Carpe Diem

Durable Goods Strength Suggests No Recession

From yesterday’s WSJ article by Brian Wesbury:

A year ago, most economic data looked much worse than they do today. New orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006 (see graph above, red circle). Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year — real GDP expanded 4.4% at an annual rate between April and September.

From today’s Commerce Department report:

New orders for manufactured durable goods in December increased $11.2 billion or 5.2% to $226.6 billion (Note: Expected consensus was only a 1.6% gain). This was the second consecutive monthly increase and followed 0.5% November increase. Excluding transportation, new orders increased 2.6%. Excluding defense, new orders increased 2.9%. Transportation equipment, up three consecutive months, had the largest increase, $7.3 billion or 11.3% to $71.4 billion. This was due to defense aircraft and parts, which increased $3.5 billion.

Bottom Line: Durable goods orders signal a much stronger economy today than a year ago, as Brian Wesbury suggests. Further, the continued gains in durable goods orders indicate that the U.S. economy is nowhere near a recession, see the graph above (data available here) and notice the steep decline in durable goods orders before, during and after the last recession in 2001.

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Due to Falling Unemployment Claims in January, Recession Odds Have Fallen From 35% to 15%

Last week there was a CD post featuring the graph above of initial claims for unemployment benefits, which was mentioned on Greg Mankiw’s blog.

Now a recently released study by labor economist Tim Kane for the Joint Economic Committe of Congress “Employment Numbers As Recession Indicators” reports (p. 12) that:

The most surprising finding, contrary to conventional wisdom, is that both payroll and household employment measures are of no value as recession indicators. The 1-month change in the unemployment rate has value, but is perhaps prone to false signals due to its moderately high variance. Finally, we have learned that unemployment insurance claims are very valuable and reliable pre-recession indicators. The fact that the UI data are released weekly makes it even more timely, and so it merits close attention.

From the Executive Summary: The best pre-recession employment indicator is actually weekly claims for unemployment insurance (UI).

From the WSJ:

Kane based his model on the three-month change in the unemployment rate and initial jobless claims. Both rose in December, which pushed up Kane’s model to signal 35% recession odds, which was still below what many on Wall Street and academia have thought.

Yet the surprising decline in weekly jobless claims this month to around 300,000 — which is usually consistent with a very healthy labor market — has brought those chances down to around 15%-16%, Kane said.

Carpe Diem

Food Fight and The Failure of Price Controls

COLOMBIAMore than a thousand additional Venezuelan troops have been sent to the Colombian border to stop food and fuel from going to Colombia. Normally, twice as much stuff (over $3 billion worth) comes FROM Colombia, than goes in the other direction TO Colombia. But Venezuela is suffering from inflation and food shortages, and president Hugo Chavez addressed the problem by putting price controls on food. But he did not put controls on the items farmers have to buy to produce the food. Thus farmers are being forced to sell food at a loss and go bankrupt. To avoid that, farmers are smuggling their products to adjacent countries like Colombia, where they can be sold at market rates.

VENEZUELAVenezuela’s top food company has accused troops of illegally seizing more than 500 tons of food from its trucks as part of President Hugo Chavez’s campaign to stem shortages. The campaign has also included government crackdowns on accused smuggling, with the military seizing 1,600 tons of food and sending 1,200 troops to the border with Colombia.

Troops said they halted the transport of 350 tons of food to states along the Colombian border on suspicion of smuggling, he said. Another 165 tons were impounded in an eastern state on accusations of hoarding.

Bottom Line: The lessons from economics and history are very clear: Price controls haven’t ever worked, they won’t work in Venezuela, and they won’t ever work anywhere. Chavez can attempt to ignore or circumvent the laws of economics, but he can’t prevent the inevitable shortages that will inevitably result as a direct consequence of his artificial price ceilings (see graph above). “The market be a harsh mistress.”
Carpe Diem

Tax Rebate Smackdown II: INCENTIVES MATTER

The government’s resources are not infinite. If it gives out $150 billion today, it must collect an extra $150 billion in taxes tomorrow (unless the government cuts spending, which nobody seems interested in). That’s a law of arithmetic. Where will that future $150 billion come from? From the same people who are being encouraged to spend their rebate checks today. That’s why this whole thing is eerily similar to the sub-prime lending crisis that got us into this mess — people are being encouraged to spend beyond their means and forgetting that it’s all got to be paid back someday.

The only way out is for people to actually earn more so they can afford to pay those future taxes. They can earn more only if they work more. They’ll work more only if they have the right incentives. For $150 billion, you can hand out a lot of incentives. But the stimulus package is incentive-free.

~Steven Landsburg in today’s LA Times

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World Record:135m Escape Poverty in Only 5 Years

In China 25 years ago, over 600 million people—two-thirds of the population—were living in extreme poverty (on $1 a day or less). Now, the number on $1 a day is below 180 million. In the world as a whole, a stunning 135 million people escaped dire poverty between 1999 and 2004. This is more than the population of Japan or Russia—and more people, more quickly than at any other time in history.

~The Economist Magazine, “The World’s Silver Lining: In a Week of Financial Uncertainty We Look Behind the Headlines to a World That is Unexpectedly Prosperous and Peaceful”

Carpe Diem

Tax Rebate Smackdown

From today’s LA Times:

Jason Furman:

In May, June and July the U.S. Treasury will likely mail out $100 billion worth of checks to working households. If past experience is any guide, at least $50 billion of these funds will be spent — which together with multiplier effects will add about 3% to the annualized growth rate in the third quarter of 2008. If food stamp increases or extended unemployment insurance are added to the final package, as demanded by many in the Senate, the macroeconomic benefits would be somewhat larger.We will eventually need to pay back this money, but an extra year of lower unemployment and higher output will put us in a better position to do so.

Steven E. Landsburg:

In sum, you (along with the president and the majority of Congress) are asking us to:

  • shower people with loans to encourage reckless spending;
  • somehow expect that the loan recipients will feel both richer and not richer at the same time (so that they’ll spend more without working less), and;
  • do all this in the name of delaying the sometimes painful adjustments that are going to have to get made a year down the line in any event.

I object. The last time large numbers of people were showered with loan money and encouraged to live beyond their means, it was called the sub-prime crisis, which is what got us into this mess to begin with.

Note: All week in the LA Times, Jason Furman, an advisor to President Clinton, and author-economist Steven E. Landsburg discuss the U.S. economy and the recently announced stimulus package.

Standings So Far: Landsburg 1, Furman 0.

Carpe Diem

Consumer Surplus on EBAY = $19 Billion in 2007

From today’s NY Times: Winners of eBay auctions typically pay not the highest amount they bid but the second highest amount, plus the bidding increment of that auction. In other words, there is a gap between what they pay and what they are willing to pay – a “consumer surplus” whose size eBay has never revealed, since the company does not share data on the highest bids.

Researchers at the University of Maryland and the Indian School of Business have now quantified the consumer surplus by using a sniping agent called Cniper to track 4,500 eBay auctions in 2003 and 2004. By using the sniper software, the researchers could track the highest bids and measure the difference with the winning bid – an average of $4, or 30% savings on the average $14 eBay auction.

Writing in an upcoming issue of Information Systems Research, the researchers report that eBay buyers saved more than $7 billion in 2003 and $8.4 billion in 2004. Extrapolating from their data, they project that consumers saved $19 billion on eBay last year.
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Earnings for Most Major Banks Forecast Up in 2008

A recent post reported that every major U.S. commercial bank was profitable last year. An anonymous commenter reported some 2008 earnings per share (EPS) estimates for some of the banks listed in the post. That comment inspired the table above (click to enlarge), which shows 2007 EPS (actual) and 2008 EPS estimates for 17 of the largest U.S. commercial and investment banks.


1. Merrill Lynch is the only major investment bank to report negative earnings in 2007, and all other banks above were profitable last year. For 2008, $5.22 EPS is forecast for Merrill Lynch.

2. For 2008, all 17 banks are expected to be profitable, and EPS for 12 out of 17 banks are expected to increase from 2007.
EPS Source: Yahoo! Finance