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Daily Archives: May 31, 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.