Archive for February, 2009

GDP Fell Sharply In Q4

Kurt Brouwer February 27th, 2009

The Commerce Department revised the fourth quarter GDP sharply downward today. The previous estimate was a decline of 3.8%. That has been revised to a 6.2% decline. Bloomberg has the details [emphasis added]:

U.S. Shrank To 6.2% Deficit, Most Since ’82 (Bloomberg, February 27, 2020, Timothy R. Homan)

The U.S. economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank.

Gross domestic product contracted at a 6.2 percent annual pace from October through December, more than economists anticipated and the most since 1982, according to revised figures from the Commerce Department today in Washington. Consumer spending, which comprises about 70 percent of the economy, declined at the fastest pace in almost three decades.

The recession is forecast to persist at least through the first half of this year as job losses mount and purchases plummet. The Obama administration’s attempts to break the grip of the worst financial crisis in 70 years are unlikely to bring immediate relief as companies from General Motors Corp. to JPMorgan Chase & Co. cut payrolls.

…U.S. manufacturing shrank in February and confidence among consumers declined, private reports today showed. The Institute for Supply Management-Chicago Inc.’s business barometer showed a contraction for a fifth consecutive month, while the Reuters/University of Michigan final index of consumer sentiment fell for the first time since November.

…For all of 2008, the economy expanded 1.1 percent as exports and government tax rebates in the first six months helped offset the deepening slump in consumer spending that followed.

Consumer spending dropped at a 4.3 percent annual rate last quarter, the most since 1980, after falling at a 3.8 percent pace the previous three months. That marks the first time purchases have dropped by more than 3 percent in consecutive quarters since record-keeping began in 1947.

…”It’s going to be a tough start to 2009,” Scott Davis, chief executive officer of United Parcel Service Inc. said yesterday during a speech in Washington. “The best case we can see out there is maybe some growth in the second half.”

The economy actually grew a bit in 2008, but that all came from the first half of the year. The first quarter of 2009 should be pretty rough and perhaps the second quarter too. We will probably see a modest up quarter towards the end of the year.

J.P. Morgan Makes a Profit / Cuts Dividend

Kurt Brouwer February 24th, 2009

Though they are still somewhat rare, there are signs of progress in major U.S. banks. In this case, J.P. Morgan Chase & Co. announced a major dividend cut, which will save the bank billions in cash. At the same time, it pointed out that it was profitable so far this year.

J.P. Morgan cuts dividend to save $5 billion a year (MarketWatch, February 24, 2020, Alistair Barr)

J.P. Morgan Chase & Co. slashed its quarterly dividend late Monday to save $5 billion a year and said that its first-quarter has been “solidly profitable” so far.

Shares of the giant bank climbed 4.7% to $20.42 during after-hours trading. The stock closed down 2% at $19.51 during regular trading.

The quarterly dividend will be 5 cents a share in future, down from 38 cents. That will help J.P. Morgan retain $5 billion in common equity a year, bolstering its financial strength in case the recession is longer and deeper than expected.

…Dimon pointed out that J.P. Morgan has been “solidly profitable” so far this year, even after adding significantly to reserves. The outlook for first-quarter results is “roughly” in line with analysts’ forecasts, according to the company.

J.P. Morgan’s investment bank has generated “very good” trading results so far in the first quarter, Dimon said during a conference call with analysts. Credit costs and write-downs of roughly $2 billion are possible during the period, a presentation by the bank stated.

The decision to slash the dividend wasn’t directly related to the Troubled Asset Relief Program, in which the Treasury Department invested $25 billion in preferred securities issued by the bank last year.

However, retaining $5 billion in common equity capital a year will help J.P. Morgan repay the government “as soon as is prudent,” the bank said…

I tend to be very skeptical about bank pronouncement these days. Nonetheless, I consider this a good move by J.P. Morgan and a return to actual profitable business would be welcome indeed.

Hat tip: Barry Ritholtz

California Budget Impasse Ends

Kurt Brouwer February 19th, 2009

The longest legislative session in California history has ended in the successful passage of a budget deal that now goes on to Gov. Schwarzenegger for his signature [emphasis added]:

Budget plan goes to Schwarzenegger after Legislature’s OK (Sacramento Bee, February 19, 2020, Kevin Yamamura, Aurelio Rojas & Jim Sanders)

The California Legislature voted early today to approve a massive budget package of tax increases, spending cuts and borrowing to close a $40 billion deficit after granting major concessions to one holdout Republican senator.

Lawmakers had been at a five-day impasse until Gov. Arnold Schwarzenegger and legislative leaders today agreed to give Sen. Abel Maldonado, R-Santa Maria, major changes he demanded in exchange for providing a crucial 27th vote for the state budget.

…The deal comes at a time when California was headed for fiscal calamity, already unable to pay all its bills and on the precipice today of suspending 374 construction projects that were valued at $5.58 billion and could have affected more than 90,000 jobs statewide.

As part of Maldonado’s agreement, lawmakers approved measures asking voters to approve constitutional amendments to establish an open primary system and ban legislative pay increases during deficit years. But legislative leaders refused to grant him his proposal to eliminate legislative pay altogether when the budget is late.

Leaders also agreed to Maldonado’s demand to eliminate the 12-cent additional gas tax, which was estimated to bring in $2.1 billion through June 2010, and up to a 5 percent surcharge on income tax liability. The money will be replaced with a 0.25 percent increase in the state income tax rate, federal stimulus dollars and more than $600 million in line-item vetoes.

With the changes made today, the deal totals $15 billion in state spending reductions, $12.8 billion in temporary tax increases, $11.4 billion in borrowing and a $1 billion reserve…

It is too early to see how this works out, but I suspect most Californians had two emotions when they heard it had passed — relief and anger. Relief that this had passed and anger that the state has mismanaged its finances so badly that we are in this mess in the first place.

Unfortunately, due to a lack of restraint in spending during the good years, the state is forced to cut spending and raise taxes at a time when the economy is weak and when we have one of the highest rates of unemployment in the country.

See also California: budget deficits forever? and Are California’s Muni Bonds Golden?.

College Tuition vs Personal Income

Kurt Brouwer February 18th, 2009

This chart from Professor Donald E. Heller, Director of Penn State’s Center for the Study of Higher Education, indicates how much college tuition costs have soared compared to personal incomes:


Source: Professor Donald E. Heller

College tuition has gone up much more rapidly than personal income for many years. That’s amazing, but I already knew that. However, this presentation does put the huge cumulative disparity in perspective.

However, I was shocked by the fact that public school tuition has gone up faster than private school tuition since 2001. What’s up with that?

One point to remember is that most students do not pay the full tuition.

Hat tip: Paul Kedrosky

93% of Economists Agree

Kurt Brouwer February 18th, 2009

Harvard economics professor, Greg Mankiw, posts a list of economics issues followed by a summary of polling results to show what percentage of economists agree with a given issue. Here are those issues on which 83% or more of economists agree according to Mankiw.

I’ll take a look at a few of these points in more depth. This post will cover point #2 below [emphasis added]:

…In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)…

In my opinion, #2 is certainly true. Tariffs and import quotas typically only benefit uncompetitive industries and, in the long run, are unsustainable. They also hurt consumers by driving up prices and higher prices hurt much more than any benefit derived from the tariffs.

In our history, we have a perfect illustration of this point in the Great Depression. The Smoot Hawley Tariff Act of 1930 is widely considered to be the catalyst for a worldwide bout of protectionism and trade barriers that deepened the economic contraction we call the Great Depression.

Yet, despite the dismal history of trade restrictions and protectionism, our political leaders saw fit to include significant ‘Buy American’ or protectionist provisions in the Economic Stimulus legislation that was recently passed and signed into law. The ink on the legislation is barely dry and we are already drawing complaints from major trading partners such as Brazil as this piece from Reuters indicates:

Brazil may challenge the legality of a “Buy American” clause in the recently approved U.S. economic stimulus package at the World Trade Organization, Brazilian Foreign Minister Celso Amorim said on Monday.

…The U.S. Congress approved a $787 billion plan to jump-start the world’s biggest economy on Friday, stipulating that public works and building projects funded by the stimulus use only U.S.-made goods, including iron and steel.

Major commodities exporter Brazil has been a key player in the Doha round of global trade negotiations, and had hoped the G20 group of leading economies would honor a November pledge in Washington to avoid protectionism.

Amorim said the U.S. move was counterproductive, likening it to a pain-killer that heals the symptoms of disease but not its cause. He said the Doha round was not dead but would be hard to revive.

“It’s a bad sign. … It’s not positive at a moment when the world economy is trying to revive,” Amorim said.

Chinese official media also blasted the Buy American provisions over the weekend, saying they were “poison” to the world economy.

U.S. business groups last week criticized Congress and warned the clause would dilute the bill’s impact and invite other countries to keep American goods out of their stimulus programs…

I believe the quotations from the spokesman for Brazil are accurate. Protectionism is a dangerous proposition and the consequences are likely to be negative. There seems to be a real failure by many of our politicians to understand that protectionist policies in our country will just spur similar policies in other countries.

For years, we tried quotas and high tariffs to protect our domestic auto industries and those policies have not helped those companies one bit. In fact, GM and Chrysler are in Washington right now asking for additional billions in government bailouts.

Next »