Tag Archives: economy

Iraq Oil Output

Its no surprise that Iraq’s oil production slowed after the American invasion in 2003. And its not shocking that it took a while for oil production to regain strength. But as of February of this year Iraq is producing 50% more than it was four years ago. Iraq is now pumping out 3.6 Million barrels a day, up from 2.4 Million in February in 2010. One would expect Iraq’s economy to be booming with such an increase in oil production however it isn’t so easy. The past decade of sanctions, neglect, and war have lead to the oil fields being neglected.

Companies like BP, Royal Dutch Shell, and ExxonMobile have been investing in the oil fields to revive them after a decade. The investments have lead to a huge increase in production, there is however, still one problem. The infrastructure in the company still hasn’t been updated. To get the increased quantity from the wells to the tanker, the infrastructure would require an overhaul. So it seems that its time to updated it but it is unclear whose going to pay. The government is the likely source of funding for the overhaul, as it would likely lead to bolstering the overall economy. The seem to be slow when it comes to providing though, so it is possible that major companies could look to kick in funds, and get the oil to the tankers at a lower cost. Personally I think this is a better option.

The government is still not the most stable since the downfall of Saddam Hussein’s regime. There are bureaucracy issues between parties that lead to the slowing of getting funding provided. There is also a major problem with corruption and bribery. Problems like these don’t help expedite the process. With a young and unstable government it isn’t likely the infrastructure will see an update anytime soon.

The companies who own major oilfields in the area could offer to kick in funds. This would help get more oil from the fields to the tankers, leading to higher profits for the company. A cost benefit analysis would show whether providing funds for infrastructure is profitable. Currently, things as simple as high winds slow production. Iraq doesn’t have the storage space for excess fuel and the wells are shutdown all together. The pipes are routinely shutdown completely for maintenance, something that a modern system wouldn’t face. Providing money to improve the pipe system and increase storage facilities would create a constant flow of oil from the wells to the tankers. Something that would benefit the major oil companies in the long run.

Economic Outlook For the Summer

Our economy has gone through a whole lot. We have had our ups and downs since the recession. Some believe we are truly make are way through this time, while some believe there will never be a stable time and a height at which we will continue to plateau at. The recovery has been long and dismal at times, but it is truly shaping up to be one of the most enduring. Yet, according to the Wall Street Journal, “after almost five years, the recovery is proving to be one of the most lackluster in modern times. The nation’s 6.7% jobless rate is the highest on the record at this state of recent expansions. Gross domestic product has grown 1.8% a year on average since the recession, half the pace of the previous three expansions.”

Even though Republicans argue that the Obama administration and other Democrats have burdened the economy with tax increases, debt and regulations like the Affordable Care Act, and hiring, Democrats also turn that and blame Republicans for withholding support for stimulus spending especially when the economy needed the boost the most.

“Perhaps the very fact we’ve been growing slower means we haven’t burnt out all the fuel,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase. “By a lot of metrics, the expansion still has quite a bit of room to run.”

What could possibly be holding us back right now? Does the Fed need to step into play at a more rapid pace? I do not believe this would be the answer. Some believe that the economy is restrained by “secular stagnation” which claims that the labor force and productivity, growing more slowly than in the past, along with reduced consumption and increased savings, prevent the economy from returning to prior growth levels.

“The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have positive impact on growth,” said Ken Goldstein, an economist at The Conference Board. “Overall, this is an optimistic report.”

Although many economists expect the overall growth rate in the January-March quarter will dip below 2 percent because of the weather disruptions, they are forecasting a rebound in the coming quarters to growth of around 3 percent.

Over the summer months, it will be interesting to see how hiring and consumption will improve, along with interest rates fueling. Our growth look strong in many areas and we should have a positive outlook in the future.

March 2014’s Retailiation

First of all, no, that is not a typo in the title of this post. The fact of the matter is that retail sales have reached a seasonally adjusted $433.9 billion in the month of March. This is a growth rate of 1.1%. This is the best monthly gain since September 2012. That is 18 months, or a year and a half ago. The Wall Street Journal predicted a .8% increase last month. This was based on February’s gain of .7% in the retail area. To put this in perspective retail spending has grown 3.8% since March 2013. The Washington Post reports that two of the larger contributors to this growth were in automobiles and furniture. Automobile sales rose 3.1%, and general merchandise grew 1.9%. An example of general merchandise would be Wal-Mart or Target. This is the largest that general merchandise has seen since March 2007, which was before the recession.

According to the New York Times, we are in a “Great Moderation”. This means that we are experiencing the same steady growth in economic activity and jobs that we saw before the Great recession. During this “Great Moderation”, the economy is less likely to experience a slump, or anything like that. The economy could be on track to being what it was before the financial crisis.

In a few of my other posts, I discussed the retail market in this country and how it is important to the economy. Without a doubt, the harsh winter definitely weakened it. As the winter thawed, so did the retail market. With sales increasing, that means that consumption is on the rise too. This is important for increasing output. Consumption is an important part of output and is integral in helping a troubled economy recover from a slump. Apparently, March 2014 was a month of record numbers. It also exceeded expectations.

Taking all of this into account with the idea of a “Great Moderation”, I would say that Americans can be a little more optimistic about their nation’s economy. As previously mentioned, March was a month of record growth rates. Furthermore, we are seeing the same kind of economic activity that we saw before the drastic downturn in 2008. Before the recession, the United States economy was very strong. We are seeing similar signs of that today. If this were to continue, then the recession would be a thing in the past. This could very well be the light at the end of the tunnel that America has been dying to see since 2008.

Bank Lending Break Through?

Bank lending seems to be back in action again. Banks all around have been on a stand still waiting for loan growth to pick up. Although the winter provoked a minor drawback, loan growth is what banks need to get the ball rolling. Without these loans, banks have had to try “to bolster earnings through repeated rounds of cost cutting and reversals of loan-loss reserves.” While loan growth seen in the first quarter isn’t a clear indication that we are back on track, it does provide signs that the lending environment is in fact improving. Although all the results have not been accounted for yet, the latest data has shown that overall bank loans grew from a year earlier at an average of 2.5%.

This pace is very similar to what occurred in the final quarter of 2013. As you can see in the FRED graph, there was a strong increase in the total value of loans towards the end of 2013.

While this may look rather attractive, but there is still room for improvement. These rates and values can decrease very quickly, especially if lenders are holding too much collateral. This means that our economy needs to continue to move forward and it all depends on how the Fed decides to solve the problem for banks. Michael Ivanovitch writes, in a CNBC article, that he believes the Fed is aware of the situation we are currently in; currently there is still weak bank lending, which is stalling our growth in the U.S.

“Monthly asset purchases—on top of a virtually zero percent interest rate—have been a relatively easy part of a sweeping crisis management. The verdict on that policy is given by America’s demand, output and employment. It is perhaps time to adjust policy instruments and intermediation techniques to address some apparently structural issues whose solution does not seem to be in the wall of money thrown at the U.S. economy.”

While we at least have seen a stabilization following a long period of declining rates of loan growth, this is something we must still be aware of. The FRED graph has been allowed a number of interpretations to be good for the economy, but there are still weaknesses. Housing has begun to cool is recent pace and we are nowhere near enough to offset the losses already incurred. What I believe will keep our economy stable for the summer months will be a couple key decisions made by the Fed and how investors will respond to all the recent buzz. If nobody gets too anxious and jumps the gun, banks will be confident in lending allowing for an increased pace in our economy.

(Revised) What The Jobs’ Report Means in the Short Run

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession and those who still have been jobless as well. Will the number of jobs added in April slow down? I believe our government can play a key role in aiding our economy and its’ job growth. However, they are currently doing very little in attacking fiscal policy changes to keep a steady pace for the coming months.

Although individuals like chief economist Jed Kolko at Trulia, mentions in The Wall Street Journal that there were improvements in jobs like construction and that young-adult employment is slowly making its way back to ‘normal’ levels, many others are convinced that the areas like the housing market may be cooling down  and that we aren’t being led in the right direction.

Throughout the beginning of 2014, we have been continuing to approach the employment level the economy was at when the down turn of jobs started to fall in 2008. However, our government cannot slow down its work and needs to “step on the accelerator” to continue to keep moving the economy. With this in mind, the market it still sensitive to the economy and our government needs to increase their activity and work together. Our government seems to be sitting back on work that’s already been completed.

Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.” Fisher added, “If the U.S. had the right fiscal policy, the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy. This in turn would lead to false complacency and market instability. Our economy cannot afford to take this extra weight.

Some, like Fed Chair Janet Yellen, found the market’s sensitivity to be true when proclaiming an interest rate hike could follow around six months after the central bank ends its bond-buying stimulus. This time period was earlier than investors had expected causing stock, bond, and currency markets to take a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. With our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement a plan and expect it will work everything out for the next couple years. They must continue activity and working to build the economy even as we still grow today. Otherwise volatility might be the theme for the coming months in the markets and I don’t believe last year’s rally will occur again this year.

Is Our Economy Really Moving Foward?

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession. Those who still have been jobless must be accounted for as well. Does this mean that there is still room for a lot of improvement? Or will the number of jobs added in April slow down?

Jed Kolko, chief economist at Trulia, mentions in The Wall Street Journal that there were improvements in construction jobs and that young-adult employment is slowly making its way back to ‘normal’ levels.

That’s it? All I have heard is that there is little doubt the housing market has cooled yet, but I am not very convinced that we are being led in the right direction.

Although we are reaching the point we were at when the down turn of jobs began during the Great Recession, our government needs to step on the accelerator and move the economy forward. Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.”

“If the U.S. had the right fiscal policy,” Fisher added, “the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy, which can lead to false complacency and market instability.

We even found the market’s sensitivity to be true when Fed Chair Janet Yellen commented that an interest rate hike could follow six months after the central bank ends its bond-buying stimulus. Stock, bond, and currency markets took a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. We cannot afford any time wasted moving forward, but with our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement one plan and think it will work everything out for the next couple years. They have to work with the present times and implement plans while the economy improves as well.

 

The minimum wage can have major effects (revised)

Minimum-Wage-kitty-520x292

Last time I wrote about how in reality, the minimum wage in America is so low that it can’t even get the average person working full time earning it out of poverty.  It is low enough that some think it may be acting as a barrier to social mobility, a defining trait of the United States.  By considering what has happened in the past after wage increases, it will be clear that the only negative effects of increasing the minimum wage is on measurements of poverty.

While It seems obvious that increasing the minimum wage would decrease poverty (the wages increased, not the poverty level), there are those that argue it will have a negligible affect, since many poverty stricken people don’t work for the minimum wage.  Even though the increase can’t end poverty, as we will see, it can have an effect on it, and can therefore be an effective tool for addressing it.  Economic theory also predicts that with an increase in the price of labor the demand for labor would decrease, resulting in lost jobs.  This notion is not consistent with past results of minimum wage increases.

First, Consider Washington, the state with the highest minimum wage in the country at $9.32/hr., with future increases tied to the consumer price index.  Surely such an extreme example should support the assertion that increasing the minimum wage results in lost jobs.  In the 16 years since the law went into effect, Washington has been above the national average with respect to job growth.

Perhaps Washington was a fluke.  An even more extreme example can be found in San Francisco, which has gone to an inflation adjusting $10.74/hr., the highest minimum in the country at any level.  In addition it has laws requiring paid sick leave and health care spending.  What it doesn’t have is the predicted job loss. This can be seen in the following graph, which tracks the effect on the San Francisco restaurant industry, which employs the largest amount of minimum wage employees.

2023116010_t670As can be seen, it tracks the surrounding counties quite well, showing no large deviation, except perhaps a small increase of hiring after the addition of paid sick leave. Since San Francisco’s minimum wage laws don’t bind the surrounding counties, it is clear that the increased minimum wage, along with other benefits, have not resulted in job losses.  If two of the most extreme cases of minimum wage increases have not resulted in less jobs, there is little support to think that lesser hourly rates would result in any significant losses.

There are less surprising results for the economy, government spending, and businesses.  In this letter from the Chicago FED the effects of a $1.75 hike in the minimum wage are analyzed.  It finds that such an increase could lead to an increase in aggregate household spending, even after accounting for spending that was lost to increased costs.  Additional research also estimates that an increase in the minimum wage could result in a decrease in government spending for the SNP program (food stamps).   A growing collection of research shows that businesses that pay a higher wages receive less theft, higher productivity, and increased worker retention.

Having seen that increasing the minimum wage won’t harm society, we consider the economic outcomes of the workers themselves.  Research by Dube provides insight into how such increases have affected workers in the past.  Tracking the effects of the minimum wage on the distribution of family income from 1990 to 2012, he finds that the coefficient on the elasticity of the poverty rate is a statistically significant -.24.  Also statistically significant (at the 1% level) is the -.32 and -.96 coefficients on the poverty gap and gap squared terms, measures of how poor the poorest families are.  This provides evidence that “…minimum wage increases do not reduce poverty by merely pushing some families above the poverty line, but rather by increasing incomes substantially and further below the poverty line.”  More concisely, increasing the minimum wage decreases the portion of the population in poverty, as well as the depth of poverty.

Increasing the minimum wage is one of the most effective tools the federal government has to fight poverty.  The minimum wage should be increased to at least the same $10.10 an hour earned by federal contractors.  Past experience has shown that this will not result in the job loss that is threatened by businesses.  It is time for the United States to take the steps needed to guarantee that a full time worker makes a wage they can live on.

 

Zoom in on trade deficit in China

When I saw the news that China had reported a huge trade deficit of $22.98 billion in February, I was almost shocked. This figure give a grim outlook for Chinese economy in 2014, especially in light of the sweeping economic reforms announced at November that would dampen short term economic growth.

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The reform, if carry out with the great determination by the Party, will invariably  slow down domestic investment, because it guarantee to break up state enterprise monopolies and wean them off cheap credit, meanwhile encouraging a more consumption-driven economy. The unemployment rate will looks bad for 2014. My worry is that, if export, the second work horse for Chinese economy, continue to shrink based on February figure, the party might grow more concerned about social instability and postpone the long overdue reform to a longer horizon.

Luckily, some analysts suggested that there are at least two reasons for us to be not so pessimistic.  

First, the dismal figure might be distorted by the timing of the Chinese Lunar New Year holiday , as manufacturers often speed shipments ahead of the long holiday when migrant workers return home and production lines fall silent.

Second, the over-invoicing by exporters last year inflated the base for comparison in February and this will continue for a few more months. Exports surged nearly 22% year on year in February 2013, and the number were widely believed to have been distorted by false invoices from exporters who wanted to bring foreign currency onshore. This is know as the hot money, which aimed at taking advantage of higher interest rates and an appreciating Chinese currency. Due to this false invoicing, the trade result  could continue to be inaccurate for a few more months.

Third, there was strong demand for resources, a major indicator of China’s industrial appetite. Importers continued to build stockpiles and take advantage of low global prices. Crude-oil imports rose 11% from a year earlier, while iron ore imports also were up 22% from February last year. Soybean and copper imports also rose by double-digit margins in the period. Still, volumes in all these major categories fell from January’s record-setting volumes, in part because of the shorter working period due to the Lunar New Year holidays.

Despite these relieving analysis, I still think that economists’ forecast that far-missed the target to be unjustified. When economist made forecast, didn’t they already factor in the impact of Lunar new year? Why they didn’t adjust the data for a inflated basis? Accurate forecast must be based on accurate historical figures that are adjusted for all the observable factors. For now we could only hope that export won’t be this bad for later months.

College Loan Industry

Paying for college is no easy thing today with the average tuition costing anywhere from about $9,000 for public instate universities up to $30,000 for private universities. A year that is. With the recession in 2009, many college graduates found themselves graduating without working and facing down hefty loans with no real income. Since then the economy has recovered and the private banking sector is regaining faith in students to pay off their loans. So will it be easy for just anyone to get their loan and head to college?

Probably not. Although the private sector has started showing signs of faith, it is likely that for now they will be lending to students who have good credit and a prosperous cosigner. A high school graduate with good credit and a cosigner can find a loan with interest ranging from 2-5.5% depending on some of the variables. If you don’t have good credit and a good cosigner you wont be finding yourself as lucky. People who fall into the later category typically find college loans with interest rates higher than 10%, an amount that makes any interest hard to pay off. Not only are they slammed with a high interest rate but they are usually limited to finding federal loans oppose to the loans from private banks.

As one may have guessed the students who are taking out federal loans at higher interest rates are finding themselves defaulting at a much higher rate. When the recession hit in 2009 student defaults spiked from about 4% in 2008 up to 10% in 2009. Facing major loses the private banks had to tighten down restrictions to avoid extreme losses. On the other side, Federal loans only increased from 7% in 2008 to 9% in 2009. The major difference between the private bank loans and Federal loans is in the recovery. Due to stricter underwriting the private sector has been able to avoid loses and drop its default rate all the way down to 3%. The Federal loans, however, kept restrictions broad not trying to limit college ambitions and as a result have seen increases in default rate from 9% during the recession to over 11%.

Don’t get me wrong, the news of improved loans for college students is a good indicator that our economy is on path to full recovery, it just isn’t great news for students across all socio-economic statuses. Some students are going to face some hard times when applying for these loans and then attempting to pay the off post graduation. We can only hope that with the improved economy more students are able to get high paying jobs upon graduation and can pay off these monstrous debts.

(Revised) The Stimulus Bill 5 Years Later

After a speedy five years, the U.S. can finally look back at the $787 billion stimulus law that was passed 246 to 183, with just 7 Democrats voting against it. Whether you think the law has made a significant impact on the U.S. or not, our country is still in a hole of debt. Many experts thought that the law would help turn our debt around and decrease the unemployment rate. But after a speedy five years, we are still in tremendous debt and many believe our unemployment rate has decreased because Americans have stopped looking for jobs. Where exactly did the entire $787 billion go? Nevertheless, our government had a plan, which was to bring back our economy, and overall I believe it truly has…to an extent.

“The goal at the heart of this plan is to create jobs. Not just any jobs, but jobs doing the work America needs done: repairing our infrastructure, modernizing our schools and hospitals, and promoting the clean, alternative energy sources that will help us finally declare independence from foreign oil,” President  Obama stated back in 2009.

The White House said on Monday that the law “saved or created an average of 1.6 million jobs a year for four years” and it raised the country’s GDP by between 2% and 3% from 2009 through mid-2011. “The spending ‘initiated’ 15,000 transportation projects and helped with the construction or improvement of nearly 6,000 miles of railway lines,” the Wall Street Journal mentions. Not only have we seen the stimulus money help in these types of areas, but at this point in time we have seen a have a long term positive effect on our economy. Our nation has seen a stabilization of mortgage debts, which is the biggest piece of household borrowing. We have also seen more Americans borrowing in general, whether it has been for education or cars. I believe many Americans are feeling more confident again especially with the rising stock prices.

That being said, there have also been some major improvements in the stock market as well. We have seen record highs through quantitative easing as investors have seemed to ignore earnings thanks to the Fed pumping the stimulus money into the market. But that is also something to look out for with our economy another year from now; if earnings don’t catch up, we are going to have a serious correction in the market.

The unemployment rate has been one of the major topics when looking back on the stimulus bill. The unemployment rate has dropped below 7% from a peak of 10% in October 2009, but that is also because so many people have stopped looking for work. Although the stimulus bill has provided many construction jobs to build infrastructure, many Americans have still been asking “where are the jobs?”

Where exactly are the new jobs? Besides construction, what are the other main jobs that have been created or saved? As far as I’m concerned, I don’t believe businesses have truly been hiring a surplus of Americans in recent years. Another problem that I believe was not taken into account was research, especially in the field of technology. The president stated back in 2009 that the money was also going towards promoting clean, alternative energy sources. However, “Republicans criticized a loan guarantee funded by the stimulus that went to Solyndra LLC, a solar-panel manufacturer that filed for bankruptcy in 2011. Unfortunately, now we see where other portions of the $787 billion went.

House Speaker John Boehner described the situation in a statement on Monday saying “a new normal of slow growth has set in.”

Maybe we have seen a new normal of slow growth set in, which has been the main cause to our ‘somewhat’ positive turnaround. But in retrospect, America went through a serious recession back in 2008. Something had to be done to help the country get back on its feet. Although the large stimulus law may not have solved all the country’s problems, the economy has indeed begun to move forward again.