms that followed, would Lehman have mattered? If the government had never bailed out anyone at all, would we be better off? But given the bailouts that preceded the Lehman failure, the Lehman failure did in fact change everything. Sometimes things that are obvious turn out to be true.

Richard Robb is chief executive of Christofferson, Robb & Co., the investment management firm, and professor of professional practice at Columbia’s School of International and Public Affairs.