Ray Hendon’s Economics Blog

Mr. Obama announced on Saturday a rough sketch of a major stimulus plan that would add several million new jobs to our faltering economy.  American workers will rebuild the nation’s roads and bridges, modernize its schools and create more sources of alternative energy, creating 2.5 million jobs by 2011, Obama said in the weekly Democratic address, posted on his Web site.

“These aren’t just steps to pull ourselves out of this immediate crisis,” he said. “These are the long-term investments in our economic future that have been ignored for far too long.”

Watch a video of Mr. Obama’s Weekly Address to the Nation:

This stimulus is a major step in the eventual recovery of our seriously crippled economy.  It will not be the last step taken, but it is an important one.  I would look for Congress to act on it quickly as soon as the new session begins in January.  Details of the plan are being worked on now by his new economics team.

UP-Date to Stimulus plan: 2/13/2009

The Senate and House of Representative have resolved their differences with Mr. Obama’s stimulus plan, and the agreed upon final version is headed back to both chambers for final passage.  Political observers think that it will pass in both Houses with about the same support the original bill had.  The final version has a price tag of $789 billion.

From a report on Bloomberg’s web site: 

“The stimulus plan emerging from Congress may jolt the U.S. economy in successive waves: relief to cash-strapped consumers, businesses and states, then a job- creating lift from spending on roads, utilities and public transit.

While the package will take time to have an impact, and unemployment is likely to keep rising for months, it will start returning the U.S. toward growth by the end of the year, economists said.

“Economic activity begins to tick up in third quarter of 2009, but the biggest effect of the stimulus bill is in 2010,” said Yale University economist Ray Fair, who has modeled on his Web site the effects of the legislation Congress is negotiating this week.

Fair and other economists say the first evidence that the plan is working should be visible in consumer spending and retail sales, which they expect will stop declining around mid-year. The next sign may come in business investment, as companies grow more confident about a pick-up in sales. The final signal of success would be a turnaround in a labor market that has lost 3.6 million jobs since the recession started in December 2007.”

The general hope is that job losses will be over by the end of this year.  There will be an almost immediate effect as the tax cuts of $400 per year for individuals and $800 for families will begin showing up in larger take-home pay as early as March or April.  The tax withholding tables can be changed and put into effect almost immediately.

The bill also contains about $54 billion for relief to the states.  42 states have announced budget shortfalls because of falling tax revenues.  This is forcing the states to lay off employees and cut programs across the board, wherever possible.  Although their shortfalls in revenue are greater than the $54 billion in aid, it will be a huge help, and, perhaps, allow them to keep some employees on the job.

There’s $60 billion to increase unemployment benefits.  This will also have an immediate effect and will be felt in the pocket books of the five million or so unemployed workers.

There is $72.5 billion for infrastructure improvements: highway improvement, public transit, etc.  This, too, will employee many, but it will take some time before these programs can be formulated and put out for bid–even longer for the employees to be put to work.

Criticism of the program has come from both side of the ideological spectrum.  Republicans complain it is too much, and Paul Krugman, the Nobel Prize winning economist from Princeton University, complains it will not be enough.  He is quite concerned that the economy is in much worse shape than many realize, and that “timid” solutions will not be sufficient.

A brief profile of Tim Geithner published last year at New York Times:

“If the brave new world of finance is daunting, the man in charge of it is not. With a boyish charm and a dry sense of humor, Mr. Geithner has taken advantage of the current calm waters of the financial markets to take an active stance, rallying Wall Street to peel apart the market of credit derivatives to try to understand its potential risks. As a financial regulator, his style is more like a cerebral Dr. Phil than an Eliot Spitzer, the former attorney general and now [former] governor of New York, who reveled in showdowns with Wall Street.

Of course, Federal Reserve bank chiefs are typically less confrontational, charged with stability, as well as being a critical part of setting monetary policy. But he has been unusually productive in tackling issues widely viewed as uncomfortably complex.

‘Tim loves projects, and he wraps his projects in packages that everyone wants to be part of,’ said Annette L. Nazareth, a Securities and Exchange commissioner who has known Mr. Geithner since he worked at the Treasury Department.

As Mr. Rubin put it: ‘He’s elbow-less. It’s really remarkable.’”

The leak that Mr. Geithner  would be appointed by Mr. Obama as the new Treasury Secretary caused the DOW to jump almost 500 points.  This was a significant vote of confidence for the President of the Federal Reserve Bank of New York.  He has been working on some of the sub-prime issues already, and has a good grasp of this area of investing that lies beneath so many of our current economic problems.  We cannot know what his tenure at Treasury will produce, but it looks as if the economic team Mr. Obama is putting together is showing competence at a high level.  I am encouraged by the quality of his choices, so far.

Feb 13, 2009.  For an update on the job of Mr. Geithner, follow this link:Here

March 9, 2009.  Update on Mr. Geithner’s plans for G-20, from NY Times.

“Administration officials say they are postponing their plan to produce a detailed road map for overhauling the nation’s financial regulatory system by April, in time for the Group of 20 meeting in London. Though officials say they will still develop basic principles in time for the meeting, the plan will not include much detail.

Treasury officials are also still scrambling to decide details of their plan to buy up as much as $1 trillion in toxic assets from the nation’s banks, one month after being widely criticized for presenting a plan that lacked any specifics on how it would work.”

This report raises my fears that Mr. Obama will not be completely prepared to take full advantage of the progress that could be made at the G-20 meeting.  On the issue of bank regulation, alone, much work must be done by the Treasury Department before the meeting.  China, Great Britain, Germany and Japan, just to name a few, will all have their plans ready for discussion.

There are many other issues, such as coordination of stimulus spending between major producers, IMF membership and IMF funding that are vital to having a good meeting.  Preparation time is necessary to be fully informed before the meeting begins.

Ultimately, April is probably a little early for Mr. Obama to have a complete agenda worked out.  He has been occupied, as has Treasury, with a collapsing economy and getting his budget through Congress.  A June or July date would probably have been better, but the meeting date was set in December, so Mr. Obama had no input on the schedule.  Also, since there is an urgency about the meeting, with the global economy on the brink of disaster, so an earlier meeting was needed.

Mr. Geithner has been criticized for not moving faster in filling important posts at Treasury, but the Administration is moving slowly with strong vetting of the tax histories of each prospect for a position.  Early stumbles on this issue have cost him valuable time in getting into high gear.

March 19, 2009 Update:  NY Times article on the A.I.G. bonus outrage and its effects on Mr. Geithner’s credibility: NY Times Article here

Mr. Geithner is in for some tough times, as he is under fire for not being more on top of the A.I.G. bonus situation.  The President had to contradict him and direct him to find a way to get the bonuses back.  Criticisms are coming fast and from all corners.  It is one week away from the London G-20 meeting, and Mr. Geithner goes to the meeting in a weakened condition.

How Bad Can it Get?

My last blog on the economy was entitled: It’s Worse Than We Think. So what comes after, worse than we think? Worser is not a word, but it’s what comes to mind today when I see the latest employment and price data.

The worser news began yesterday with the release of the Consumer Price Index information. In October, the CPI actually fell 1%. This news might be ignored by some, but to me it raised a red flag of the highest intensity. A drop in the general price level is quite different from a drop in the price of one or two things. We can understand specific price drops in, say, housing, because there was a huge real estate bubble that was years in the making. That is not deflation—it is a price adjustment to an oversupply. But, when all (or the average of all) prices drop, that is not something we can ignore. Price deflation is a danger sign for the economy that would be akin to a bad EKG for someone who had no history of heart trouble. The attending physician would know that something was seriously wrong. A falling CPI is for the economy what a bad EKG is for an individual.

Then the news this morning came:

• The U.S. Department of Labor reported that initial filings for state jobless benefits increased by 27,000 to 542,000 for the week ended Nov. 15. This marks the third time since 1992 that initial claims have exceeded 500,000. Claims are at the highest total since the week ended July 25, 1992, when 564,000 initial claims were filed.
• The number of people continuing to collect benefits for one week or more neared a 26-year high. The number surged by 109,000 to 4,012,000 for the week ended Nov. 8, the most recent data available. The last time the figure was this high was for the week of Dec. 12, 1982, when it reached 4,381,000.
• This means that last month’s unemployment rate of 6.5%, a 14-year high, will most likely jump at the end of November.
• The Conference Board’s index of leading economic indicators declined 0.8 percent, and a measure of manufacturing in the Philadelphia region fell to an 18-year low. The index is also made up of jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times, new orders for consumer goods, bookings for capital goods and money supply adjusted for inflation.

· A report from the New York Times about imported automobiles pilling up in the parking lots of the Port of Long Beach: “. . .for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril. “This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars. “And it scares you to death.”

I’m scared. The economy is in a serious nosedive, and we are not alone. You can repeat these kinds of statistics in Germany, the U.K., Central Europe, Russia, South Korea, Argentina, Vietnam and almost all of Southeast Asia. There is a world-wide slow down that has serious spiral-down consequences. The United States is not an economic island. We are connected with everyone else in the world. What we do affects them; what they do affects us. We are in an embrace that is not quickly loosened, and we are all falling off the same cliff.

My fear is that unemployment may reach past the forecast level of 7% to 8% that the Federal Reserve is predicting. My fear is that it can go to 10% or higher. If it does, then deflation is a serious consequence. With that many people out of work, the personal income level in the United States will plummet. Couple this with the tendency of out of work people to seriously curtail not only their own spending but also to influence others to do the same. When you see your neighbors lose their jobs, your immediate concern is for yours. Declining consumer spending is not what we need right now, but it looks as if it may be what we get.

The only thing we can do, as citizens, for now, is to hunker down and prepare for the worst. For investors, if a period of deflation does persist, you want to be a net creditor, not debtor. In other words, pay off your own debt, don’t take on any more, and buy bonds, CDs and other secured debt obligations. Holding sound debt in a period of falling prices is the best of all worlds. You are paid a fixed rate of interest, which means a constant stream of income in a world where every month that same income stream buys more than it did in the last.

We should not expect a period of deflation to last for a long time. Deflation can be defeated by boosting the money supply. But, we have already been priming that pump for almost a decade, so I am not certain of what the effects will be if we continue. A liquidity trap, postulated by the late economist, John Maynard Keynes, may come into play and limit the effectiveness of any monetary policy.

Even then, however, fiscal stimulus will have an effect. The United States has decades of bridges and roads that have been neglected. A huge federal spending program on these kinds of needed projects would go a long way to pumping money into the system, employing many of those who are unemployed, and leading the way out of deflation and a serious recession. I suspect a major stimulus bill will be introduced when the new Congress meets next year.

So, how bad is it. It is so bad that this morning President Bush put out a press release saying he was dropping his opposition to extending unemployment benefits past the 13-week limit now imposed. He opposed this suggestion in September. Now he supports it. When a Republican President does a 180° turn on a labor benefit issue, you know it’s bad.

Mr. Obama’s Weekly address on video, announcing his new stimulus plan:

http://www.youtube.com/watch?v=m17pz0R_qZo

For an up-date as to how bad can it get, see: 34 Year High

Here is a link to the full text of the press release of the attendees: Press Release of G-20 Members

There were two agendas at the G-20 meeting on Saturday:

• Strengthen the world’s economies and reduce the effect of the world-wide recession that is getting worse daily.
• Find a way to share the authority over the structure of the global financial system.  Europe, Asia and Latin America are all clamoring for more say-so in how things work.

On the first agenda, that of working together to strengthen the world’s economies, there is progress to report.  All that could reasonably be expected from the Conference would be to reach agreement on what to do for the next meeting, and this was accomplished.  They agreed to meet at the end of April, about 100 days after Mr. Obama assumes his duties as President of the United States, and take up a specific list of agenda items:

Stimulus spending

Interest rate cuts

IMF funding and lending to shore up currencies under attack

Regulatory oversight on banks and other financial institutions

Oversight on credit default swaps and credit rating agencies

Transparent accounting standards for all world-wide financial institutions

A Supervisory College to meet and discuss world banking developments

Limiting compensation for financial executives

There has been no agreement on the structure of any of these issues, but there is agreement that these are the items that will be worked on for the next meeting.  It is a rich agenda, and one full of difficulties to resolve.  Bank regulation, alone, poses a host of thorny issues that will test the ability of the G-20 to work together.

As of yet, there has been no agreement as to who will fund the IMF in its increased lending activities, which is essential to stop the excessive volatility of the currency markets.  There are, generally, three nations that have the wherewithal to do this: Saudi Arabia, China and Japan.  All three of these countries have huge reserves of foreign currencies (China as over $2 trillion), and they will be needed if the plunge in currency values of both emerging and developed markets is to stop.  There will probably be much discussion on this issue before the next meeting.

As to the second agenda, the spreading of authority, there is little talk, so any analysis of this issue will have to be done by reading between the lines.  The background for this agenda has its roots in the vast changes that have taken place in the world economy since the 1944 Bretton Woods Agreement .  The United States probably produced at least half the GNP of the world when the meeting took place.  It now accounts for about 25%.  Also, the economic power has shifted from Western Europe and North America to be more dispersed over all continents.  Asia has enormous economic power since the rise of China, India, South Korea, and Taiwan.  Plus, there are a host of South East Asian economies that are growing fast and that are now fully integrated into the world’s finance system.  In addition Europe has not only recovered from the devastation of WWII, but has coalesced within the EEC, and Eastern Europe is taking off.  

The first reading between the lines is the fact that it was the G-20 that was called into meeting rather than the G-7 or G-8.  This reflects the reality of the new power dispersion.  In times past, it would have been the top industrialized nations meeting at the behest of the U.S. 

The second reading regards the desire to expand the powers and monies available to the IMF.  This institution, which has contributed to world economic stability over the years, has been a virtual fiefdom of the United States.  But the ousting by Europe last year of Mr. Bush’s appointee to head the IMF set the tone for things to come.  In my view, it would be beneficial to expand the membership and voting of the IMF, to include the emerging markets.  If this step cannot be done, then continuing the G-20 as the major tool of international policy making would be an important step.  Over time, the members will sort things out and determine where the consultative power lies.

Below is a list of the world’s top 20 economies, measured in U.S. dollars for the year 2007.  This is not the exact membership of the Group of 20, however.

The G-20 has added Saudi Arabia, South Africa and Argentina, and eliminated Spain, the Netherlands and Belgium.  the European Union was also added as a single member.

The list goes a long way in explaining how things need to change in regulating the world’s economies.  Although the United States still dominates–no one else is even close, there are many new, major players on the list.  China will probably soon replace Germany as the third largest economy, and Brazil has been gaining on Canada the last few years.  Turkey is now growing fast, and Indonesia will likely pass Belgium before long.  The new world order needs to reflect these realities.

The final analysis may reflect that the most significant part of the G-20 meeting of 2008 was that the G-20 meeting was called.  If they did nothing else, the fact that all twenty of the members came and participated marks a boundary of recognition that things have changed.  Managing the world’s economies will no longer be confined to the top seven or eight nations of the world.  Power has shifted to include the newer, faster growing economies. 

This is as it should be, in my view.  This meeting is acceptance of the new realities, regardless of its achievements in the realm of policy making.  There will be other opportunities to expand the membership of the IMF and World Bank.  But this G-20 meeting will mark the beginning of the end of the old order.

Join me in welcoming Mr. Obama to the world of international economics and finance.  I hope he puts a strong team together, soon.  There is some heavy lifting ahead.

The emergency meeting of the Group of 20 this Saturday, November 15, was called because the world’s financial system is broken. The meeting was suggested by French President, Nicolas Sarkozy to President Bush. Although Mr. Bush did not want to take up the issues that will be brought up at the meeting, he agreed to host it at Mr. Sarkozy’s insistence.

The primary issue to be discussed will be helping the developed and emerging markets out of the deepening recession that the world now faces. But, included in the discussions will be proposals made by European and emerging market leaders to reform banking regulations that would prevent the kind of financial meltdown that started the downward spiral this year.

Mr. Bush has publicly warned about stifling economic growth by excessive regulation, while the European leaders and Brazil, specifically, are more prone to take a strong government hand when they see a larger public need.

This argument is ancient in origin, and there has never been a consensus about the exact amount of regulation that is needed in every situation. Don’t look for a resolution to this issue at the meeting today. Mr. Bush couldn’t do anything about it even if he wanted to, given his status as out-going President, and the discussions today will last only about five hours.

Another meeting is planned after Mr. Obama assumes the Presidency, and at that meeting, more detailed work can be done to help coordinate government efforts to stave off what threatens to be a major downturn in many of the world’s economies. America is just entering a recession now, and the prognosis is looking increasingly bad. Europe is already in a recession, lead by Germany, the world’s third largest economy. Almost all the emerging markets, with the exceptions of China and India, are in recession, and even China and India are experiencing significantly lower growth rates for 2009.

The following description from Economix of the NY Times will be helpful in understanding the structure of The Group of 20:

Members – 19 countries with some of the world’s biggest industrial and emerging economies, plus the European Union – represent about 90 percent of the world’s gross national product, 80 percent of world trade (including trade within the European Union) and two-thirds of the global population. Member countries usually meet annually.

The annual meeting already took place last weekend in São Paulo, Brazil. This weekend’s meeting was not on the regular schedule and was arranged specifically to address concerns about the international financial crisis. It is unprecedented because heads of government will be attending.

The member countries are Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey and the United States. The European Union is also a member, represented by the rotating council presidency and the European Central Bank.

Usually, the attendees of the annual meetings are the finance ministers and central bank governors of the member countries, plus top leadership of the World Bank and the International Monetary Fund.  This is the first time that heads of governments will attend a G-20 meeting.

A number of economist and other leaders are hoping specific policy proposals will be discussed at this meeting, but the expectations for what can and will be accomplished in the next 24 hours are relatively low.  The last-minute nature of the meeting allowed for little preparation time. The meeting itself is also relatively short.

“I would be surprised if much happens,” said Edwin M. Truman, a senior fellow at the Peterson Institute who served as the assistant secretary of the Treasury for international affairs during the founding of the G-20. “When you think about it, it’s 20 people, and they’re all heads of government. They’ll meet tonight for dinner, informally, and then they’ll meet tomorrow for just five hours. That’s not a lot of time for everyone to talk.”

There is only so much that attendees at this event can commit to, anyway, since any major policy changes will likely have to be approved by leaders’ full governments back home. President Bush — as an outgoing president — would have an especially hard time committing to anything substantial. (Former Secretary of State Madeleine K. Albright, and former Representative Jim Leach will meet with representatives of G-20 nations on President-elect Barack Obama’s behalf this weekend.)

The smaller Group of 7 and Group of 8 have memberships of  the largest economies, which exclude, China, Brazil, India and Russia, to name a few.  There has been strong criticism leveled at these groups because they exclude far too many of the world’s economic powerhouses. Most would agree with this criticism, and for this reason, and bolstered by the enormous recent growth of the emerging countries, the G-20 will probably assume a much larger role in the future in discussions of global economic issues. We may be seeing the first emergence of this new role in today’s meeting.

I look for much more substance from the second meeting than this one, but this one is important as a necessary first step.

For an update on the current meeting of the finnce ministers in London, March 13 and 14, check out: http://www.rayhendon.com/g-20-finance-ministers-meet-in-london-this-weekend-to-hash-out-the-april-agenda-for-a-new-world-order/245/

The evidence is mounting that the American economic downturn is going to be much worse than generally thought. A downturn that was thought to see unemployment at 8%, which is a recession level, is seen now to have an easy potential of 9% or 10%–levels not seen for decades–a deep recession.

Here are the culprits:

• Falling home prices are not showing signs of stopping. This quotation from the AP sets the latest news:

The number of homeowners caught in the wave of foreclosures in October grew 25 percent nationally over the same month in 2007, data released Thursday showed.More than 279,500 U.S. homes received at least one foreclosure-related notice in October, an increase of 5 percent over September, according to RealtyTrac Inc. One in every 452 housing units received a foreclosure filing, such as a default notice, auction sale notice or bank repossession.

More than 84,000 properties were repossessed in October, RealtyTrac said.

A nasty brew of strict lending standards, falling home values and a tough economy is filtering through the housing market. By the end of the year, the company expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

The problem with home foreclosures is that once the mortgagee takes them over, the prices falls much more than if the home had been sold while occupied. Repossessed homes tend to sit vacant for longer, deteriorating and bringing down the entire neighborhood as they fall further into to disrepair. This puts pressures on all the other homes in the neighborhood, making it more likely that other owners will walk away from their mortgages which may be twice the current market value. It is a vicious cycle, and once started, it spirals quickly down.

• Lending standards have tightened to the extent that many consumers can no longer get automobile or furniture loans. This is pushing General Motors, Ford and Chrysler into bankruptcy, imperiling over three million jobs in the process.
• Rising unemployment is sapping the spirit and incomes from ten million Americans right now. This has a tremendous effect on the morale of everyone they know and everywhere they live. Unemployment is a killer for spending plans. Those unemployed tend to pull back significantly on their spending, and their gloom spreads to their friends and relatives. It is contagious and destructive and will kill consumer spending which has, for the last five to ten years, been the mainstay of the American economy. An AP report released today (11/13) shows the extent of new jobless claims:

The number of newly laid-off individuals seeking unemployment benefits has jumped to a seven-year high, the government said Thursday.

The Labor Department reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That is the highest total since just after the Sept. 11 terrorist attacks and second-highest since 1992.

The total was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000.

The four-week average of claims, which smooths out fluctuations, rose by 13,250 to 491,000, the highest tally in over 17 years.

Thursday’s figure is the first time claims have topped 500,000 during the current economic slowdown. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 338,000.

• Falling economies around the world. As the world’s economies fall into below-trend growth, their spending slows down. The buy fewer airline tickets, fewer American cars, less software, and less American wheat. America does import much more than we export. But, we still export a lot, and many jobs depend on them.

the Commerce Department said the trade deficit declined by a bigger-than-expected amount in September, falling by 4.4 percent to $56.5 billion as imports experienced a record plunge.

The import decline was led by a huge fall in imported oil as the average price for crude dropped by a record $12.41 per barrel and the volume of shipments fell to the lowest level in five years. But demand for other types of imports also fell, with imported cars and car parts dropping to the lowest level in more than five years, an indication that foreign automakers are feeling the pinch hitting U.S. consumers.

The feedback loop in this kind of international recession is horrible. U.S. and European economies enter into recession. This feeds back to the emerging markets as a lower demand for their products, thus inducing recession in their economies. The recession there reduces demand in the U.S. and Europe for things they make: airplanes, large computer, computer software, agricultural commodities, etc. This further reduces employment in the U.S. and Europe, etc., etc.

It will take a Herculean effort by all the world’s economies to break this cycle. There is a meeting beginning the 15^th in Washington of the G-20, approximately the 20 largest economies in the world, and they will attempt to address the problem. Probably not much will come of the first meeting since American leadership is in a transition stage that won’t formally begin until January 20. But a second meeting will most likely be agreed to, and at the second one I would expect much better results of a comprehensive and coordinated efforts to bring the world recession under control.

For a more detailed look at this meeting, see my recent article @ http://seekingalpha.com/article/105737-the-g-20-sings-a-song-of-sixpence

The five graphs below show with stunning visibility how bad the economy is today. Chart 1 shows changes in nonfarm employment from 1990 through the end of October, 2008.  You can see the dramatic drop of 240,000 jobs lost last month in this graph. Also shown are the relative lengths of the last two recessions: the 1991 drop was relatively short, lasting about one year. The 2001-02 recession was much longer and less well defined than previous recessions.  There was an increase in jobs shortly after 2002, only to plunge back into the red again in 2003.

This graph also shows the anemic recovery that followed. Note that the job creations shown in the space above the zero line after 2003 were well below those of the earlier recovery. We never made a full recovery from the 01-02 recession.

Chart 1: Change in Nonfarm Employment

All data from Bureau of Labor Stastics: Graphs from NY Times

Chart 2, below, shows the overall unemployment rate over the same period. Again, the recovery during the early period of President Clinton’s Presidency showed a rapid recovery—seen by the falling unemployment rate to a low of around 4% when he left office. Beginning in 2001 the unemployment rate increased through 2003.  After 2003 a fairly good recovery began and lasted from 2004 until 2007. At that point, things began getting bad again. What was an anemic recovery quickly gave way to a more serious downturn, which we are just beginning to experience.

Chart 2: Unemployment Rate

Chart 3 shows the unemployment rate among different ethnic groups. Blacks have always had a higher unemployment rate than whites, and since the Department of Labor began keeping track of unemployment by ethnic groups, Hispanics have traditionally been lower than Blacks and higher than Whites. Also, once Asians were tracked, their rates of unemployment have more closely mirrored that of Whites. All groups, however, are suffering with the current downturn.

Chart 3: Unemployment by Ethnic Group

Chart 4 shows that the unemployment crisis also affects those who keep working. The number of part-time workers who want full-time work rises dramatically once the unemployment rate begins climbing. This reflects the reality that many full-time workers are effective in getting only part-time work during the down-turn.

Chart 4: Part-Time Workers who want full-time work

This is a hidden cost of unemployment, since these workers don’t show up on the unemployment statistics or unemployment benefits program.

Chart 5: Real Weekly Wages

Chart 5 shows the effects of unemployment in terms of the general wage level of all workers. The real wage is the dollar wage per week adjusted for inflation, showing that even those who continue working in a downturn often end up getting behind the inflation curve.  During recession they work for less purchasing power than when the economy was sound.

It doesn’t look good for the coming months. Many respected economists predict that the unemployment rate could reach eight percent before it begins getting better. You can surmise from these charts, that this will be especially hard on the minority populations.  They will work less than they want and for real wages below what they need.

This is not a pretty picture, and it points to the need for a significant stimulus program that will directly create jobs. In a nation that needs to rebuild its infrastructure after decades of neglect, there will be plenty of men and women willing to work on such projects. Job creation, in my view, will be much more effective in easing the pain of unemployment than stimulus checks. Those checks that were mailed earlier this year were not spent as freely as Congress had expected. During tough times, when jobs are harder to get and hold, the fear factor enters the equation.  Stimulus checks given at that time are often hoarded rather than spent. 

The details of a new stimulus package will soon be discussed in Congress and the White House.  We should forget about trying to balance the budget, and go with a huge public works program.  The nation is in need, and quick and powerful action is necessary to bring us out of this trying period.

After years of hyper growth, averaging close to 10% a year, the great engine of growth that is China, is faltering. A series of government reports released over the last few weeks indicated that China’s exports are moderating. Real estate construction projects are being suspended. Consumer confidence is in decline. And many factories in southern China are closing, putting tens of thousands of migrant laborers out of work. Another sign, orders for Christmas from the Western nations, were down 20 percent this year. Big retailers and toy marketers are gloomy about the upcoming holiday season sales.

Newly released data suggests that nearly every sector of the economy is slowing and credit is tightening. While few economists expect China to fall into recession, analysts are forecasting the worst growth in more than a decade, with the economy expected to expand by as little as 5.8 percent in the fourth quarter this year, down from about 11 percent in 2007.

5.8 percent growth would be welcomed in any of the developed nations today; most all of the west is looking at declines in GDP for 2009. But for China, a moderation of this magnitude, spells trouble. China’s huge population is still largely rural, with hundreds of millions of farm laborers still stuck in medieval farming methods. The high growth generated over the last ten or twenty years in China has been the ticket for millions of these folk to make their way to the cities and find work in the burgeoning factories that lead China’s export industry.

A slowdown of the growth rate raises fears of political unrest within the Communist Party, so they are taking strong steps to keep the growth rate as high as possible. The government is preparing a large economic stimulus package, pushing new infrastructure projects, offering aid to exporters and searching for ways to prop up the nation’s severely depressed stock and real estate markets.

Domestically, there is also signs of a slowdown: Auto sales have plummeted this year. Air travel is in decline. Property sales have dried up, and weakness in the property market is hitting the makers of steel, cement and glass. “There is a nose dive in real estate construction in south China and east China, the two real estate boom areas,” said Yang Dongsen, a cement industry analyst at Merchant Securities. The real estate slowdown is expected to affect retail sales, which for the last few years had been lifted by new-home buyers purchasing appliances, decorations and other household goods.

It does not help that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50 percent, and the Shanghai composite index has fallen 67 percent this year, wiping out nearly all the gains it had made in the previous two years.

These data do not necessarily spell doom for China’s growth, but they do point to a period of economic adjustment that they must navigate. The west and the east are, to a large degree, joined. The depend on us for demand for their factories, and we depend on them for supplying us with inexpensive goods. The developing markets in Latin America are, themselves, dependent on China for purchasing their raw commodities, such as iron ore and petroleum. The downturn in Europe, Latin America and America is too severe to not be felt in the China. As much as they would like to be insulated from our economic problems, the interdependence is unavoidable. It will probably be some time before China will be worried about inflation and growth that is too fast.

From our friends at Economy.com we learn of a new international currency comparator: The IPod index.  From their table below Australia, Indonesia, Canada, and Korea are selling the IPod for less than $140.  Argentina, Brazil and Russia over over $250.  This index gives you a good indicator  of which currencies may decline in the future and which are more likely to rise.

>Just what we needed: A way to track shifts in global purchasing power that fits in your pocket. And is less greasy & caloric than the alternative…

Australia is the cheapest place in the globe to buy an Apple iPod, highlighting just how far the currency has plunged since July. The CommSec iPod index shows that Australia is the cheapest place of 62 countries to buy an Apple iPod 8gb nano music player when measured in US dollar terms.

The value of the iPod index is to highlight implications of currency changes and country relativities.

In other words, it’s an update of The Economist’s Big Mac Index. If you’re clueless, all it takes is a common good or service that’s sold in identical form the world over. The local price is simply converted to a common currency (typically U.S. dollars, though I wonder for how long?) and you can see who’s living how high, in relative terms. Pretty neat.<

Perhaps this is a little better than the Big Mac Index.  It’s more current, and it reflects relative currency valuation more precisely than the Big Mac.  After all, the Big Mac takes a lot of locally prices labor and vegetable prices, as well as local rents.  The IPod is made in America and shipped, whole, to each country where it is sold.  To me, this makes it a more pure reflection of local currency value.

UPDATE: 3/17/09

In retrospect, the IPOD index was a good predictor of currencies about to fall.  Check out the current exchanged rates to those which are listed as overvalued.  There is a strong correlation between the IPOD prediction and the exchange rates today.

The Big Mac Index latest figures: (February, 2009)

These data point to most of the emerging markets from Europe, Asia and Latin America to be undervalued.  If there is a significant economic recovery over the next six months, then these currencies, especially those that appear to be undervalued by over 25%, look to be good bets for revaluation.

These same data can also be interpreted in another way: since almost all of the currencies shown are undervalued, it implies that the U.S. dollar is significantly over-valued.  The comports with the rise of the dollar after the world recession began.  This brought a tremendous capital flight from all the emerging markets and into U.S. Treasury obligations.  The meant that dollars had to be purchased, so the value was pumped up by the flight to quality.

Once confidence is restored to the emerging world economies, the dollar may not do well.  It is likely to take as much a hit when dollars begin flowing back into emerging markets.

Predicting the exact time this will occur is beyond my abilities.  But, I am convinced it will occur within the next year.  The world economy will recover, and confidence in the major trading partners will also be restored.  It is a matter of timing.  Look for the conclusion of the G-20 meeting in early April as the first chance for the restoration stage to begin.

There is no longer any debate about the U.S. entering a period of a declining economy.  Everyone who watched the leading indicators had been expecting a recession since the beginning of the year.  Finally, in the third quarter, it came.

Nor is there any debate about the global slowdown.  It’s not that the United States controls the rest of the world.  It’s just that the same things that have pushed us into recession are also affecting the rest of the world: overextended credit and a growth spurt based on loose credit standards.  As is almost always the case, growth spurts go too far, too fast, and have to be brought back to earth and consolidate before taking off again.  I think it will be some time before the emerging markets take off again, but they will.  Just not any time soon.  This is also true of the United States and Europe.  We will resume our growth, eventually.   But there is going to be some time before we are ready to sustain more growth.

And therein lies a problem.  With everyone declining at the same time, we can go too far to the downside and experience deflation–a spiral to the downside that frightens economists.  Depression, which is the companion of deflation, is not something anyone would want to see.  There is nothing uplifting about suffering for years, where entire economies collapse under the weight of falling demand, falling employment and falling production.  Recessions are a necessary adjustment to a period of excess.  Depressions are not necessary, but they can happen if the economy isn’t handled well.

A recession could see unemployment in the U.S., for example, reach 7% or 8%.  A depression could see 25%.  There is no comparison, though, between this set of numbers.  The level of suffering under a depression is much more than, say, seven multiplied by three or four (7% x 3 = 21%).  From depression come revolutions and war, as scape-goats are sought and found.  Demagoguery rules when things look hopeless, and those afflicted by unemployment and despair are easily swayed into despotic politics. It happened in post WWI Germany, when the onerous provision of the Treaty of Paris pushed Germany into the arms of Adolph Hitler.  It has happened in Argentina where bad conditions led to the fascism of Juan Perón.  This specter could easily be duplicated in many of the emerging markets if things get bad.  The democracies in South East Asia, for example, are too fragile to handle a period of major deflation.

These conditions make it exceptionally important that the American, Japanese and European economies be handled properly during the downturn.  The burden falls on these three regions because it is demand from the large economies that drive production and growth in the smaller ones.  During this time we cannot look for strictly balanced budgets.  Deficit spending, if done on public projects that are needed and useful (roads, bridges, schools, etc.), can go a long way in reducing the ill effects of unemployment and help keep consumer spending up.  Longer unemployment benefits, veteran help for college and home loans are other measures that were especially effective after WWII that saw the return of more than a million soldiers and sailors to the economy.

We will have our hands full for most of 2009.  Most of the predictions I trust point to a possible end of the recession by the third quarter of next year–if things go well.  One thing about deflation: it can be stopped by printing enough money.  But, the balance between enough and too much is sometimes hard to find.  And that task, in my view, will be the defining test of our next President.  Go too far, and we have hyper inflation, which, in its own way, is as bad as deflation.  Not go far enough, and we have deflation and depression.  It’s a thin line between these poles.  I hope for a wise President and an equally wise Congress to keep the proper balance on this line. 

Even though there will be skeptics who think “wise President” and “wise Congress” are oxymoron terms, I disagree.  There are times when it appears that way, but I think when things get bad, there is a tendency of Americans to pull together.  We will certainly have this test to pass in the coming year.