Good News In Manufacturing Activity

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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.


Political Instability in Ukraine Impacts Global Markets

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When reviewing living standards, a key component is boosting productivity rates.  There are various ways to measure that, but the current crisis in Ukraine touches on one key theme.  Markets hate uncertainty and Russian troops mobilizing along the eastern part of Ukraine hampers political stability.  Even though this is happening across the globe, it is affecting U.S. stock markets that have experienced their worst day in a month.  Until this issue stabilizes, expect a volatile ride on Wall street.

Political stability is huge because investors and markets like certainty.  With the survival of political sovereignty at stake, there is a real possibility that the current government will collapse.  With that scenario present, the whole economic system could be toppled.   Relations between Russia with Europe and the U.S. have grown icy cold with economic sanctions expected  That can affect crude oil prices worldwide, so do not be surprised to see gas prices rise.

Asia’s Challenge to U.S. Economic Dominance Is Overplayed

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While not agreeing with all of the points made by Paul Ferrell of MarketWatch, his editorial on U.S. and Asia economic prospects was thought-provoking.  Mr. Ferrell’s premise is that the intransigence of our U.S. Congress is affecting our future economic competitiveness due to lack of investment in infrastructure and insufficient public education.  While agreeing with that, he might be overplaying the long-term strength of Asia’s economic prowess.

Asia is a region that still has significant challenges.  Japan has been in a rut for the last couple of decades with deflation wrecking their growth prospects.  Even with China enjoying remarkable growth, they have encountered some issues recently.  Their economy still remains under significant government control with private financing access limited.  They also have done a poor job in protecting intellectual property rights, so they must continue to resort to espionage and stealing of commercial secrets in order to maintain their competitive edge.  In my mind, that’s not a sustainable strategy.

While both India and China’s urban and coastal areas have experienced great prosperity, there remains large swaths of land where people live in grinding poverty.  Their living standards are below the world average and rectifying this from the state level will be very challenging.  In China, we are starting to see some chinks in their armor as Chinese workers are starting to demand higher wages.  As they transition to a middle-income country, they must find a way to maintain productivity gains as their labor costs rise.

Reverting back to the U.S., it is obvious that Mr. Ferrell is not a fan of the military buildup over the past decade as we try to fight the endless war on terrorism.  However, we must realize that military spending is an economic driver and job creator.  It also enables us to influence and protect our economic interests abroad that can be compromised if non-market friendly regime emerges.  Having said that, it is true that budgetary pressures and other demands within our borders means that we do have to be smarter and more efficient with our defense dollars abroad.

As for infrastructure, this is a point that I most agree with Mr. Ferrell.  Our transportation system is in need of more attention and encouraging more investment in natural resources and technology will be a key to maintaining our competitive edge globally.

On the other hand, there have been successes in energy for the U.S.  In contrast to Europe whose large investments in alternative energy have yet to pay off, the U.S. has been very successful in natural gas production, which is significantly cutting our energy costs for industry and households.

Mr. Ferrell is also right to be concerned about the state of education, but its solution goes beyond funding.  Correcting the culture toward intellectual curiosity and addressing the breakdown in family structures are socioeconomic challenges that must be addressed first before we can see improvement in educational outcomes.  Lack of male role models and the prominence of single-parent households are proving to be difficult obstacles to overcome.  With demands at work, it appears that child development has suffered as a result when the parental roles are not shared.  As a result, the skill gap between the low- and middle-income households relative to high-income households is a major threat to having a diverse, healthy economy.

Even though America’s global economic dominance is starting to wear off, it is too premature to assume that Asia will be able to fully capitalize on it.

If Bernanke’s Superman, Then…

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The U.S. economy is his kryptonite.  Al Lewis of MarketWatch offers a satirical comparison of Federal Reserve chairman Ben Bernanke to the “Man of Steel”.  Both Lewis and my comment could be described as cheap shots to him.  However, being fair to Bernanke, his tools are limited in turning around the economy and unemployment.

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Still, if it was up to me to grade Bernanke’s performance, it would rate from a C- to C.  His best work was preventing a huge collapse of our financial system in 2008.  Even though some of his actions might have been questionable, many people do not realize how close the U.S. was to experiencing a depression.  Through creative monetary policy, he was able to create liquidity within the financial system without spurring significant inflation and for that he deserves credit.

While Bernanke’s critics have predicted that his aggressive monetary policy would result in high inflation, it has been four years now and inflation remains moderate.

Having said that, we cannot say that his efforts have not caused any negative consequences.  Some of the global instability, such as high food prices in the Middle East, Africa, and other developing nations, can be attributed to the U.S. and their efforts to keeping the value of the dollar low in order to kick-start the economy.  With U.S. dollars serving as the primary financial vehicle in the global economy, a cheaper dollar made credit more accessible not only in the U.S., but throughout the world.

On the surface, that sounds good.  When developing countries are able to access more credit, then that will lead to more investment and consumer spending.  However, the downside is that it can lead to over-investment and cause asset bubbles.  It is similar to U.S. households, who cannot resist low interest rate offers, and get into trouble by increasing their debt levels.  Even though it will enhance their standard of living in the short-run, it can result in devastating outcomes when economic conditions change.

We have seen potential asset bubbles start to emerge in China, India, Brazil and other emerging countries.  With this occurring, inflation has started to rise in all of those countries and there is concern that their economy will suffer severely as a result.  Even though that has not happened yet, its threat remains and the U.S. should bear some of that blame.

Referring back to U.S. performance, it is true that the U.S. has grown steadily since its collapse during the end of the Bush administration when our economy contracted by a staggering rate of -8.9% during the 4th quarter of 2008.  Since that time, we have shown steady improvement, but it has been very slow.  Subsequently, our economy would shrink further the next two quarters, but at a much slower rate.  But since then, our economy has grown consistently, albeit modestly.  Historically, we want to see economic growth of at least 3%.  In over four years, we have only exceeded that benchmark three times out of seventeen quarters.

When looking at unemployment, the figures are even worse.  Historically, an economy is performing at capacity when the unemployment rate is between 5-6%.  The last time that the unemployment rate fell below the 6% mark was July 2008.  While we should be encouraged by the drop in the unemployment rate from 10% in October 2010 to its current rate of 7.6%, that is still a very high number.  Another disturbing measure is long-term unemployment, which continues to be a problem.  Pew Fiscal Studies showed that 9.5% of the unemployed were searching for work for at least a year in the first quarter of 2008 and that has jumped up dramatically to 29.5% in the first quarter of 2012.  These high rates have never been close to being matched in past history.

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The economic evidence is clear.  Bernanke is no Superman.

Are They Calling Off Euro Zone Crisis Too Soon?

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During a speaking engagement with Japanese leaders, French President Francois Hollande is confident that Europe has averted the crisis.  While it’s true that efforts from the European Central Bank and International Monetary Fund have been instrumental in keeping southern Europe solvent, there are still real concerns.

Unemployment and economic growth figures are disappointing.  The unemployment rate within the euro-zone reached a record high during April at 12.2 percent.  Even with the very high unemployment rate, there were wide disparities among countries.  While Germany had a very low unemployment rate of 5.4 percent, Greece and Spain approached 25 percent.  Their economy is not much better with it shrinking by 0.2 percent, which was the sixth consecutive month of contraction.   Even, one of Europe’s strongest countries, Germany, expects little growth in the first quarter of 2013.  Both are strong signals of a steep recession.

In comparison, the U.S. has fared much better.  The U.S. economy grew at a rate of 2.4 percent during the first quarter of 2013 and its unemployment rate is much lower at 7.6 percent as of May 2013.

Even though the U.S. economic prospects are not that bright, Europe’s performance pales in comparison.

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Why Japan’s Currency Devaluation Is Worrisome


Japan has been in an economic funk since the 1990s.  It was at that time that many speculated that they would overtake the U.S. as the global economic superpower, rather than China.  However, a poorly regulated financial system led to a housing crisis that they have yet to recover from.

With the recent election of Shinzo Abe as Prime Minister and his appointment of Haruhiko Kuroda as governor of the Bank of Japan, they have embarked on an extremely aggressive approach that involved significantly devaluing their currency.

It sounds odd that Japan would purposely devalue the yen, but it actually makes sense because they are highly dependent on exports.  Exports are goods that are produced in Japan but sold outside the country.   Consumers value goods that are inexpensive, so that’s where the yen depreciation becomes beneficial.  When the value of yen declines relative to a foreign currency, then that means that good will be cheaper to foreigners.

For instance, a weaker yen drives the price lower for a Nissan car, thus making it more attractive than a GM car to Americans.  This will lead to more Nissan cars being produced and less GM cars being produced.  Therefore, this has the effect of boosting auto employment in Japan, but lowering auto employment in the U.S.

Even though this is potentially damaging to the U.S. economy, it also makes Europe and developing countries even more vulnerable.  While the U.S. has a strong internal economy and is not as dependent on exports, that is not the case for emerging countries in Asia, South America, and Africa, along with parts of Europe.  A weaker yen places more pressure on those countries because their goods are now more expensive.  They are faced with two unenviable options.  Either accept that their currency will rise and cause unemployment to rise or also devalue their currency and risk higher inflation.

Theoretically, Japan is more able to absorb a weaker currency than most countries.  This is because their citizens historically have high saving rates.  Even though a weaker currency typically drives people to buy more goods and allow businesses to drive up prices, that might not be the case in Japan where they are frugal in their purchases.  This is one of the reasons why Japan has been plagued with deflation despite significant monetary and fiscal expansion.  On the other hand, they would benefit through increased employment opportunities when they see more of their goods being bought abroad.

However, there is a downside with this strategy.  Bond investors are already leery about Japan’s excessive debt levels that actually dwarf the U.S.  The danger is that bond investors will flee Japan, which would drive their interest rates higher.  If this occurs, then that will make it more difficult for Japanese businesses to gain access to cheap credit and thus this would depress future economic growth.

Even though these events are taking place across the Pacific, the ramifications of a weak yen are potentially huge.  It could lead to a currency war that can result in higher global inflation and create more economic turmoil worldwide.  A slow growing global economy means less opportunities for Americans, who are becoming more reliant on exports to increase employment and boost their standard of living.

Is The U.S. Economy Turning The Corner?

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This Bloomberg report from Carlos Torres and Catalina Saraiva on April 12, 2013 highlights some good news about the U.S. economy.  Despite gridlock and an increase in the payroll tax, consumer spending was quite resilient and they expect economic growth of 3% of real gross domestic product.  Real gross domestic product measures economic activity with adjusting for inflation.  If these estimates prove to be accurate, then that will be surprising news.  However, the Bureau of Economic Analysis will release their first estimate on April 26th.

If this economic performance proves to be accurate and it can be sustained throughout the rest of the year, it will be a welcomed relief if the momentum of the first quarter extends through the rest of the year.  What is often misunderstood is that actual economic performance is usually a result of past events.  Due to a sustained recession and slow recovery, industry has been slow to build up capacity.  That will soon change if they think that greater consumer demand will be sustainable.

There are two events that can explain why consumers are spending despite an increased tax burden and a sluggish labor market.  First, housing is on the rebound with both home sales and prices rising.  When people are buying homes, that leads to more spending with household appliances and new furniture is needed to fill up their space.  This also enhances the wealth of those selling homes because they are receiving higher prices.   Then there is strong performance of the stock market where its improved rate of return is boosting overall wealth.  When their stock portfolio rises in value, then households are more opt to spend.  Economists call this the wealth effect.

The quick improvement in growth prospects also speaks to the labor flexibility built within the U.S. economic system.  While Americans certainly do not appreciate how firms are quick to fire workers when economic prospects take a turn for the worse, firms are also able to quickly reverse their actions when the economy brightens.  This can be attributed to our economic system where it is less burdensome for firms to hire and fire workers.  That is in contrast to Europe where worker protections make it harder for European companies to lay off workers.  Even though it softens the blow during economic downturns, they are more reluctant to hire workers when an economic recovery starts to emerge.  That is one of the reasons why the U.S. has been more resilient in recovering from the financial crisis than Europe.

We can draw some optimism from this news, but it is still premature to say that we are out of the woods.  The impact of the sequester will not be fully felt until the second and third quarters of 2013.  Then there’s the uncertainty from events in North Korea.  However if the impact from those two events are less than expected, then we might see the U.S. economy perform above expectations.