Kurt Brouwer November 21st, 2007
Here in one post is a quick overview of our economy. Overall, the news is surprisingly good considering the gloomy headlines we see everyday. However, there are some areas of concern as well and those are: soaring oil prices, higher inflation, the declining dollar and the troubled housing industry.
- Economy Growing? Despite the housing slump and the subprime lending mess, the economy did very well in the third quarter, showing growth of 3.9%. This was pretty surprising actually as most estimates were for slower growth. With economic growth and higher energy prices, we are also seeing an increase in inflation, particularly in the areas of food and energy. For the past year, the Consumer Price Index rose by 3.6%, which is well above the Federal Reserve’s inflation target. Taking out increases in food and energy costs, the CPI rose 2.2%, which is at the high end of the range.
- Oil Prices Rise: Oil prices soared recently and are now around $98 per barrel. This price level seems to be driven more by speculation than by increased demand, but it is likely to go higher before we see any decline.
- Interest Rates: The Fed Funds rate is now 4.50%. Other interest rates are trending downward. The inflation numbers shown above will make it harder for the Fed to cut interest rates again at its December meeting.
- U.S. Housing Industry Remains Sluggish: Housing starts have fallen quite a bit around the country. Prices on residential real estate have softened in many markets around the country. Also, the mortgage industry has suffered as companies specializing in sub-prime lending (loans to borrowers with credit problems) have been hit very hard with defaults and credit problems. Mortgage woes have dragged down financial stocks of late and have led to weakness for stocks.
- U.S. Unemployment: The unemployment rate is moving up a bit and is now at 4.7%. However, the most recent report on new unemployment claims was a decline of 11,000. Job growth was solid in the payroll survey with 166,000 new jobs. That number may well get revised downward for statistical reasons.
- U.S. Budget Deficit: For the 2007 budget year, which ended on Sept. 30, the federal deficit came in at $161 billion. That was a considerable decline from last year’s deficit. The October revenues numbers were not too encouraging though as tax revenues, particularly from corporations, showed slower growth. If the current trend continues, the budget will not be in balance until mid-year 2009.
Here are other recent posts on the state of the economy:
Americans Have More Discretionary Income
National Debt at $9 Trillion
The Happiness Gap — Economy, Jobs, Money & Government
Dollar Falls — New Low vs. Euro
The economy has been severely tested by the whole subprime lending mess and the housing slump as well as the 70% increase in oil prices and the sharp decline in the dollar vs. the Euro. The declining dollar has not hurt the economy yet nor has the soaring price of oil. Both could become problems though if they stay on trend for a long time. One piece of good news is that the falling dollar has significantly improved our trade deficit.
Overall, the state of the economy is still good — despite the problem areas outlined above — inflation is moderate, interest rates are low, unemployment is low and GDP growth is solid. Long may it last.
Kurt Brouwer November 19th, 2007
Update: We have written on China quite a bit lately. For more see Can China Dump the Dollar? and China Threatens the Dollar. Now, a former World Bank economist who is an expert on China’s economy has issued a report with a startling conclusion — China’s economy may be much smaller than we thought it was based on previous estimates.
China’s Economy 40% Smaller Than Estimated (via Yahoo: AFP, November 15,2007, Rob Lever)
‘China’s economy is 40 percent smaller than most recent estimates, a US economist said Wednesday, citing data from the Asian Development Bank and guidelines from the World Bank.
Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US think tank and in a commentary in the Financial Times.
Keidel told AFP he made the calculations based on a recent ADB report that made its first analysis of China’s economy based on so-called purchasing power parity (PPP), which strips out the impact of exchange rates.
“The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 percent smaller than previously stated,” Keidel wrote…
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Kurt Brouwer November 19th, 2007
As the credit crunch and the subprime lending mess slowly unwinds, we begin to see the impact on a variety of investments, in this case money market mutual funds.
More Money-Market Mutual Funds Hit Trouble (Wall Street Journal, November 16, 2007, Shefali Anand)
‘More money-market mutual funds are getting headaches after holding troublesome debt investments.
The latest instance: a money-market fund offered by FAF Advisors Inc., a unit of U.S. Bancorp. According to recent filings, in late October one of its large money-market funds, First American Prime Obligations Fund, sold some of its troubled securities to an affiliate.
In a presentation recently, U.S. Bancorp’s chief executive officer, Richard Davis, said FAF Advisors “has some exposure to liquidity and credit issues” — a reference to the fact that some securities had gotten tougher to sell recently. He said U.S. Bancorp would support all affected funds.
The risk to money-market funds is that a decline in the value of a single investment can cause them to “break the buck,” or allow their net asset value to fall below the $1 level the funds are required to maintain…
In all likelihood, the potential losses on these various investments (structured investment notes etc.) will be relatively small, but that’s of small comfort because money market funds are intended to have no losses that might threaten the $1 net asset value…
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Kurt Brouwer November 16th, 2007
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Kurt Brouwer November 15th, 2007
Update: Some have taken to calling our current real estate woes a bubble and, in fact, real estate prices have been falling. See Home Prices Fall For Past 12 Months and Major Turning Point — Robert Shiller. However, no matter how rough our housing market is right now, it is nothing like the bubble that occurred in Amsterdam.
My ancestors, the Dutch, were ahead of the curve when it comes to financial innovations such trading in financial securities. But, they also experienced bubbles such as the famous tulip bulb bubble. There was also a real estate bubble in Amsterdam, on the famous canal, the Herengracht.
Justin Fox at Time’s Curious Capitalist Blog posted on an article he translated from a Dutch newspaper [emphasis added]:
House Prices on Amsterdam’s Herengracht Have Almost Returned To Their 1736 Highs (Curious Capitalist Blog, November 14, 2007, Justin Fox)
I missed this when it came out, but the NRC Handelsblad had a piece Saturday on the latest data from University of Maastricht professor Piet Eichholtz’s famous index of house prices along the Herengracht in Amsterdam dating back to 1650 (translation mine):
The average house on the Herengracht now costs 2.6 million euros. That is, on an inflation-adjusted basis, just a bit less than in 1736, when house prices along the Herengracht were at their historical high. If house prices keep rising at their current tempo, the 271-year-old record will be tied in 2008…’
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