NEMA Currents : Economics

A Small Problem?

Lego, Brian — Fri, 13 Nov 2009 15:22:00 GMT

The devastating consequences created by the residential mortgage market’s blow-up have been well documented. Now concerns over the broader impact of souring commercial real estate (CRE) loans are on the rise. The value of CRE loans outstanding is significantly smaller than residential loans ($3.5 trillion vs. $11.1 trillion); however, the size of the potential losses is not as much of a problem as it is the size of the institutions that hold these loans.

Smaller regional and community banks (<$10 billion in assets) account for less than 20% of all commercial banking assets in the U.S., but hold more than half of all outstanding CRE loans. Guess which institutions are more likely to lend to small businesses? The answer – small banks. Worse yet, those banks that account for almost half of all small business lending have the highest exposure to CRE loans. Mounting losses for banks from bad CRE debt will likely precipitate yet another impairment to credit availability for small businesses. Since businesses with fewer than 50 employees typically account for about one-third of total net job growth during economic expansions, credit constraints will likely prevent small business owners from ramping up hiring activity once the economic recovery gains momentum.

One Step at a Time

Lego, Brian — Fri, 30 Oct 2009 19:07:00 GMT

This week we saw something that hadn’t happened in over a year: growth in real GDP. Indeed, real GDP expanded 3.5 percent on an annualized basis during the third quarter, bolstered by consumer spending, business equipment spending, housing construction and exports. In a bit of a statistical quirk inventories declined sharply yet again, but since the rate of liquidation was smaller than in Q2, it actually contributed a bit to topline growth. The results weren’t a complete surprise given the temporary boosts engendered by federal stimulus spending (“cash for clunkers”, the tax credit for first-time homebuyers, etc.) and a decelerating inventory sell-off. At this point, our concerns should be focused a few quarters down the road because once the impacts of these sweeteners fade, consumer spending, capital expansion, exports or some other macroeconomic driver will need to be strong enough to ‘step up’ and fill in the gap.

Jobless Recovery Redux

Lego, Brian — Thu, 22 Oct 2009 20:30:00 GMT

The Federal Reserve Bank of Atlanta’s macroblog provides a good look at the evidence that points to the likelihood that the emerging recovery will be a jobless one. First, despite what has been an appreciable improvement in corporate profits during the third quarter, businesses have chosen to hold the line on hiring new workers as they cope with uncertainty about the economy’s performance beyond the next quarter or two. Once the recovery gains some momentum and enters a self-sustaining phase, there should be some firming in hiring activity. Still, the piece points to a troublesome sign that suggests the unemployment rate will remain uncomfortably high for quite a while. As of September, 56 percent of unemployed workers labeled their job losses as permanent—more than 10 percentage points higher than in any modern recession. This might be a problem of perception by those responding to the survey, but it does point to the fact that even as the economy gains traction and job growth resumes, businesses will have to ramp up hiring significantly in order to make a dent in the unemployment rate.

Down but not Out

Lego, Brian — Fri, 16 Oct 2009 20:30:00 GMT

After struggling through the worst downturn in the postwar era, the manufacturing sector is showing some signs of life. Sure, a large share of the rebound in output over the past three months is due to automakers restarting shuttered facilities and expanding inventories depleted by “cash for clunkers”; however, those reasons alone don’t account for the sector’s recent improvement since output excluding autos grew at a 3.8 percent annualized clip during the third quarter of 2009. Total manufacturing output will likely not maintain a particularly robust pace of growth, and might endure the same kind of fits and starts that are expected for the economy as a whole. Nonetheless, a rebound in the auto production and inventory replenishment by businesses may help bridge the gap until capital spending, consumer spending and export demand are in better shape to form the basis of a self-sustaining recovery.

Smart Grid Potpourri

Lego, Brian — Fri, 09 Oct 2009 20:30:00 GMT

This month’s Economist includes an article that goes over some of the developments in the smart grid arena internationally, including efforts to reduce peak demand and integrate renewables into the transmission network. The article describes a California utility’s (PG&E) program to install up to 5 million smart meters in consumers’ homes and the potential benefits these devices would provide via a more rapid demand response. Meanwhile, Lynne Kiesling, of Knowledge Problem fame, discusses the article and extends the analysis to include some of the real-world difficulties that might prevent us from maximizing the true potential of Smart Grid.

Have a good weekend!

Fragile Economy - Handle with Care

Lego, Brian — Fri, 02 Oct 2009 19:00:00 GMT

Just when many economists thought the economic recovery might be gaining a little momentum, reality comes along and throws a big bucket of icy cold water on the party. The employment report was by far the worst in a week where economic data had been signaling at least some improvement. Net job losses accelerated to 263,000 and the unemployment rate rose to 9.8 percent in September. Other surveys had shown the pace of layoffs slowing down, so many analysts thought this might carry over to the jobs data. No such luck. Moreover, the report showed that many who were let go early in the recession have remained jobless for a long time. Indeed, the median duration (or spell in econospeak) of unemployment is now over 17 weeks and nearly 36 percent of unemployed workers have remained jobless for more than 6 months—a record for a data series that stretches back to 1948. The economic recovery can proceed even if net job losses continue, as the two previous business cycles illustrate; however, the size of the unemployment problem is much larger this time around and could prove a big limiting factor to growth going forward.

What's Next?

Lego, Brian — Fri, 25 Sep 2009 20:30:00 GMT

An op-ed in today’s Wall Street Journal written by Kevin Warsh, a member of the Federal Reserve Board of Governors, is a must-read. Without striking a self-congratulatory tone about their apparent successes thus far in averting catastrophe, the article provides insights into the ramifications of decisions made by the Fed over the past two years (remember, the financial crisis started in 2007) as well as the pitfalls that might lie ahead.

One of the more salient comments in the article was that policy normalization (i.e. winding down liquidity programs, raising interest rates, removing excess bank reserves and suspending mortgage-backed securities [MBS] purchases) would need to begin before it was “obviously necessary” and that it could possibly be done with “greater force” than is customary. The Fed has already indicated that it will keep interest rates at very low levels for a long time and announced this week that the MBS purchase program will be shut down by March 2010. Thus, figuring out how to remove the rest of its $2+ trillion footprint from the economy, while at the same time minimizing the potential for harm, will likely prove to be the most difficult part of all for the Fed.

Still in the Early Innings

Lego, Brian — Fri, 18 Sep 2009 19:14:00 GMT

After enduring the deepest economic downturn of the postwar era, manufacturers are finally beginning to see some signs of recovery. For the second month in a row, industrial production and capacity utilization have posted decent-sized gains. A temporary rebound in the auto industry, thanks in part to "cash for clunkers" demand, certainly helped; however, industrial output from manufacturers outside of the automotive sector also rose in July and August.

The main question going forward, of course, will be whether this nascent recovery hangs around or not. Some of the recent growth in output can be attributed to firms rebuilding lean inventories following a period of severe drawdown, but one or two quarters of inventory-related production growth will be insufficient to trigger a self-sustaining recovery in the manufacturing sector. Rebounds in business capital investment and global export demand, and a healthier consumer base, will be needed to keep manufacturing from sinking back into a slump.

Climbing out of the Hole

Lego, Brian — Fri, 11 Sep 2009 19:44:00 GMT

The recovery watch continues and based on anecdotal reports out of the Fed's Beige Book, economic activity is stabilizing, and even showing signs of improving, around the nation. Indeed, the key question is quickly becoming how strong and steady the gains will be as we emerge from the deep hole we in which we find ourselves. There certainly are a lot of headwinds out there, such as rising home foreclosures, faltering commercial real estate, contracting credit and struggling labor market, just to name a few, that could impede growth going forward and even set the stage for the dreaded W-shaped recession. By contrast, identifying triggers for pent-up consumer/business demand or the next major technological innovation is difficult except in hindsight, but either factor could produce significant positive effects that go a long way in boosting the economy's prospects.

In the meantime, enjoy this comic strip that illustrates how things have 'improved'.

Labor Day Lament

Lego, Brian — Fri, 04 Sep 2009 15:21:00 GMT

While we're getting more and more signs that an honest-to-goodness economic recovery might be in the offing, one particularly stubborn segment of the economy continues to cast a lingering shadow: the labor market. Today's employment report did show yet another moderation in the pace of job losses, but we have little reason to celebrate month-to-month net declines of more than 200,000 payrolls. Measuring the cumulative job losses observed to date in percentage terms shows just how deep this recession has been for the labor market.

The NBER shows that the U.S. has experienced 11 recessions in the post-WWII era, and only the one immediately following the WWII saw larger job losses in percentage terms (see graph). The obvious difference between now and then is the labor market improved much more quickly back in '48, due in part to a difference in industrial composition (manufacturing vs. services). Indeed, the hallmark of the past few business cycles has been the incredible length of time it takes before total payrolls reach their previous peak. Even as job losses continue to abate over the next few months and job growth actually returns some time in 2010, it could be 2013 before we see payrolls return to levels observed at the end of 2007.