Category Archives: China

A few Boehnalities and other notables on the US going broke

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Cross currents of right and wrong but always for the wrong reasons.

Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech

By David J. Lynch

March 7 (Bloomberg) — House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville.

Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.

“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”

Wrong reason! Broke implies not able to spend.

The US spends by crediting member bank accounts at the Fed, and taxes by debiting member bank accounts at the Fed.

It never has nor doesn’t have any dollars.

The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007.

That’s simply a function of where the Fed, a agent of Congress, has decided to set rates, and market perceptions of where it may set rates in the future. Solvency doesn’t enter into it.

Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.

All taxing does is debit member bank accounts. The govt doesn’t actually ‘get’ anything.

To be sure, the U.S. confronts long-term fiscal dangers.

For example???

Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.

So?

“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.

So?
What does that have to do with govts ability to credit accounts at its own central bank?

$1.6 Trillion Deficit

A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.

Still, a rhetorical drumbeat has spread that the U.S. is tapped out. Republicans, including Representative Ron Paul of Texas, chairman of the House domestic monetary policy subcommittee, and Fox News commentator Bill O’Reilly, have labeled the U.S. “broke” in recent days.

Chris Christie, the Republican governor of New Jersey, said in a speech last month that the Medicare program is “going to bankrupt us.” Julian Robertson, chairman of Tiger Management LLC in New York, told The Australian newspaper March 2: “we’re broke, broker than all get out.”

A similar claim was even made Feb. 28 by comedian Jon Stewart, the host of “The Daily Show” on Comedy Central.

So much for their legacies.

Cost of Insuring Debt

Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the
G20.

There are two factors in default insurance. Ability to pay and willingness to pay. While the US always has the ability to pay, Congress does not always show a united willingness to pay. Hence the actual default risk.

Creditors regard Venezuela, Greece and Argentina as the three riskiest countries. Buying credit default insurance on a notional $10 million of those nations’ debt costs $1.2 million, $950,000 and $665,000 respectively.

“I think it’s very misleading to call a country ‘broke,'” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”

In any case, the euro zone member nations put themselves in the fiscal position of US states when they joined the euro.

That means a state like Illinois could be the next Greece, but not the US govt.

Less Likely to Default

CMA prices for credit insurance show that global investors consider it more likely that France, Japan, China, the United Kingdom, Australia or Germany will default than the U.S.

Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”

Presumably a statement with regard to willingness of Congress to pay.

George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.

That has nothing to do with it.

“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”

Any nation can do that with its own currency

The current concerns over debt contrast with the views of founding father Alexander Hamilton, the nation’s first Treasury secretary. At Hamilton’s urging, the federal government in 1790 absorbed the Revolutionary War debts of the states and issued new government securities in about the same total amount.

Alexander Hamilton

Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”

Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.

Far be it from me to argue with a Pulitzer Prize winner…

From Oct. 1, 2008, the beginning of the 2009 fiscal year, through the current year, which ends Sept. 30, 2011, the U.S. will have added more than $4.3 trillion of debt. Despite White House forecasts of an additional $2.4 trillion of debt over the next three fiscal years, investors’ appetite for Treasury securities shows little sign of abating.

It’s just a reserve drain- get over it!

Govt spending credits member bank reserve accounts at the Fed

Tsy securities exist as securities accounts at the Fed.

‘Going into debt’ entails nothing more than the Fed debiting Fed reserve accounts and crediting Fed securities accounts and ‘paying off the debt’ is nothing more than debiting securities accounts and crediting reserve accounts

No grandchildren involved.

Longer-Term Debt

In addition to accepting low yields on two-year notes, creditors are willing to lend the U.S. money for longer periods at interest rates that are below long-term averages. Ten-year U.S. bonds carry a rate of 3.5 percent, compared with an average 5.4 percent since 1990. And U.S. debt is more attractive than comparable securities from the U.K., which has moved aggressively to rein in government spending. U.K. 10-year bonds offer a 3.6 percent yield.

“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.

Who also completely misses the point.

Any doubts traders had about the solvency of the U.S. would immediately be reflected in the markets, a fact noted by James Carville, a former adviser to President Bill Clinton, after he saw how bond investors could determine the success or failure of economic policy.

No they can’t.

“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter,” Carville said. “But now I want to come back as the bond market. You can intimidate everyone.”

Only those who don’t know any better.

Republican Dissenters

Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.

“To say your debts exceed your income is not ‘broke,'” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.

The U.S. government nonetheless faces a daunting gap between its expected financial resources

It’s not about ‘financial resources’ when it comes to a govt that never has nor doesn’t have any dollars, and just changes numbers in our accounts when it spends and taxes

and promised future outlays. Fratto said the Obama administration’s continued accumulation of debt risked a future crisis, as most major economies also face growing debt burdens.

The burden is that of making data entries.

In the nightmare scenario, a crush of countries competing to simultaneously sell IOUs to global investors could bid up the yield on government debt and compel overleveraged countries such as the U.S. to abruptly slash public spending.

It could only compel leaders who didn’t know how it all worked to do that.

Not selling the debt simply means the dollars stay in reserve accounts at the Fed and instead of being shifted by the Fed to securities accounts. Why would anyone who knew how it worked care which account the dollars were in? Especially when spending has nothing, operationally, to do with those accounts.

Fratto dismissed the markets’ current calm, noting that until the European debt crisis erupted early last year, investors had priced German and Greek debt as near equivalents.

“Markets can make mistakes,” Fratto said.

So can he. That all applies to the US states, not the federal govt.

$9.4 Trillion Outstanding

If recent budgetary trends continue unchanged, the U.S. risks a fiscal day of reckoning, slower growth or both.

No it doesn’t.

Altman notes that the U.S. debt outstanding is “enormous.” As of the end of 2010, debt held by the public was $9.4 trillion or 63 percent of gross domestic product — roughly half of the corresponding figures for Greece (126.7 percent) and Japan (121 percent) and well below countries such as Italy (116 percent), Belgium (96.2 percent) and France (78.1 percent).

Once a country’s debt-to-GDP ratio exceeds 90 percent, median annual economic growth rates fall by 1 percent, according to economists Kenneth Rogoff and Carmen Reinhart.

Wrong, that’s for convertible currency/fixed exchange rate regimes, not nations like the US, Uk, and Japan which have non convertible currencies and floating exchange rates.

The Congressional Budget Office warns that debt held by the public will reach 97 percent of GDP in 10 years if certain tax breaks are extended rather than allowed to expire next year and if Medicare payments to physicians are held at existing levels rather than reduced as the administration has proposed.

So???

AAA Rating

For now, Standard & Poor’s maintains a stable outlook on its top AAA rating on U.S. debt, assuming the government will “soon reveal a credible plan to tighten fiscal policy.” Debate over closing the budget gap thus far has centered on potential spending reductions. S&P says a deficit-closing plan “will require both expenditure and revenue measures.”

Measured against the size of the economy, U.S. federal tax revenue is at its lowest level since 1950. Tax receipts in the 2011 fiscal year are expected to equal 14.4 percent of GDP, according to the White House. That compares with the 40-year average of 18 percent, according to the Congressional Budget Office. So if tax receipts return to their long-term average amid an economic recovery, about one-third of the annual budget deficit would disappear.

Likewise, individual federal income tax rates have declined sharply since the top marginal rate peaked at 94 percent in 1945. The marginal rate — which applies to income above a numerical threshold that has changed over time — was 91 percent as late as 1963 and 50 percent in 1986. For 2011, the top marginal rate is 35 percent on income over $373,650 for individuals and couples filing jointly.

Not Overtaxed

Americans also aren’t overtaxed compared with residents of other advanced nations. In a 28-nation survey, only Chile and Mexico reported a lower total tax burden than the U.S., according to the Organization for Economic Development and Cooperation.

In 2009, taxes of all kinds claimed 24 percent of U.S. GDP, compared with 34.3 percent in the U.K., 37 percent in Germany and 48.2 percent in Denmark, the most heavily taxed OECD member.

“By the standard of U.S. history, by the standard of other countries — by the standard of where else are we going to get the money — increased tax revenues have to be a part of the solution,” said Jeffrey Frankel, an economist at Harvard University who advises the Federal Reserve Banks of Boston and New York.

So much for his legacy.

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Libya Libya Libya

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Here’s my take.

As before, all the world actually cares about is the price of oil.

And the internal struggle will wind down with someone controlling the oil.

And whoever gets control of the oil wants the oil for only one reason- to sell it.

In a land of haves and have nots (at all levels), and no understanding of fiscal balance, it’s all about having the oil to sell.

So that means prices go back to where the Saudis want them to be.

My guess, and all anyone can do is guess, is Brent at maybe 100 which puts WTI maybe just under 90 until the glut issues are sorted out.

If this happens, seems-

The long oil long trades reverse.
Food prices back off some.
The view of the economy goes from half empty to half full.
The dollar gets a lot stronger.
Energy related stocks lose, others win.
But a stronger dollar may dampen prospects for US stocks.
Bonds move with stocks.
Attention shifts back to China, Europe, UK, and US fiscal policies, which are all in tightening mode.

And happy birthday to my brother Seth who turns 60 today! He just posted some old family pictures on facebook.

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China’s Top Priority in 2011 Is Controlling Inflation: Wen

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Sounds like very strong language to me.
As previously discussed, in the past inflation in China has led to regime change.
And also as previously discussed, China would have to be the exception to the rule to do it without a recession.

China’s Top Priority in 2011 Is Controlling Inflation: Wen

March 4 Reuters) — China’s Premier Wen Jiabao said on Saturday the nation had to tame inflation that threatened social stability as the government seeks to steer the world’s second-biggest economy towards more balanced, greener growth.

In China’s version of a “State of the Union” address to be presented later to the annual parliament session, Wen said the government aims to contain inflation to within 4 percent this year.

Failure to rein in price rises for food, housing and other goods could become more than an economic problem for the ruling Communist Party, which is jittery about social unrest especially after the upheavals shaking the Middle East.

“Recently, prices have risen fairly quickly and inflation expectations have increased. This problem concerns the people’s well-being, bears on overall interests and affects social stability. We must, therefore, make it our top priority in macroeconomic control to keep overall price levels stable,” Wen said in a work report prepared for delivery before the National People’s Congress.

Wen said that inflation was among the immediate worries weighing on China’s efforts to unleash new sources of domestically driven growth that will spread wealth more evenly.

“Expanding domestic demand is a long-term strategic principle and basic standpoint of China’s economic development as well as a fundamental means and an internal requirement for promoting balanced economic development,” said the prepared text of his speech.

The Premier’s annual address is given in the cavernous Great Hall of the People, crowded with thousands of delegates who are vetted by the Communist Party to acclaim and approve its policies.

But the Premier’s televised speech is also aimed at hundreds of millions of ordinary citizens who the Party leaders fear could become sources of discontent unless their grievances about price rises, unaffordable housing and expensive healthcare are eased.

Wen made clear that addressing those concerns would preoccupy China’s economic policy, shaping decisions on everything from farmers’ incomes to the yuan exchange rate.

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Why the public sector is not overpaid

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The rhetoric is that the public sector is overpaid relative to the private sector.
Ok, they don’t adjust for education and probably a few other things, but it all still misses the point.

Back when I was a kid in Ct. the 50’s, I recall the private sector jobs paying a lot more than the public sector jobs. People worked for the US Post Office, for example, because of the security, or because they couldn’t get a higher paying private sector job for one reason or another.

So seems since then things have reversed.

The reason is the overly tight fiscal policy that’s kept unemployment a lot higher, and beat down the private sector.

And best I can tell, it’s not that public sector employees are earning too much (with a few anecdotal exceptions), it’s that because the economy is so bad, private sector employees aren’t earning what they might in a good economy.

The obvious answer to me.
Instead of trying to drag down public sector compensation to today’s depressed private sector levels, which also happens to further hurt the private sector at exactly the wrong time,
I’d rather see us restore a full employment economy (like we had in 1999-2000)
and let the good times bring up private sector wages and benefits, which, in a good economy, surpass public sector wages and benefits.

But no one is even considering that option.
Because they all agree:
The US has run out of money.
And now must borrow from the likes of China in order to spend
And leave the tab to the grandchildren.
And Social Security and Medicare are bankrupting the nation.
And the deficit is taking away our savings starving private investment.
And that the US could be the next Greece if we don’t get our fiscal house in order NOW.
And all the rest of that kind of nonsense.

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U.K. Construction Grew Fastest in Eight Months in February

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While the austerity measures will bite, in the UK, like much of the world, automatic fiscal stabilizers (rising transfer payments and lower tax revenues) got their deficits up high enough to reverse the downturns in GDP, and deficits remain high enough for modest growth.

The UK had weather issues in December, which are reversing.

As the austerity measures continue to come on line, they will drain off some of the aggregate demand being added by the counter cyclical deficits and keep a damper on growth.

It’s just a guess, and there are other factors as well (oil prices, China slowdown, etc.) but I suspect the actual slowdown from the austerity is still down the road a piece.


UK Headlines:

U.K. Construction Grew Fastest in Eight Months in February
King Says Raising Rate to Make a Gesture Is Self-Defeating
RBC Says Stronger Pound Highlights View BOE’s King Faces Defeat
UK House Prices Stage Surprise Rise as Mortgage Approvals Also Up

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the Mideast, the Saudis, and our markets

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First, I’ve been pretty quiet on the mideast goings ons.
I’ve been watching intently from the time Egypt made headlines,
and have yet to see anything of particular consequence to us, beyond oil prices.

I’ve yet to come up with any channel to world aggregate demand, inflation, etc. apart from oil prices.

Seems all moves in stocks and bonds have been linked directly or indirectly only to actual and potential changes in crude oil and product prices.

And the mainstream has yet to realize that ultimately the Saudis- the only producer with excess capacity, continues as price setter, at least until their excess capacity is gone.

So the price of crude oil remains set by decree, and not market forces.
And markets don’t yet seem to know that.
Credit the Saudis for outsmarting the world on that score.
They say they don’t set prices, but let the market set price, as they only set spreads to benchmark market prices they post for their refiners.
The world completely misses the simple difference between the Saudi’s reaction function as a price setter, and prices set competitively in the market place.

That’s like the Fed saying they don’t set $US interest rates, because they have a reaction function that guides them.

So what does that mean?

It means the price of crude will come down only if the Saudis want it to come down (assuming they do have excess capacity).

And my best guess is that their survival strategy includes a lower price of oil.

They will play the maestro with grand gesture and international ‘faux diplomacy’ with ‘high level’ behind the scenes goings ons with pledges to come to the rescue with promises of production increases to replace any lost output due to the crisis, making it clear that they are going the extra mile and taking extraordinary measures to ensure the western economies both won’t see any supply disruptions and prices will be contained. Making it clear that we owe them for their selfless, gargantuan, efforts and expenditures of political capital on our behalf.

It’s all a big show to ingratiate themselves to the West in the hopes of getting the western support needed to sustain their position of power.

And the west will never realize that prices went up only because the Saudis raised their posted prices under cover of their reaction function that the west mistakes for ‘market forces,’ and that prices will go down only as the Saudis simply lower their posted prices, as they continue to play us for complete fools.

Much like China does to us because we think we need to sell our Tsy secs to fund our federal spending.

And with lower crude prices we go ‘risk off’ and much of the recent moves in other markets reverse.

The other possibility is that the Saudis don’t cut price, maybe because they decide they want the increased revenues to sustain control domestically with increased distributions to their population.

One way or another, it’s all their political decision, and we don’t even understand how it works, which reduces the odds that whatever influence we might have will be used to our ultimate benefit.

Before the early 1970’s the price of oil was set by the Texas Railroad Commission, who kept it relatively low and stable, fueling growth with reasonable price stability, while govt policy fostered relatively high levels of employment and low output gaps.

Since the hand off to the Saudis in the early 1970’s, when circumstances allowed them to take over as swing producer/price setter, prices have increased dramatically with very high levels of volatility, disrupting the world order and fostering today’s very high levels of unemployment and massive output gaps, as govts struggle with fears of inflation and seemingly no understanding of the process that’s got us into that mess.

And now with the world turmoil perhaps largely a function of mass unemployment, and govts with no idea how to keep that from happening, the pendulum is shifting from order to chaos.

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China’s “dynamic differentiated required reserve ratios”

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This only works to raise the cost of funds for the targeted banks.

It’s still about price, not quantity

So far the actual quantitative measures remain the govt telling its banks to lend less, or else.
That does work.
The problem is it works via a hard landing/widening output gap.

From Yang Kewei

As small and medium sized banks contributed ~70% of new loans in 2011. It makes sense the PBOC implemented punitive required reserves on them. Given that, the tight liquidity reflected on 7d repo is explainable as S&M sized banks have to borrow to meet their RRR. This gave big local banks great opportunity to squeeze on tenor repos, but o/n is still stable given ample liquidity 1) cash back to banks from households after LNY 2) pboc bill maturing (most are held by big banks) 3) FX reserve accumulation (one indicator is that o/n repo is still quite stable which signals current liquidity situation.).

One additional impact of significant net amount of PBOC bill expiring since 4Q10 is that big banks have been passively extending duration of their assets. To maintain balanced balance sheet, banks could have some adjustment on their asset allocation going fwd.

China has slapped punitive reserves on multiple banks

* First official confirmation of punitive reserve moves

* Differentiated reserves key part of central bank policy

* China is trying to slow credit and money growth

February 22 (Reuters) — China has already imposed punitive required reserve increases on more than 40 banks this year, targeting those that have issued too many loans, state news agency Xinhua reported on Tuesday.

This approach, formally known as “dynamic differentiated required reserve ratios”, has been effective in restraining lending by banks and will be continued as a core part of the government’s efforts to control inflation, Xinhua said, citing an unnamed central bank source.

The report was the first official confirmation that Beijing has been using a complex new system for tweaking mandatory reserve levels on a regular basis as a way of disciplining unruly and especially profligate banks.

China has increased reserve requirements across the board for all banks twice this year. The dynamic increases have been on top of those and can be reversed once banks fall back into line with official lending and capital guidelines.

“Since the start of 2011, the central bank has already started using dynamic differentiated required reserve ratios as a tool in its monetary and credit controls,” Xinhua said.

“It has already imposed differentiated reserve requirements on more than 40 local financial institutions that had low capital adequacy ratios, overly fast credit growth and increasing cyclical risks,” it added.

The report did not name any of the targeted banks, nor did it disclose the magnitude of the punitive reserve increases.

It did say that the central bank would continue to draw on a mixture of tools, including interest rates and required reserves, in implementing a prudent monetary policy.

NEW TOOL

A local magazine said on Monday that China had abandoned dynamic differentiated reserves because the formula for determining them was too complex, but the central bank denied that.

The Xinhua report served to underscore that differentiated reserves have, in fact, become an essential component of China’s monetary policy toolkit.

The People’s Bank of China first unveiled plans for “dynamic differentiated required reserve ratios” last year to keep a tighter leash on banks.

Higher reserves force banks to lock up more of their deposits at the central bank, inhibiting their ability to lend and slowing money growth. Excess cash in the economy has been one of the root causes of the run-up in Chinese inflation, which hit an annual pace of 4.9 percent in January, near a two-year high.

China had previously imposed differentiated reserve requirement ratios on banks as a way to punish rampant lending.

But a “dynamic differentiated” system marks a departure from the past because the central bank has been reviewing lenders’ balance sheets on an on-going basis and looking at a wider range of indicators, including lending, capital and liquidity levels.

Chinese inflation is expected to quicken in coming months as global commodity prices and domestic food costs climb.

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China raises bank reserve to curb lending

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While this doesn’t actually work to curb lending, it does indicate that China continues to see inflation as a severe enough of a political problem to risk a serious slowdown. And while it’s not impossible, I’ve yet to see any nation succeed in cutting what they call inflation short of increasing their output gap- and most often with a dramatic slowdown.

So while the 9% of GDP US budget deficit continues to support modest GDP growth and only very modestly increasing employment, a combination that’s a pretty good environment for stocks, the risks outlined at year end continue to increase.

China continues to fight inflation which can soften thing sufficiently for a commodities retreat. The euro zone continues its austerity and is already showing sings of weakening domestic demand from levels that weren’t all that high. The US Congress continues to press for deficit reduction well before private sector credit growth is ready to take the hand off, and with all sides agreeing there’s a long term deficit problem there doesn’t seem to be much resistance.

It’s all deflationary, and I continue to watch for a strong dollar as a timing/cue to the potential global slowdown.
So far world crude prices hovering at just over $100/barrel are keeping the dollar in check, but doing so by bleeding off some US domestic demand.

China raises bank reserve to curb lending

February 18 (CNBC) — China ordered its banks Friday to hold back more money as reserves in a new move to curb lending and cool a spike in inflation.

The order raising reserves by 0.5 percent of deposits was the second such move this year by the central bank and followed six reserve increases in 2010. Reserves vary by institution but are about 20 percent for China’s biggest state-owned lenders.

Beijing is using a series of repeated, gradual hikes in interest rates and reserve levels to stanch a flood of lending that helped China rebound quickly from the global crisis but now is fueling pressure for prices to rise.

Inflation is politically dangerous for China’s communist leaders because it erodes economic gains on which they base their claim to power. Poor families are hit hardest in a society where some spend up to half their incomes on food and millions have seen little benefit from three decades of economic reform.

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ISM- Obama boom!

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Karim writes:

Across the board strength. More evidence that the inventory drag in Q4 was involuntary (demand running well ahead of production). While some of these figures may cool, the order backlog and supplier delivery indices (lead times) suggest very strong data for the next few quarters.

  • Overall index: Highest since May 2004
  • New orders: Highest since Dec 2003
  • Employment index highest since April 1973
  • Export orders: Highest since Dec 1988



ISM Jan Dec
Index 60.8 58.5
Prices paid 81.5 72.5
Production 63.5 63.0
New Orders 67.8 62.0
Backlog of orders 58.0 47.0
Supplier deliveries 58.6 56.7
Inventories 52.4 51.8
Customer inventories 45.5 40.0
Employment 61.7 58.9
Export Orders 62.0 54.5
Imports 55.0 50.5

Yes, manufacturing is being led by exports, which tells me to watch for a dollar rally.

The problem is crude is moving higher, but that may be temporary and fall back as the Egyptian crisis gets resolved, if the Saudis don’t support the higher prices. And the US cost advantage with the dollar at current levels could drive the dollar higher even with the higher crude prices.

The federal budget deficit remains plenty high to support the 3-5% reported real growth, which is enough to bring unemployment down some as well with productivity running maybe 2.5% or so, but unemployment probably won’t fall fast enough for the Fed to declare victory anytime soon. And with core inflation numbers still decelerating the Fed continues to see itself ‘failing’ on both mandates as Chairman Bernanke reported in his last address.

For the Fed, the GDP growth limit is as high as possible without jeopardizing price stability. While they have calculated that should be around the 3-4% real growth level, if the evidence supports higher rates of gdp growth with price stability they should in theory have no problem with higher levels of real growth.

Risks remain China, Europe, and US fiscal tightening, as well as a sharp spike in crude prices

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