Saturday, January 01, 2011

100 Things to Watch in 2011

From global advertising agency JWT, comes its list of "100 Things to Watch in 2011," including Africa's growing middle class, bamboo (as a building material, clothing, etc.), the rise of beer sommeliers and the rise of the city of Detroit, the decline of the cash register, digital etiquette and digital interventions, etc.

HT: Paul Kedrosky

World Stock Markets End 2010 at 27-Month High

The Morgan Stanley Capital International (MSCI) World Stock Market Index closed out the year by reaching a 27-month high of 1280.07 yesterday.  This was the highest closing index value for world stock markets since September 19, 2008 in the wake of Lehman Brothers' filing for bankruptcy on September 15, and the subsequent financial meltdown caused the MSCI World Index to drop below 700 by March 2009 (see chart). As I reported previously, it's a significant milestone that world stock markets have now returned to their pre-Lehman levels.

House Price Indexes: Case-Shiller vs. FHFA; Based on FHFA, There's No Threat to Economic Recovery


In a post yesterday, I discussed Alan Reynolds' recent editorial in the IBD titled "Do Falling Home Prices Imperil Recovery?, where he points out that house price declines in a "few troubled cities in a few states [based on the Case-Shiller 20-city composite house price index] do not represent the entire nation."  This was in response to a recent front-page Wall Street Journal article ("Housing Recovery Stalls") that fretted about how "A new bout of declining home prices (based on the October decline in the Case-Shiller house price index) is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing." 

Like the chart in the previous post, the chart above provides further evidence of the significant disconnect between the Case-Shiller Home Price Index (10-city composite above for Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.) and the FHFA U.S. House Price Index.  As Alan Reynolds pointed out, the FHFA U.S. House Price Index based on 50 states increased by 1.07% in the third quarter of this year vs. the previous quarter, the largest quarterly gain since the 1.30% increase in the fourth quarter of 2006.  Based on the FHFA House Price Index, there's no threat to the U.S. economic recovery.  

Friday, December 31, 2010

Do Economists Need a Code of Ethics?

From the New York Times:

"Academic economists, particularly those active in policy debates in Washington and Wall Street, are facing greater scrutiny of their outside activities these days. Faced with a run of criticism, including a popular movie, leaders of the American Economic Association, the world’s largest professional society for economists, founded in 1885, are considering a step that most other professions took a long time ago — adopting a code of ethical standards.

Should economists be required merely to disclose who finances their research, as many academic journals already require? Should they have to reveal which corporate clients they advise, consult for or give speeches to? Should they even be allowed to serve as corporate directors and officers, as many business and finance professors do? Some scholars say the discussion is long overdue."

Many Parts of Country Won't Have Double-Dip In Home Prices Because They Never Had the FIrst Dip


Cato's Alan Reynolds writes in yesterday's IBD:

"A front-page Wall Street Journal feature, titled "Housing Recovery Stalls," worries that "a new bout of declining home prices is threatening to hamper the U.S. recovery." A dip in the Case-Shiller moving average of home prices in 20 cities for August to October is said to be "troublesome headwind" for the economy in 2011, and "markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines."

Some of those cities may indeed account for a significant share of the Case-Shiller index, because that index covers only 20 cities (and Sacramento, the centerpiece of the story, is not one of them). However, a few troubled cities in a few states do not represent the entire nation."

Alan concludes that "anxiety about falling home prices is based on a limited sample of 20 cities," among several other factors. 

Reynolds also refers to a WSJ editorial from yesterday, where Peter Schiff  warns that "...third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable."

MP: The chart above of FHFA house price indexes in eight states (data here) helps to support Alan Reynold's position about falling home prices being heavily concentrated in large cities that are included in the Case-Shiller home price index.  While states like Arizona, Florida, Nevada and California have experienced housing bubbles and huge price declines in recent years, many other states like South Dakota, Iowa, Oklahoma and Texas have seen fairly steady, but very mild increases in home prices, with no bubbles and no house price corrections.  Especially in many states in the middle of the country stretching from Texas all the way up to the Dakotas, it will be hard to have a "double dip" in home prices because they haven't yet had the "first dip."

Nov. Int'l. Air Traffic 4% Above Pre-Recession Level

Geneva -- "The International Air Transport Association (IATA) announced international scheduled traffic results for November showing 8.2% year-on-year passenger traffic growth and a 5.4% increase for freight.  November saw traffic growth slow from the 10% increase recorded in the passenger business and the 14.5% growth in freight in October. The slowdown in 2010 is partially skewed because of the exceptionally rapid rise in traffic volumes recorded during the fourth quarter of 2009. This slower growth does not necessarily signal a negative trend. Even with the decline in November, passenger and freight traffic are still expanding at annualized rates of between 5-6% which is in line with the industry’s historical growth trend."

Highlights of the November report include:

1. The level of international air travel is now 4% above the pre-recession peak of early 2008.

2. November passenger traffic levels for North American carriers equaled the pre-recession levels of early 2008.

3. On a year-to-date basis, passenger traffic in 2010 is 8.5% above the same period last year, and freight volume is above 2009 by 21.9%. 

Thursday, December 30, 2010

The Christmas Tree Indicator: Economy's Improving

Wall Street Journal (OAK PARK, Ill.) -- "Sandhill Christmas Trees here sells fewer than 5,000 firs in a typical holiday season but this year it sold nearly 6,000, many as last-minute deliveries to retailers who had underestimated demand. Sandhill's success mirrors that of tree farms across the U.S.

Precise numbers won't be available until late winter, when the National Christmas Tree Association completes its annual survey. But after two flat seasons, tree-farm associations in the biggest-producing states say members are estimating an industry-wide sales jump in the mid- to high single digits over a year ago, with some growers reporting larger gains.

"At times during the season, we had growers reporting increases of 20% to 40%," said Brian Ostlund, executive director of the Pacific Northwest Christmas Tree Association, whose territory includes Oregon, the nation's largest producer of Christmas trees.

With annual sales under $2 billion, the Christmas tree is a small but nevertheless telling economic indicator because when incomes fall, people tend to forgo buying trees, economists say. "Better sales would be a good supporting indicator for better consumer sentiment," said Michael Swanson, agricultural economist for Wells Fargo." 

State Tax Revenues Rebound By 5.2% in QIII

The Census Bureau reported this week that state and local tax revenues increased by 5.21% in the third quarter compared to a year ago, which is the largest quarterly increase since the fourth quarter of 2007.  Here's a breakdown by category for the third quarter 2010 vs. 2009:

Individual income tax: +4.78%
Property taxes:  +7.77% 
General sales taxes: +4.01% 
Motor fuel taxes: +8.21% 
Tobacco taxes: +8.25% 
Alcoholic beverage taxes: +1.90%
Corporation income taxes: - 3.26%

The increases in state tax revenues in the third quarter provide more evidence that economic activity (income, retail sales, etc.) continues to improve, and we can probably look forward to even greater improvements in the fourth quarter. 

Update: See related report in today's WSJ

As Year Ends, Labor Market Continues to Improve

The Department of Labor reported today that initial jobless claims fell to 388,000 for the week ending December 25, the lowest weekly level since early July 2008, almost two and-a-half years ago.   That brought the four-week moving average down to 414,000 claims, the lowest count since late July 2008 (see chart).

In other positive labor market news this week, the American Staffing Association reported that its weekly Staffing Index was 100 for the week ending December 19.  That marks the 14th consecutive week (except for a holiday-related drop around Thanksgiving) that the ASA Staffing Index has remained at a level of 100 or above.  U.S. staffing employment is 45% higher than the first week of 2010, and is 16% higher than the same weekly period in 2009.  And for late December, the demand for temporary and contract employment this year is above any of the previous years going back to 2006 (see bottom chart below).


Tuesday, December 28, 2010

Major Social Legislation Votes by Party

From Matthias Shapiro: "One of the more entertaining themes running around the media these days is that the almost entirely Democratic passage of the health care reform bill is pretty standard issue for major social legislation. After all, the theory goes, Republicans never really supported any major social legislation and this bill was about as bi-partisan as it could get under the circumstances.

We live in a world of accessible information. Quite frankly, if you’re too lazy to go look up the damn facts your own damn self you should probably make it a practice of just keeping your mouth shut. So when I hear people saying that this kind of narrow, one-party passage of major social legislation is par for the course, I look it up for myself. Guess what I found?"

Great graphic and post from the Political Math blog (Political Information Visualization and Other Math-y Things).  

Thanks to Tom Sullivan for finding this blog. 

Fair Trade vs. Free Trade

"Last summer, I purchased a 2010 LS 460 Lexus, through a U.S. intermediary, from a Japanese producer for $70,000. Here's my question to you: Was that a fair trade?

I was free to keep my $70,000 or purchase the car. The Japanese producer was free to keep his Lexus or sell me the car.  As it turned out, I gave up my $70,000 and took possession of the car, and the Japanese producer gave up possession of the car and took possession of my money.

The exchange occurred because I saw myself as being better off and so did the Japanese producer. I think it was both free and fair trade, and I'd like an American mercantilist to explain to me how it wasn't.

Mercantilists have absolutely no argument when we recognize that trade is mostly between individuals.  Mercantilists pretend that trade occurs between nations, such as the U.S. trading with England or Japan, to appeal to our jingoism.

First, does the U.S. actually trade with Japan and England? In other words, is it members of the U.S. Congress trading with their counterparts in the Japanese Diet or the English Parliament?  That's nonsense. Trade occurs between individuals in one country, through intermediaries, with individuals in another country.

Who might protest that my trade with the Lexus manufacturer was unfair?  If you said an American car manufacturer and their union workers, go to the head of the class.

They would like Congress to restrict foreign trade so they can sell their cars at a pleasing price and their workers earn a pleasing wage.  As a matter of fact, it's never American consumers who complain about cheaper prices.  It's always American producers and their unions who do the complaining. That ought to tell us something."


Economists: The Real "Party of No"

"Economists are the real "Party of No." They keep saying that there is no such thing as a free lunch — and politicians keep on getting elected by promising free lunches. Nothing is easier for politicians than to play Santa Claus by promising benefits without mentioning the costs — or lying about the costs and leaving it to future governments to figure out what to do when the money runs out."

~Thomas Sowell

The Finite World of Paul Krugman's Thinking

Paul Krugman claims that the commodity markets are telling us that we're living in an Ehrlich-like finite world of resource scarcity where "the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices."

And what are the implications of the recent increase in certain commodity prices? According to Krugman, "It's a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding."

Don Boudreaux responds and suggests that Krugman study resource economist Julian Simon, and points out that:

"It’s not true that vigorous economic growth necessarily makes resources more scarce.  In fact, history shows that, because of human ingenuity, the opposite is not only possible but prevalent. Since the dawn of the industrial revolution in the mid-18th century, available supplies of coal, petroleum, iron ore, and most other resources have increased significantly – and, as a result, their real prices have fallen." 

MP: The evidence is working against Krugman and in favor of Boudreaux on this one.  The chart above shows the monthly, inflation-adjusted Dow Jones-AIG Commodity Index back to January of 1934 (data from Global Financial Data, paid subscription required). The DJ-AIG index is composed of futures contracts on 19 physical commodities in five categories with the following weights (individual weights are listed here): 

1. Agriculture (coffee, corn, cotton, soybeans, soybean oil, sugar, wheat): 34.37%
2. Energy (crude oil, natural gas, heating oil, unleaded gas): 27.28%
3. Industrial Metals (aluminum, copper, nickel, zinc): 17.65%
4. Precious Metals (gold, silver): 14.60%
5. Livestock (lean hogs, live cattle): 6.10%

(Note: According to Global Financial Data, data in the index from 1933 to 1989 are from the Dow Jones Futures Index, and data from 1990 are from the Dow Jones-AIG Commodity Index.)

Bottom Line: Over a very long period of time (76 years), there has been a significant downward trend in the real prices of commodities (see red trend line in graph), and the decline in commodity prices has taken place during a period when the world population increased by more than three times, from 2 billion in 1934 to the current population of 7 billion in 2010.  Don asks the right question:

"If economic growth since the industrial revolution coincided with increasing resource supplies, why should we expect that continued economic growth will suddenly start to have the opposite, dreary effects predicted by Mr. Krugman?"

Monday, December 27, 2010

Julian Simon via John Tierney Wins Another Bet

In the summer of 2005, when oil was trading at $60 per barrel (see chart above), there was a bet between Malthusian Matthew R. Simmons (member of the Council on Foreign Relations, head of a Houston investment bank specializing  in the energy industry, and author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy”), and New York Times science writer John Tierney, proponent of the Julian Simon school of economics.  

"Peak oil" advocate Simmons predicted in 2005 that the inflation-adjusted price of oil would more than triple over the next five years, and he made a $5,000 bet with Tierney that the average price of oil in 2010 would be at least $200 per barrel in 2005 dollars.  Tierney agreed to share his bet with Julian Simon's widow, who enthusiastically participated in a bet on the real price of a natural resource in the tradition of her late husband, who won the famous bet in 1990 against Malthusian Paul Ehrlich about resource scarcity based on real prices of five commodities selected by Ehrlich and his doomsayer colleagues (see details here)

Although Mr. Simmons died in August of this year, the representatives of his estate will deliver $5,000 on January 1 to John Tierney and Rita Simon, because the price of oil this year has averaged about $80, or about $70 in inflation-adjusted 2005 dollars (see chart above), which is about 1/3 of the $200 per barrel price predicted by Simmons.   

John Tierney summarizes his economic optimism a la Julian Simon here:

"Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades. The really good news is the discovery of vast quantities of natural gas. It’s now selling for less than half of what it was five years ago. There’s so much available that the Energy Department is predicting low prices for gas and electricity for the next quarter-century.

Maybe something unexpected will change these happy trends, but for now I’d say that Julian Simon’s advice remains as good as ever. You can always make news with doomsday predictions, but you can usually make money betting against them."

Where Do Canadians Go When They Need Experimental Life-Saving Surgery?

Now that's a pretty easy question, and you'll find the answer here.  

HT: Pete Krieger

Markets in Everything: Market-Based Beer Pricing

How much is a pint of beer worth?  Well, why not let market forces determine the price? That's exactly what will happen at Michigan's Kalamazoo Beer Exchange, where a variety of 28 tap beers will be priced according to market demand, and will fluctuate like stock prices in increments of 25 cents. 

"Stagehand Scalping" at Carnegie Hall; Where's the Outrage About $450,000 Salaries for Stagehands?


About a year ago, I had a post about "excessive pay" for the unionized stagehands at Carnegie Hall, some of whom made more during the 2007-2008 season by pushing the 9-foot Steinway Model D concert grand piano out onto the stage for a concert than the artist makes for playing the piano.  Financial data for many nonprofit organizations, including salary data for the "highest paid employees and their compensation," are available at the website GuideStar. Here's the link to The Carnegie Hall Corporation listing at GuideStar.

For the fiscal year ending June 30, 2009, the top five highest paid Carnegie employees were all stagehands making an average of $359,000 in base compensation (see chart above).  A more detailed analysis of Carnegie Hall's 2008 tax return reveals that each of the five stagehands earned an additional $100,000 in deferred compensation for 2008, bringing their total yearly compensation amounts to:

Dennis O'Connell (properties manager): $524,332
James Csollany (carpenter): $461,174
John Cardinale (electrician): $438,828
Kenneth Beltrone (carpenter): $432,655
John Goodson (electrician): $425,105    

That's a total annual compensation for the five Carnegie stagehands of $2,280,000, or $456,000 each.   How to explain these excessive above-market wages? Easy, the stagehands are members of one of the oldest and most powerful NYC labor unions - The International Alliance of Theatrical Stage Employees - which exercised its union muscle in 2007 by striking and shutting down 26 Broadway shows for almost three weeks, at an estimated cost to NYC of about $40 million. 

There's a lot of outrage and attention directed towards "excessive CEO pay," judging by the 153,000 Google hits for that phrase, which is 270 times more than the 567 Google hits for the phrase "excessive union pay."  As I mentioned in the previous post, musicians and promoters frequently blame "ticket scalpers" for raising ticket prices, but maybe "stagehand scalping" deserves some of the blame for high concert ticket prices?! 

Europe Leading Index:Continued Expansion in 2011

The Conference Board Leading Economic Index (LEI) for the Euro Area increased by 0.7% in November to 114.3, following a 0.3% increase in October and no change in September.

Said Jean-Claude Manini, The Conference Board senior economist for Europe: “The LEI for the Euro Area reaccelerated in November and points to a continued expansion in economic activity during the first half of 2011. But, the strengths have not been very widespread. Downside risks still dominate the outlook, and the planned government budget cuts will increasingly create a drag on growth. The divergence between the LEIs for Germany and Spain is a further reminder that the improvement in economic conditions will remain uneven.” 


The Conference Board also reported last week that the Leading Index for Mexico increased sharply in October by 1.5%, following a 0.3% increase in September and a 0.5% increase in August.  Except for Spain and Japan, all other 9 LEIs reported by the Conference Board are showing positive signs of future growth (Australia, China, Euro Area, France, Germany, Korea, Mexico, UK and US). 

Balancing the Budget Requires Spending Restraint and Pro-Growth Policies, Not Higher Tax Rates

Scott Grannis has a great post about the pro-cyclical pattern of federal tax revenues, illustrating graphically above the huge increase in tax revenues recently due to the economic rebound.  Historically, tax revenues as a share of GDP have been fairly constant, despite large variations in the top marginal tax rate, see the chart below. 


This analysis leads Scott to conclude that:

"There is every reason to think that federal (and state and local) revenues will continue to grow at a relatively high rate as long as the economy continues to recover. Balancing the budget doesn't require higher tax rates, it just requires spending restraint and pro-growth policies. Holding spending constant, and assuming revenues grow at their current rate, the federal budget would be balanced in 5-6 years. If the new Congress can't make a significant move in this direction (i.e., holding the line on spending and keeping tax rates as low as possible), they deserve to be trounced in the next election."

20 Things That Became Obsolete This Decade

From the Huffington Post:

"The last ten years have brought us a windfall of new gadgets and gizmos, and with them, a new way of life. Since 2000, we've gained iPods and iPads, Travelocity and Twitter, Facebook and Foursquare, BlackBerry smartphones and Android devices, Xboxes and Wiis, among many other new services, sites, and electronics. We're now poking, tweeting, Googling, and Skyping.

But in that time we've also changed our habits and lost a few things, too. As we look forward to 2011, HuffPostTech has taken a look back at the 20 things that have become obsolete this decade."

Check out the list here, includes dial-up Internet, newspaper classifieds, maps, watches, travel agents, VCRs and VHS tapes, etc.   

Sunday, December 26, 2010

Current Labor Market Recovery and Job Creation Are Outpacing the 1990-91 and 2001 Recoveries

According to a new study from the Joint Economic Committee based on employment data through November, "the recovery from the Great Recession continues, and is occurring more quickly than the recoveries from the 2001 and 1990-1991 recessions."

Here's an excerpt:

"Despite the severity of job losses during the Great Recession, the current labor market recovery is outpacing the last two recoveries.  A focus on private-sector job growth during this recovery as compared to the last two recoveries illuminates this point. In all three recoveries, the labor market continued to shed jobs even after economic activity accelerated. However, private sector job growth in the current recovery began substantially sooner than in the recovery from the 1990-1991recession and in the recovery from the 2001 recession. The private sector began adding jobs 16 months after the official end to the Great Recession, in comparison with 18 months after the 1990-1991 recession and 30 months after the 2001 recession (see chart above). Total non-farm job growth during the current recovery has been less steady, but this unevenness is due almost entirely to declines in government-sector employment (see chart below)."


HT: Steve Bartin of The Newsalert Blog

Living the Good Life: The Good Old Days Are Now

Here's another comparison of consumer purchasing power in the 1960s versus today, based on the time cost of common household appliances like a kitchen oven. The Sears Kenmore oven pictured below retailed for $330 in 1966, which would represent 121.3 hours of work (about three weeks) at the average hourly wage in that year (ignoring taxes).  


At the current average hourly wage of $19.10, today's average consumer would earn a little more than $2,300 working 121.3 hours, and would be able to furnish their entire kitchen with the new appliances pictured below (click to enlarge) from Best Buy including a high-efficiency front-loading washing machine, super capacity gas dryer, 30-inch gas stove, 8.8 cubic feet chest freezer, 16.5 cubic foot refrigerator, dishwasher, mid-size microwave and blender:

Measured by what is ultimately most important, the value of our time, household appliances keep getting cheaper and cheaper, thanks to innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year. As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.

Facts of the Day: U.S. Auto Industry

After falling in every single year between 1994 and 2009, the market share of the Big Three (GM, Ford and Chrysler) is on pace to increase slightly in 2010 for the first time in 17 years.  Based on year-to-date (YTD) sales through  November from Ward's Automotive, the Big Three will capture about 44% of the U.S. vehicle market this year, up slightly from 43.66% last year (see chart below).  If that happens, it would be the Big Three's first increase in market share since 1993. 
   
Also based on sales data through November from Ward's, the light truck share of the U.S. vehicle market will increase to 50.8% in 2010 from 48.5% last year.  This will be the first time since 2007 that light truck sales will be more than half of all vehicle sales, and the first year since 2005 that the market share of trucks has increased (see chart below). 

Other highlights for the automotive industry include:

1. Capacity Utilization for the U.S. automakers in 2009 was only 45.2%, compared to 62.2% for 2010 (based on full year data).

2. U.S. total vehicle production YTD in 2010 is above last year by 38.7%, from 5.17 million units to 7.17 units.  

3. Vehicle sales in the U.S. this year, at 10.4 million units YTD, are running 11.1% above last year's sales of 9.375 million units.  

Taken together, these facts suggest that the U.S. automotive industry made a strong recovery this year in terms of sales and production, and next year will probably be even better.