Friday, May 29, 2009

Flashback: BEA will Revise Up

In April, I said that real GDP fell 1.0 - 1.5 percent 2008 Q4 - 2009 Q1. The -1.0 was based on an analysis of spending; the -1.5 on an analysis of productivity.

Later the BEA gave its advance estimate of -1.57 percent.

This morning, the BEA revised that estimate to -1.47 percent.

All of these estimates agree that real consumption grew 2008 Q4 - 2009 Q1. I am still surprised that the BEA finds that non-residential construction fell somewhat more than residential construction did.

Wednesday, May 27, 2009

The Anatomy of a Housing Recovery

We receive monthly housing data from a variety of sources, and some of the reports seem to conflict with others, so an understanding of the basic economic forces behind a housing recovery is helpful for evaluating that evidence.

As in any market, the amount of housing and its prices (both purchase and rental) are determined by supply and demand. What is somewhat unique about housing is that houses last so long, which means that the demand for houses depends not on what they do for us now, but what services houses will provide over the next 50 - 100 years. The demand for houses rises when expectations about the future are revised upward, or when time passes toward an already anticipated increase in the services houses.

The U.S. population continues to grow. As I wrote earlier, population will soon be catching up with housing supply, which means that home building should continue at a more normal pace. For home builders to be willing to renew home building, the prices for homes must be higher than they are now relative to the costs of building new homes. As home builders build more and demand more workers and equipment to do their jobs, home construction costs will rise.

The "fiscal stimulus" is another factor. To the degree that the government will be hiring construction workers and equipment away from housing, home construction costs will rise. This by itself will reduce home construction and increase home prices.

Thus, it has been no surprise that the housing bust has been characterized by: (a) sharply falling housing construction, (b) sharply falling housing prices, and (c) costs of home construction that have fallen, but not as much as housing prices have. If it were not for the fiscal stimulus, a housing recovery would have all of these elements in the opposite direction. When it happens, the fiscal stimulus will add a wrinkle: more of the housing recovery may be in the form of rising prices rather than rising construction activity (that's crowding out).

The chart below shows the BLS monthly measure of home construction prices. They continue to fall, but a lesser rate in 2009 than in 2008. The April 2009 decline is steeper than the declines in the other months of 2009, though.

This chart shows three quarterly measures of home purchase prices as a ratio to home construction prices.

Two of the series show housing prices increasing relative to construction costs 2008 Q4 - 2009 Q1 (that is, falling less than construction costs did). This should encourage building.

One of those two series -- OFHEO -- is also available monthly and its March value was released today: the housing price drop February - March was even greater than the construction cost drop. However, the ratio of OFHEO housing price to construction cost still remains higher in March 2009 than it was in any of the four months September - December 2008.

Another monthly housing price measure (not shown) from the National Association of Realtors shows housing prices repeatedly higher in each of the months January-March.

On the other hand, the Case-Shiller index continues to drop more than construction costs. If this index were right, construction spending will be less than ever.

The Census Bureau's Housing construction data suggest that seasonally adjusted housing construction has continued to hit new lows in January, February, and March, even when measured relative to construction costs. Even the rate of decline of housing construction spending does not seem to have declined.

Is the Case-Shiller index, despite its contradictions with the three other measures, right that housing prices have not yet hit bottom?

How Much Will ‘Cap and Trade’ Cost?

As part of a public strategy to offset global warming, the president and Congress are considering possible “cap and trade” laws to limit the United States’ carbon dioxide emissions. One question raised in this debate is the amount that such limits would cost United States taxpayers and consumers.

Many scientists argue that carbon dioxide emissions are a significant contributor to global warming, and that humanity would benefit if the government did something to stop, or partly offset, global warming.

One proposal for limiting the United States’ carbon dioxide emissions is to set an emission limit for each business, and allow businesses to trade their emissions “allowances” with each other. The “trades” would involve a business that uses less than its permitted limit and that then sells the remainder to another business that wants to produce over its limit.

If we suppose that limiting the United States’ emissions through a cap-and-trade system would generate an environmental benefit, that still leaves the question of how much taxpayers and consumers would pay.

One component is the cost of reducing United States energy production, and then reallocating energy production toward nuclear power and other means that emit less carbon dioxide per unit of energy produced.

Those “reallocation” costs are hard to know because, among other things, we do not yet know the degree to which restrictions on the building of new nuclear plants will be relaxed to help attain the goal of reducing carbon dioxide emissions. One study puts these costs at about $300 per family per year, although from experience I have seen reallocation costs overestimated because the capacity for our economy to adjust to new circumstances is not adequately appreciated.

On the other hand, one reason why the reallocation costs might be underestimated is that the worldwide pattern of production can adjust so that some carbon-intensive production occurs outside the United States. To the degree that carbon-intensive production leaves the United States, the (financial) costs of cap and trade will be less, although so will be the benefits in terms of reducing global carbon emissions.

A second issue is the distribution of the emission allowances. Will emission allowances be auctioned by the government, as President Obama promised during his campaign? Or will they be given away to existing energy producers?

To a rough approximation, the distribution of the allowances does not affect the total amount of the costs of reducing aggregate emissions, just the allocation of those costs across different sectors (i.e., which industries pay what). To the extent that allowances are auctioned and the revenues go to the United States Treasury, the stockholders and consumers of existing energy companies would pay more and taxpayers would pay less. Some estimates suggest that the amount at stake for the taxpayers is over $3,000 per family.

To the extent that allowances are given away to energy companies, shareholders and consumers pay less and taxpayers pay more.

But the allowances would be valuable. That means existing business would strategically adjust their behavior (and probably already are doing so) to be eligible for a larger emission permit. The costs of jockeying for permits are costs in addition to the cost of reducing and reallocating energy production.

For example, a grandfathering system would give businesses emission allowances in proportion to how much they had emitted in the past. Given the monetary value of emission permits, a grandfathering system gives producers a large incentive to, in anticipation of the grandfather awarding of permits, emit more prior to the creation of the cap-and-trade system.

Reducing carbon is a goal shared by the Obama administration and a number of members of Congress. But, as with the promotion of hybrid vehicles,cleaning banks of their toxic assets, and other government ambitions, it takes more than a lofty goal to create good policy. Cap and trade is yet another example of how the details of regulation matter not only for the costs to taxpayers and consumers, but also for whether the policy actually pushes the economy in the intended direction.

Tuesday, May 26, 2009

March and April Housing Activity

The Case-Shiller house price index released today shows that housing prices fell 2 percent March - April 2009 (significantly more than construction prices fell). I will display some charts tomorrow when OFHEO and NAR data are released.

Sunday, May 24, 2009

More Labor Supply, or Less?

We expect people to retire later as a result of the stock and housing market crashes. This article explains how survey evidence indicates that many people do plan later retirements, but over the past few months EARLY retirements have been more than usual.

Wednesday, May 20, 2009

The Incidence of Women's Progress -- Technical Version

In the New York Times Economix blog today, I discussed recent empirical findings that women have lost in relative happiness even while their labor market outcomes improved. The purpose of this post is to interpret this finding with more technical notation than I did in NYT.

The 1970s through the 1990s are notable because (economists have repeatedly measured that) women worked more in the marketplace, both in absolute terms and relative to men. I am not aware of any evidence that women consumed significantly more relative to men.

The major reason for working in the market place is to enhance one's own consumption or the consumption of one's family. The major reason for not working is, well, working is EFFORT. The evidence compiled on the women's labor market clearly shows that women put forth much more time effort in the marketplace than they once did. Absent good evidence on their consumption, I have to say that it is very likely that women did not have their individual consumption increase as much as their market effort did.

Previous studies have attempted to partly rebut this point by saying that women have ENTIRELY offset their extra market time and effort with less non-market time and effort. There was an offset, but not 100%.

Professor Yona Rubinstein and I have published a theory of why women supply more human capital to the marketplace now than they used to -- the increase in the return to skill. The increase in the return to skill does not necessarily make people happier on average (not that unskilled people had their wages fall). But it does change COMPARATIVE advantage and therefore the identity of the people who will put forth the effort.

Consider this simple model: all Americans are in one family and consume the same amount c. But time and effort is individual, with person i working ni. Each individual's personal happiness is u(c) - vi(ni), where u and v are increasing functions. Moreover, v for men is such that the efficiency supply of effort for men is less elastic.

Now change comparative advantage in a way that raises aggregate output. Consumption rises for everyone, and that by itself makes everyone happier.

It is efficient to increase the effort of some people and perhaps efficient to decrease the effort of others. The people who work more are (individually) LOSING happiness relative to those who decreased their effort [Kydland and Prescott made this point in a published paper once -- I forget the citation].

As Professor Rubinstein and I explained, between 1970 and 1990 comparative advantage changed in the direction of causing high skilled women to work more in the marketplace. Low-skilled women's market work did not fall to offset this, so the average woman was working more. Thus, to the extent the one family model is correct, women will lose happiness relative to men.

The one-family model has been criticized -- one obvious thing is that consumption is not the same for all people. But, given that women and men so often live together in reality, the one-family model illustrates the reality that the incidence of effort can be quantitatively different than the incidence of consumption, so that the people working most in the marketplace are not necessarily the happiest.

Who Benefits From Women’s Progress?

Over the last couple of decades, professional achievements and pay have grown substantially for women — especially for married women — although they have not yet fully caught up with men. A recent study of happiness by gender suggests that men may have shared a significant amount of the gains from progress made by women.

Often it is assumed that economic gains by women create benefits for women (and perhaps their children), but losses for men. Economic theory does not support this assumption, because the job market is not a zero-sum game. Employment gains for one group can create benefits for others as these gains create additional opportunities to exploit the efficiencies of the division of labor.

Perhaps more salient in this recession is how job market gains by married women can ease some of the financial hardship from job losses by their husbands. Employed husbands also gain when their spouses are successful, in part because of the significant incomes brought home by their wives.

On Monday, the National Bureau of Economic Research released a study of happiness by Professors Betsey Stevenson and Justin Wolfers of the University of Pennsylvania. Using a variety of measures for the United States and the European Union, they found women and men to be equally happy in recent years — decades after much of the economic progress for women had occurred.

If Professors Stevenson and Wolfers had found that men were happier than women in the 1970s — before much of women’s economic progress had occurred — the zero-sum theory of the job market would have some support. In other words, such a finding would say that women were relatively unhappy when their economic outcomes lagged behind men’s, and that their happiness caught up as their economic outcomes started to catch up.

However, they found the opposite — that women were happier than men in the 1970s.

Happiness measures are notoriously difficult for economists to interpret because happiness is measured subjectively — as answers to questions like “How satisfied are you with your life today?” Thus, one interpretation of this study is that happiness is measured in a way that is poorly suited to comparisons with economic outcomes, so that no conclusion should be drawn from such comparisons. On the other hand, some previous studies have found happiness to be correlated with income, health and other objective outcomes (although admittedly other studies dispute some of the correlations).

Professors Stevenson and Wolfers do not know why men and women have different happiness trends, but raise the question “Did men garner a disproportionate share of the benefits of the women’s movement?”

Given that men and women often live and work together, the answer to their question may be yes.

Tuesday, May 19, 2009

No Housing Recovery in April

The Commerce Department reported this morning that housing starts were low in April. I also noticed last week that the BLS reported that house construction prices were lower in April than in any of the last several months. A housing recovery would have more construction and higher construction prices.

Government Actually Can Shrink?!

The idea of smaller government is usually just textbook material. But Canada has actually done it -- look at the chart below from Cato (I first saw this at

Cato also notes that most of Canada's government spending is not federal so there is a degree of competition (via migration) to ensure that the government spending is actually beneficial.

This picture also shows how the "big spending Democrat" stereotype is incorrect -- government spending / GDP fell under Clinton and increased under Bush.

Sunday, May 17, 2009

Update of a Bad Picture

The 1930s were different from today in many ways. But its hard to see those differences in this chart of monthly industrial production. In the 1930s, this index of industrial production hit a low of 48.1 in July 1932.

Industry is a smaller share of our economy now than then. Unlike 1929, 2008 industrial production was falling even before October, but much of that reflects the fact that 2008 began in recession and 1929 did not.

Friday, May 15, 2009

Inflation, We Need You

When his mom would leave the house shopping for a few hours, my toddler son used to go the window and yell out "Mommy, I need you!"

That's pretty much where our economy is right now: inflation has disappeared and we are wondering if and when it will come back. This morning the BLS released the April CPI, which (seasonally adjusted) was lower than March. The seasonally adjusted CPI has fallen month-to-month five out of the last seven months.

The chart below shows the seasonally adjusted CPI (blue) for 2008-9 and the seasonally unadjusted CPI (red) for the 1929-30 (sorry, no seasonal adjustment is available for 1929-30).

Wednesday, May 13, 2009

Antitrust Overblown -- At Least the Merger Part

This week the Obama administration announced that they would strengthen antitrust rules, as compared to the Bush Administration. I am always skeptical when one party claims to have dramatically different policy than the other, but maybe this promise is credible. So what?

The Obama years would have fewer mergers. Obama will leave office eventually, at which point there would be many more mergers. Presumably a bunch of mergers occurred at the end of the Bush Administration in anticipation of tougher enforcement by Obama.

I do not think that team Obama will go so far as to break up companies that were merged under Bush, so its really only a question of how much it matters that two corporations have to operate separately for a while (waiting for Obama to leave) or that two corporations were merged prematurely as the Bush administration ended.

In case you think the typical merger would enhance efficiency: is it a big deal to postpone the efficiency gain for a few years? What about the efficiency gains that happened early as a result of mergers rushed through before Bush was done?

In case you think that the typical merger would be anti-competitive: how much does the consumer gain if the anti-competitive effect is postponed a few years? What about the anti-competitive mergers that happened early in a rush before Bush was done?

Timing is probably not so crucial to mergers. The interesting thing about the Obama anti-trust announcement is what it reveals about his plans to differentiate HIS (political) product and extract rents from HIS consumers (the citizens) ;).

[NOTE: Other aspects of anti-trust policy, such as the regulation of marketing practices, are another story because many of the prohibited practices create on-going efficiency benefits and/or anti-competitive costs]

Why Markets, Not the Treasury, Determine Bank Capital

Bailout mania began with the Bush administration’s attempts to boost bank capitalization rates. The Obama administration’s reaction to bank stress-test results marks an important change by asking failing banks to raise their own capital rather than injecting another round of taxpayer funds. Yet neither administration has admitted to the public how difficult it is for the Treasury to have an impact on bank capitalization, because the market works to offset Treasury transactions in bank capital.

Bank capital refers to the excess value of banks’ assets over liabilities. Bank capital belongs to the bank shareholders, but provides a degree of insurance to the bank’s creditors –- its depositors and bond holders –- because their claims on bank assets (in the case of bankruptcy, for example) are senior to those of bank shareholders. Some economists also think that adequate bank capital is also essential for lending.

As the housing market crashed, so did the value of some of banks’ important assets: residential mortgages and mortgage-backed securities. This not only reduced the value of bank stocks, but heightened the risk that bank creditors might not be paid in full, because bank capitalization rates (the amount of bank capital per dollar of bank assets) were falling. Some thought that bank lending would suffer, too.

The Federal Reserve and the Bush administration let some banks fail, but ultimately desired to do something to replenish bank capital. They convinced Congress that they could do so, and had $700 billion (almost $7,000 for every United States household) earmarked for that purpose. Almost $300 billion of that amount had been awarded to banks between late October 2008 and Inauguration Day, in the form of Treasury purchases of newly issued bank stock.

Although the Federal Reserve and the Bush administration included quite a number of officials who once admired the power of free markets, none of them admitted to the taxpayers (whose money they requested) that the marketplace would largely, if not entirely, thwart their recapitalization efforts. The market would react to Treasury share purchases by reducing private holdings of bank capital, and react to Treasury share sales by increasing private holdings.

As noted above, bank capital belongs to the shareholders. Moreover, a variety of market mechanisms permit shareholders to increase or decrease bank capital. New shares can be issued in the private sector, or old shares bought back. Dividends can be increased, or decreased. Banks can merge with each other in cash deals, which decrease the combined capital of the merging banks and increase cash paid to shareholders.

Thus, bank capitalization rates are expected to suit shareholder interests, not the United States Treasury’s. Markets will neutralize Treasury transactions regardless of whether the Treasury reasonably desires banks to be more capitalized, because the bank capital belongs to the shareholders, even if the shareholders’ desired capitalization is “unreasonable” or “panicked.”

In other words, bank shareholders will have whatever capitalization level they want to have, and if they don’t like the level foisted upon them by the Treasury, they can easily grind it back down to their preferred level. And they have done just this, again and again.

Although lawmakers acted surprised, it is more than coincidence that payouts to bank industry shareholders occurred at the end of 2008 as the United States Treasury was “injecting capital.” Banks paid dividends that were far greater than what was commensurate with their profitability.

Joe Nocera reported in The New York Times that JPMorgan Chase’s chief executive, Jamie Dimon, told his employees that the $25 billion they obtained from selling equity to the Treasury would help them acquire competitors.

These are all ways how Treasury bailout funds ended up with bank shareholders rather than adding to bank capital, as bailout advocates led taxpayers to believe.

Several banks are now trying to give back their taxpayer capital injections — i.e., they are asking Treasury to sell back their bank shares. (Perhaps they find the Treasury to be an extraordinarily meddlesome shareholder.)

If the Bush administration had been right that Treasury purchases of bank stock raise bank capital, shouldn’t Treasury sales reduce bank capital? Recent events suggest not. Bank cash going back to the Treasury will be largely offset by cash coming in from the private sector: an offset mirroring what we saw in the fall, when cash coming in from the “capital” injections was spent on dividends, cash mergers and the like.

That’s what’s happening at banks such as BB&T, which plans to pay back $3.1 billion to the Treasury. At the same time, BB&T will issue $1.5 billion in common stock and cut their dividend by $0.725 billion per year. In two years’ time, the combination of those two actions alone will raise $2.95 billion, almost entirely offsetting the cash going to Treasury as it sells back BB&T shares.

The Obama administration’s reactions to bank stress-test results are refreshingly cognizant that the marketplace, and not Treasury injections, will determine bank capitalization. When the latest stress tests find that a bank has too little capital, the Obama Treasury (unlike the Bush Treasury) is asking that bank to raise its own capital, rather than arranging for a Treasury “injection.”

The moral: Bank capital is determined by the market, not the amount spent by taxpayers on bank bailouts.

CORRECTION: A previous version said that National City shareholders got cash from the merger -- they did not receive much, but as PNC shareholders they continued to get a historically high dividend ($0.66 per share) through January 2009.

Tuesday, May 12, 2009

Who Has the Home Court Advantage at Notre Dame?

The two most important economic forces in politics are comparative advantage and the free-rider problem, and both of them are critical at Notre Dame's graduation this weekend.

Comparative advantage says that everyone is talented at something, where "talent" is measured in relative terms. People, businesses, and organizations tend to engage in activities where they have their advantage. Political groups recognize this, and play in the political arenas where they have comparative advantage (and attempt to reshape the arena to suit that advantage).

For example, the elderly (more specifically, the retired) have more time on their hands than do working-aged people. Working aged people have more money than time, which is why the American Association of Retired Persons has always been important advocates of limiting the role of campaign funds in political campaigns -- a money intensive political campaign suits the political comparative advantage of persons who are not retired.

The free-rider problem says that large groups are difficult to mobilize, because any one member might recognize that he has little effect on the group's aggregate effort. But the group is just the sum of its members, so with most of the members slacking off, the group accomplishes little.

Thus, we have the economic story at Notre Dame this weekend, where President Obama will give a commencement address and many domers are protesting.

It is clear from the video and news stories that Obama opponents have been mobilized by this event. Obama opponents have always been there, but the free-rider problem ensured that the vast majority of them did nothing to demonstrate that opposition -- until Notre Dame. On that account, President Obama may wish that he had initially declined (or at least ignored) Notre Dame's invitation: the sleeping dog would still be sleeping.

However, President Obama is the best orator I have seen in my lifetime. I assume he has given commencement addresses before, but virtually everyone ignored them because those addresses were not newsworthy. Not so this weekend -- the Notre Dame address will be seen by millions. On that account, domers may wish they had attacked Obama in some other arena.

So a lot is riding on this commencement address. But if you are against Obama, don't tell anyone about the occasion until it's over and the news media have stopped playing the clips of his address!

Monday, May 11, 2009

Flashback: Treasury Capital Crowds Out Private Capital at BB&T

Treasury "capital injections" just result in greater payments to bank industry shareholders. Some of the ways it could work is that a bank receiving TARP money would buy back its shares (or buy, for cash, shares of competitors), use the Treasury funds to forestall raising new capital that (thanks to the recession and housing crash) would have been necessary, or cut dividends.

The same argument implies that payments from a bank TO the Treasury would reduce payments from banks to bank industry shareholders (or increase payments from shareholders to the banking industry).

That's what's happening at BB&T. They plan to pay back $3.1 billion to the Treasury. At the same time, they will issue $1.5 billion in common stock and cut their dividend by $0.725 billion per year. In two year's time, the combination of those actions will raise $2.95 billion.

Fiscal Stimulus: Bright Promises, Dismal Performance

Milton Friedman get credit for the title, but the current Congress and the Obama Administration get credit for the content. When the stimulus bill was being debated, a number of economists explained how "stimulative" results would be less than promised because the composition of stimulus spending was tilted toward industries (like health care) that were already doing well. Now the AP reports that the same pattern is found regionally: road construction is going to regions that are already doing well.

That is the likely trade off of government spending: in order to even come close to stimulating, the spending must be on items where private spending is low -- that is, items that the private sector current finds to have little value. One example is home building. Another example is expansion in depressed areas (eg., a road project in an area that is losing population).

Conversely, if the government spending is to be considered valuable (or at least better than stupid), it will likely have to occur in areas where the private sector is also spending, such as health care and construction in places that are gaining population. But, when it comes to areas where the private sector is already spending, you have to wonder why the government needs to add to it.

Thursday, May 7, 2009

Rename Las Vegas Atlantis

The Wall Street Journal reports that more than 2/3 of Las Vegas homes are "underwater" -- the mortgage amount is greater than the house value [I think WSJ must mean 2/3 of Las Vegas homes with mortgages].

Productivity Residuals in this and Previous Recessions

Productivity -- output per hour worked -- has risen almost every quarter of this recession. That doesn't always happen in a recession.

Nevertheless, if there were a reduction in hours worked without any fundamental change in productivity, then we would expect output per hour to rise because of diminishing marginal product of labor. Thus, it is helpful to know what productivity would be if hours had not changed -- that's what I call the productivity residual (conceptually similar to the Solow residual used in macroeconomics).

The chart below (an update of Figure 5 in my NBER wp) shows the productivity residual in this recession and four previous ones. The productivity residual has fallen in the last two quarters -- that is productivity has not risen as much as you might expected given the drop in hours -- and remains higher than it was when the recession began. The two worst quarters of this recession are not near as bad (in terms of productivity residuals) as the two worst quarters of 1981-82.

Time will tell whether the productivity residual rises or falls 2009 Q1 - Q2.

Productivity Rises Again

The BLS reported this morning that labor productivity rose again 2008 Q4 - 2009 Q1. As a result, productivity has risen in four out of five quarters in this recession.

This productivity report is hard to reconcile with the BEA's report two weeks ago that real GDP fell 1.6 percent. This is another reason why I think BEA will revise Q1 real GDP upward from its advance estimate.

Wednesday, May 6, 2009

22 percent of mortgages underwater

According to (reported by Reuters).

When Will Women Become a Work-Force Majority?

The jobs report coming out this Friday will most likely show that the female percentage of employment in March was greater than ever, after increasing 16 consecutive months. It is possible that, for the first time in American history, women will make up a majority of the labor force late this summer.

The chart below compares overall employment (in millions of jobs) to the female percentage of that employment, with each month shown as its own data point. When the recession began in December 2007, there were 138.2 million nonfarm payroll jobs, of which 48.7 percent were held by women. Last month’s employment report showed that February employment was down to 133.7 million, of which 49.6 percent were held by women.

Casey B. Mulligan; Bureau of Labor Statistics

Since October 2008, three-quarters of the total employment decline (both sexes combined) have been employment declines for men. If that pattern continues, and employment continues to decline, the female percentage of the work force will continue climbing.

Based on this pattern, and the Labor Department’s last report that March employment was down to 133.0 million, my guess is that women made up 49.7 percent of March employment. At this rate, total employment would have to fall below 131 million for women to be a majority of the work force.

The Labor Department’s data show that the largest monthly employment declines so far were from November to December 2008, and December 2008 to January 2009 (681,000 and 741,000 jobs lost on net, respectively). But that rate of job losses has not continued in 2009, and economists expect job losses to slow (and perhaps stop) later this year.

The Obama administration forecasts that (thanks to its stimulus package), the labor market will be recovering in the third quarter of this year. If so, total employment may never get as low as 131 million, and the female percentage may not reach a full 50 percent for several years.

Other forecasters believe that employment will continue to decline, although at lesser rates, throughout 2009. In this scenario, August 2009 may be the month when employment falls below 131 million and female employment exceeds male employment for the first time.

If the female percentage does exceed 50 percent in this recession, it is likely to dip back below the halfway point again during the recovery, as some of the male-intensive industries (such as construction) that contracted so much during this recession start to expand again. In any case, this recession will have a lasting effect on the composition of employment.

Tuesday, May 5, 2009

Why do Troubled Banks Pay Dividends?

A recent study documents how troubled banks continue to pay dividends.

Dividends are paid because the taxpayers are giving the banks more cash than the banks' shareholders' want to have in the banks. This is not Monday morning quarterbacking, but rather the prediction of economic theory that has been recognized for decades and was applied to the bank bailout this fall.

Stock Market has a Different Opinion Now than Two Months Ago

The stock market is much higher now than it was two months ago. Part of the increase must be a reassessment of the probability that this recession could get significantly worse (now it looks like we've seen the worse).

But the stock market is still lower than it was in November. Does that mean (if anything) that a recovery is still a long way off? I believe that this recession has to end with the stock market's being lower than when it started, because, while this recovery will have some housing investment, it will not have nearly as much as during the "housing bubble" and therefore existing businesses will face more competition from new ones than they faced during the housing bubble (see also here).

Simply put, the stock market two months ago was too low to say a recovery was near. But it's high enough now, even if not at pre-crash levels.

Monday, May 4, 2009

Non-residential Construction Remains Higher than It was When The Recession Began

True, but rarely acknowledged:

However, residential construction spending was down in March (for the 24th consecutive month), which is not particularly supportive of my hypothesis that housing hit bottom in early 2009.

We need to consider that public construction spending (which is almost exclusively non-residential) rose, and will continue to rise this year. Greater public construction will be a force reducing private construction, perhaps especially private residential construction. Thus, thanks to the stimulus package's crowding out effects, the housing recovery may be more in the form of higher housing prices rather than more housing construction.

More on My Confusion with the BEA Q1 GDP

The Chart below shows two measures of non-residential investment in structures: private construction spending from the Census Bureau (blue) and Gross Private Domestic Investment Expenditure in Non-Residential Structures from the National Accounts (red). The latter is part of the BEA's report last week that Q1 real GDP was 1.6 percent lower than it was in Q4.

As you can see from the chart, the BEA reports a sharp decline Q4-Q1 but the Census Bureau does not. Part of the difference is that the latest version of the Census Bureau numbers were not available until this morning. Thus, I expect the BEA to revise upward nonresidential structures investment expenditure. They may end up saying that real GDP fell 1.5 percent rather than 1.6 percent.

Another reason this is important is that nonresidential investment is good indicator of the health of capital markets, because residential investment would be low now even with healthy capital markets. Thus, I would really like to know whether non-residential structures investment was pretty flat, or fell sharply.

Inflation Would be Efficient, and is Therefore Imminent

Professor Meltzer today predicts that inflation is coming. In explaining his prediction, he takes a negative tone.

I do not agree with his tone. Some inflation would be efficient right now, because it would raise housing prices without raising housing relative prices. Raising housing prices would alleviate some of the serious problems with settling old mortgages. But leaving housing relative prices to market forces would help avoid over-building going forward.

Inflation would also help banks that own lots of mortgages. Because banks have a huge influence on the Fed, and because now inflation would help more than it hurts, I agree with Professor Meltzer's prediction that inflation is coming. My disagreement with him regards his evaluation of the inflationary outcome.

Real GDP Now and 1981-82

Professor Nunes writes (and attaches a chart):

""Stilettoheels" is mistaken.The graph shows the traditional measure of growth as the latest four Qtr average over four qtyr average four qtrs ago. (or average GDP for year t over average GDP for year t-1).The "depth' of this recession (GDP wise) is still far away from the one in 1981-82 as you mentioned and "Stilettoheels" contested."

I think part of the dispute is whether you count the mini recession that shortly preceded the 1981-82 recession. Real GDP in 1981 Q2 (just before the famous 1981-82 recession) was hardly greater than it was in 1980 Q1. The 1981-82 recession therefore erased more than 3 years of GDP growth.

If real GDP growth resumes this year, and real GDP stays above my "11 trillion real GDP floor", about the same will have occurred: the 2008-9 recession will have erased less than 4 years real GDP growth.