Why did Americans (and Spaniards and Irish) borrow so much against housing in the 2000s, only to find themselves stuck with more debt than assets? It sounds like a simple question, but it’s surprisingly difficult for economists to agree on an answer.
The standard approach is to attribute the excesses to changes in the behaviour of lenders, who, for whatever reason, became much more eager to give mortgages to people they previously would have avoided with terms they previously would have considered reckless. (For more on the European cases, see here.)
For example, about a third of all mortgage debt originated in 2005 and 2006 was either subprime or “alt-A”, according to data from Inside Mortgage Finance, compared to the stable 1990-2003 average of about 10 per cent. Subsequent experience tarnished these product segments so badly they effectively disappeared. Read more
American interest rates imply the economic outlook has worsened considerably in the past eight months. Optimists think the markets are wrong, pointing to the continued improvement of the job market and the rebound in consumer price inflation. But other data corroborate the pessimism of the fixed-income markets.
Recall the world five months ago, when fears of a downturn were far more pronounced than today. Back then, plunging industrial commodity prices, yawning risk spreads, and sharp declines in stock prices led many to worry a downturn was imminent. When we looked at the data we were cautiously optimistic, noting previous recessions had been mostly attributable to sharp contractions in residential construction and spending on motor vehicles, which in turn were often associated with big changes in credit conditions: Read more
For the past three years, the Federal Reserve has surveyed thousands of Americans about their finances, their hopes, and their fears. We wrote about the first version of the survey when it was released in August, 2014. The third iteration came out this week. Unsurprisingly, the answers to the repeated questions haven’t changed much. But there are some new questions compared to two years ago, which means a few new interesting things to learn about the American economy.
Some highlights: Read more
In this guest post, Toby Nangle, the Global Co-Head of Multi Asset & Head of Asset Allocation, EMEA at Columbia Threadneedle, wonders whether rising wages caused by changes in demography could ultimately end the productivity slump.
Weak productivity growth has puzzled economists and policymakers but it doesn’t seem to have hurt investors: the period 2009-2016 might even be called “the Goldilocks Slump”. Ample slack in job markets ensured little bargaining power for workers, whilst central banks battled deflationary impulses with a combination of low (or negative) rates and asset purchases. The net effect has been falling real yields and tight risk premiums.
But productivity growth does matter. And we are nearing the point where its absence will be of overwhelming importance to financial market investors. Read more
Donald Trump — one of the few remaining American presidential candidates who failed to attend Camp Alphaville last summer — has repeatedly promised he will build a wall along the southern border, with construction costs to be covered by the Mexican government. Since last August, Trump has asserted he can extract this concession by threatening to close America’s trade deficit with Mexico and by threatening to confiscate southbound remittances.
Despite being one of Trump’s signature policies for more than six months, the release of a memo fleshing out a few additional details has led to a flurry of additional coverage, much of it concerned with the possible humanitarian consequences.
We don’t want to focus on whether the idea is actually sound, but on what the proposal can teach us about the balance of payments. It’s possible Trump’s plan, if enacted, could actually cause America’s trade deficit to widen. Read more
It doesn’t get nearly as many pixels as the gross domestic product figures or the trade balance, but America’s statisticians also capture detailed industry-level data on sales, labour costs, taxes, profits, and other input costs. We’ve started exploring these tables and thought we’d share some of what we’ve found so far.
First, here’s a chart showing earnings before interest, tax, depreciation, and amortisation as a share of total revenues by industry sector, as well as corporate tax paid as a share of Ebitda:
So how are US car loans doing these days? Well, from Fitch on Thursday:
Delinquencies on U.S. subprime auto ABS have reached a level not seen since 2009 with underperforming loans from recent vintages driving the increase, according to Fitch Ratings. Read more
In recent months, both Lending Club and Prosper Marketplace have hiked the rates they charge their borrowers. The conversation about this has largely focussed on what it says about online lending. Have they been underwriting badly and so now are scrabbling to account for past mistakes? Are they having to offer higher returns to investors who are tempted to put their money elsewhere? Is this the sign of stress that will bring the whole digital house of cards tumbling down?
Forget all of that for a moment and suppose that Lending Club or Prosper loans are just like any other consumer loan. Now ask yourself this question: what do the actions of those lenders say about the US economy itself? The answer isn’t re-assuring. Read more
You’d think it wouldn’t be news when allies of an incumbent politician criticise the policies of an outsider seeking to change the status quo, but lots of folks were impressed by the publication of “An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman”.
This is the key bit, with our highlights: Read more
With all the doom and gloom in the air, you would be forgiven for getting a bit down about the prospects for growth.
Indeed it is interesting just quite how quickly market expectations have been upended, with Goldman Sachs abandoning five of its six “top trades” for 2016 barely a month into the year. Read more
In our previous post, we looked at which sectors of the US economy tend to be responsible for contractions in real output. After toiling away in table 1.5.2 of the National Income and Product Accounts, we produced this chart:
Despite accounting for less than a fifth of economic activity on the eve of the last downturn, changes in spending on residential construction, business investment in equipment, and household consumption of durable goods accounted for basically all of the decline in real GDP, just as they did in 1973, 1980, and 1990. Read more
Stocks and corporate bonds haven’t been doing so well lately, while the market-implied probability of four Fed rate hikes by the end of this year — the median expectation of policymakers as of December — has plunged below 1 per cent (according to Bloomberg’s WIRP function, anyway). Reasonable people are now starting to wonder whether another downturn is imminent.
Changes in prices could be signalling weakness yet to be captured by the official statistics on employment, output, and incomes. Even if you don’t believe asset prices contain useful information, it’s possible the hit to net wealth could encourage households and businesses to cut spending, thereby leading to recession and job losses.
We can’t answer whether a recession is around the corner, although the probability of another downturn necessarily rises with time since the last one. Instead, we want to lay out some of the main arguments and think through what various downside scenarios might look like. Read more
Spend too much time with people of a certain social class in certain cities, and you get the impression the tech industry is taking over the entire economy. Technology firms are certainly among the world’s most valuable — Alphabet, Amazon, and Apple are just the ones starting with A — but their impact on the aggregate US economy is actually quite small, at least according to the official statistics.
We were reminded of this after reading an interesting feature in today’s FT on the Israeli tech sector’s growing ambitions. (The country has been successful at producing small companies that get bought by larger American and European firms, and is host to research labs and offices for multinationals keen on employing local talent, but is now keen on creating some industrial champions of its own.) One passage from the article was particularly striking: Read more
One common explanation why Europe had a worse crisis and weaker recovery than America: its companies depend far more on banks for financing than the capital markets.
Those banks have been in perpetually worse shape than US lenders, mostly because of bad decisions from officials in national governments and the European Central Bank.
The critics point hammer home their point with charts like this:
After a considerable period of boredom, trying to figure out America’s central bank has gotten interesting again.
For months, the mid-September meeting of the Federal Open Market Committee was being telegraphed as the most likely start date of the “normalisation” process. Or, to use another bit of central banker-ese, the day when short-term interest rates would begin “liftoff” from the current range of zero to 25 basis points. Read more
It’s amazing what you can find when you spend some time in table 2.1 of America’s National Income and Product Accounts.
As anyone following the debates about inequality has surely heard, income from owning capital has fluctuated dramatically as a share of total personal income:
Zoltan Pozsar — who will be at Camp Alphaville, so buy your ticket now! — has a fascinating new slide deck illustrating the changing landscape of US household debt, which, thankfully, is easier to read than his incredibly detailed map of the shadow banking system.
While the total stock of household obligations is only slightly lower than it was at the peak in 2008, the composition of the lenders has changed dramatically. The government, which for our purposes includes Fannie and Freddie as well as the Federal Reserve, has become far more important, while so-called “shadow banks”, private-label securitisation, and foreigners have all become less important. On the whole, this is probably good for financial stability. Read more
There’s been much gnashing of teeth in the past few weeks regarding the health of the US economy. The government’s initial estimate GDP growth in the first quarter looked weak on the surface, and private forecasters now expect downward revisions based on unfavourable changes to the trade balance. But, as we noted a few weeks ago, quarterly data are noisy, while the underlying trends are broadly positive.
So it was interesting to read a new note from economists at Barclays (h/t George Pearkes) suggesting that most of the disappointment in the first quarter’s data can be explained by a statistical artifact that disproportionately affects the figures for non-oil construction, exports, and defence procurement. Ever since the start of 2010, spending in these categories has consistently collapsed in the first three months of the year only to rebound in the subsequent nine months. The difference in average annualised growth rates is a whopping 20 percentage points. Read more
At first glance, America’s latest growth figures don’t look so good. We generally refrain from commenting on quarterly GDP data because, among other reasons, the numbers are naturally noisy and they’re often revised by large amounts. (Or as the Fed says, “transitory factors,” although probably not the weather.) Those caveats out of the way, there are a few interesting points in this report that are worth noting.
Let’s start with a theoretical exercise. Imagine it were one year ago today, and someone told you that, between then and the end of this past March, the price of oil would fall by about half and that the real, trade-weighted dollar would appreciate by more than 10 per cent. A reasonable person would expect two things: big cutbacks in domestic oil investment that wouldn’t initially have been offset by higher investment elsewhere, and a hit to net exports.
None of this would have told you anything about would happen to total spending, but it would have provided guidance on how the composition of spending would change. Read more
In a previous post we looked at which US states were the best for job growth in 2014. (North Dakota was best overall, followed closely by Utah, which has the advantage of not being reliant on energy extraction, as well as one of the highest median incomes in the US.) In this post we’re going to take a longer view of how the distribution of employment has shifted across the most populous US metro areas since 1990, when the data begin.
The first thing to note is that the share of Americans employed in one of the major metro areas in our sample* has stayed relatively constant since 1990, although there have been some interesting trends over the period: Read more
We want to share a few highlights of the new state-level data on employment and unemployment from the US Bureau of Labor Statistics.
Our first chart compares the growth rate in the number of workers by state against the US as a whole: Read more
The straightforward ranking of US states by personal income per person has Washington DC, Connecticut, Massachusetts, New Jersey, North Dakota, Maryland, and New York on top, and Mississippi, Idaho, South Carolina, West Virginia, Utah, Arkansas, and Kentucky on the bottom.
With the exception of Utah, which has the sixth-highest median household income in the country, none of this should be terribly surprising. (We suspect the discrepancy can be explained by the large size of the typical Utah household.)
Among metro areas, it similarly shouldn’t be surprising that the oil town of Midland, TX tops the list, followed by the hedge fund mecca of greater Stamford, CT, followed by Silicon Valley and San Francisco. The lowest-income metro areas are mostly populated by towns and cities along the Mexican border, Indian reservations, and particularly deprived pockets of the old Confederacy.
But the problem with these straightforward rankings is that they ignore the wide variation in living costs across the country. Someone who wanted to buy a modern 1-bedroom apartment in Queens, NY, would have to pay far more than someone who wanted to buy a 4-bedroom house in a nice area of Chicago, for example. Read more
Eric Rosengren, the President of the Federal Reserve Bank of Boston, gave a speech in Frankfurt on Thursday arguing that the Fed’s full employment mandate gave the central bank more flexibility to be aggressive earlier, and that open-ended programmes that are tied to economic targets are more effective than purchases of predetermined size and duration.
Nothing novel there. But his speech also contained, perhaps inadvertently, some interesting arguments that the rounds of bond-buying after the acute phase of the financial crisis did little for the real economy. (We covered the tenuous relationship between asset purchase programmes and inflation here.) Read more
We recently had the chance to attend a fascinating presentation given by Erik Hurst at the Booth economic outlook in New York. He discussed the divergent employment outcomes of those with college educations compared to those without them, which featured a chart that looked something like this:
(Source: Bureau of Labor Statistics, author’s calculations)
The implication is that the economy is booming for people with college degrees but hasn’t recovered at all for people who never got past high school. Read more
The Congressional Budget Office has just come out with its latest ten-year projections on spending, revenue, and debt. As has been the case for a while, the boffins estimate that the deficit will continue to shrink for a few years and then gradually widen, eventually raising the government debt to GDP ratio.
The actual arguments in the body of the report contradict elements of this forecast, however. It’s quite possible that, for at least a few years before the next recession, the combination of strong growth and previous austerity measures will combine to produce a budget surplus and an associated scarcity of safe assets. Read more
It’s no secret that spending cuts (and tax hikes) have retarded America’s growth for the past four years. But data from the Bureau of Economic Analysis suggests that the era of austerity may finally have ended.
The following chart shows the contribution of government and private spending to annual GDP growth, since the start of 2005:
Americans bought 5.4 per cent more light vehicles in the first nine months of the year than in the same period in 2013.
What’s striking is a whopping 92 per cent of this increase is due to higher purchases of sport utility vehicles, crossovers, pickup trucks, and vans. Traditional cars contributed a measly 8 per cent to the total increase in units sold. Here’s a full breakdown, courtesy of CreditSights: Read more
The Federal Reserve’s latest flow of funds data shows that US households have rediscovered their credit cards, and lenders are eager to oblige them. Just look at this:
The US Census Bureau has just released its latest data on median incomes by state, which can be found here in table H-8. We looked at these data and would like to share a few interesting charts.
First, look at the gap between the states with the highest and lowest median incomes. Read more