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State of US economic recovery
Almost three years after the recession ended, where do we stand now, in terms of employment and investment?
Not much to cheer about.
(Graph courtesy of San Francisco Fed. )
Composition of world’s FX reserves
According to IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) database, US dollar remains the preferred reserve currency. In the fourth quarter of 2011, the dollar made up 62.1% of official reserves. The dollar accounted for 61.4% of official reserves in 2011 vs. 61.8% in 2010 and 62% in 2009.
See the chart below.
(graph courtesy of Northern Trust)
What is dragging economic recovery?
Compare housing starts and unemployment across different business cycles:
(graph courtesy of Wells Fargo economic research team)
Another strong reading on weekly jobless claims
On Thursday, the 4-week moving average of weekly jobless claims reached the lowest level since April 2008. The US labor market continues to show sign of thawing.
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If this trend continues, consumer confidence is likely to bounce back. Then the US will be on the track of a virtuous cycle: business investment will follow, so will bank lending. We need to wait for more data in coming weeks to confirm such trend.
What’s happening in Asia-Pacific?
Jagdish Bhagwati analyzes the recent move by the US to establish Trans-Pacific Partnership (TPP).
As if undermining the World Trade Organization’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the United States has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP). President Barack Obama announced this with nine Asian countries during his recent trip to the region.
The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening.
The Fed may raise interest rate sooner than expected
Greg Mankiw explains:
I estimated the following simple formula for setting the federal funds rate:
Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment).
The parameters in this formula were chosen to offer the best fit for data from the 1990s.
Eddy Elfenbein has recently replotted this equation. Here it is:
The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line.
Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession. Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going. But note that the rule is now moving back toward zero. As Eddy points out, “At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close.”
The only caveat is the estimation was done in 1990s. It captured the Fed’s interest rate policy in 1990s, but may not be accurate for the current Fed, especially when the Fed chooses to deviate from the Taylor rule.
Yuan/Euro exchange rate breaks almost 10-year low
The most recent reading was 8.08 Chinese Yuan per Euro, the lowest reading since October 24, 2002. Chinese government seems to have allowed a large appreciation of Yuan against the Euro in recent months. They may have done so by deliberately selling euro-denominated assets.
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Stock market in long cycles
A fantastic chart from NYT on the US stock market cycles in the long run.
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Remember: TWO does not prove anything statistically.