The Fed meets again this week to discuss further tapering of its bond buying program and to refine their blueprint for when and how they will begin to increase interest rates.
The following figure from The Wall Street Journal shows that tapering will likely end in October. And when the bond purchasing program ends, the Fed will have acquired over a trillion dollars in bonds because of the program.
The journal has also compiled a very nice interactive chart showing how key economic indicators have responded to monetary policy moves by central banks in four advanced economies since the beginning of the Great Recession. Here is a link to the interactive chart. Below is a snap show of the chart (Last data point: July 24, 2014).
Here is a neat video on how behavioral economics can help humans make better decisions.
The Bureau of Labor Statistics (BLS) released its June 2014 Consumer Price Index (CPI) report today. Click here to read the report.
The CPI increased 2.1 percent over the last 12 months (see the figure below). This reading is above the Fed’s inflation target of 2 percent.
Core CPI–which excludes food and energy prices–increased 1.9 percent over the last 12 months.
The following figure shows both CPI and Core CPI since June 2013.
In crafting monetary policy, Janet Yellen, the Federal Reserve Chairwoman, pays close attention to an array of labor market gauges. Bloomberg Business week has a nice article that summarizes what has become known as Yellen’s jobs dashboard. See some of the dashboard indicators in the figure below. Click here to read the article.
Among the dozen indicators on the dashboard are the unemployment rate, long-term unemployment rate, quits rate, share of unemployed who have been out of work for 27 weeks or longer, labor force participation rate, hires rate, and unemployment rate. By emphasizing a wide array of U.S. labor market statistics, Yellen downplays the role of any one statistic—say the unemployment rate—and simultaneously captures a more robust view of the actual labor market. The ultimate goal of the dashboard is to gain a more complete understanding of labor market conditions in order to make better monetary policy decisions.
Review the dashboard in the figure above. Discuss the current state of the U.S. labor market.
China—the world’s second largest economy—experienced a 7.5 percent increased in its GDP in the second quarter. See China’s GDP growth since 2010 in the figure below from The Financial Times.
The second quarter number suggests that stimulus efforts (including infrastructure spending and bank lending) to stabilize growth might have succeeded in offsetting the impact of a weak property market (discussed here).
Moreover, the data released on Wednesday by the National Bureau of Statistics shows that a good portion of economic growth came from shoppers. This suggests that Beijing is making progress on its goal to rebalance the economy towards domestic consumption and away from investment.
Employees quit their jobs more often in a healthy economy. This is so because new job opportunities are plentiful. Although the quit rate in the U.S. remains weak, the rate is slowing improving. See the figure below from The Wall Street Journal.
Josh Zumbrum writes (click here to read the article) that weak job market churn remains one of the Fed’s leading concerns about the recovering U.S. economy.
In a weak labor market, the economy experiences a lower quit rate because people are fearful about leaving their job because they do not think they will find another job.
The longer-term issue with a low quit rate is that many workers will remain employed with the same employer for a long time, thereby stunting their earning growth and slowing their acquisition of additional labor market skills. Both effects have a negative impact their life time earning potential.
Discuss why the quit rate is lower for younger employees.
Gregory Meyer, of The Financial Times, writes about this year’s record soyabean crop. Click here to read the article. The soyabean is typically crushed into soya meal that is fed to livestock, and into vegetable oil, making it a key input into products including steak, baked goods, and biodiesel, according to the article.
Favorable temperatures, ample rain, and record planting due to higher prices last year, have lead to an 11 percent increase in this year’s crop. The increase in the crop size has caused the price of soyabeans on the Chicago Board of Trade (CBOT) to decrease 6 percent.
1) Using the model of supply and demand, sketch how the soyabean market has changed relative to last year. Does it make sense that the price of soyabeans has decreased as the quantity has increased? Explain.
2) Using the percentages above, and assume that all else is equal, calculate the price elasticity of demand for soyabeans.
The price of food in the U.S. is rising. The figure below shows that beef, fruit and pork prices are all much higher than expected.
The open question is: is the rise in food prices temporary or permanent?
This Wall Street Journal article suggests that the forces causing food prices to rise might be temporary. It appears that “drought in Oklahoma and Texas is driving up cattle prices. A disease known as porcine epidemic diarrhea virus has killed millions of piglets and contributed to higher hog prices. A disease known as citrus greening is killing Florida’s orange and grapefruit trees, driving up citrus prices. Most of the shrimp eaten in the U.S. comes from Southeast Asia, where a bacterial infection has devastated stocks. Coffee prices have risen this year due to a drought in Brazil.”
So, the consumer-price index increased 2.1 percent in May, which was marginally higher than the Fed’s 2-percent inflation target. However, the Fed’s preferred measure of inflation, one that excludes food and energy prices, rose by only 1.5 percent, which is well below the Fed’s inflation target. Further, if the problems created by drought, disease and infection are solved over the short-term, upward food price pressures could be temporary. If so, the Fed is not likely to alter it medium-term path forward.
1. What is the name of the Fed’s preferred price index?
2. How does the Fed’s preferred measure of differ from the consumer price index?
The Bureau of Labor Statistics (BLS) released its June 2014 jobs report. Read the BLS report here.
The U.S. added 288,000 jobs in June 2014. With upward revisions to both April and June jobs numbers, employment growth over the last three months averaged 272,000 per month.
The unemployment rate in June decreased to 6.1 percent.
Importantly, the labor force participation rate in June was unchanged at 62.8 percent and the employment-population ratio showed little change at 59 percent.
Here are other highlights from the June report:
1. The number of long-term unemployed (those jobless for 27 weeks or more) declined by 293,000 to 3.1 million persons. The number of long-term unemployed has decreased by 1.2 million over the last 12 months.
2. Individuals working part time because their hours had been cut back or because they were unable to find a full-time job increased by 275,000 to 7.5 million persons.
3. The number of discouraged workers in June 2014 was 676,000 persons, a decrease of 351,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.
The Case-Shiller housing price index (HPI) for Charlotte, NC from January 1987 to April 2014 is shown in the figure below.
The housing market in Charlotte hit its pre-great recession peak of 133.85 in August 2007. The index declined 17.7 percent to reach its lowest HPI value of 110.10 in January 2012.
As of April 2014, the housing market in Charlotte, NC has increased 14.6 percent from its 2012 low. Charlotte is now 5.7 percent below its August 2007 level. The housing market in Charlotte appears to be recovering nicely from the effects of the great recession.
The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Oregon (red line) and the Portland metro area (green line) between January 2000 and May 2014.
The U.S. and Oregon have observed monthly increases in this employment measure since August 2010, while the Portland metro area has observed a monthly increase in this employment measure since June 2010.
The most recent data reveal that year-on-year employment growth continues in the Portland metro area (2.8 percent, May 2014), Oregon (3 percent, May 2014) and the U.S. (1.7 percent, May 2014).
As of May 2014, the number of nonfarm employees in the Portland metro area is 11,200 higher than the peek level observed prior to the great recession in November 2007.
Real gross domestic product (GDP) decreased 2.9 percent in the first quarter of 2014, according to the Bureau of Economic Analysis’s third estimate. See figure below. Click here to read the BEA’s June 25 news release.
According to the BEA’s news release the decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment that were partly offset by a positive contribution from consumption expenditures. Imports, which are a subtraction in the calculation of GDP, increased.
Jacob Gershman has a fascinating article in The Wall Street Journal on the undefined property rights for tattoos. Click here to read the article.
The economic and legal question that is making its way through the court system is: who owns the copyright to a tattoo? Some might think that once you pay for a tattoo, you own it. Others suggest that a tattoo artist is covered by the same rights granted to a photographer or another visual artist.
To be copyrightable, artwork needs to have some originality. It also has to be “fixed in a tangible medium of expression.” That can be a canvas, film or audio, according to the article. What is new is that skin would likely count as a tangible medium of expression. If the courts agree, then the tattoo artist will retain the copyright to your tattoo.
From an economic efficiency perspective, does it matter to whom (the tattoo artist or the buyer) the court grants the copyright? (Hint: What would Ronald Coase say?)
Portland’s Case-Shiller housing price index (HPI) from January 1987 to March 2014 is shown in the figure below.
Portland’s pre-recession housing market peak was May 2007. Similar to the rest of the U.S., Portland’s housing market declined after 2007 and it has subsequently recovered.
If the Portland housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.
1) The top third of Portland’s housing market—the high tier segment—reached a maximum value of 179.26 in May 2007. The high tier declined 26.7 percent to reach its lowest HPI value of 131.34 in March 2012. As of March 2014, this segment of Portland’s housing market has increased 21.9 percent from its 2012 low.
2) The middle third of Portland’s housing market—the middle tier segment—reached a maximum value of 185.78 in May 2007. The middle tier declined 28.9 percent to reach its lowest HPI value of 132.18 in March 2011. As of March 2014, this segment of Portland’s housing market has increased 28.7 percent from its 2012 low.
3) The bottom third of Portland’s housing market—the low tier segment—reached a maximum value of 197.82 in May 2007. The low tier declined 33 percent to reach its lowest HPI value of 132.62 in March 2012. As of March 2014, this segment of the Portland’s housing market has increased 35 percent from its 2012 low.
The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced that it will reduce its monthly asset purchases by another $10 billion to $35 billion–$15 billion for mortgage backed securities and $20 billion of longer-term Treasury securities.
According to the Fed’s announcement, information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
The Bureau of Labor Statistics (BLS) released its May 2014 Consumer Price Index (CPI) report today. Click here to read the report.
The CPI increased 2.1 percent over the last 12 months (see the figure below). This reading is above the Fed’s inflation target of 2 percent.
Core CPI–which excludes food and energy prices–increased 2 percent over the last 12 months.
The following figure shows both CPI and Core CPI since May 2013.
Social science researchers find that in a simple repeated game chimpanzees are more likely to find the predicted (mixed strategy) Nash equilibrium than are humans.
The chimpanzee subjects are from the Kyoto University Primate Research Institute and the human subjects are from Japan and from Guinea, West Africa. Read the article here in the journal Nature and a summary of the article here on cnet.
So why do the chimpanzees do better than humans? The authors write that chimpanzee may remember patterns very well, and in some cases, much better than humans. They conclude: it’s possible that chimpanzees have a cognitive advantage over humans in this competitive experimental environment. This newly discovered advantage would parallel other known advantages that chimpanzees have over humans—for example, they are physically stronger and faster than humans.
All is not lost, however. In games requiring coordination and cooperation, where language is useful, the authors predict that humans will likely outperform chimpanzees and other species.
Andrew Martin has a very interesting article in Bloomberg Businessweek on the recent explosion in U.S. dairy exports. Click here to read the article.
The U.S. dairy industry has been known to experience enormous domestic surpluses. But now it appears that global shortages are the norm. These shortages have helped to drive the value of U.S. dairy exports up 39 percent in the first quarter of 2014 and to increase the average price for raw milk to $25.30 per 100 pounds in April—an all-time high, according Martin’s article.
This is quite a change. Since the 1930s, the U.S. dairy industry has depended on government price-support programs, which helped to keep dairy prices artificially high. Because of the programs, the U.S. government would end up purchasing excess cheese, butter, and nonfat dry milk when prices fell to a certain level, and store the cache in the caves near Kansas City, Mo. Eventually these surpluses would be given away, sold or left to rot. By the 1980s, the program cost an enormous amount—nearly $2 billion.
The expense experienced in the 1980s motivated the government to switch to paying farmers to kill their cows. This program was used to directly reduce supply, rather than waiting to purchase all that cheese. The government also imposed import tariffs and quotas to keep lower priced foreign dairy products from being sold in the U.S, according to the article. And the deadweight loss kept adding up.
Just recently, the world price of dairy products has increased. And U.S. dairy producers are now exporting large amount dairy product to China. Martin argues that there are at least two reasons for the serge in U.S. exports to China. First, Chinese dairy farmers are not trusted by Chinese consumers. Second, New Zealand has experienced a drought reducing its ability to meet global demand.
So it is interesting two watch the U.S. dairy industry’s transformation. The industry has switched on a dime from being very protectionist and actively lobbing for price supports, quotas, and tariffs to being an industry that supports global trade free of price restrictions.
Along the way, no one appears to be worrying about the rising price for a gallon of milk for the average U.S. consumer, which reached $3.69 in April.
1) Discuss what happens to total surplus when an economy moves from autarky to a net exporter.
2) Discuss what happens to total surplus when an economy moves from autarky to a net importer.
3) Given your answers above, discuss why a government would impose tariffs, quotas and price-supports when a net importer of dairy products (as the U.S. was until recently), but not want to impose restrictions on free trade when a net exporter of dairy products (as the U.S. is now).
The Bureau of Labor Statistics (BLS) released its May 2014 jobs report. Read the BLS report here.
The U.S. added 217,000 jobs in May 2014. Over the prior 12 months, employment growth averaged 197,000 per month. The unemployment rate in April was unchanged at 6.3 percent. However, the number of unemployed re-entrants (unemployed individuals not looking for a job in April that started looking for a job in May) increased by 237,000 over the month.
The labor force participation rate in May was unchanged at 62.8 percent and the employment-population ratio held steady at 58.9 percent in May.
Here are other highlights from the May report:
1. The number of long-term unemployed (those jobless for 27 weeks or more) declined incrementally to 3.4 million persons.
2. Individuals working part time because their hours had been cut back or because they were unable to find a full-time job declined to 7.3 million persons.
3. The number of discouraged workers in May 2014 was 697,000 persons, little changed from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.
Today the European Central Bank (ECB) reduced interest rates and announced a series of other stimulative monetary policy measures in an effort to create higher inflation rates in the euro-zone. Click here and here to read about the ECB’s unconventional measures.
The ECB is the first major central bank to cut a key interest rate below zero. As shown in the figure below, the ECB decreased the rate on bank deposits at the central bank to -0.1 percent. Commercial banks will now be charged for keeping their money at the ECB. The ECB hopes that the negative interest rate will nudge commercial banks to issue loans rather than letting the money decay at the ECB.
In addition to rate cuts, the ECB announced that it would loan up to 400 billion euros to euro-zone banks to try to boost lending, increase inflation and boost the euro-zone economy.
The Wall Street Journal reports that euro-zone inflation decelerated from 0.7 percent in April to 0.5 percent in May. The latest reading is a four-year low and it is well below the European Central Bank’s (ECB) inflation target of 2 percent.
Click here to read the article. Also see the change in the consumer price indexes for Germany, Italy, Spain and the (18-country) euro zone from 2011 to May 2014 in the figure below.
The ECB meets again on Thursday June 5. Because inflation rates are low and falling, it is widely expected that the central bank will continue to reduce key interest rates. And because its deposit rate is already at zero, this would include the unusual move of installing a negative interest rate on overnight bank deposits.
When there is a negative interest rate, depositors are effectively charged a fee to deposit their funds. A negative interest rate thus discourages banks from depositing funds at the ECB and encourages them to loan funds to other banks and the private sector. The goal is to weaken the exchange rate and increase the inflation rate.
The concept is not new. Indeed, central banks in Denmark and Sweden have experimented with negative interest rates.
Ed Crooks has an interesting article in the Financial Times on the new tariffs the U.S. plans to levy on Chinese solar panel manufactures. Click here to read the article.
The U.S. department of commerce announced on Tuesday that photovoltaic components imported from China were being subsidized in a way that damaged U.S.-based manufacturers, according to the article. Because of the harm caused to U.S. manufacturers, the U.S. will impose new tariffs on Chinese solar panel manufacturers.
The rates of the new tariffs vary for products from different Chinese companies: 18.6 percent for Trina Solar, 35.2 percent for Suntech Power, 26.9 percent for all other manufacturers and exports.
1) A tariff is a restriction on trade. Discuss what will happen to the quantity of photovoltaic components purchased by U.S. consumers after the new tariffs are imposed.
2) Discuss what will happen to total surplus in the U.S. after the new tariffs on photovoltaic components are imposed.
3) Discuss who actually will pay the tariff that is being imposed on Chinese manufacturers–Chinese manufacturers or U.S. consumers? Explain.
Real gross domestic product (GDP) decreased 1 percent in the first quarter of 2014, according to the Bureau of Economic Analysis’s second estimate. See figure below. Click here to read the BEA’s May 29 news release.
According to the BEA’s news release the decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures. Imports, which are a subtraction in the calculation of GDP, increased.
Alan Blinder writes about the path forward for the Fed in today’s Wall Street Journal. Click here to read the article.
At this point, we do know that the market fully expects the Fed continue the orderly tapering of its bond purchasing down to zero by the end of this summer. The open question is: what happens next? The post-tapering period at the Fed will be interesting. And Blinder writes that there will be a loud revival of the hawk-dove wars at the Fed.
When the hawk-dove wars begin, the main questions will be:
1) How long should the Fed wait between the end of tapering and the beginning of exiting its near-zero interest rates and its bloated balance sheet?
2) How fast and how high should interest rates rise?
3) How quickly should the Fed’s balance sheet shrink?
It appears, that the pace at which the Fed will process through these questions will be largely determined by the economy. If the economy accelerates, the exit will happen faster. If the economy continues at its anemic pace the exit might well be slower than expected.
Professor Blinder writes that the Fed has already articulated crucial parts of its exit strategy. List and describe the parts of the Fed exist strategy articulated by the Fed.
The Wall Street Journal reports that soft economic growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have folks nervous. Click here to read the article.
The figure below has a lot of data and it tells a very interesting story. Among other items, it measures the change in GDP since the prerecession peak. The U.S. has past its earlier peak, but we’ve flat-lined recently. Japan has past its earlier peak only recently. And the U.K. and the 18-county euro zone have yet to claw their way back.
The open question remains: how will policymakers around the globe respond to the tepid economic growth? Only time will tell.
1) Inflation in the U.S. was measured at 2 percent over the last 12 months . Does this make Fed Chairwomen Yellen more or less likely to remove U.S. monetary stimulus? Explain.
2) Inflation in the euro zone is trending toward zero percent. Does this make the ECB more or less likely to add monetary stimulus? Explain.
The Bureau of Labor Statistics (BLS) released its April 2014 Consumer Price Index (CPI) report today. Click here to read the report.
The CPI increased 2 percent over the last 12 months (see the figure below). This reading is equal to the Fed’s inflation target.
Core CPI–which excludes food and energy prices–increased 1.8 percent over the last 12 months.
The following figure shows both CPI and Core CPI since April 2013.
John Miller writes that American steelmakers filed 38 trade complaints last year, igniting calls for new tariffs on imported steel. Click here to read the article. The heart of the matter is: foreign steel prices are as much as 20 percent lower that U.S. steel prices. As a result of the significant price difference, there has been a surge in steel imports.
Reference Karlan and Morduch’s International Trade chapter for the following discussion questions:
1) As imports increase, explain what happens to total surplus in the domestic economy.
2) As imports increase, explain how consumer surplus and producer surplus change.
3) As imports increase, are producers or consumers more likely to claim trade is unfair? Why?
4) If a tariff on imported steel is imposed, who are the winners and who are the losers? Explain.
Jamil Anderlini has an interesting article on China’s nationwide property bubble in the Financial Times. Click here to read it.
It appears that China’s economy has begun to sputter. In the first four months of this year, relative to the same period last year, real estate sales fell 7.8 percent and construction projects fell 22.1 percent. These declines are a big deal because the building, sale and outfitting of apartments–the so-called property market–accounted for 23 percent of Chinese GDP last year, according to the article. A substantial decline in the property market will ripple through the Chinese economy and could affect other major economies.
The potential impact of a declining Chinese property market is summed up nicely by Jian Chang of Barclays (he is quoted in the article): “Self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local government debt, and a fragile financial system with a large shadow banking sector, suggest the risks of a disorderly adjustment [in the Chinese economy] are real and rising.”
1) Read the article. Compare the size of China’s property market as a percentage of GDP to the U.S., Spain or Ireland at the peaks of their housing bubbles.
2) The U.S. housing bubble popped in 2006. Discuss three major events that are linked to the popping of the U.S. housing bubble.
The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Arizona (red line) and the Phoenix metro area (green line) between January 2000 and April 2014.
The U.S. has observed monthly increases in this employment measure since August 2010, the Phoenix metro area has observed a monthly increase in this employment measure since October 2010, and Arizona has observed a monthly increase in this employment measure since November 2010.
The most recent data reveal that year-on-year employment growth continues in the Phoenix metro area (2.2 percent, March 2014), Arizona (1.9 percent, March 2014) and the U.S. (1.7 percent, April 2014).
However, the number of nonfarm employees in the Phoenix metro area is 99,000 lower than the peek level observed prior to the great recession in December 2007.
Matthew Philips has an interesting article in Bloomberg Businessweek on the relative stability in the global crude oil market. Click here to read it.
Philips’ highlights that despite the collective troubles in Libya, Iran, Nigera, Venezuela, and now Russia, the price of crude oil has been stable. In times gone by, these geopolitical challenges would have led to a spike in the price of crude oil.
It appears, however, that this time is different. The price of Brent crude oil, the most traded oil contract in the world has been stable over the last few years, and it has fallen recently. The question is: why?
Well, it appears that the U.S. shale oil boom is one reason why oil prices have not gone crazy over the last few years, according to “Why Oil Prices Haven’t Gone Crazy” (Bloomberg Businessweek May 12-18, 2014). U.S. oil production has increased from about 3 million barrels a day in 2011 to more than 8 million barrels a day. In addition, Canadian oil production has also increased by more than 1 million barrels a day since May 2011, according to the article.
The increases in U.S and Canadian oil production have come on line just as production decreased in other parts of the world. These changes have had a stabilizing effect on global markets. More recently, the decline in the demand for oil from China has placed additional downward pressure on crude oil prices.
Discuss how U.S. oil imports have changed because of recent changes to U.S. shale oil production.