Export and import prices

Deflationary chill coming in through the trade channel.

Import and Export Prices

Cross-border inflationary pressures remain dormant including import prices which fell 0.5 percent in September for the third straight decline. Year-on-year, import prices are deep into the deflationary zone at minus 0.9 percent. The drop in imported petroleum prices, down 2.0 percent in the month and down 6.6 percent year-on-year, is a key factor in the import-price decline, but even when excluding petroleum, import prices fell 0.2 percent in the month. Year-on-year, the ex-petroleum reading is in the plus column but not by much, at plus 0.7 percent.

Export prices fell 0.2 percent for a second straight monthly decline and are also down 0.2 percent year-on-year. Here, agricultural prices are a key factor, down 0.9 percent in the month and down 2.9 percent year-on-year. When excluding agriculture, export prices also fell 0.2 percent on the month and are unchanged year-on-year.

Posted in Trade |

Macro update

First this, supporting what I’ve been writing about all along:

Here’s Proof That Congress Has Been Dragging Down The Economy For Years

By Shane Ferro

Oct 8 (Business Insider) — In honor of the new fiscal year, the Brookings Institution released the Fiscal Impact Measure, an interactive chart by senior fellow Louise Sheiner that shows how the balance of government spending and tax revenues have affected US GDP growth.

The takeaway? Fiscal policies have been a drag on economic growth since 2011.

Full size image

And earlier today it was announced that August wholesale sales were down .7%, while inventories were up .7%. This means they produced the same but sold less and the unsold inventory is still there. Not good!

Unfortunately the Fed has the interest rate thing backwards, as in fact rate cuts slow the economy and depress inflation. So with the Fed thinking the economy is too weak to hike rates, they leave rates at 0 which ironically keeps the economy where it is. Not that I would raise rates to help the economy. Instead I’ve proposed fiscal measures, as previously discussed.

Fed Minutes Show Concern About Weak Overseas Growth, Strong Dollar (WSJ) “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,” according to the minutes. “Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk.” “Several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions,” the minutes said.

The case for patience strengthens yet further by a consideration of the risks around the outlook. Across GS economics and markets research, we have recently cut our 2015 growth forecasts for China, Germany, and Italy, noted the continued weakness in Japan, and made a further upgrade to our already-bullish dollar views. So far, our analysis suggests that the spillovers from foreign demand weakness and currency appreciation only pose modest risks to US growth and inflation. But at the margin they amplify the asymmetric risks facing monetary policy at the zero bound emphasized by Chicago Fed President Charles Evans. If the FOMC raises the funds rate too late and inflation moves modestly above the 2% target, little is lost. But if the committee hikes too early and has to reverse course, the consequences are potentially more serious given the limited tools available at the zero bound for short-term rates.

Germany not looking good:

German exports plunge by largest amount in five-and-a-half years (Reuters) German exports slumped by 5.8 percent in August, their biggest fall since the height of the global financial crisis in January 2009. The Federal Statistics Office said late-falling summer vacations in some German states had contributed to the fall in both exports and imports. Seasonally adjusted imports falling 1.3 percent on the month, after rising 4.8 percent in July. The trade surplus stood at 17.5 billion euros, down from 22.2 billion euros in July and less than a forecast 18.5 billion euros. Later on Thursday a group of leading economic institutes is poised to sharply cut its forecasts for German growth. The top economic priority of Merkel’s government is to deliver on its promise of a federal budget that is in the black in 2015.

UK peaking?

London house prices fall in Sept. for first time since 2011: RICS (Reuters) The Royal Institution of Chartered Surveyors said prices in London fell for the first time since January 2011. The RICS national balance slid to +30 for September from a downwardly revised +39 in August. The RICS data is based on its members’ views on whether house prices in particular regions have risen or fallen in the past three months. British house prices are around 10 percent higher than a year ago, and house prices in London have risen by more than twice that. Over the next 12 months, they predict prices will rise 1 percent in London and 2 percent in Britain as a whole. Over the next five years, it expects average annual price growth of just under 5 percent.

British Chambers of Commerce warns of ‘alarm bell’ for UK recovery (Reuters) “The strong upsurge in manufacturing at the start of the year appears to have run its course. We may be hearing the first alarm bell for the UK,” said British Chambers of Commerce director-general John Longworth. The BCC said growth in goods exports as well as export orders for goods and services was its lowest since the fourth quarter of 2012. Services exports grew at the slowest rate since the third quarter of 2012. Manufacturers’ growth in domestic sales and orders slowed sharply from a record high in the second quarter to its lowest since the second quarter of 2013. However, sales remained strong in the services sector and confidence stayed high across the board.

Not to forget the stock market is a pretty fair leading indicator.

Some even say it causes what comes next:

Posted in Fed, Germany, Government Spending, UK, USA |

Fed minutes

Bill McBride and I agree this is the key takeaway.

That is, the Fed still sees the risks as asymmetrical and therefore prefers to err on the side of ease. So stocks soar on the belief that low rates from the Fed will support earnings and valuations, as interest rates stay low believing the Fed will keep rates lower for longer.

Theory and evidence, however, continues to support my narrative that 0 rates and QE are deflationary and contractionary biases, and therefore the economy won’t accelerate as hoped for and as forecast by those believing otherwise.

FOMC Minutes: “Costs of downside shocks to the economy would be larger than those of upside shocks”

Note: Not every member of the FOMC agrees, but I think this is the key sentence: “the costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation”.

Posted in Fed, Inflation | Tagged |

Consumer credit way down and downward revisions as well

As I suggested previously, the well hyped ‘credit acceleration’ has fizzled indicating most GDP growth forecasts could be grossly overstated:

Revolving credit outstanding had been edging higher in what had been a good indication for consumer spending but not in August, slipping $0.2 billion to end five straight months of gains. Non-revolving credit outstanding, boosted by strong vehicle sales and the government’s continued acquisition of student loans from private lenders, rose yet again, up $13.7 billion for the 36th straight month of increase. But the gain for the non-revolving component is the smallest since January and, combined with the slippage in revolving credit, made for a lower-than-expected total increase of $13.5 billion. This compares with Econoday expectations for $20 billion and is the lowest total increase since November. The consumer sector, the largest sector of the economy, has not been a stand-out contributor which has held back the recovery in general, and part of this drag is a reluctance among consumers to borrow.

Posted in Comodities |

The 10th Plague

Several years ago I began using the analogy of the 10th plague of the Old Testament, the idea being that the EU wouldn’t move away from austerity until it brought down Germany itself. It’s looking like that day is getting a whole lot closer, as austerity has not only damaged Germany’s export markets in the rest of the EU, but has also caused the rest of the EU to become more competitive vs Germany in the external markets, which have themselves been weakened by their own austerity policies.

German industry output plunges most in over 5 years

Oct 7 (Reuters) — German industrial output fell far more than expected in August and posted its biggest drop since the financial crisis in early 2009, Economy Ministry data showed on Tuesday, the latest figures to raise question marks about Europe’s largest economy.

The 4.0 percent month-on-month drop missed the consensus forecast in a Reuters poll for a 1.5 percent decrease and came short even of the lowest forecast for a 3.0 percent fall. It was the biggest drop since a 6.9 percent fall in January 2009.

Posted in Germany, Government Spending |

WRKO interview

Warren Mosler on the Economy

Posted in Uncategorized |

EU Commission- more of same


Latvia’s Dombrovskis Brings Fiscal Hawk Record to EU Commission

By Mathew Dalton

Oct 5 (WSJ) — The budget hawk who steered Latvia out of economic collapse with a bruising austerity program is poised to get one of the EU’s top economic-policy jobs as Europe is heading toward a clash over austerity.

Former Prime Minister Valdis Dombrovskis is nominated to join the European Commission, the European Union’s executive arm, as one of its top economic policy makers. When he appears before the European Parliament for his confirmation hearing on Monday, one of the main questions will likely be whether he plans to bring the tough policies he used in Latvia to a much bigger stage.

A host of Europe’s deep-seated economic problems await him. They include anemic growth, high unemployment and the threat of deflation, all of which may haunt the region for years to come.

The 43-year-old Mr. Dombrovskis, whose portfolio will include oversight of national budgets, will be at the center of the debate now raging in Europe about whether tight budgets will exacerbate those problems and fuel the rise of extremist, anti-EU political parties.

His most immediate problem will be how to bring the finances of the French and Italian governments back in line with the EU’s budget rules. Paris and Rome argue the dismal shape of their economies means they should be granted more time to hit EU budget targets.

Wielding degrees in economics and physics, Mr. Dombrovskis brings formidable technical skills to the debates that lie ahead, say people who have worked with him, along with a free-market—some would say right-wing—economic philosophy and a direct personal style. “He’s very focused on fiscal rigor,” said Olli Rehn, a member of the European Parliament and the EU’s previous economics commissioner, who worked with Mr. Dombrovskis on an international bailout for Latvia in 2009. “He’s quite blunt and quite straightforward. I don’t know if that is being right-wing or not.”

Under Mr. Dombrovskis’s leadership, Latvia adopted sharp spending cuts to win emergency loans from the EU and the International Monetary Fund. His government kept the Latvian currency pegged to the euro, a measure that many economists say deepened the country’s pain.

The economy ultimately shrank by 25%. Poverty soared, as did emigration. The IMF sometimes chided Mr. Dombrovskis’s government for not doing enough to shield poorer Latvians from the hardship of the crisis.

Mr. Dombrovskis said that Latvia had no other choice but to cut deeply and that he wouldn’t necessarily recommend the Latvian solution for other countries. “I don’t think we can say that something is mechanically applicable from one situation to another,” he said.But he does argue that cutting the budget deficit quickly, as Latvia did in 2009 and 2010, is the best way to stabilize government finances. That puts him at odds with some economists and European officials, who have argued that sharp cuts can actually widen the deficit by throwing the economy into a deep recession. Mr. Dombrovskis also sought to temper his image as a hard-core budget hawk: “I see my task as balancing the economic and financial side, with the social side,” he said.

Einars Repše, Mr. Dombrovskis’s finance minister, said that Mr. Dombrovskis often mediated between competing forces in the government on budget questions.

“I recollect him being more on the cautious side than myself,” Mr. Repše said. “I was much more a supporter of radical and immediate consolidation.”

Starting in 2011, Latvia posted some of the highest growth rates in the EU. Its bailout program has been hailed a success by officials in Brussels and Washington, burnishing Mr. Dombrovskis’s international profile. Yet the unemployment rate is still 11% and many of the country’s younger and better-educated workers have emigrated, facts that often go unmentioned by Latvia’s boosters.

“There is still much more to do in Latvia,” Mr. Dombrovskis acknowledges.

In the next commission, with Jean-Claude Juncker as president, Mr. Dombrovskis is expected to be the hawkish foil to Pierre Moscovici, the dovish former French finance minister with whom he will share decision-making powers over national budgets. Mr. Rehn said the turmoil of the Latvian bailout, when his government occasionally came to the brink of collapse, should serve him well as he navigates the commission’s internal debates.

“He has cool nerves and strong composure,” Mr. Rehn said, “and he can intellectually handle difficult situations under pressure.”

Posted in CBs, ECB |

Talking points for 11am WRKO radio interview

Jobs: Just keeping up with population growth- 59% three months in a row, not at all ‘recovering’ as in prior cycles. So seems the extra jobs are from underestimating population growth?

Spending- working its way lower after the tax hikes and sequesters. Q3 201313 was supported by unsold inventories, Q4 13 by expiring tax credits, then down for Q1 2014 as inventories were reduced and cold weather hurt some, and a Q2 bounce that resulted in only 1.2% growth for the first half of this year:

You can see how in the previous cycle the large drop in the growth rate was followed by a rebound to much higher rates of growth. The current cycle saw a much larger decline in GDP that was followed by lower rates of growth that now seem to be further declining:

You can see the persistent shift down after the last recession that didn’t happen in prior cycles:

Inflation? 6 years of 0 rates, over 4 trillion of QE, and the Fed still can’t hit it’s 2% target? Maybe it’s not so easy to inflate as most think? And just maybe the Fed has it all backward, and 0 rates and QE are deflationary?

Like the hairdresser said, “no matter how much I cut off its still too short”:

Posted in Employment, GDP |

Weekly credit update

Turned down this week as ‘leveling off’ continues:

No great shakes and leveling off:

Nothing happening here either:


The Fed believes this stuff causes inflation if it goes up, disinflation when it goes down:

Posted in Credit |

Employment report

A lot better than expected, and markets reacting accordingly, and the narrative about the 1.2 million people losing benefits at year end ‘inflating’ the jobs number seems not material based on the numbers so far released:

Employment Situation

The labor market improved in September for the most part. Job growth topped expectations, The unemployment rate declined. However, wage inflation is oscillating but remaining on a low trajectory.

Nonfarm payroll jobs gained 248,000, after a 180,000 rise in August and 243,000 increase in July. Net revisions for July and August were up a sharp 69,000. The median market forecast for September was for a 215,000 gain.

The unemployment rate declined to 5.9 percent from 6.1 percent in August. Expectations were for 6.1 percent.

Going back to the payroll report, private payrolls advanced 236,000 in September after a 175,000 boost in August. Expectations were for 236,000.

Average hourly earnings were unchanged in September after a 0.3 percent rise the month before. Average weekly hours ticked up to 34.6 hours versus 34.5 hours in August and expectations for 34.5 hours.

Overall, job growth improved while wage inflation remained soft. The Fed still has many options for policy.

While there were more net new hires, seems the working age population went up quite a bit as well, as the % of the population working remained at relatively low 59% for the third month:

Posted in Employment |