Tag Archives: Inflation Expectations

Trade numbers

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U.S. Trade Deficit Hits 14-Month High on Oil Imports

by Reed Saxon

The U.S. trade deficit in November surged to the highest level in 14 months, reflecting record imports of foreign oil. The deficit with China declined slightly while the weak dollar boosted exports to another record high.

The Commerce Department reported that the trade deficit, the gap between imports and exports, jumped by 9.3 percent, to $63.1 billion. The imbalance was much larger than the $60 billion that had been expected.

The increase was driven by a 16.3 percent surge in America’s foreign oil bill, which climbed to an all-time high of $34.4 billion as the per barrel price of imported crude reached new records. With oil prices last week touching $100 per barrel, analysts are forecasting higher oil bills in future months.

The big surge in oil pushed total imports of goods and services up by 3 percent to a record $205.4 billion. Exports also set another record, rising by a smaller 0.4 percent to $142.3 billion. Export demand has been growing significantly over the past two years as U.S. manufacturers and farmers have gotten a boost from a weaker dollar against many other currencies. That makes U.S. goods cheaper on overseas markets.

Exports still moving up.

Through the first 11 months of 2007, the deficit is running at an annual rate of $709.1 billion, down 6.5 percent from last year’s all-time high of $758.5 billion. Analysts believe that the export boom will finally result in a drop in the trade deficit in 2007 after it set consecutive records for five years.

Agreed. Ultimately, the only way the foreign sector can slow their accumulation of $US, as the falling $ indicates they are in the process of doing, is to spend it here.

The growth in exports has been a major factor cushioning the blow to the economy from the slump in housing and a severe credit crunch. However, with oil pushing imports up sharply, analysts believe the help from trade in the final three months of last year will be shown to have been significantly smaller.

Could be. December numbers will not be out for another month.

By country, the deficit with Canada, America’s largest trading partner, dropped by 12.1 percent to $4.7 billion in November while the imbalance with Mexico rose by 1.4 percent to $7.6 billion. The imbalance with the European Union fell by 12.6 percent to $10.4 billion.

Might explain some weakness in Canada and Eurozone.

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Re: Bernanke

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On 11 Jan 2008 11:17:34 +0000, Prof. P. Arestis wrote:
>   Dear Warren,
>
>   Many thanks. Some good comments below.
>
>   The paragraph that I think is of some importance is this:
>
> >  The Committee will, of course, be carefully evaluating incoming
> >  information bearing on the economic outlook. Based on that evaluation,
> >  and consistent with our dual mandate, we stand ready to take
> >  substantive additional action as needed to support growth and to
> >  provide adequate insurance against downside risks.
>
>   If I am not wrong this is the first time for Bernanke that the word
>   inflation does not appear explicitly in his relevant statement. But also
>   there is no mention of anything relevant that might capture their motto
>   that winning the battle against inflation is both necessary and sufficient
>   for their dual mandate.
>
>   Are the economic beliefs of BB changing, I wonder? I rather doubt it but
>   see what you think.

Dear Philip,

I see this is all part of the Bernanke conumdrum.

Implied is that their forecasts call for falling inflation and well anchored expectations, which can only mean continued modest wage increases.

They believe inflation expectations operate through two channels-accelerated purchases and wage demands.

Their forecasts use futures prices of non perishable commodities including food and energy. They don’t seem to realize the
‘backwardation’ term structure of futures prices (spot prices higher than forward prices) is how futures markets express shortages.

Instead, the Fed models use the futures prices as forecasts of where prices will be in the future.

So a term structure for the primary components of CPI that is screaming ‘shortage’ is being read for purposes of monetary policy as a deflation forecast.

Bernanke also fears convertible currency/fixed fx implosions which are far more severe than non convertible currency/floating fx slumps. Even in Japan, for example, there was never a credit supply side constraint – credit worthy borrowers were always able to borrow (and at very low rates) in spite of a near total systemic bank failure. And the payments system continued to function. Contrast that with the collapse in Argentina, Russia, Mexico, and the US in the 30’s which were under fixed fx and gold standard regimes.

It’s like someone with a diesel engine worrying about the fuel blowing up. It can’t. Gasoline explodes, diesel doesn’t. But someone who’s studied automobile explosions when fuel tanks ruptured in collisions, and doesn’t understand the fundamental difference, might be unduly worried about an explosion with his diesel car.

More losses today, but none that directly diminish aggregate demand or alter the supply side availability of credit.

And while the world does seem to be slowing down some, as expected, the call on Saudi oil continues at about 9 million bpd,
so the twin themes of moderating demand and rising food/fuel/import prices remains.

I also expect core CPI to continue to slowly rise for an extended period of time even if food/fuel prices stay at current levels as
these are passed through via the cost structure with a lag.

All the best,

Warren

>
>  Best wishes,
>
>  Philip

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Comments on Bernanke speech

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Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace.

Q4 GDP seen as ‘moderate’ – that is substantially better than initial expectations of several weeks ago.

Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.

They initially said this for Q3 and for Q4.

Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets.

Maybe, but even if so, housing is now a much smaller influence on GDP.

In addition, a number of factors, including higher oil prices,

Yes, this slows consumer spending on other items, but oil producers have that extra income to spend, and if they continue to do so, GDP will hold up and exports will remain strong.

lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

The fed has little if any evidence those last two things alter consumer spending.

Financial conditions continue to pose a downside risk to the outlook for growth.

Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.

Yes, his main concern is on the supply side of credit. With a floating fx/non convertible currency, there is a very low probability. Even Japan with all its financial sector problems was never credit constrained.

Debilitating credit supply constraints are byproducts of convertible currency/fixed fx regimes gone bad, like in the US in the 1930s, Mexico in 1994, Russia in 1998, and Argentina in 2001.

I expect that financial-market participants–and, of course, the Committee–will be paying particular attention to developments in the housing market, in part because of the potential for spillovers from housing to other sectors of the economy.

A second consequential risk to the growth outlook concerns the performance of the labor market. Last week’s report on labor-market conditions in December was disappointing, as it showed an increase of 0.3 percentage point in the unemployment rate and a decline in private payroll employment. Heretofore, the labor market has been a source of stability in the macroeconomic situation, with relatively steady gains in wage and salary income providing households the wherewithal to support moderate growth in real consumption spending. It would be a mistake to read too much into any one report.

Right, best to wait for the revisions. November was revised to a decent up number, and October was OK as well. And today’s claims numbers indicate not much changed in December.

However, should the labor market deteriorate, the risks to consumer spending would rise.

Yes, if..

Even as the outlook for real activity has weakened,

Yes, the outlook has always been weakening over the last six months, while the actual numbers subsequently come in better than expected. Seems outlooks are not proving reliable.

there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well.

Interesting that he mentions upward pressure on core – must be in their forecast. It took them a long time to get core to moderate, and even in August they did not cut as upward risks remained.

Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored,

They have very little information on this. They only know when they become unglued, and then it is too late.

and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future.

Meaning once they go, it is too late.

Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards inflation expectations.

The fed has no credibility here. Markets ignore this, and the financial press does not even report it.

Monetary policy has responded proactively to evolving conditions. As you know, the Committee cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the funds rate down by a percentage point from its level just before financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary.

Reads a bit defensive to me.

The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Financial and economic conditions can change quickly. Consequently, the Committee must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.

This was to come out at 1PM, instead it was released at noon.

This seems they meant to send a signal that they are ready to go 50.

It may take another 0.3% core CPI number, low claims numbers, and further tightening of the FF/LIBOR spread to get them to think twice about not cutting.

Their fixed fx paradigm supply side fears elevates their perception of the downside risks.

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2007-12-21 US Economic Releases

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2007-12-21 Personal Income

Personal Income (Nov)

Survey 0.5%
Actual 0.4%
Prior 0.2%
Revised n/a

OK number.

2007-12-21 Personal Spending

Personal Spending (Nov)

Survey 0.7%
Actual 1.1%
Prior 0.2%
Revised 0.4%

Nice bounce back from a low number also revised up. Makes the two month average about 0.75%. This will cause further upward revisions of Q4 GDP.

2007-12-21 PCE Deflator YoY

PCE Deflator YoY (Nov)

Survey 3.4%
Actual 3.6%
Prior 2.9%
Revised 3.0%

Back to my favorite quote from September, ‘If the fed doesn’t care about inflation, why should I?’

Wonder what it takes for the fed to care?

2007-12-21 PCE Core MoM

PCE Core MoM (Nov)

Survey 0.2%
Actual 0.2%
Prior 0.2%
Revised n/a

2007-12-21 PCE Core YoY

PCE Core YoY (Nov)

Survey 2.0%
Actual 2.2%
Prior 1.9%
Revised 2.0%

Core at or though fed’s upper bound.

2007-12-21-u-of-michigan-confidence.gif

U. of Michigan Confidence (Dec F)

Survey 74.5
Actual 75.5
Prior 74.5
Revised 2.0%

People still watching CNBC.

2007-12-21 Inflation Expecations - 1 Year Ahead

Inflation Expectations – 1 Year Ahead

Survey n/a
Actual 3.4%
Prior 3.2%
Revised n/a

One of the fed’s indicators – don’t like this action as they think once it elevates it’s too late.

2007-12-21 Inflation Expecations - 5 Years Ahead

Inflation Expectations – 5 Years Ahead

Survey n/a
Actual 3.1%
Prior 2.8%
Revised n/a

As above – once it elevates it’s too late.

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Where the fed is vulnerable to the press

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While Fed gov Fisher was correct in stating the Fed isn’t held hostage to market pricing of fed funds when it makes its decision, the Fed is vulnerable to manipulation when it comes to inflation expectations.

Under mainstream theory, the ultimate cause of inflation is entirely attributed to the elevation of inflation expectations. The theory explains that price increases remain ‘relative value stories’ until inflation expectations elevate and turn the relative value story into an inflation story.

So far the Fed sees the price increases of recent years as relative value stories, as headline CPI has not been seen to leak into core. However, with capacity utilization high and unemployment low, the risk of inflation expectations elevating is heightened.

The Fed also knows that if the financial press starts harping on how high inflation is going, starts to intensely question Fed credibility, and calls the Fed soft on inflation, etc. etc. this process per se is capable of raising inflation expectations and potentially triggering accelerating inflation.

Therefore, I anticipate extended discussion at the meeting regarding ‘managing inflation expectations.’

And if they do cut the ff rate it will mean they continue to blinded by ‘market functioning’ risk and not willing to take the risk of not meeting market expectations of the cut.

Note the rhetoric of the financial press continues to turn in front of the meeting. First strong economy stories, then inflation stories, note this:

Bernanke May Risk `Fool in the Shower’ Label to Avert Recession

 

By Rich Miller

 

Dec. 10 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke may have to risk becoming the proverbial “fool in the shower” to keep the U.S. economy out of recession.

 

Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal funds futures are betting it’s a certainty the Fed will cut its benchmark interest rate from 4.5 percent tomorrow, and they see a better-than-even chance the rate will be 3.75 percent or below by April.

 

“The Fed has to assure the markets that it’s ready to ride to the rescue and cut rates by as much as necessary,” says Lyle Gramley, a former Fed governor who’s now a senior economic adviser in Washington for the Stanford Group Co., a wealth- management firm.

 

The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.

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