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Monthly Archives: May 2008

Don’t be fooled by GDP revision in short term

Jim Hamilton suggests you look at GDP revision in a longer term. The bottom line is: don’t be fooled by the recent 0.9% Q1 GDP number. The graph below shows it all.

I’d like to remind readers that GDP is a series subject to a lot of revisions (and in any case, NBER looks at a lot of other series). To that end, I depict below what we thought GDP was doing at the end of May 2001 [1], [2].


Figure 2: Real GDP (Ch.2000$, SAAR), annualized quarter-on-quarter growth rates from May 2008 release (blue), from May 2001 release (red), from July 2001 release (green). NBER defined recession highlighted gray. Source: BEA via FRED II, ALFRED, NBER, and author’s calculations.
Note that even at the end of July 2001, we still thought 2001Q1 growth was positive, and thought the same of 2001Q2 as well… So I’m more in agreement with Jeff Frankel than with Carpe Diem.
The reason why many suspected a QI turning point in the first place is employment, which is virtually as important an indicator to the NBER BCDC as is GDP. Jobs have been lost each month since January. Total hours worked is my personal favorite, because in addition to employment it captures the length of the workweek, which firms tend to cut before they lay off workers. …

China’s foreign exchange reserves reach $1.76 trillion

Reuters reports in April China's FX reserves hit $1.76 trillion.
More speculative money are flowing into China in anticipation of further Yuan appreciation, even with capital control.  Chinese policy makers are facing a dilemma.  They will soon realize only by appreciating the currency thus reduce trade surplus won't solve the inflation problem.  This is because foreign capital continue to flow in (those hot money), and money supply still increases.
There are two ways out of this.
First, raise interest rate sharply to cool down the economy and fight the greater inflation evil.  Be reminded, this may encourage more carry-trade toward China, so effective capital control is essential.
Or, re-evaluate Yuan in an one-shot fashion and be done with it.  This requires much greater political courage and may hurt exporters a great deal.  For this reason, I think raising interest rate is more prudent policy choice.

What is the way out for the US airlines

BusinessWeek article "You Think Flying Is Bad Now…"  reports: 

To fully appreciate the impact that soaring oil prices have had on the nation's beleaguered airline industry, consider that U.S. carriers will likely spend $60 billion on jet fuel this year—nearly four times what they paid in 2000. Because of the spike in fuel costs, airlines now lose roughly $60 on every round-trip passenger, a slow bleed that puts the industry on pace to lose $7.2 billion this year, the largest yearly loss ever.

Not surprisingly, Wall Street has become so dour about the industry's prospects—can you say federal bailout?—that the combined market capitalization for the six major legacy carriers and Southwest Airlines has fallen to just over $17 billion. That's about what ExxonMobil (XOM) books in revenues every two weeks. "The U.S. airline industry, as it is constituted today, was not built for $125-per-barrel oil," Gerard Arpey, the chief executive of American Airlines parent AMR (AMR), told shareholders on May 21.

Vietnam’s inflation crisis

Vietnam is in an inflation crisis (source: wsj). The government said this week the inflation rate in May was 25.2% on an annual basis, up from 21.4% in April and 14.1% in January. What happened in Vietnam today reminds me of the two great inflation in China: one in 1988, which partly led to the Tian'anmen Square incident of 1989, and the other one during mid 1990s, which ended up with deflation near the millennium. 
With soaring food and energy prices, I am not so much worried about inflation in G7 countries.  But I am truly worried about inflation in those emerging economies, where governments/central banks have little experience fighting inflation and the evil of inflation is often played down as a byproduct of high growth or the so called structural inflation.  Well, every country should learn the lesson by themselves. I hope China's policy makers are better prepared this time.

New wave of African aid (aka grabbing natural resources)

Afraid of being left behind, Japan, a resources-scare country, is following China and India, is set to offer more aid to African countries, this time with no strings attached. The strings, advocated by Europeans and Americans, require good governance and human rights.
This is a troublesome development. 
This new wave of African aid, with sole purpose of competing and grabbing for more natural resources may leave African people with more income to spend. But aid without improving governance and institutions in general could end up hurting these poorest countries in the world in the very long run.

A look at Q1 GDP revision

The 1st revision is out: GDP in Q1 was revised up from 0.6% to 0.9%.  Jeff Frankel, member of NBER business cycle committee, talks about how he views the new revised number.
It is hard to say that we entered a recession in the first quarter, without a single negative growth quarter, let alone two of them.   Even so, three minor qualifications to that 0.9% remain: 
1)      The number will be revised again, and could move in either direction.
2)      A bit of the measured growth consisted of an increased rate of inventory investment, which was almost certainly not desired by firms and is likely to reverse in the 2nd quarter
3)      As Martin
Feldstein has pointed out, the QI growth number is defined as the change for the quarter as a whole relative to QIV of 2007;  within QI, the information currently available suggests that GDP fell from January to February to March.

The economy is a four-engine airplane flying at stall speed, skimming along the top of the waves without yet going down.   Real gross domestic purchases increased only 0.1 percent in the first quarter.   But exports provided an important source of demand for US products, and are likely to remain a positive engine of growth in the future.   The same is true of the fiscal policy engine, as consumers receive and spend their tax cuts in the 2nd and 3rd quarters.   On the other wing, the investment engine has been knocked out;  inventory investment is likely to fall and residential construction will remain negative for sometime.   The big question mark is the consumption engine.   Is the long-spending American household taking a hard look at its diminished net worth and taking steps to raise its saving rate above the very low levels of recent years?

We are already clearly in a “growth recession…

Behind Bear Stearns’ fallout

A fascinating story behind the fallout of Bear Stearns, featured on WSJ.

Part One
Part Two
Part Three

Ditch dollar peg?

Much unlike currency attacks in 90s, this time investors are betting currencies in dollar-pegging countries will appreciate and possibly break away from the peg. Policy makers in these countries feel compelled to do so as expansionary monetary policy in the US adds too much pressure on domestic inflation.

(source: wsj)