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Economics
By Avery Shenfeld
It’s increasingly evident that America’s economic recovery is simply not good enough. Not good enough to vanquish unemployment, power consumption, withstand fiscal tightening, and protect against deflation risks down the road. Canadians have a stake in that game, since growth here will slow if the US import engine sputters. Something must be done, and in the week ahead, it’s Ben Bernanke’s FOMC that will be looking at what role it can play in that effort.
What bullets are still left in Bernanke’s arsenal? One suggestion, reducing the rate paid on deposits of excess reserves held at the Fed, would have a trivial impact, since the yield is already so low relative to, say, the yield on a car loan. The very slight movement in that spread is therefore unlikely to trigger a big wave of fresh credit flows.
Quantitative easing, printing even more money to buy securities, rather than winding down the Fed’s balance sheet, can help defuse deflation expectations if done with sufficient aggression. Expectations of higher prices, perhaps abetted by announcing a formal CPI target, can get consumers to buy now rather than later, making savings less attractive. The impact on bond yields is actually ambiguous. Real rates (the key to economic activity) should fall as the Fed buys securities, but nominal Treasury rates could ultimately move higher if QE is successful in convincing markets that inflation is going to heat up. That said, the impact on the economy from QE will still be dulled to the extent that the money multiplier remains low, and the extra liquidity fails to spark a surge in lending and broader money aggregates.
If the US economy is in such a liquidity trap, two even more aggressive options remain. The Fed can agree to monetize an addition to Treasury debt that is used to finance another significant round of spending or tax cuts. A tax cut financed by printed money is equivalent to the “helicopter drop” of money that Bernanke spoke about in a speech on anti-deflation weapons a decade ago. Or it could print money to buy foreign currency, driving the dollar down in the process. That would boost US export prospects and at the same time reinforce expectations that inflation will stay positive, although it would draw the ire of America’s trading partners who, at this point in the cycle, won’t be happy seeing their currencies appreciate.
But before any of this is even considered, the Fed has to come to a consensus that laissez faire won’t work. That will require a sea change in thinking. The likes of Hoenig and Fisher are more focused on unwinding stimulus than adding to it, and even Bernanke’s recent testimony spent much more time on the former. Since the last two recoveries also started with a year or so of job losses, the FOMC could cling to hopes that a jobs revival is just ‘round the corner.
New appointees at the table in September might tilt the balance towards the doves, but couple more quarters of sluggish jobs figures would be even more likely to do the trick. By early 2011, either fiscal tightening will be pushed off, or the Fed will be reaching for unconventional tools to get the economy moving again.
Summary:
Ben Bernanke is the current Chairman of the U.S. Federal Reserve. He was chairman of President George W. Bush’s Council of Economic Advisers. He taught at Stanford’s University School of Business from 1979 to 1985, before being a professor at Princeton University in the Department of Economics. He graduated from Harvard University with a Bachelor in Economics in 1975, and then received a Ph.D. from MIT in 1979.
CANADA FX DEBT-C$ flat as investors ponder economy, eye Fed
By John McCrank
Canada’s dollar was flat against the U.S. dollar on Monday and was seen remaining rangebound as investors digest recent financial data and awaited clues on the state of the economic recovery.
The currency tumbled hard at the end of last week on the back of weak job reports out of Canada and the United States.
With no major economic data due on Monday, the currency would not likely be very active going into Tuesday’s policy meeting of the U.S. Federal Reserve Open Market Committee, said Eric Lascelles, chief Canada macro strategist at TD Securities.
“We are seeing some movements, but it seems to me that they are relatively mild,” he said.
“There is a chance this could be a ‘risk on’ day to a slight degree, which could ultimately be favorable to the Canadian dollar just based on how some of the international equities markets have fared … but it’s not clear to me that there is not much scope for an explosive market movement.”
Canadian bond prices were mostly lower, unwinding slightly after a big rally on Friday.
Read more:
http://www.reuters.com/
What’s Taking So Long?
Avery Shenfeld
Chief Economist
Concerns about the US all come down to one big worry—jobs. If hiring had picked up, as it did within months after the end of recessions prior to the 90s, we would have had the income growth needed to raise the savings rate, cover tax hikes and have something left over for spending. But it really hasn’t. Instead, we seem to be following the pattern evident after US recessions of the past two decades, in which it took two to three years for hiring to gain serious momentum. Why, then, have these recent cycles been so different?
In part, it reflects a change in the nature of job losses. Temporary layoffs now account for a much smaller share of recessionary employment declines than they did prior to 1990. The globalized nature of today’s economy has meant that recessionary earnings pressures often see businesses accelerate shifts in production locations, including those involving overseas plants, leading to more permanent shutdowns during the downturns.
Furloughs have also not been as customary in the service sector, which has gained in its share of total US employment over the past few decades. Furloughed workers are ready to be quickly recalled when demand picks up, without needing to go through the adjustment process of relocating or changing skills. Those frictions lead to a slower process in re-employing workers when their job loss was from a permanent shutdown, as is more often the case these days.
But that’s not the whole story, because it’s not as if there has been a groundswell of unfilled job vacancies. Perhaps the technology investments in recent decades have businesses under-appreciating how lean they can run. It’s only under the profit pressures of a recession that they uncover all of the labour saving opportunities, so that rehiring doesn’t have to coincide as directly with an output recovery.
Finally, in this cycle, we have the particular role played by the unprecedented slump in home building, and the inability of the traditional weapon, low interest rates, to reignite activity in the face of the huge inventory of foreclosed properties, an indebted household sector, and weakened financial intermediation. In Canada, where those factors have weighed less if at all, construction employment is nearly back to its pre-recession peak.
In the US, there are nearly three times as many employees in residential construction and related trades as there would typically be with this level of housing starts. So building could pick up without much hiring as the existing workforce simply extends its weekly hours. One more reason why it could be a long, long road back to full employment.
Will the Bulls Keep Running?
By Peter Buchanan
research.cibcwm.com
Besides Pamplona, the bulls were out in some force this week on Wall Street, after a lengthy absence. Whether they continue to roam quite so freely will depend in no small part on the upcoming S&P earnings season, which begins Monday.
Market eyes will also be on China. That country, a centre of slowdown fears that have battered commodities, reports Q2 GDP on Thursday, becoming the first major economy to do so.
Investors and companies have had their plates full of market moving developments lately. Eurozone contagion fears dominated the headlines during the spring. More recently, concerns have shifted to the US economy itself. Forward-looking data is always more critical in interesting times. Analysts are expecting a year-on-year rise of 23% in earnings for the S&P 500 in the quarter ended. How well firms do against that target will as always be of significance. But even more important, given the fast-changing backdrop, will be the clues provided in the guidance of what to expect down the road. Announcements from some firms have suggested that meeting last quarter’s targets may not prove so difficult. However, the year-on-year comps will get more challenging from here as the earnings recovery matures. Given that fact, a loss of fiscal support and drag from the higher dollar, investors will be more interested in firms’ views on their ability to validate the 27% and 31% earnings gains pencilled in for Q3 and Q4, based on the Thomson data.
Double-dip recession fears appear to have eased a bit in recent days, contributing to the improved tone. That’s not so surprising. While the housing data has been abysmal, two broader gauges of the US economy’s health are still some way from recessionary territory. The yield curve has only flattened by about a fifth as much as it did before the last two recessions (Chart). The ISM index, while softer, is still 14 points above the level typically associated with a broad economic pullback.
The IMF’s upgrade of its forecast for 2010 global growth also helped to ease gloom on Thursday. Part of the story there was China. With fiscal retightening set to slow growth in the indebted developed nations to a crawl of 2% or less next year, the global recovery’s prospects will rest even more on the shoulders of emerging market businesses and consumers. China’s GDP report will indicate whether those in one key market are up to the task.