by Calculated Risk on 9/24/2012 06:18:00 PM

This is an excellent followup to Josh Lehner's post (and the graph I posted) earlier today showing that the US recovery is doing better than most recoveries following a financial crisis.

From Tim Duy at EconomistsView: Excuses Not To Do More. Duy discusses Reinhart and Rogoff and excerpts from a piece by Ezra Klein:

...if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you’ll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of “$1 trillion over two years” — which is actually larger than the American Recovery and Reinvestment Act. So if they’d been following Rogoff’s advice, the initial stimulus would have been even bigger — not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration’s economic policy. “The initial policy of monetary and fiscal stimulus really made a huge difference,” she told me. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.”

Then Duy added this update:

Update: I notice some Twitter chatter of surprise that Rogoff was not completely opposed to fiscal stimulus (I thought everyone read Ezra Klein).

The key point here is that short term stimulus, in a depressed economy, can actually reduce the long term deficit.

by Calculated Risk on 9/24/2012 03:25:00 PM

From San Francisco Fed President John Williams: The Economic Outlook and Challenges to Monetary Policy. A few excerpts:

In considering what maximum employment is, economists look at the unemployment rate. We tend to think of maximum employment as the level of unemployment that pushes inflation neither up nor down. This is the so-called natural rate of unemployment. It is a moving target that depends on how efficient the labor market is at matching workers with jobs. Although we can’t know exactly what the natural rate of unemployment is at any point in time, a reasonable estimate is that it is currently a little over 6 percent.5 In other words, right now, an unemployment rate of about 6 percent would be consistent with the Fed’s goal of maximum employment. In terms of the Fed’s other statutory goal—price stability—our monetary policy body, the Federal Open Market Committee, or FOMC, has specified that a 2 percent inflation rate is most consistent with our dual mandate.

So, how are we doing on these goals? As I said earlier, the economy continues to grow and add jobs. However, the current 8.1 percent unemployment rate is well above the natural rate, and progress on reducing unemployment has nearly stalled over the past six months. If we hadn’t taken additional monetary policy steps, the economy looked like it could get stuck in low gear. That would have meant that, over the next few years, we would make relatively modest further progress on our maximum employment mandate. What’s more, the job situation could get worse if the European crisis intensifies or we go over the fiscal cliff. Progress on our other mandate, price stability, might also have been threatened. Inflation, which has averaged 1.3 percent over the past year, could have gotten stuck below our 2 percent target.

For the FOMC, this was the sobering set of circumstances we were staring at during our most recent policy meeting. Faced with this situation, it was essential that we at the Fed provide the stimulus needed to keep our economy moving toward maximum employment and price stability. So, at our meeting, we took two strong measures aimed at achieving this goal.

First, we announced a new program to purchase $40 billion of mortgage-backed securities every month. This is in addition to our ongoing program to expand our holdings of longer-term Treasury securities by $45 billion a month. Second, we announced that we expect to keep short-term interest rates low for a considerable time, even after the economy strengthens. Specifically, we expect exceptionally low levels of our benchmark federal funds rate at least through mid-2015.

And on the economic outlook:

Thanks in part to the recent policy actions, I anticipate the economy will gain momentum over the next few years. I expect real gross domestic product to expand at a modest pace of about 1¾ percent this year, but to improve to 2½ percent growth next year and 3¼ percent in 2014. With economic growth trending upward, I see the unemployment rate gradually declining to about 7¼ percent by the end of 2014. Despite improvement in the job market, I expect inflation to remain slightly below 2 percent for the next few years as increases in labor costs remain subdued and public inflation expectations stay at low levels.

Of course, my projections, like any forecast, may turn out to be wrong. That’s something we kept in mind when we designed our new policy measures. Specifically, an important new element is that our recently announced purchase program is intended to be flexible and adjust to changing circumstances. Unlike our past asset purchase programs, this one doesn’t have a preset expiration date. Instead, it is explicitly linked to what happens with the economy. In particular, we will continue buying mortgage-backed securities until the job market looks substantially healthier. We said we might even expand our purchases to include other assets.

This approach serves as a kind of automatic stabilizer for the economy. If conditions improve faster than expected, we will end the program sooner, cutting back the degree of monetary stimulus. But, if the economy stumbles, we will keep the program in place as long as needed for the job market to improve substantially, in the context of price stability. Similarly, if we find that our policies aren’t doing what we want or are causing significant problems for the economy, we will adjust or end them as appropriate.

With this forecast, QE3 will continue for some time.

by Calculated Risk on 9/24/2012 01:15:00 PM

Last year economist Josh Lehner posted a number of charts and graphs as an update to work by Carmen Reinhart and Kenneth Rogoff: This Time is Different, An Update

Today, Lehner updated a few graphs again (through August, 2012). See: Checking in on Financial Crises Recoveries. Here is one graph and an excerpt:

Click on graph for larger image.

From Lerner:

[W]hen the Great Recession is compared ... to the Big 5 financial crises and the U.S. Great Depression ... the current cycle actually compares pretty favorably. This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009. While the initial path of both the global and U.S. economies in 2008 and 2009 effectively matched the early years of the Great Depression – or worse – the strong policy response employed by nearly all major economies – both monetary and fiscal – helped stop the economic free fall.

by Calculated Risk on 9/24/2012 10:38:00 AM

From the Dallas Fed: Texas Manufacturing Growth Picks Up

Texas factory activity increased in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 6.4 to 10, suggesting stronger output growth.

Other measures of current manufacturing activity also indicated growth in September. The new orders index rose to 5.3 following a reading of zero last month, suggesting a pickup in demand. The capacity utilization index advanced from 1.7 to 9.3, largely due to fewer manufacturers noting a decrease. The shipments index rose to 4.5, bouncing back into positive territory after falling to -2.3 in August.

Indexes reflecting broader business conditions were mixed. The general business activity index remained slightly negative but edged up from -1.6 to -0.9. The company outlook index was positive for the fifth month in a row but fell slightly to 2.4 from a reading of 4.1 in August.

Labor market indicators reflected slower labor demand growth and slightly longer workweeks. The employment index remained positive but fell to 5.9, its lowest reading in more than a year. Sixteen percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index moved up from -0.9 to 2.8.

This is still weak, and the general business activity index has been negative 5 of last 6 months.

by Calculated Risk on 9/24/2012 09:08:00 AM

LPS released their First Look report for August today. LPS reported that the percent of loans delinquent decreased in August from July, and declined about 10% year-over-year. The percent of loans in the foreclosure process also decreased in August, but remain at a very high level.

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.87% from 7.03% in July. The percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.57%, so delinquencies have fallen over half way back to normal. The percent of loans in the foreclosure process declined to 4.04%.

The table below shows the LPS numbers for August 2012, and also for last month (July 2012) and one year ago (August 2011).

The number of delinquent properties, but not in foreclosure, is down about 10% year-over-year (530,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 5% or 100,000 year-over-year.

The percent of loans less than 90 days delinquent is close to normal, but the percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high.

LPS: Percent Loans Delinquent and in Foreclosure Process
	August 2012	July 2012	August 2011
Delinquent	6.87%	7.03%	7.68%
In Foreclosure	4.04%	4.08%	4.12%
Number of properties:
Number of properties that are 30 or more, and less than 90 days past due, but not in foreclosure:	1,910,000	1,960,000	2,240,000
Number of properties that are 90 or more days delinquent, but not in foreclosure:	1,520,000	1,560,000	1,720,000
Number of properties in foreclosure pre-sale inventory:	2,020,000	2,042,000	2,120,000
Total Properties	​5,450,000	5,562,000	6,080,000