House Passes Stimulus Package

The WSJ reports on the passage of President Obama's stimulus package.

The House passed an $819 billion tax-and-spending bill Wednesday, in a recession-fighting effort that would extend the reach of the federal government across the U.S. economy by reshaping policy on energy, education, health care and social programs.
The House bill is one of the largest single stimulus packages in history, almost equal to the entire cost of annual federal spending under Congress's discretion. A parallel Senate measure, which is expected to come to a vote next week, is now valued at nearly $900 billion.
Either bill, if enacted, would push the federal debt toward levels not seen since the second World War.

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Phillips Curve Makes Ugly Comeback

The WSJ is claiming that the Phillips curve is making an ugly come back. I do not think that this is the case. Those in the 1990s who did not shelve the Phillips curve did so, becuase they drew a distintion between a static Phillips curve and a Phillips curve that is shifting; That was the issue not that there was no Phillips curve.
Here is the comeback story from the WSJ.
The recent comeback of the economic theory known as the Phillips Curve is a little like Mickey Rourke’s latest comeback on the Hollywood red carpet: it’s kind of scary to watch it play out.
The central idea of the theory named for economist Alban William Phillips is that there’s an inverse relationship between unemployment and inflation. It was shelved by some in the 1990s when unemployment fell to historically low levels without the expected uptick in inflation.
But the relationship appears to have reinserted itself, something households are being reminded of in painful ways via job and salary cutbacks almost daily.
The national unemployment rate already increased over two percentage points in the final eight months of 2008 to 7.2%, and that’s before the recent flood of corporate layoffs. Meanwhile, inflation has fallen off sharply.
In a one-day bloodbath for the economy, companies from across the economic spectrum, including Caterpillar Inc., Sprint Nextel Corp., Pfizer Inc., Home Depot Inc. and General Motors Corp., all announced layoffs on Monday alone.
And as the Phillips Curve would predict, the effects are being felt not just by the unemployed but the employed, too. Companies from Home Depot to Yahoo Inc. and Eddie Bauer Holdings Inc. have recently launched salary freezes for at least some of their staffs. Even the Obama Administration has instituted pay freezes for top White House positions.
Predictably, households fearful of job or at least income cuts are reporting record-low levels of confidence, according to the latest Conference Board survey released Tuesday. And inflation has come down drastically even when energy prices are excluded, reflecting the reluctance of consumers to spend.
“The Phillips Curve was out of vogue for a while, but now it’s back,” said Sung Won Sohn, a professor at California State University.
The point is more than just academic.
As Laurence Meyer and Brian Sack of Macroeconomic Advisers point out, there are two ways of looking at the inflation outlook now. Those who think monetary aggregates such as bank reserves are a determinant would likely see greater risk that inflation will bubble up again once the economy stabilizes.
Yet those economists that generally base their forecasts on a Phillips Curve framework, including Meyer and Sack, think outright deflation is the greater risk. “Exit from extraordinary policy actions is a very long way off from this perspective,” they said in a research note.
“The current episode looks almost like a laboratory experiment to test the validity of the Phillips curve and, particularly, the relative usefulness of the Phillips curve and the monetary aggregates in forecasting near-term inflation,” said Meyer, a former Fed governor, and Sack, a former Fed economist.
That economists are even reexamining the validity of the Phillips Curve is surprising. After the mid-1990s the theory appeared woefully outdated as the unemployment rate fell below levels long thought to be inflationary. Indeed even rates as low as 4% didn’t appear to be driving price pressures higher.
Explanations abounded: productivity had changed the relationship between joblessness and wages; global competition meant the U.S. unemployment rate was too narrow of a focus; better management of monetary policy since the 1980s had already licked inflation; and, more recently, energy and commodity prices were key drivers of inflation.
But with the unemployment-wage link apparently reestablished, “it’s possible that for the next couple of years we could see the Phillips Curve operate as it’s supposed to,” said Sohn.
Of course, the question remains exactly what rate of unemployment is consistent with stable inflation, otherwise known as the non-accelerating inflation rate of unemployment or Nairu. Long thought to have been around 6% until the late 1990s, it’s surely lower than that now, but whether it’s 4% or 5% could have a big effect on just how quickly inflation comes down, especially now that energy prices have stabilized.
Another question is whether the Phillips Curve flattens when inflation hits zero — in other words, can the unemployment rate keep rising without leading to outright deflation.
Unfortunately for many U.S. households, they’ll see that debate play out in the newspaper every day. –Brian Blackstone

Housing resales rise as prices tumble

Existing-home sales rose 6.5% last month, with many distressed deals. The median price fell 15.3% to $175,400. It is important to note the emphasis on distressed deals. The rise in sales is driven by forecosure sales.
Here are some views on the latest data report.
http://blogs.wsj.com/economics/2009/01/26/economists-react-dont-jump-out-of-your-chair-yet/

My favorite is this one:
The most substantial problem with the resales data is the increasing prevalence of bank-owned properties (ordinarily auctioned) are being sold through traditional realtor channels. This will tend to boost both inventories and sales, leaving the impression of higher activity levels, an increasing upward bias in the series. (The fact that the properties are finding buyers is not one of the many negatives) This is not the case with new construction, which shows a decimated sales pace through November 2008 –Steven Wieting, Citigroup

How to avoid the horrors of ‘stag-deflation’

Nouriel Roubini writes in FT an Op-ed, "How to avoid the horrors of ‘stag-deflation’"

The U.S. and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation. A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labor markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 percent level leading to concerns about deflation. The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and coordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

For more click on this link.

More Bad News on Employment

Today's employment news is driving stocks down.
Nonfarm payroll employment fell sharply (-533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent. Job losses were large and widespread across the major industry sectors.
Here is the entry from the Financial Times.


US job losses steepest since 1974
By Joanna Chung in New York
Published: December 5 2008 14:05 Last updated: December 5 2008 17:05
The US economy lost a stunning 533,000 jobs in November – the largest monthly drop in more than three decades – as the unemployment rate jumped to 6.7 per cent, the labour department said on Friday.
Non-farm payroll data were far worse than expected by many economists, whose median forecast was that employers would shed about 340,000 positions in November.
The news sparked a fall in US stocks, with the S&P 500 down 1.6 per cent in early trade, the Dow Jones Industrial Average 1.5 per cent lower and the Nasdaq off 1.4 per cent. European stocks were also sharply lower.
The report marked the 11th consecutive month of job losses in the US economy, underscoring the severe impact the downturn is having on the labour market.
“Today’s figures seem awful, but we would stress that they are merely in line with what a number of indicators have been pointing to for months, and there could be an even bigger negative lurking out there in the months ahead,” said Rob Carnell, analyst at ING Financial Markets.
The National Bureau of Economic Research declared this week that the US economy has been in recession since December last year, but Friday’s figures, the latest in a string of grim economic data, suggest conditions are getting worse.
With upward revisions to both September and October showing sharper job cuts than previously reported, the economy has lost more than 1.2m jobs in the last three month alone, bringing the tally for the year to about 1.9m, the data showed.
October’s job losses were revised to show a fall to 320,000 compared with a previously reported loss of 240,000, while September’s losses were revised up to 403,000 from 284,000.
November’s job losses are the highest since December 1974. The month’s employment rate, which rose to 6.7 per cent from 6.5 per cent in October, was slightly lower than expected but still the highest reading since 1993, having risen 1.7 percentage points since December last year.
Service sector employment fell 370,000 in November while retail cut 91,000 jobs – further underlining the slowdown in consumer spending. But the job losses cut across a broad range of sectors, from manufacturing to construction to services.
However, in contrast to most industries, healthcare added jobs in November, with jobs rising 34,000, an increase of 341,000 so far this year.
The job losses were coupled with disheartening data for the broader market. The number of people who worked part-time for economic reasons – including those who would like to work full-time – continued to increase and reached 7.3m, having risen by 2.8m in the past 12 months. Though the average hourly earnings rose by 7 cents, or 0.4 per cent, the average work week fell by 0.1 hour to 33.5 hours.
President-elect Barack Obama said the job losses were ”more than a dramatic reflection of the growing economic crisis we face”, adding that a recovery plan was needed to ”save or create at least 2.5m more jobs over two years while we act decisively to maintain the flows of credit on which so many American families and American businesses depend.”
Grim news on the health of the US economy has emerged throughout the week. On Wednesday, other data showed that US service industries contracted by the biggest margin on record in November, while the private sector shed the most jobs in six years.
The situation reinforces widespread expectations that the Federal Reserve will cut the federal funds target rate, currently 1 per cent, even further when it meets later this month.
“Policymakers were given a new mandate to act decisively to address the economic and financial crisis today, with job losses moving to levels rarely seen,” said Tony Crescenzi, analyst at Miller Tabak.
“For its part, the Federal Reserve will make further forays into the realm of quantitative easing, and is now more likely to expand its programme of purchasing mortgage-backed securities and of targeting long-term interest rates.”
Copyright The Financial Times Limited 2008

Inflation is --- A Letter to a 10 year old.

Here is something interesting from the Foundation of Economic Education. It is response to a query from a 10 year old.

Inflation is ...

U.S. recession began in December 2007, NBER says

MarketWatch is reporting that it is official, the US economy entered into a recession in December 2007.
The U.S. economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said Monday. The economy reached a peak in December and has been declining since, according to the business cycle dating committee of the NBER. The committee does not judge a recession as two consecutive quarterly declines in gross domestic product; rather, it looks at four key monthly economic indicators, including employment, industrial output and sales. Employment peaked in December.